<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
RULE NO. 424(b)(1)
REGISTRATION NO. 333-76865
1,333,333 Shares
[LOGO]
FINANCIAL INSTITUTIONS, INC.
Common Stock
$14.00 per share
- --------------------------------------------------------------------------------
This is an initial public offering of common stock of Financial Institutions,
Inc. Financial Institutions is offering 903,133 shares of common stock with
this prospectus, and the selling shareholder, the Young Men's Christian
Association of Batavia, is offering 430,200 shares of common stock with this
prospectus. Financial Institutions will not receive any proceeds from the sale
of shares by the YMCA of Batavia. This is a firm commitment underwriting.
Our shares have been approved for listing on the Nasdaq National Market under
the symbol "FISI".
Our shares are not savings or deposit accounts and are not insured by the
Federal Deposit Insurance Corporation, the Bank Insurance Fund or any other
governmental agency.
Investing in the common stock involves certain risks. See "Risk Factors"
beginning on page 10.
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Price to the public....................... $14.00 $18,666,662
Underwriting discount..................... 0.98 1,306,666
Proceeds to Financial Institutions........ 13.02 11,758,792
Proceeds to the YMCA of Batavia........... 13.02 5,601,204
</TABLE>
Financial Institutions has granted an over-allotment option to the
underwriters. Under this option, the underwriters may elect to purchase a
maximum of 200,000 additional shares from Financial Institutions within 30 days
following the date of this prospectus to cover over-allotments.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
CIBC World Markets Keefe, Bruyette & Woods, Inc.
The date of this prospectus is June 25, 1999
<PAGE>
Financial Institutions, Inc.
<TABLE>
<CAPTION>
At March 31, 1999 Branches Deposits
- ----------------- -------- --------
<S> <C> <C>
Wyoming County Bank 11 $343 M
The National Bank of Geneva 6 $319 M
The Pavilion State Bank 5 $108 M
First Tier Bank & Trust 6 $94 M
</TABLE>
<TABLE>
<S> <C>
.The National Bank of Geneva
Branches
--------
Canandaigua - 2425 Rochester Rd & ATM
Geneva (Town & Country Plaza) - 387 Hamilton St. & ATM
Geneva (Main Office) - 2 Seneca St
Geneva (Motor Bank) - 65 Elizabeth Blackwell St & ATM
Penn Yan - 129 Elm St & ATM
Seneca County (Waterloo) - 1940 Routes 5 & 20 & ATM
. The Pavilion State Bank
Branches
--------
Batavia (Eastown Plaza) - 567 East Main St & ATM
Batavia (Tops Supercenter) - 390 West Main St
Caledonia - 3110 Main St & ATM
LeRoy - 124 West Main St & ATM
Pavilion (Main St) - 6948 Cato St
</TABLE>
[Picture of New York State highlighting the eight countries in which Financial
Institutions and its banks have offices and branches. The picture also depicts
the proximity of Financial Institutions' headquarters to the Cities of Rochester
and Buffalo.]
<TABLE>
<S> <C>
[Blown-up picture of the eight counties in which Financial Institutions
and its banks have offices and branches. The location of the offices and
branches are depicted on the picture using symbols.]
</TABLE>
[MAP OF FINANCIAL INSTITUTIONS APPEARS HERE]
. Wyoming County Bank
Branches
- --------
Attica - 26 Main St & ATM
Dansville - 152 Franklin St & ATM
Geneseo - 4288 Lakeville Dr & ATM
Lakeville - 3261 Rochester Rd & ATM
Mount Morris - Route 408 & ATM
North Java - 4222 Route 98
North Warsaw - 2330 North Main St & ATM
Strykerville - 3672 Route 78
Warsaw (Main Office) - 55 North Main St & ATM
Wyoming - 5 South Academy St
Yorkshire - 12209 Route 16 & ATM
. First Tier Bank & Trust
Branches
- --------
Allegany - 60 West Main St & ATM
Cuba - 27 Water St & ATM
Ellicottville - 54 Washington St & ATM
Olean - 129 North Union St
Olean (Autobank) - 124 West State St & ATM
Salamanca (Main Office) - 107 Main St
<PAGE>
Table Of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 10
Forward-Looking Statements................................................ 14
Use of Proceeds........................................................... 14
Dividend Policy........................................................... 14
Capitalization............................................................ 15
Dilution.................................................................. 16
Selected Consolidated Financial Data ..................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations .............................................................. 20
Business.................................................................. 54
Supervision and Regulation................................................ 62
Management................................................................ 69
Principal and Selling Shareholders........................................ 76
Certain Transactions...................................................... 77
Description of Capital Stock.............................................. 78
Shares Eligible for Future Sale........................................... 80
Underwriting.............................................................. 81
Legal Matters............................................................. 84
Experts................................................................... 84
Where You Can Find More Information....................................... 84
Index to Consolidated Financial Statements ............................... F-1
</TABLE>
3
<PAGE>
Prospectus Summary
This summary highlights information contained in other parts of this
prospectus. It does not contain all of the information that you should consider
before investing in the shares. You should read the entire prospectus
carefully.
The Company
We are a bank holding company headquartered in Warsaw, New York, which is
located 45 miles southwest of Rochester and 45 miles southeast of Buffalo. We
operate as what is referred to in the banking industry as a super-community
bank holding company--a bank holding company that owns multiple community banks
that are separately managed. We own four commercial banks that provide
consumer, commercial and agricultural banking services in Western and Central
New York State: Wyoming County Bank, The National Bank of Geneva, The Pavilion
State Bank and First Tier Bank & Trust. We were formed in 1931 to facilitate
the management of three of these banks that had been primarily owned by the
Humphrey family during the late 1800s and early 1900s. In recent years, we have
grown through a combination of internal growth, the opening of new branch
offices and acquisitions of a community bank and branches of other banks.
As a super-community bank holding company, our strategy has been to manage our
bank subsidiaries on a decentralized basis. We feel that this strategy provides
each bank with the flexibility to efficiently serve its markets and respond to
local customer needs. While we generally operate on a decentralized basis, we
have consolidated selected lines of business, operations and support functions
in order to achieve economies of scale, greater efficiency and operational
consistency. We believe that by increasing our use of technology that we have
already implemented, and by further centralizing back-office operations, we can
accommodate substantial additional growth without incurring proportionately
greater operational costs.
Many of the banks we compete against are either significantly larger super-
regional financial institutions or smaller community banks. Our super-community
banking strategy competitively positions us as one of the few mid-sized
financial institutions in our market that combines responsive community banking
with the sophistication, capacity and range of services and products of a
larger regional bank holding company.
On March 31, 1999, we had assets of $993.2 million, loans of $660.4 million,
deposits of $860.1 million and shareholders' equity of $98.5 million. For the
three-month period ended March 31, 1999, our net income was $3.7 million and we
earned annualized returns on average common equity of 17.05% and on average
assets of 1.55%. For the year ended December 31, 1998, our net income was $13.6
million and we earned returns on average common equity of 16.28% and on average
assets of 1.48%. Our efficiency ratio, which is our noninterest expense
excluding other real estate expense divided by our tax-equivalent net interest
income plus noninterest income, was 47.74% for the three-month period ended
March 31, 1999 and 48.31% for the year ended 1998. Our efficiency ratio has
been below 50% since 1995. Our efficiency ratio ranks us in the top 10% of the
most efficient bank holding companies in our peer group, according to the
Federal Reserve Board's Uniform Bank Holding Company Performance Report dated
December 31, 1998.
Business
We operate 28 branches and have 35 ATMs in eight contiguous counties of Western
and Central New York State: Allegany, Cattaraugus, Genesee, Livingston,
Ontario, Seneca, Wyoming and Yates Counties. We have opened five new branches
in the past four years, and we expect to open a new branch in Monroe County in
the second half of 1999. This new branch will be our first branch in the county
in which Rochester is located. The following table lists, as of March 31, 1999,
each of our banks and their respective date of founding, number of branches,
total assets and total deposits:
4
<PAGE>
<TABLE>
<CAPTION>
Year Number of Total Total
Founded Branches Assets Deposits
------- --------- ------ --------
(in millions)
<S> <C> <C> <C> <C>
Wyoming County Bank (New York State-
Chartered).................................. 1851 11 $388.7 $343.3
The National Bank of Geneva (Federally
Chartered).................................. 1817 6 370.8 319.0
The Pavilion State Bank (New York State-
Chartered).................................. 1928 5 124.4 107.6
First Tier Bank & Trust (New York
State-Chartered; Federal Reserve System
Member)..................................... 1902 6 106.4 93.8
</TABLE>
Our banks provide a wide range of consumer and commercial banking services and
products to individuals, municipalities and small and medium size businesses,
including agribusiness. While our banks function as community banks, we strive
to provide our customers with a broad range of competitive services generally
provided only by larger, regional banks. Currently, we provide customers with
24 hour ATM access, telephone customer service and 24 hour automated telephone
account access. We also provide interactive internet banking and bill paying
services through each of our banks and provide general bank information through
our web sites. We are planning to introduce a corporate cash management account
module to the existing internet banking program during 1999.
Our primary source of revenue is our loan portfolio. We offer a broad range of
loans including commercial and agricultural working capital and revolving lines
of credit, commercial and agricultural mortgages, equipment loans, crop and
cattle loans, residential mortgage loans and home equity lines of credit, home
improvement loans, student loans, automobile loans, personal loans and credit
cards. The following table describes the composition of our loan portfolio as
of March 31, 1999:
<TABLE>
<CAPTION>
Principal Amount of Percentage of Total
Type of Loans Loans Outstanding Loans Outstanding
------------- ------------------- -------------------
(in millions)
<S> <C> <C>
Commercial.............................. $121.8 18.5%
Commercial real estate.................. 111.7 16.9
Agricultural............................ 121.8 18.4
Residential real estate................. 179.9 27.2
Consumer and home equity................ 125.6 19.0
------ -----
Total loans........................... $660.8 100.0%
====== =====
</TABLE>
Our noninterest revenues consist of deposit service fees, fees from servicing
mortgage loans that we originated and sold which, as of March 31, 1999, had an
aggregate principal balance of $186.3 million, commissions from selling mutual
fund and variable annuity products through a third-party broker-dealer and
other service fees from ancillary services and products. We are in the process
of expanding the trust operations of our banks beyond the two which currently
have trust powers and establishing our own brokerage operation to enable us to
expand the scope of investment products that we offer and to complement our
trust business. We are also exploring the acquisition of insurance agency
operations to further enhance our position as a full-service provider of
financial services.
Our Market Position
As of June 30, 1998, according to FDIC-published data, we had the largest
aggregate deposit market share in the eight counties in which we have branch
offices. On an individual county basis, we had the largest share of deposits in
Livingston, Wyoming and Yates Counties, the second largest share in Ontario
County, the third largest share in Genesee and Cattaraugus Counties and the
fifth largest share in Allegany County. Our core deposits, which include all of
our deposits other than certificates of deposit in amounts of $100,000 or more,
comprised 78.3% of all of our deposits as of March 31, 1999. In 1997, Wyoming
County Bank ranked as the
5
<PAGE>
largest agricultural lender in New York State and the eighth-largest lender in
the United States under the federally-guaranteed Farm Services Administration
program. It was also ranked as the most "small-business-friendly lender" in New
York State in the $100 million-$500 million asset size category by the U.S.
Small Business Administration in 1997. Wyoming County Bank is a "Preferred
Lender" under the SBA's programs and a "Certified Preferred Lender" under the
FSA's programs.
Our market area is geographically and economically diversified because we serve
both rural markets and, increasingly, the larger more affluent markets of
suburban Rochester and suburban Buffalo. Rochester and Buffalo are the two
largest cities in New York State outside of New York City, with combined
metropolitan area populations of over two million people. We anticipate
allocating more resources to increase our presence in the markets around these
two cities. By doing so, we hope to fill the void created by the acquisition of
many of the independent community banks that once served those areas.
We believe that we have a competitive advantage in the Western and Central New
York banking market because we have deep roots in the region, we have a
dominant market share in the communities we serve and our super-community
banking structure enables our banks to offer a broad range of services and
products and to effectively respond to local market opportunities. The sale to
larger banks of a number of mid-size community banks and thrifts serving our
market has created opportunities for us to capture the allegiance of customers
alienated by these acquisitions. We believe that the remaining large banks in
our market will find it increasingly difficult to remain competitive in the
more rural areas and will likely continue to refocus their resources toward the
more urban areas. We feel that we are well positioned to attract customers
disaffected with the metropolitan focus of these large banks and to be an
acquiror of any branches sold by the large banks who choose to reduce their
operations in the rural markets. Further, we believe that we are well
positioned to be an attractive acquiror of community banks in our market who
may choose to affiliate with a larger, locally-based institution with a broader
range of services, products and back-office support.
We have a track record of successfully negotiating the acquisition of and
integrating bank branches and small banks. Our historical acquisition activity
has included the purchase of Wyoming County Bank's Attica branch from Security
Trust Company in 1984, Salamanca Trust Company (now First Tier Bank & Trust) in
1990, First Tier Bank & Trust's Allegany branch from Manufacturer's Hanover
Trust in 1992 and two branches in Yates County (acquired by The National Bank
of Geneva) and Livingston County (acquired by Wyoming County Bank) from the
Resolution Trust Corporation as receiver of Columbia Federal Savings Bank in
1994. All of our acquisitions have been profitably integrated into our
operations.
Our Growth Strategy
Our primary business objectives are to profitably grow and diversify our
business and be the dominant financial services provider in our market. Key
elements of our strategy for future growth include:
. Expand Traditional Banking Base--expand our traditional banking base by
increasing the number of households and businesses served in our market and
targeted new markets by providing a high level of customer service, opening
new branch offices, making strategic acquisitions of branches and community
banks, competing for customers of recently acquired banks in our market
area, offering attractive services and products at competitive pricing and
implementing new technologies and delivery systems;
. Strengthen Sales Culture--maximize the number of bank services and products
used by each of our customers by actively training employees to cross-sell
various services and products, expanding our software and use of other
systems to identify cross-selling opportunities and providing performance
incentives to our managers and employees to cross-sell services and
products;
. Increase Noninterest Revenues--increase our noninterest revenues by
offering expanded and new fee-based bank services and products, broadening
the scope of our investment and insurance products,
6
<PAGE>
growing our trust services, establishing brokerage operations and evaluating
other types of services that we can offer;
. Focus on Efficiency--seek to improve our efficiency ratio by continuing to
maintain tight control of overhead and expenses and further centralizing
common functions presently performed by all four banks to the extent that
such centralization can be accomplished without undermining the benefits of
our super-community banking model;
. Preserve Conservative Credit and Interest Rate Risk Profile--continue our
commitment to preserve our asset quality through a conservative credit
culture and continue to actively manage our exposure to interest rate risk;
and
. Retain and Attract Talented Employees--maintain and enhance effective
performance-based compensation and human resource management programs to
retain, attract and incent talented and motivated management, employees and
directors.
Our Headquarters
Our principal executive offices are located at 220 Liberty Street, Warsaw, New
York 14569. Our telephone number is (716) 786-1100.
The Offering
Common stock being offered by us.... 903,133 shares (excluding shares
represented by the over-allotment
option)
Common stock being offered by the
YMCA of Batavia....................
430,200 shares
Common stock to be outstanding 10,818,733 shares
after the offering..................
Purpose of the offering............. A primary purpose of this offering
is to provide us with greater
flexibility to structure and
finance the ongoing growth and
diversification of our operations.
We believe that having a publicly-
traded common stock will more
effectively position us to
consummate strategic acquisitions.
Use of proceeds..................... The net proceeds to us from the
offering (approximately $11.3
million) will be used for general
corporate purposes, including
possible future acquisitions. We
will not receive proceeds from the
sale of shares by the YMCA of
Batavia. The members of the YMCA of
Batavia have approved the sale of
all 430,200 shares contributed to
it by members of the Humphrey
family and will use the proceeds to
finance various programs and
capital projects, including the
construction of a new YMCA in
Warsaw, New York.
Nasdaq National Market symbol....... FISI
Anticipated dividends............... We initially plan to pay a
quarterly dividend of $0.08 per
share following the offering. See
"Dividend Policy" for a discussion
of certain factors that will affect
our ability to pay dividends.
7
<PAGE>
Summary Consolidated Financial Data
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
As of and for the
Three Months As of and for the Years
Ended March 31, Ended December 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net interest income..... $ 10,816 $ 10,217 $ 41,912 $ 39,317 $ 36,678 $ 34,388 $ 29,797
Noninterest income...... 1,825 1,350 6,381 5,733 5,165 4,405 3,923
Net income.............. 3,746 3,386 13,605 12,842 13,075 11,103 9,102
Preferred dividends..... 376 378 1,506 1,513 1,522 1,523 1,523
Net income available to
common................. 3,370 3,008 12,099 11,329 11,553 9,580 7,579
Per Common Share Data:
Net income per common
share.................. $ 0.34 $ 0.30 $ 1.22 $ 1.14 $ 1.16 $ 0.96 $ 0.76
Book value.............. 8.13 7.21 7.94 6.94 5.96 5.02 3.92
Tangible book value..... 7.76 6.74 7.54 6.46 5.40 4.37 3.18
Cash dividends declared. 0.0755 0.05 0.26 0.22 0.20 0.18 0.09
Shares outstanding at
end of period.......... 9,915,600 9,928,500 9,915,600 9,928,500 9,927,700 9,940,200 9,946,200
Balance Sheet Data:
Total assets............ $ 993,170 $ 898,341 $ 976,185 $ 880,512 $ 802,266 $ 721,994 $ 672,807
Net loans............... 650,542 596,361 645,857 594,332 545,060 474,822 415,666
Total deposits.......... 860,088 777,255 850,455 767,726 707,703 640,237 607,097
Borrowings.............. 19,929 16,424 13,862 12,066 5,814 1,739 1,739
Preferred equity........ 17,856 17,927 17,858 17,927 18,052 18,075 18,086
Common equity........... 80,655 71,547 78,720 68,916 59,202 49,926 38,980
Total shareholders'
equity................. 98,511 89,474 96,578 86,843 77,254 68,001 57,066
Performance Ratios:
Return on average
assets................. 1.55% 1.56% 1.48% 1.54% 1.71% 1.58% 1.45%
Return on average common
equity................. 17.05% 17.28% 16.28% 17.62% 20.86% 21.34% 20.01%
Net interest margin
(tax-equivalent)....... 4.94% 5.21% 5.06% 5.21% 5.31% 5.40% 5.25%
Efficiency ratio........ 47.74% 47.07% 48.31% 47.02% 45.47% 49.69% 53.30%
Asset Quality Ratios:
Excluding impact of
government guarantees
on portion of loan
portfolio:
Nonperforming assets to
total loans and other
real estate........... 1.22% 1.58% 1.24% 1.62% 1.38% 1.21% 1.04%
Net loan charge-offs to
average loans......... 0.14% 0.11% 0.21% 0.32% 0.16% 0.12% 0.12%
Allowance for loan
losses to total loans. 1.49% 1.41% 1.46% 1.35% 1.29% 1.29% 1.26%
Allowance for loan
losses to
nonperforming loans... 160.90% 117.88% 156.86% 108.95% 121.51% 143.76% 155.24%
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
As of and for
the
Three Months
Ended March As of and for the Years
31, Ended December 31,
-------------- --------------------------------------
1999 1998 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Asset Quality Ratios:
(continued)
Including impact of
government guarantees
on portion of loan
portfolio:
Nonperforming assets,
net of government
guaranteed portion, to
total loans and other
real estate........... 1.00% 1.35% 1.03% 1.38% 1.12% 1.07% 0.99%
Allowance for loan
losses to
nonperforming loans,
net
of government
guaranteed portion.... 211.00% 145.30% 204.49% 134.67% 162.43% 169.86% 165.31%
Capital Ratios:
Average common equity
to
average total assets.. 8.15% 8.01% 8.09% 7.70% 7.25% 6.39% 6.02%
Leverage ratio......... 9.63% 9.56% 9.58% 9.53% 9.05% 8.57% 7.65%
Tier 1 risk-based
capital ratio......... 13.89% 13.83% 13.71% 13.58% 13.25% 12.76% 11.08%
Risk-based capital
ratio................. 15.15% 15.08% 14.96% 14.81% 14.50% 14.01% 12.31%
</TABLE>
All of the per share data in the table above and elsewhere in this prospectus
has been adjusted to reflect a 100-for-one stock split effected on June 9, 1999
by means of a stock distribution. The tangible book value per common share was
calculated by dividing common shareholders' equity less intangible assets, by
common shares outstanding at the end of the applicable period. For purposes of
computing the performance ratios and net loan charge-offs to average loans, all
interim periods have been annualized. A 35% federal income tax rate was used
for computing the net interest margin on a tax equivalent basis. The efficiency
ratio was calculated by dividing total noninterest expense less other real
estate expense by tax-equivalent net interest income plus noninterest income
other than securities gains and losses. Except for the ratio of net loan
charge-offs to average loans and the ratio of average common equity to average
total assets, all asset quality ratios and capital ratios have been stated as
of the end of the applicable period. As used in the table, nonperforming loans
include nonaccrual loans, restructured loans and accruing loans 90 days or more
delinquent. Nonperforming loans, net of government guaranteed portion, is total
nonperforming loans less the portion of the principal amount of all
nonperforming loans that is guaranteed by the U.S. Small Business
Administration or the Farm Service Agency of the U.S. Department of
Agriculture.
9
<PAGE>
Risk Factors
You should carefully consider the following factors and the other information
in this prospectus before deciding to invest in the shares.
Changes in interest rates could make us less profitable
Our profitability depends largely on our net interest income, which is the
difference between the interest we receive from loans and investments and the
interest we pay on deposit liabilities and borrowings. Changes in interest
rates may adversely affect our profitability. Interest rates are sensitive to
many factors, including general economic conditions and the policies of
government and regulatory authorities. Changes in interest rates can also have
other significant effects on our mortgage origination business. In periods of
rising interest rates, financial institutions such as ours typically originate
fewer mortgage loans. In that case, our mortgage interest income may decline.
In periods of declining interest rates, borrowers typically prepay existing
mortgages by refinancing. When loans that we service are prepaid, it reduces
our income from servicing mortgage loans. Changes in the difference between
short and long-term interest rates, commonly known as the yield curve, may also
harm our business. If the difference between short-term and long-term interest
rates shrinks or disappears, we would earn less interest income on mortgages
that we retain.
If the economic conditions in our market areas deteriorate, our borrowers may
be unable to repay their loans
Adverse changes in our local market economies may have a material adverse
effect on our business. Our business depends heavily on general economic
conditions within our primary market areas, which have seen limited economic
growth in the past decade. Our primary market areas are substantially rural,
which limits our prospects for growth. Further, the profitability of dairy
farming is affected by changes in milk prices, which have been kept
artificially high in recent years and may decline. We have many outstanding
loans to dairy farmers, and a significant decline in milk prices could render
such farmers unable to repay their loans when due.
Our borrowers may not repay us, our collateral may be insufficient and our
decentralized lending authority carries risks
All lending involves the risk that borrowers may default on their loans and
that loans may be insufficiently collateralized. Most industry experts believe
that agricultural, commercial and consumer loans, which accounted for
approximately 55.9% of our total loans outstanding at March 31, 1999, expose a
lender to a greater risk of loss than one- to four-family residential loans,
which accounted for approximately 27.2% of our total loans outstanding at March
31, 1999.
Although the majority of our loans are secured by collateral such as real
property, equipment, accounts receivable, cattle or crops, this collateral may
not provide us with enough protection against defaults by our borrowers. The
independent appraisals that we obtain may overstate the value of our
collateral, and we may rely on existing appraisals that may not be current.
Also, our banks may not be able to realize the full value of our collateral in
the event of a foreclosure. The value of collateral, such as farmland, farm
equipment, construction equipment, cattle, crops and receivables generated by
agricultural and construction-related businesses may be adversely affected by
falling prices for farm commodities or a decline in construction work in our
area. One of our banks faces additional lending risks because it owns real
property and holds mortgages on land owned by a sovereign Indian nation, which
could have ownership rights superior to its rights. As of March 31, 1999, the
principal amount of loans secured by these mortgages was $3.8 million. Many of
our commercial loans are collateralized by personal guarantees of the owners of
the farm or business obtaining the loan. In the event the personal financial
condition of the guarantors deteriorates, these guarantees may be of limited
value.
10
<PAGE>
There is additional lending risk inherent in our decentralized management
structure. Because most loans are made at the branch or individual bank level,
there are a number of loan officers with the ability to approve loans. This
increases the possibility of errors, noncompliance with underwriting standards
and fraud.
If we lose any of our key personnel, we may not be able to replace them
We are very dependent on our key personnel, including Peter G. Humphrey and the
presidents of our four banks. The loss of Mr. Humphrey or other members of
senior management could have an adverse effect on us. Qualified replacements
could be difficult to find or retain. See "Management."
Intense competition could hurt our financial performance or cause us to lose
market share
Our competition is intense, and we expect that it will continue to be. If we
are unable to compete effectively, our profitability will be reduced. We
compete with other commercial banks, savings banks, savings and loan
associations, credit unions, finance companies, mutual funds, insurance
companies and other financial institutions, as well as with retail stores which
offer credit programs and governmental agencies. Many of our competitors have
greater financial strength, marketing capability and name recognition than we
do, and operate on a statewide or nationwide basis. In addition, recent
developments in technology and mass marketing have permitted larger companies
to market loans more aggressively to our small business customers. Such
advantages may give our competitors opportunities to realize greater
efficiencies and economies of scale than we can. Competition for loans and
deposits reduces interest rate spreads, which reduces our net interest income.
We may not be able to undertake activities that we would like to because of
governmental regulations; changes in governmental regulations may force us to
alter the way we conduct our business
We and our banks operate in a highly regulated environment and are subject to
supervision and examination by several federal and state regulatory agencies,
including the Federal Reserve Board, the FDIC, the Office of the Comptroller of
the Currency and the New York State Banking Department. The laws and
regulations administered by these agencies are intended primarily for the
protection of depositors and customers, rather than for the benefit of
investors in our stock, and may adversely affect our business. Federal laws and
regulations govern numerous matters including adequate capital and financial
condition, permissible types, amounts and terms of extensions of credit and
investments, permissible non-banking activities and restrictions on dividend
payments. The federal and state regulators have extensive discretion and power
to prevent or remedy unsafe or unsound practices or violations of law by banks
and bank holding companies. Following periodic examinations by regulatory
agencies, we may be required, among other things, to change our asset
valuations or the amounts of required loss allowances or to restrict our
operations. The banks' operations are also subject to a wide variety of state
and federal consumer protection and similar statutes and regulations. Such
federal and state regulatory restrictions limit the manner in which Financial
Institutions and the banks may conduct business and obtain financing. We are
subject to changes in federal and state laws, as well as changes in regulations
and governmental policies, income tax laws and accounting principles. The
Federal Reserve Board has adopted a policy that can require a bank holding
company to contribute cash to its bank subsidiaries, which could have the
effect of decreasing funds available for distributions to our shareholders. In
addition, under certain circumstances we could be required to guarantee the
capital plan of an undercapitalized bank subsidiary.
You may not receive dividends on your common stock and the amount of dividends
that you do receive may be less than the amounts we have paid in the past
While we currently pay cash dividends on our common stock, there can be no
assurance that we will do so in the future. The declaration and payment of
dividends on our common stock will depend upon our earnings and financial
condition, liquidity and capital requirements, the general economic and
regulatory climate, specific regulatory requirements, our ability to service
any equity or debt obligations senior to the common stock and other factors
deemed relevant by our Board of Directors.
11
<PAGE>
You will have a minimal influence on shareholder decisions
A small number of our shareholders are able to significantly influence our
management policies and decisions and matters which require a shareholder vote.
Their interests, and the interests of the executive officers and directors who
are members of the Humphrey family, may differ from the interests of other
shareholders with respect to management issues. After the completion of this
offering, our executive officers and directors will beneficially own 2,026,300,
or 18.7%, of the outstanding shares of common stock and Donald G. Humphrey, W.
J. Humphrey, Jr., Margaret H. Wyckoff, their children and grandchildren, and
their respective immediate family members will own 6,984,900, or 64.6%, of the
outstanding shares of common stock. In addition, Wyoming County Bank will own
650,100, or 6.6%, of the outstanding shares of common stock after the offering
in its capacity as trustee of trusts established by members of the Humphrey
family.
Possible future sales of our common stock by our directors, officers and other
shareholders could cause the market value of our common stock to decline and
may make raising equity capital more difficult
Sales of additional shares of our stock, or the perception that they may be
sold, could adversely affect the market price of our stock.
Our directors, executive officers and certain shareholders have each entered
into a lock-up agreement in which they agreed that, in general, without the
prior written consent of CIBC World Markets Corp. on behalf of the
underwriters, they will not, during the period ending 180 days after the date
of this prospectus, sell or agree to sell our common stock. Following the
expiration of these agreements, shares held by those persons may be sold in the
public market subject to applicable securities laws.
In addition, we have implemented stock incentive plans that permit us to grant
options to purchase up to 1,610,353 shares of common stock to employees,
officers and directors. Options to purchase 296,142 shares of common stock will
be granted under these plans as of the date of this prospectus. The exercise of
options and subsequent sale of common stock could reduce the market price for
our common stock and result in dilution to our shareholders.
We could incur significant costs or losses if our computer systems are unable
to handle the transition to the year 2000 or if our customers' or suppliers'
businesses are interrupted because of year 2000 issues
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
If our computer systems, or the computer systems of our customers and service
providers, are not Year 2000 compliant by December 31, 1999, our business may
be disrupted. Also, we may incur additional unanticipated costs to make our
systems Year 2000 compliant. Any disruption and additional costs could hurt our
operating results.
We rely on computer systems and computer software programs extensively in order
to conduct our business. In similar fashion, most of our commercial borrowers
and depositors are also heavily dependent on computer systems and software, as
are their suppliers and customers. The software for our systems is provided
through outside vendors who have warranted to us that their products are fully
Year 2000 compliant. If their products are in fact not Year 2000 compliant, we
may be required to purchase new software from other vendors which could result
in operational delays and increase our costs. We also could be sued by our
customers in the event we are unable to process transactions or if we process
transactions incorrectly. We also could be subject to regulatory enforcement
proceedings, including fines and consent orders, in the event our regulators
determine that our failure to be Year 2000 compliant affects our safety and
soundness or the safety and soundness of any of our subsidiary banks. As of
March 31, 1999, we had spent approximately $110,000 to upgrade our systems.
12
<PAGE>
We cannot accurately gauge the impact of Year 2000 non-compliance by third
parties with which our banks and we transact business. In the event a major
customer is non-Year 2000 compliant, it could negatively impact the customer's
business and might result in the inability of the customer to repay its loans.
Depositors who experience increased cash needs may withdraw funds on deposit.
If enough of our customers experience these types of difficulties, both our
liquidity and our loan loss experience could be negatively affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Year 2000 Compliance" for more detailed information regarding this
subject.
You may not be able to trade your common stock if an active market for our
stock does not develop
We cannot assure you that an active public market for our stock will develop or
be sustained after this offering. We have applied for approval for quotation of
our common stock on the Nasdaq National Market under the symbol FISI. CIBC
World Markets Corp. and Keefe, Bruyette & Woods, Inc. intend to make a market
in our common stock but are under no obligation to do so.
The value of your investment in our common stock may decrease after the
offering
We cannot assure you that the market price of our common stock will not decline
below the initial public offering price. The initial public offering price for
our common stock has been determined by negotiations between us and the
underwriters and may not be indicative of the market price of the common stock
after the offering.
Your investment will be greater than the tangible book value of your interest
in Financial Institutions
Investors purchasing shares in the offering will incur immediate dilution of
approximately 41.8% in their investment, as our tangible book value after the
offering will be approximately $8.15 per share compared with the initial public
offering price of $14.00 per share.
We do not currently have specific uses for the offering proceeds
We have no specific plans or allocations for the proceeds of this offering
other than for general corporate purposes, including the support of anticipated
balance sheet growth and possible future acquisitions. We will have broad
discretion with respect to the expenditure of the proceeds of the offering.
If our return on equity goes down, it may cause our stock price to decline
There can be no assurance that we will be able to successfully deploy the
offering proceeds, or that we will be successful in generating future returns
on equity equal to our historical returns. Our equity will increase as a result
of the offering. It will take time to prudently deploy the offering proceeds.
As a result, until we use the capital raised in this offering to leverage
growth in our interest-earning assets and interest-bearing liabilities, which
will reduce our equity as a percentage of assets, our return on equity will be
reduced.
Our anti-takeover provisions may affect the value of our stock or prevent our
shareholders from realizing a takeover premium on their common stock
Our Certificate of Incorporation and By-laws contain certain provisions which
may delay, discourage or prevent an attempted acquisition or change of control.
In addition, certain provisions of New York law may delay, discourage or
prevent an attempted acquisition or change in control. These considerations
could adversely affect the market price of our stock and/or reduce the
likelihood of our shareholders realizing a takeover premium.
You may need regulatory approval to acquire our stock
Individuals, alone or acting in concert with others, seeking to acquire 10% or
more of any class of our voting securities must comply with the Change in Bank
Control Act, which requires the prior approval of the Federal Reserve Board for
any such acquisition. If you seek to acquire 5% or more of any class of our
voting securities or to otherwise control us, you may be required to obtain the
prior approval of the Federal Reserve Board.
13
<PAGE>
Forward-Looking Statements
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws. Forward-looking statements
typically are identified by use of terms such as "may," "will," "should,"
"might," "expect," "anticipate," "estimate" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
our actual results could differ materially from those contained in the forward-
looking statements due to a number of factors. You should carefully consider
the statements under "Risk Factors" and other sections of this prospectus which
address additional factors that could cause our actual results to differ from
those set forth in the forward-looking statements.
Use of Proceeds
The net proceeds to be received by us from the offering, after deducting the
underwriting discount and estimated offering expenses, will be approximately
$11.3 million, or $13.9 million if the underwriters' over-allotment option is
fully exercised. Although we have no specific plans for the net proceeds, we
have elected to proceed with an offering at this time in order to have funds
available to, among other things, support anticipated balance sheet growth by
increasing the size of our loan portfolio. Pending the application of the net
proceeds, we intend to invest such proceeds in short-term, interest-bearing
securities, certificates of deposit or guaranteed obligations of the United
States.
In addition, we may use the proceeds in connection with future acquisition
opportunities that we decide to pursue. At present, we are not actively
pursuing any acquisitions, however we are constantly evaluating potential
targets, the acquisition of which would be consistent with our strategic plan.
We will not receive any proceeds from the sale of shares by the YMCA of
Batavia. It is anticipated that the YMCA of Batavia will use the proceeds from
its sale of shares to finance various programs and capital projects, including
the construction of a new YMCA in Warsaw, New York.
Dividend Policy
Holders of common stock are entitled to receive dividends when, as and if
declared by our Board of Directors out of funds legally available therefor.
While we have paid dividends on our common stock since 1994 and presently
intend to pay an initial quarterly dividend of $0.08 per share, there can be no
assurance that we will pay dividends in the future. The declaration and payment
of dividends on our common stock will depend upon our earnings and financial
condition, liquidity and capital requirements, the general economic and
regulatory climate, our ability to service any equity or debt obligations
senior to the common stock and other factors deemed relevant by our Board of
Directors. In addition, pursuant to the terms of the documents governing our
outstanding preferred stock, we are required to pay dividends on our preferred
stock before paying any dividends on junior securities, such as the common
stock.
For the foreseeable future, our principal source of cash will be dividends paid
by our four subsidiary banks. There are certain restrictions on the payment of
such dividends imposed by federal and state banking laws, regulations and
authorities. As of March 31, 1999, an aggregate of approximately $16.5 million
was available for payment of dividends by the subsidiary banks to us without
regulatory approval under applicable restrictions. Regulatory authorities could
administratively impose stricter limitations on the ability of the four
subsidiary banks to pay dividends to us if such limits were deemed appropriate
to preserve certain capital adequacy requirements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Supervision and Regulation--The Banks."
14
<PAGE>
Capitalization
The following table sets forth our consolidated capitalization as of March 31,
1999 on a historical basis and as adjusted to give effect to the sale by us of
903,133 shares of common stock offered hereby at the initial offering price of
$14.00 per share, net of the underwriting discount and offering expenses.
<TABLE>
<CAPTION>
March 31, 1999
---------------------
Actual As Adjusted
-------- -----------
(dollars in
thousands)
<S> <C> <C>
Borrowings............................................... $ 19,929 $ 19,929
Shareholders' Equity:
3% Cumulative Preferred stock; $100 par value, 10,000
shares authorized; 1,829 shares issued and
outstanding........................................... 183 183
8.48% Cumulative Preferred stock; $100 par value,
200,000 shares authorized; 176,734 shares issued and
outstanding........................................... 17,673 17,673
Common stock, $.01 par value; 50,000,000 shares
authorized;
10,200,400 shares issued, 9,915,600 shares
outstanding; 11,103,533 shares
issued and 10,818,733 shares outstanding, as
adjusted(1)........................................... 102 111
Additional paid-in capital............................. 2,838 14,088
Retained earnings...................................... 77,788 77,788
Accumulated other comprehensive income................. 453 453
Less common stock held in treasury, at cost............ (526) (526)
-------- --------
Total shareholders' equity............................... 98,511 109,770
-------- --------
Total capitalization..................................... $118,440 $129,699
======== ========
Leverage capital ratio................................... 9.63% 10.66%
Tier 1 capital ratio..................................... 13.89% 15.38%
Total capital ratio...................................... 15.15% 16.64%
</TABLE>
- ------------------
(1) Does not include an aggregate of 1,610,353 shares of common stock reserved
for issuance under our stock incentive plans, pursuant to which options to
purchase an aggregate of 296,142 shares of our common stock will be granted
on the offering date. The options to purchase 282,142 shares granted under
our management stock incentive plan will vest at a rate of 20% per year
over five years, and the options to purchase 14,000 shares granted under
our directors' stock incentive plan will vest at a rate of 33 1/3% per year
over three years, in each case with the first installment vesting in June
2000.
The net proceeds from this offering will initially be deposited in cash and
cash equivalents and will subsequently be applied as described in "Use of
Proceeds." The "as adjusted" ratios have been calculated assuming we invest the
net proceeds in assets with a weighted average risk weighting of 68%, which is
consistent with our historical risk-weighted asset composition.
15
<PAGE>
Dilution
Our net tangible book value on March 31, 1999 was approximately $76.9 million,
or $7.76 per share. "Net tangible book value" is common shareholders' equity
less intangible assets. "Net tangible book value per common share" is net
tangible book value divided by the total number of common shares outstanding
before the offering.
After giving effect to certain adjustments relating to the offering, our pro
forma net tangible book value on March 31, 1999 would have been $88.2 million,
or $8.15 per common share. The adjustments made to determine pro forma net
tangible book value per common share are: (1) an increase in total assets to
reflect the net proceeds of the offering as described under "Use of Proceeds"
(reflecting the initial public offering price of $14.00 per common share and
before deducting the underwriting discount and estimated expenses of the
offering), and (2) the addition of the 903,133 shares offered by us under this
prospectus to the number of common shares outstanding.
If the underwriters exercise their over-allotment option in full, the pro forma
net tangible book value per common share would be $8.24 and dilution of net
tangible book value per common share to new investors would be $5.76.
The following table illustrates the pro forma increase in net tangible book
value of $0.39 per common share and the dilution to new investors, which is the
difference between the offering price per share and net tangible book value per
common share.
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $14.00
Net tangible book value per common share as of March 31,
1999........................................................ 7.76
Increase in net tangible book value per common share
attributable to the offering................................ 0.39
----
Pro forma net tangible book value per common share as of
March 31, 1999 after giving effect to the offering.......... 8.15
------
Dilution per common share to new investors in the offering... $ 5.85
======
</TABLE>
The calculations set forth above do not take into account an aggregate of
1,610,353 shares of common stock reserved for issuance under our stock
incentive plans, pursuant to which options to purchase an aggregate of 296,142
shares of our common stock will be granted on the offering date. The options to
purchase 282,142 shares granted under our management stock incentive plan will
vest at a rate of 20% per year over five years, and the options to purchase
14,000 shares granted under our directors' stock incentive plan will vest at a
rate of 33 1/3% per year over three years, in each case with the first
installment vesting in June 2000.
16
<PAGE>
Selected Consolidated Financial Data
(dollars in thousands, except per share data)
This section presents our selected historical financial data. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements. The selected data in this section is not
intended to replace the financial statements.
We derived the consolidated statement of income data for the years ended
December 31, 1998, 1997 and 1996, and consolidated statements of financial
condition data as of December 31, 1998 and 1997, from the audited consolidated
financial statements in this prospectus. We derived the consolidated statement
of income data for the years ended December 31, 1995 and 1994, and consolidated
statements of financial condition data as of December 31, 1996, 1995 and 1994,
from consolidated audited financial statements which are not included in this
prospectus. Our consolidated financial statements as of and for the years ended
December 31, 1998, 1997, 1996 and 1995 have been audited by KPMG LLP. Our
consolidated financial statements as of and for the year ended December 31,
1994 have been audited by PricewaterhouseCoopers LLP. The selected data
provided below as of and for the three month periods ended March 31, 1999 and
1998 are derived from our unaudited consolidated financial statements included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of and for the
Three Months As of and for the Years
Ended March 31, Ended December 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income......... $ 18,452 $ 17,670 $ 72,870 $ 67,168 $ 61,192 $ 57,016 $ 46,432
Interest expense........ 7,636 7,453 30,958 27,851 24,514 22,628 16,635
--------- --------- --------- --------- --------- --------- ---------
Net interest income..... 10,816 10,217 41,912 39,317 36,678 34,388 29,797
Provision for loan
losses................. 525 573 2,732 2,829 1,740 1,405 1,232
--------- --------- --------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses............ 10,291 9,644 39,180 36,488 34,938 32,983 28,565
Noninterest income...... 1,825 1,350 6,381 5,733 5,165 4,405 3,923
Noninterest expense..... 6,321 5,678 24,602 22,084 19,796 20,062 18,807
--------- --------- --------- --------- --------- --------- ---------
Income before income
taxes.................. 5,795 5,316 20,959 20,137 20,307 17,326 13,681
Income taxes............ 2,049 1,930 7,354 7,295 7,232 6,223 4,579
--------- --------- --------- --------- --------- --------- ---------
Net income.............. 3,746 3,386 13,605 12,842 13,075 11,103 9,102
Preferred dividends..... 376 378 1,506 1,513 1,522 1,523 1,523
--------- --------- --------- --------- --------- --------- ---------
Net income available to
common................. $ 3,370 $ 3,008 $ 12,099 $ 11,329 $ 11,553 $ 9,580 $ 7,579
========= ========= ========= ========= ========= ========= =========
Per Common Share
Data:(1)
Net income per common
share.................. $ 0.34 $ 0.30 $ 1.22 $ 1.14 $ 1.16 $ 0.96 $ 0.76
Book value.............. 8.13 7.21 7.94 6.94 5.96 5.02 3.92
Tangible book value(2).. 7.76 6.74 7.54 6.46 5.40 4.37 3.18
Cash dividends declared. 0.0755 0.05 0.26 0.22 0.20 0.18 0.09
Common dividend payout
ratio.................. 22.23% 16.49% 21.43% 19.28% 16.78% 18.16% 11.82%
Weighted average shares
outstanding............ 9,915,600 9,928,500 9,915,921 9,926,678 9,939,197 9,944,559 9,949,800
Shares outstanding at
end of period.......... 9,915,600 9,928,500 9,915,600 9,928,500 9,927,700 9,940,200 9,946,200
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
As of and for the
Three Months As of and for the Years
Ended March 31, Ended December 31,
------------------ ------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets............ $993,170 $898,341 $976,185 $880,512 $802,266 $721,994 $672,807
Securities.............. 276,014 230,884 248,038 209,207 189,843 185,445 198,225
Loans................... 660,402 604,912 655,427 602,477 552,189 481,005 420,969
Allowance for loan
losses................. 9,860 8,551 9,570 8,145 7,129 6,183 5,303
Intangible assets....... 3,747 4,586 3,957 4,796 5,635 6,474 7,312
Total deposits.......... 860,088 777,255 850,455 767,726 707,703 640,237 607,097
Borrowings.............. 19,929 16,424 13,862 12,066 5,814 1,739 1,739
Preferred equity........ 17,856 17,927 17,858 17,927 18,052 18,075 18,086
Common equity........... 80,655 71,547 78,720 68,916 59,202 49,926 38,980
Total shareholders'
equity................. 98,511 89,474 96,578 86,843 77,254 68,001 57,066
Average Balance Sheet
Data:
Total assets............ $983,147 $880,873 $918,408 $834,786 $763,789 $702,671 $628,624
Securities.............. 273,932 225,151 227,352 197,992 192,860 197,722 180,022
Loans................... 656,908 602,416 621,418 571,877 511,033 448,509 392,574
Allowance for loan
losses................. 9,686 8,290 8,910 7,370 6,634 5,692 4,869
Total deposits.......... 850,225 764,293 798,954 730,098 677,244 628,796 566,879
Borrowings.............. 20,709 14,465 13,635 10,585 2,856 1,999 3,124
Preferred equity........ 17,857 17,927 17,883 17,980 18,073 18,082 18,095
Common equity........... 80,166 70,579 74,323 64,286 55,375 44,892 37,884
Total shareholders'
equity................. 98,023 88,506 92,206 82,266 73,448 62,974 55,979
Performance Ratios:
Return on average
assets(3).............. 1.55% 1.56% 1.48% 1.54% 1.71% 1.58% 1.45%
Return on average common
equity(3).............. 17.05% 17.28% 16.28% 17.62% 20.86% 21.34% 20.01%
Net interest margin
(tax-equivalent)(3)(4). 4.94% 5.21% 5.06% 5.21% 5.31% 5.40% 5.25%
Efficiency ratio(5)..... 47.74% 47.07% 48.31% 47.02% 45.47% 49.69% 53.30%
Asset Quality
Ratios:(6)(7)
Excluding impact of
government guarantees
on portion of loan
portfolio:
Nonperforming loans to
total loans........... 0.93% 1.20% 0.93% 1.24% 1.06% 0.89% 0.81%
Nonperforming assets to
total loans and other
real estate........... 1.22% 1.58% 1.24% 1.62% 1.38% 1.21% 1.04%
Net loan charge-offs to
average loans(3)...... 0.14% 0.11% 0.21% 0.32% 0.16% 0.12% 0.12%
Allowance for loan
losses to total loans. 1.49% 1.41% 1.46% 1.35% 1.29% 1.29% 1.26%
Allowance for loan
losses to
nonperforming loans... 160.90% 117.88% 156.86% 108.95% 121.51% 143.76% 155.24%
Including impact of
government guarantees
on portion of loan
portfolio:(8)
Nonperforming loans,
net of government
guaranteed portion, to
total loans........... 0.71% 0.97% 0.71% 1.00% 0.79% 0.76% 0.76%
Nonperforming assets,
net of government
guaranteed portion, to
total loans and other
real estate........... 1.00% 1.35% 1.03% 1.38% 1.12% 1.07% 0.99%
Allowance for loan
losses to
nonperforming loans,
net of government
guaranteed portion.... 211.00% 145.30% 204.49% 134.67% 162.43% 169.86% 165.31%
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
As of and for the
Three Months As of and for the Years
Ended March 31, Ended December 31,
------------------ ---------------------------------
1999 1998 1998 1997 1996 1995 1994
-------- -------- ----- ----- ----- ----- -----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Ratios:(6)
Average common equity to
average total assets... 8.15% 8.01% 8.09% 7.70% 7.25% 6.39% 6.02%
Leverage ratio.......... 9.63% 9.56% 9.58% 9.53% 9.05% 8.57% 7.65%
Tier 1 risk-based
capital ratio.......... 13.89% 13.83% 13.71% 13.58% 13.25% 12.76% 11.08%
Risk-based capital
ratio.................. 15.15% 15.08% 14.96% 14.81% 14.50% 14.01% 12.31%
Intangibles to tangible
common equity.......... 4.87% 6.85% 5.29% 7.48% 10.52% 14.90% 23.09%
</TABLE>
- ------------------
(1) All of the per share data in the table above has been adjusted to reflect
the 100-for-one stock split effected June 9, 1999.
(2) Calculated by dividing common shareholders' equity less intangible assets,
by common shares outstanding at end of the applicable period.
(3) For purposes of computing these ratios, all interim periods have been
annualized.
(4) Calculated using a 35% federal income tax rate.
(5) Calculated by dividing total noninterest expense less other real estate
expense by tax-equivalent net interest income plus noninterest income other
than securities gains and losses.
(6) Except for the ratio of net loan charge-offs to average loans and the ratio
of average common equity to average total assets, all asset quality ratios
and capital ratios have been stated as of the end of the applicable period.
(7) Nonperforming loans include nonaccrual loans, restructured loans and
accruing loans 90 days or more delinquent.
(8) Nonperforming loans, net of government guaranteed portion, is total
nonperforming loans less the portion of the principal amount of all
nonperforming loans that is guaranteed by the SBA or the Farm Service
Agency of the USDA.
19
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Overview
We have a strong record of financial performance, with compounded annual growth
rates for the five-year period ended December 31, 1998 of 11.3% in total
assets, 11.4% in total loans and 14.5% in net income available to common
shareholders. At December 31, 1998, our total assets were $976.2 million, an
increase of $405.5 million from $570.7 million at December 31, 1993. Our total
loans at December 31, 1998 were $655.4 million, an increase of $274.0 million
from $381.4 million at December 31, 1993. Our net income available to common
shareholders for 1998 was $12.1 million, nearly twice the amount of our net
income available to common shareholders of $6.1 million for 1993.
We compare ourselves to a group of approximately 200 bank holding companies
with assets of between $500 million and $1 billion based on information
published by the Federal Reserve Board in its Uniform Bank Holding Company
Performance Report. Our return on average assets of 1.48% in 1998 ranked us in
the top 20% of this peer group with respect to that index. Our tax-equivalent
net interest margin has exceeded 5.00% in each of the last five years, and our
margin of 5.06% for 1998 placed us in the top 25% of our peer group with
respect to that indicator. Our efficiency ratio has been below 50% since 1995,
and our efficiency ratio of 48.31% in 1998 ranked us in the top 10% of our peer
group with respect to that benchmark.
Our net income in 1998 increased to $13.6 million from $12.8 million in 1997,
representing an increase of 5.9%. Our earnings per common share in 1998
increased to $1.22 from $1.14 in 1997, representing an increase of 7.0%. The
increase in net income reflected higher net interest income and noninterest
income which more than offset increases in noninterest expense. The increase in
net interest income was driven by growth in interest-earning assets, including
strong loan growth, as well as solid growth in lower-cost core deposits, which
includes all of our deposits other than certificates of deposit in amounts of
$100,000 or more. In 1998, our average cost of funds was 3.59%. At December 31,
1998, approximately 79.8% of our deposits were core deposits and 15.1% of our
total deposits were noninterest-bearing demand deposits. Our return on average
assets was 1.48% in 1998 and 1.54% in 1997, and our return on average common
equity was 16.28% in 1998 and 17.62% in 1997.
Our strong financial trends continued into the three month period ended March
31, 1999 ("First Quarter 1999") with net income of $3.7 million, representing a
10.6% increase over the three month period ended March 31, 1998 ("First Quarter
1998"). Our annualized return on average assets for First Quarter 1999 was
1.55%, and our annualized return on average common equity was 17.05%. Our
efficiency ratio remained steady at 47.74%. Our earnings increase was led by
solid revenue growth, with net interest income for First Quarter 1999 of $10.8
million increasing $600,000, or 5.9%, from net interest income for First
Quarter 1998. Our increased volumes offset a decline in net interest margin to
4.94%. Noninterest income for First Quarter 1999 of $1.8 million reflects an
increase of $475,000, or 35.2%, over First Quarter 1998, primarily due to
higher fees from our deposit service charge activities.
Our balance sheet growth in First Quarter 1999 reflects slower growth since
December 31, 1998 than during prior periods which is consistent with seasonal
patterns we have traditionally experienced. Our total assets at March 31, 1999
were $993.2 million, compared to $976.2 million at December 31, 1998,
representing an increase of $17.0 million or 1.7%. Our loan portfolio increased
to $660.8 million at March 31, 1999 from $655.8 million at December 31, 1998,
representing an increase $5.0 million or 0.8%. Deposits increased by $9.6
million, or 1.1%, to $860.1 million from $850.5 million at December 31, 1998.
20
<PAGE>
Information as of and for the three month periods ended March 31, 1999 and 1998
Results of Operations
Net Interest Income
Net interest income, which is the principal source of our earnings, represents
the amount by which interest income on interest-earning assets, including loans
and securities, exceeds interest expense incurred on interest-bearing
liabilities, including deposits and other borrowings. Interest rate
fluctuations and changes in the amount and type of earning assets and
liabilities affect net interest income. One of the primary indicators that we
use to measure our performance in the area of net interest income is net
interest margin. Net interest margin represents the difference between the
yield on our total interest-earning assets and the cost of our funds divided by
interest-earning assets.
Net interest income for First Quarter 1999 was $10.8 million, an increase of
$600,000, or 5.9%, from $10.2 million of net interest income recorded for First
Quarter 1998. This increase resulted from a 12.5% increase in average earning
assets, derived primarily from growth in loans and securities, the benefits of
which were partially offset by a 27 basis point decline in our net interest
margin. Average earning assets increased by $103.3 million, or 12.5%, in First
Quarter 1999 as compared to First Quarter 1998, with average loans increasing
by $54.5 million, or 9.0%, and average investment securities increasing by
$50.9 million, or 24.2%. Our average core deposits increased by $62.0 million,
or 10.1%, to $677.5 million. Our average wholesale funds, which include our
time deposits over $100,000 plus our borrowings, increased by $30.2 million, or
18.5%, to $193.4 million.
Our net interest margin for First Quarter 1999, on a tax-equivalent basis,
declined to 4.94% from 5.21% in First Quarter 1998. This decline resulted from
a declining interest rate environment, a relatively flat yield curve and
intense competitive pressures. Our yield on interest-earning assets in First
Quarter 1999 decreased to 8.27% from 8.86% in First Quarter 1998, while our
cost of interest-bearing liabilities decreased to 4.13% from 4.48% over the
same period.
21
<PAGE>
The following table presents, for the periods indicated, the total dollar
amount of average balances, our interest income from average interest-earning
assets, the resulting yields and our interest expense on average interest-
bearing liabilities expressed both in dollars and rates. Except as indicated in
the footnotes to this table, no tax-equivalent adjustments have been made and
all average balances are daily average balances. Nonaccruing loans have been
included in the yield calculations in this table.
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1999 March 31, 1998
---------------------------- ----------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
interest-bearing
deposits............. $ 12,667 $ 155 4.96% $ 14,792 $ 208 5.70%
Investment
securities(1).......... 261,465 4,066 6.31 210,567 3,447 6.64
Loans(2):
Commercial and
agricultural.......... 352,112 7,781 8.96 312,059 7,493 9.74
Residential real
estate................ 179,837 4,007 9.04 171,719 3,994 9.43
Consumer and home
equity................ 124,959 2,971 9.64 118,637 2,936 10.04
-------- ------- ------ -------- ------- ------
Total loans........... 656,908 14,759 9.11 602,415 14,423 9.71
-------- ------- ------ -------- ------- ------
Total interest-earning
assets................. 931,040 18,980 8.27 827,774 18,078 8.86
-------- ------- ------ -------- ------- ------
Interest-bearing
liabilities:
Interest-bearing
checking.............. 97,284 334 1.39 86,343 305 1.43
Savings and money
market................ 176,415 1,079 2.48 158,672 1,043 2.67
Certificates of
deposit............... 454,867 5,949 5.30 415,492 5,885 5.74
Borrowed funds......... 20,709 274 5.37 14,465 220 6.17
-------- ------- ------ -------- ------- ------
Total interest-
bearing liabilities. 749,275 7,636 4.13 674,972 7,453 4.48
-------- ------- ------ -------- ------- ------
Net interest income..... $11,344 $10,625
======= =======
Net interest rate
spread................. 4.14% 4.38%
====== ======
Net earning assets...... $181,765 $152,802
======== ========
Net interest margin on
earning assets(3)...... 4.94% 5.21%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities.......... 124.26% 122.64%
====== ======
</TABLE>
- ------------------
(1) Amounts shown are amortized cost. In order to make pre-tax income and
resultant yields on tax-exempt securities comparable to those on taxable
securities and loans, a tax-equivalent adjustment to interest earned from
tax-exempt securities has been computed using a federal income tax rate of
35%.
(2) Net of deferred loan fees and expenses.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets and is presented on an annualized basis.
22
<PAGE>
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
periods indicated. Information is provided in each category with respect to:
(1) changes attributable to changes in volume (changes in volume multiplied by
the prior rate); (2) changes attributable to changes in rate (changes in rate
multiplied by the prior volume); and (3) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
vs Three Months Ended March 31, 1998
------------------------------------
Increase (Decrease)
Due to Total
--------------------------- Increase
Volume Rate (Decrease)
------------ ------------- ---------------
(dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold and interest
bearing deposits................. $ (27) $ (26) $ (53)
Investment securities............. 1,710 (1,091) 619
Loans:
Commercial....................... 1,207 (1,201) 6
Commercial real estate........... 888 (819) 69
Agricultural..................... 949 (736) 213
Residential real estate.......... 718 (705) 13
Consumer and home equity......... 348 (313) 35
------------ ------------- ----------
Total loans..................... 4,110 (3,774) 336
------------ ------------- ----------
Total interest-earning assets... 5,793 (4,891) 902
------------ ------------- ----------
Interest-bearing liabilities:
Interest-bearing checking......... 108 (79) 29
Savings and money market.......... 366 (330) 36
Certificates of deposit........... 1,992 (1,928) 64
Borrowed funds.................... 220 (166) 54
------------ ------------- ----------
Total interest-bearing
liabilities.................... 2,686 (2,503) 183
------------ ------------- ----------
Net interest income................ $ 3,107 $ (2,388) $ 719
============ ============= ==========
</TABLE>
Provision for Loan Losses
We establish provisions for loan losses, which are charged to operations, to
reflect our allowance for loan losses at a level deemed appropriate by
management based on the factors discussed under "--Financial Condition--
Allowance for Loan Losses."
The provision for loan losses was $525,000 for First Quarter 1999, down from
$573,000 for First Quarter 1998. Actual loan charge-offs, net of recoveries,
were $235,000 for First Quarter 1999, up from $167,000 for First Quarter 1998.
The current provision reflects the additional risk related to growth in our
loan portfolio. As a result, we continue to strengthen our allowance for loan
losses to total loans (1.49% at March 31, 1999, up from 1.46% at December 31,
1998) and our allowance for loan losses to nonperforming loans net of
government guarantees (211.00% at March 31, 1999, up from 204.49% at December
31, 1998).
23
<PAGE>
Noninterest Income
The following table presents the major categories of noninterest income during
the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts........... $ 953 $ 668
Loan servicing fees........................... 297 290
Mutual fund income............................ 137 95
Insurance income.............................. 76 14
Gain on sale of assets........................ 107 41
Other......................................... 255 242
----------- -----------
Total noninterest income..................... $ 1,825 $ 1,350
=========== ===========
</TABLE>
Noninterest income increased to $1.8 million for First Quarter 1999 from $1.4
million for First Quarter 1998, representing an increase of 35.2%. Service
charges on deposit accounts increased $285,000 over this period due to an
increase in demand deposit customers, selected increases in deposit service
pricing and reductions in deposit service charge waivers. Mutual fund income
increased $42,000 and insurance income $62,000 over this period, due to a
greater emphasis on sales of mutual fund and insurance products. An increase of
$66,000 in gain on the sale of assets resulted principally from the sale of
other real estate.
Noninterest Expense
The following table presents the major categories of noninterest expense for
the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
--------- ---------
(dollars in
thousands)
<S> <C> <C>
Salaries and benefits................................ $ 3,524 $ 3,108
Occupancy and equipment.............................. 1,045 942
Supplies and postage................................. 346 293
Amortization of intangibles.......................... 210 210
Professional fees.................................... 126 121
Advertising.......................................... 110 76
Other real estate.................................... 34 42
Other expense........................................ 926 886
--------- ---------
Total noninterest expense........................... $ 6,321 $ 5,678
========= =========
</TABLE>
Noninterest expense increased to $6.3 million for First Quarter 1999 from $5.7
million for First Quarter 1998. The increase of $643,000, or 11.3%, reflects a
continuing investment in our future with additions to staff and upgrades to
facilities and technology. Notwithstanding this increase, our efficiency ratio
for First Quarter 1999 only increased to 47.7%, compared to 47.1% for First
Quarter 1998.
Salaries and employee benefits increased to $3.5 million for First Quarter 1999
from $3.1 million for First Quarter 1998, representing an increase of 13.4%.
Upgrades to our salary and incentive compensation programs, additions to our
management team and additional staff hired at a new branch account for the
increase. Occupancy and equipment costs increased $103,000, or 10.9%, as we
incurred additional non-recurring costs associated with improving
communications and technology.
24
<PAGE>
Income Taxes.
Income tax expense increased to $2.0 million for First Quarter 1999 from $1.9
million for First Quarter 1998. The effective tax rate for First Quarter 1999
was 35.4%, compared to 36.3% for First Quarter 1998. The decline in the
effective tax rate is attributable to an increased percentage of our pre-tax
income being derived from interest income on tax-exempt securities.
Financial Condition
Loan Portfolio
Our total loans increased to $660.8 million at March 31, 1999 from $655.8
million at December 31, 1998, representing an increase of $5.0 million, or
0.8%. In First Quarter 1999, our commercial loans increased by $4.0 million, or
3.4%, while commercial real estate loans increased by $4.8 million, or 4.5%.
These increases demonstrate our ability to attract new commercial lending
business in a slow-growth environment as a result of effective business
development. All of our banks are active small business lenders and are
directly involved in economic development programs in their markets. At March
31, 1999, commercial loans totaled $121.8 million, representing 18.5% of total
loans, and commercial real estate loans totaled $111.7 million, representing
16.9% of total loans. During First Quarter 1999, agricultural loans decreased
by $2.0 million, or 1.6%, to $121.8 million. The drop in agricultural loans is
consistent with seasonal patterns we have traditionally experienced.
Residential mortgage lending is our largest lending product by dollar volume.
As of March 31, 1999, our residential loan portfolio decreased by $2.2 million,
or 1.2%, from December 31, 1998 and totaled $179.9 million, or 27.2%, of the
total loan portfolio. The drop in residential real estate loans is also
consistent with seasonal patterns. We have been able to compete successfully
for residential mortgage business during the heavy refinancing period of the
last few years through aggressive business development efforts and by providing
a broad line of variable and fixed-rate mortgage products.
We also offer a broad range of consumer loan products. Consumer and home equity
loans grew by $369,000, or 0.3%, during First Quarter 1999 from First Quarter
1998, and at March 31, 1999, totaled $125.6 million.
The following table summarizes, as of March 31, 1999, our loan portfolio by
type of loan:
<TABLE>
<CAPTION>
Percent of
Amount Total Loans
-------- -----------
(dollars in
thousands)
<S> <C> <C>
Commercial.......................................... $121,780 18.5%
Commercial real estate.............................. 111,716 16.9
Agricultural........................................ 121,793 18.4
Residential real estate............................. 179,940 27.2
Consumer and home equity............................ 125,567 19.0
-------- ------
Total loans, gross................................. $660,796 100.00%
======
Net deferred fees................................... (394)
Allowance for loan losses........................... (9,860)
--------
Total loans, net................................... $650,542
========
</TABLE>
Loan Policy. Our loan policy establishes the general parameters of the types of
loans that are desirable, emphasizing cash flow and collateral coverage. Under
our decentralized management structure, credit decisions are made at the
subsidiary bank level by officers who generally have had long personal
experience with most of their commercial and many of their individual
borrowers, helping to ensure thorough underwriting and sound
25
<PAGE>
credit decisions. Each subsidiary bank approves its own loan policy that must
comply with our overall loan policy. Revisions to these bank subsidiary
policies are reviewed by us before they are presented to the banks' Boards of
Directors for approval. These policies establish the lending authority of
individual loan officers as well as the loan authority of the banks' loan
committees. Typical loan authority for any individual is less than $100,000 and
less than $300,000 for the officer's loan committee at each bank subsidiary.
Each bank subsidiary has an outside loan committee, which includes members of
the subsidiary bank's Board of Directors, that acts on loans over $300,000. In
addition, any loans over $3.0 million must be approved by Financial
Institutions' Loan Approval Committee. Generally we have a policy of limiting
our exposure to any one borrower to $4.0 million in order to limit our credit
risk, although the aggregate legal lending limit for our banks on a combined
basis is $13.1 million. We presently have only six loans in excess of $4.0
million and none of our loans exceeds $7.1 million.
Commercial Loans. We originate commercial loans in our primary market area and
underwrite them based on the borrower's ability to service the loan from
operating income. We offer a broad range of commercial lending products,
including term loans and lines of credit. Short- and medium-term commercial
loans, primarily collateralized, are made available to businesses for working
capital (including inventory and receivables), business expansion (including
acquisition of real estate, expansion and improvements) and the purchase of
equipment. The purpose of a loan generally determines its structure. As a
general practice, we take a collateral lien on any available real estate,
equipment or other assets owned by the borrower and obtain a personal guarantee
of the borrower. Working capital loans are generally collateralized by short-
term assets, whereas term loans are primarily collateralized by long-term
assets. We also utilize government loan guarantee programs offered by the Small
Business Administration (or "SBA") when appropriate. See "--Government
Guarantee Programs" below. Commercial loans still present risks even if they
are collateralized and/or guaranteed. For example, the collateral is often
specialized equipment which may not be readily saleable and which may decline
in value quicker than the associated loan balance. Also, the ability of
borrowers and guarantors to repay their loans is heavily dependent on their
cash flow, which may fluctuate. At March 31, 1999, $25.0 million, or 20.5%, of
our aggregate commercial loan portfolio was at fixed rates while $96.8 million,
or 79.5%, was at variable rates.
Commercial Real Estate Loans. In addition to commercial loans secured by real
estate, we make commercial real estate loans to finance the purchase of real
property which generally consists of real estate with completed structures. Our
commercial real estate loans are secured by first liens on the real estate,
typically have variable interest rates and are amortized over a 10 to 15 year
period. Payments on loans secured by such properties are often dependent on the
successful operation or management of the properties. Accordingly, repayment of
these loans may be subject to adverse conditions in the real estate market or
the economy to a greater extent than other types of loans. Additionally, if we
do need to foreclose on these loans, the collateral tends to be very
specialized and of a type of commercial property for which there may be a very
limited resale market. We seek to minimize these risks in a variety of ways
when we underwrite these loans, including by giving careful consideration to
the property's operating history, future operating projections, current and
projected occupancy, location and physical condition. The underwriting analysis
also includes credit verification, appraisals and a review of the borrower's
financial condition. At March 31, 1999, $34.4 million, or 30.8%, of our
aggregate commercial real estate loan portfolio was at fixed rates while $77.3
million, or 69.2%, was at variable rates.
Agricultural Loans. We provide agricultural loans for short-term crop
production, farm equipment financing and agricultural real estate financing,
including term loans and lines of credit. Short- and medium-term agricultural
loans, primarily collateralized, are made available for working capital (crops
and cattle), business expansion (including acquisition of real estate,
expansion and improvement) and the purchase of equipment. We evaluate
agricultural borrowers primarily based on their historical profitability, level
of experience in their particular agricultural industry, overall financial
capacity and the availability of secondary collateral to withstand economic and
natural variations common to the industry. Agricultural loans present risks
associated with events caused by nature as well as changes in commodity prices
which can fluctuate significantly. To address these risks, we routinely make
on-site visits and inspections in order to monitor and identify the
26
<PAGE>
condition of the collateral. We also closely monitor commodity prices and
inventory build-up in various commodity categories to better anticipate price
changes in key agricultural products that could adversely affect our borrowers'
ability to repay their loans. Our experience in over a century of agricultural
lending in Western and Central New York has produced a substantial experience
base on which to draw in evaluating and underwriting agricultural loans. We
utilize government loan guarantee programs offered by the SBA and the Farm
Service Agency (or "FSA") of the United States Department of Agriculture where
available and appropriate. See "--Government Guarantee Programs" below. At
March 31, 1999, $16.6 million, or 13.6%, of our aggregate agricultural loan
portfolio was at fixed rates while $105.2 million, or 86.4%, was at variable
rates.
Residential Real Estate Loans. We originate fixed and variable rate one-to-four
family residential real estate loans collateralized by owner-occupied
properties located in our market area. We offer a variety of real estate loan
products which generally are amortized over five to thirty years. Loans
collateralized by one-to-four family residential real estate generally have
been originated in amounts of no more than 80% of appraised value or have
mortgage insurance. We normally require mortgage title insurance and hazard
insurance. We sell most of our fixed rate one-to-four family residential
mortgages to the Federal Home Loan Mortgage Corporation ("Freddie Mac") and
retain the rights to service the mortgages. At March 31, 1999, we serviced
$150.5 million in residential mortgages, all of which have been sold to Freddie
Mac. At March 31, 1999, $86.8 million, or 48.2%, of our aggregate residential
real estate loan portfolio was at fixed rates while $93.1 million, or 51.8%,
was at variable rates.
Consumer and Home Equity Loans. We make direct and indirect "A-" credit
automobile loans, recreational vehicle loans, boat loans, home improvement
loans, fixed and open-ended home equity loans, personal loans (collateralized
and uncollateralized), student loans and deposit account collateralized loans.
We also issue Visa Cards that provide consumer credit lines. The terms of these
loans typically range from 12 to 120 months and vary based upon the nature of
the collateral and the size of loan. The majority of the consumer lending
program is underwritten on a secured basis using the customer's home or the
financed automobile, mobile home, boat or snowmobile as collateral. We use
credit scoring to efficiently administer the underwriting of this portfolio.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciating assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment for the outstanding loan balance. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections are
dependent on the borrower's continuing financial stability, and thus are more
likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Furthermore, the application of various federal and state laws may
limit the amount which can be recovered on such loans. At March 31, 1999, $91.4
million, or 72.8%, of our aggregate consumer and home equity loan portfolio was
at fixed rates while $34.2 million, or 27.2%, was at variable rates.
Government Guarantee Programs. We participate in government loan guarantee
programs offered by the SBA and FSA. At March 31, 1999, we had loans with an
aggregate principal balance of $30.6 million that were covered by guarantees
under these programs. The guarantees only cover a certain percentage of these
loans. By participating in these programs, we are able to broaden our base of
borrowers while minimizing credit risk.
The SBA administers 14 separate loan programs designed to facilitate lending to
small and minority-owned businesses. The most popular program is the 7(A) Loan
Guaranty Program, which typically covers loans of up to $1 million. The maximum
SBA guaranty is 75% of the principal amount of the loan, and the maximum amount
that the SBA can guarantee for a single loan is generally $750,000. For loans
of $100,000 or less, the SBA can guarantee up to 80% of the principal amount.
Eligibility for SBA-guaranteed loans is generally determined by the borrower's
size (measured by annual sales or number of employees, in certain cases) and
type of business. The proceeds of SBA-guaranteed loans can be used for most
business purposes, including construction, renovation, purchase of equipment or
inventory, and working capital. There are also a number of
27
<PAGE>
small-loan programs, such as the Specialized 7(a) SBA Low Doc Program, for
loans under $150,000. Loan maturities range from seven years for working
capital and equipment loans to 25 years for real estate loans. Interest rates
are established by the originating lender, but are subject to SBA maximums,
which are pegged to the prime rate. Wyoming County Bank is certified as a
"Preferred Lender" under the SBA's PLP Program, which allows it to make
guaranteed 7(A) loans without prior SBA approval.
We also participate in the Certified Lenders Program sponsored by the FSA. The
FSA offers direct and guaranteed farm ownership and operating loans to farmers
who are temporarily unable to obtain private, commercial credit. Under the
guaranteed loan program, the FSA guarantees loans made by conventional
agricultural lenders for up to 90% of principal (up to 95% in very limited
circumstances). The lender is responsible for servicing the loan. All loans
must meet certain qualifying criteria to be eligible for guarantees, and the
FSA has the right and responsibility to monitor the lender's servicing
activities. Farmers interested in guaranteed loans apply to a conventional
lender, who then arranges for the FSA guarantee. Applicants unable to qualify
for a guaranteed loan may be eligible for a direct loan from the FSA. Farm
Ownership Loans may be used to purchase farmland, construct or repair
buildings, develop farmland to promote soil or water conservation or to
refinance debt. Operating Loans may be used to purchase livestock, farm
equipment, feed, seed, fuel, insurance and to refinance other obligations under
certain conditions. The FSA can guarantee both of these types of loans in
principal amounts of up to $700,000. Operating Loans normally have a seven-year
term and Farm Ownership Loans can have terms up of to 40 years. Interest rates
cannot exceed the rate charged by the lender to its average farm borrower.
Wyoming County Bank has been designated as a "Preferred Certified Lender" by
the FSA which generally provides for expedited approval of loans, greater
flexibility to use the lender's own forms and a five-year line of credit.
Loan Maturities. The following table sets forth contractual maturity ranges of
our loan portfolio by loan type as of March 31, 1999. Demand loans having no
stated schedule of repayment and no stated maturity and overdrafts are reported
as due in one year or less.
<TABLE>
<CAPTION>
After One After
Within but Within Five
One Year Five Years Years Total
-------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Commercial............................... $56,078 $ 35,492 $ 30,210 $121,780
Commercial real estate................... 6,819 12,803 92,094 111,716
Agricultural............................. 21,529 23,526 76,738 121,793
Residential real estate.................. 2,832 9,061 168,047 179,940
Consumer and home equity................. 6,534 65,162 53,871 125,567
------- -------- -------- --------
Total................................... $93,792 $146,044 $420,960 $660,796
======= ======== ======== ========
</TABLE>
Delinquencies and Nonperforming Assets
We have several procedures in place to assist in maintaining the overall
quality of our loan portfolio. We have established specific underwriting
guidelines to be followed by our lending officers. We also monitor each bank
subsidiary's delinquency levels on a monthly basis for any adverse trends.
There can be no assurance, however, that our loan portfolio will not become
subject to increasing pressures from deteriorating borrower credit due to
general economic conditions.
Every commercial and agribusiness borrower is given a credit grade by the
originating officer which is then confirmed or modified by the subsidiary
bank's loan committee. These credit grades are maintained and adjusted upon the
review of the borrower's situation either when a new borrowing request is
considered, or during the annual review of updated financial information.
The National Bank of Geneva has an internal loan review department which
performs a formal loan review of that bank's loan portfolio on an ongoing
basis. The scope of that review is approved by that bank's Board of
28
<PAGE>
Directors. Our other three banks contract with an outside firm to conduct a
formal loan review annually on an outsourced basis. The National Bank of Geneva
also conducts an outsourced loan review every two or three years. The scope of
each of the reviews is approved by the applicable bank's Boards of Directors.
The results of all loan reviews are presented in detail to each subsidiary
bank's Board of Directors as well as to our Chief Executive Officer.
Through the loan review process, we maintain an internally classified loan list
which, along with delinquency reporting, helps management assess the overall
quality of the loan portfolio and the adequacy of the allowance for loan
losses. Loans classified as "substandard" are those loans with clear and
defined weaknesses such as a higher leveraged position, unfavorable financial
ratios, uncertain repayment sources or poor financial condition which may
jeopardize recoverability of the debt. Loans classified as "doubtful" are those
loans which have characteristics similar to substandard accounts but with an
increased risk that a loss may occur, or at least a portion of the loan may
require a charge-off if liquidated at present. Loans classified as "loss" are
those loans which are in the process of being charged-off.
In addition to the internally classified loan list and delinquency list of
loans, we maintain a separate "watch list" which further assists in monitoring
our loan portfolio. Watch list loans have one or more deficiencies that require
attention in the short-term or in a pertinent ratio of the loan agreement that
have weakened to a point where more frequent monitoring is warranted. These
loans do not have all of the characteristics of a classified loan (substandard
or doubtful) but do show weakened elements compared with those of a
satisfactory credit. We review these loans to assist in assessing the adequacy
of the allowance for loan losses.
We typically require appraisals on loans secured by real estate as well as
valuations of equipment. With respect to potential problem loans, an evaluation
of the borrower's overall financial condition is made to determine the need, if
any, for possible writedowns or appropriate additions to the allowance for loan
losses.
We generally place a loan on nonaccrual status and cease accruing interest when
the payment of principal or interest is delinquent for 90 days, or earlier in
some cases, unless the loan is in the process of collection and the underlying
collateral further supports the carrying value of the loan.
As of March 31, 1999, we had $8.1 million in nonperforming assets, of which
$1.5 million were government guaranteed, resulting in total nonperforming
assets, net of government guarantees, of $6.6 million, or 1.00% of total loans
and other real estate. This reflects an improving trend from December 31, 1998
when $8.2 million in assets were nonperforming, of which $1.4 million were
government guaranteed, resulting in nonperforming assets net of government
guarantees of $6.8 million, or 1.03%, of total loans and other real estate.
29
<PAGE>
The following table presents information regarding nonperforming assets at
March 31, 1999:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Nonaccruing loans(1):
Commercial......................................... $ 844
Commercial real estate............................. 1,136
Agricultural....................................... 1,997
Residential real estate............................ 878
Consumer and home equity........................... 390
------
Total nonaccruing loans........................... 5,245
Accruing loans 90 days or more delinquent........... 883
------
Total nonperforming loans......................... 6,128
Other real estate owned(2).......................... 1,943
------
Total nonperforming assets....................... 8,071
Less: government guaranteed portion of nonperforming
loans.............................................. 1,455
------
Total nonperforming assets, net of government
guaranteed portion................................. $6,616
======
Nonperforming loans to total loans.................. 0.93%
======
Nonperforming loans, net of government guaranteed
portion, to total loans(3)......................... 0.71%
======
Nonperforming assets to total loans and other real
estate............................................. 1.22%
======
Nonperforming assets, net of government guaranteed
portion, to total
loans and other real estate........................ 1.00%
======
</TABLE>
- ------------------
(1) Loans are placed on nonaccrual status when they become 90 days past due if
they have been identified as presenting uncertainty with respect to the
collectibility of interest or principal.
(2) Other real estate owned balances are shown net of related allowances.
(3) Nonperforming loans, net of government guaranteed portion, is total
nonperforming loans less the portion of the principal amount of all
nonperforming loans that is guaranteed by the SBA or FSA.
The following table summarizes the principal balance of loan delinquencies in
our loan portfolio as of March 31, 1999:
<TABLE>
<CAPTION>
90 Days
60-89 Days or More
----------- ------------
(dollars in thousands)
<S> <C> <C>
Commercial.................................... $ 444 $ 941
Commercial real estate........................ 236 1,602
Agricultural.................................. -- 2,065
Residential real estate....................... 451 970
Consumer and home equity...................... 369 550
----------- -----------
Total........................................ $ 1,500 $ 6,128
=========== ===========
Delinquent loans to total loans............... 0.23% 0.93%
=========== ===========
</TABLE>
30
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. The allowance reflects our estimate of the
amount of reasonably foreseeable losses, based on the following factors:
. the economic conditions in the region in which we do business;
. the credit conditions of our loan customers, as well as the condition and
value of underlying collateral;
. the amount of historical charge-off experience; and
. the evaluation of the loan portfolio by the loan review function.
Charge-offs occur when loans are deemed to be uncollectible.
Management presents a quarterly review of the allowance for loan losses to each
subsidiary bank's Board of Directors as well as to Financial Institutions'
Board of Directors, indicating any change in the allowance since the last
review and any recommendations as to adjustments in the allowance.
In order to determine the adequacy of the allowance for loan losses, we
consider the risk classification and delinquency status of loans and other
factors, such as collateral value, government guarantees, portfolio
composition, trends in economic conditions and the financial strength of
borrowers. We establish specific allowances for loans which we believe require
reserves greater than those allocated according to their classification or
delinquency status. An allowance is also established for each loan type based
upon our rolling average of historical charge-off experience taking into
account levels and trends in delinquencies, loan volumes, economic and industry
trends and concentrations of credit. We then charge to operations a provision
for loan losses to maintain the allowance for loan losses at an adequate level
determined by the foregoing methodology.
Actual charge-offs, net of recoveries, totaled $235,000 for First Quarter 1999,
compared to net charge-offs of $167,000 for First Quarter 1998. Our charge-
offs, net of recoveries on an annualized basis, were 0.14% of average loans
outstanding for First Quarter 1999 compared to 0.11% of average loans
outstanding for First Quarter 1998.
31
<PAGE>
The following table presents an analysis of the allowance for loan losses and
other related data for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 1998
--------- ---------
(dollars in
thousands)
<S> <C> <C>
Balance at the beginning of the period............... $ 9,570 $ 8,145
Charge-offs:
Commercial.......................................... 95 6
Commercial real estate.............................. 4 79
Agricultural........................................ -- --
Residential real estate............................. 67 10
Consumer and home equity............................ 120 120
--------- ---------
Total charge-offs.................................. 286 215
--------- ---------
Recoveries:
Commercial.......................................... 31 6
Commercial real estate.............................. 1 21
Agricultural........................................ -- --
Residential real estate............................. -- --
Consumer and home equity............................ 19 21
--------- ---------
Total recoveries................................... 51 48
--------- ---------
Net charge-offs...................................... 235 167
Provision for loan losses............................ 525 573
--------- ---------
Balance at the end of the period..................... $ 9,860 $ 8,551
========= =========
Ratio of net charge-offs to average loans
(annualized)........................................ 0.14% 0.11%
========= =========
Allowance for loan losses to total loans............. 1.49% 1.41%
========= =========
Allowance for loan losses to nonperforming loans..... 160.90% 117.88%
========= =========
Allowance of loan losses to nonperforming loans, net
of government guaranteed portion(1)................. 211.00% 145.30%
========= =========
</TABLE>
- ------------------
(1) Nonperforming loans, net of government guaranteed portion, is total
nonperforming loans less the portion of the principal amount of all
nonperforming loans that is guaranteed by the SBA or FSA.
The following table describes the allocation of the allowance for loan losses
among various categories of loans and certain other information as of March 31,
1999. The allocation is made for analytical purposes and is not necessarily
indicative of the categories in which future losses may occur. The total
allowance is available to absorb losses from any segment of the loan portfolio.
<TABLE>
<CAPTION>
Allowance Percent of
Amount Total Loans
--------- -----------
(dollars in
thousands)
<S> <C> <C>
Commercial......................................... $2,895 18.5%
Commercial real estate............................. 1,960 16.9
Agricultural....................................... 1,289 18.4
Residential real estate............................ 1,376 27.2
Consumer and home equity........................... 1,484 19.0
Unallocated........................................ 856 --
------ -----
Total allowance for loan losses................... $9,860 100.0%
====== =====
</TABLE>
32
<PAGE>
Where we are able to identify specific loans or categories of loans where
specific amounts of reserves are required, allocations are assigned to those
categories. We also maintain a reserve that is sufficient to absorb an
estimated amount of unidentified potential losses based on management's
perception of economic conditions, loan portfolio growth, historical charge-off
experience and exposure concentrations. Our historic charge-off rate has been
comparatively low, reflecting conservative underwriting, the use of government
guarantees, a predictable economic environment and aggressive collection
efforts. However, we are aware that our regional and state economies have
demonstrated increasing instability which could contribute to job losses and
otherwise adversely affect a broad variety of business sectors. We believe that
the diversified nature of our loan portfolio properly spreads this risk.
Securities Activities
Our investment securities policy is contained within our overall
asset/liability policy. This policy dictates that investment decisions will be
made based on the safety of the investment, liquidity requirements, potential
returns, cash flow targets and desired risk parameters. In pursuing these
objectives, we consider the ability of an investment to provide earnings
consistent with factors of quality, maturity, marketability and risk
diversification. The Board of each subsidiary bank adopts an asset/liability
policy containing an investment securities policy within the parameters of our
overall asset/liability policy. The treasurer of each subsidiary bank is
responsible for securities portfolio decisions within the established policies,
with review and oversight provided by each bank's asset/liability committee.
Our investment securities strategy centers on providing liquidity to meet loan
demand and deposit withdrawal activity, meeting pledging requirements, managing
overall interest rate risk and maximizing portfolio yield. Subsidiary bank
policies generally limit security purchases to:
.U.S. Treasury securities;
. U.S. government agency securities;
. pass-through mortgage-backed securities and collateralized mortgage
obligations issued by the Federal National Mortgage Association (FNMA), the
Government National Mortgage Association (GNMA) and Freddie Mac;
. investment grade municipal securities, including tax, revenue and bond
anticipation notes and general obligation and revenue notes and bonds;
. certain creditworthy un-rated securities issued by municipalities; and
. investment grade corporate debt.
33
<PAGE>
Amortized Cost and Fair Value of Securities. Statement of Financial Accounting
Standards (SFAS) No. 115 requires that securities be designated as either held
to maturity or available for sale or trading, depending on our intent regarding
the particular security. We do not have a trading portfolio. The following
table sets forth certain information regarding the amortized cost and fair
values of our securities portfolio as of March 31, 1999:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
(in thousands)
<S> <C> <C>
Securities held to maturity:
U.S. Treasury and agency............................. $ 9,469 $ 9,535
State and municipal obligations...................... 83,320 84,261
-------- --------
Total securities held to maturity................... 92,789 93,796
-------- --------
Debt securities available for sale:
U.S. Treasury and agency............................. 137,808 137,576
Mortgage-backed securities........................... 23,898 23,949
State and municipal obligations...................... 9,020 9,141
Corporate bonds...................................... 8,521 8,524
-------- --------
Total debt securities available for sale............ 179,247 179,190
-------- --------
Equity securities available for sale.................. 3,212 4,035
-------- --------
Total securities.................................... $275,248 $277,021
======== ========
</TABLE>
Contractual Maturities and Weighted Average Yields of Securities at Amortized
Cost. The following table sets forth certain information regarding the
contractual maturities and weighted average yields of our securities portfolio
as of March 31, 1999. The state and municipal obligations are the only
securities for which the weighted average yields are shown on a taxable-
equivalent basis.
<TABLE>
<CAPTION>
One Year More Than One More Than Five
or Less Year to Five Years Years to Ten Years After Ten Years Total
------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and
agency................ $14,045 6.22% $ 74,673 5.83% $58,559 5.99% $ -- 0.00% $147,277 5.93%
Mortgaged-backed
securities............ 424 6.86 11,582 6.11 7,146 6.04 4,746 6.29 23,898 6.14
State and municipal
obligations........... 19,085 5.30 56,559 6.10 15,601 6.59 1,095 7.70 92,340 6.04
Corporate bonds........ -- -- 5,798 6.09 1,973 6.26 750 6.22 8,521 6.14
------- ---- -------- ---- ------- ---- ------ ---- -------- ----
Total debt securities... 33,554 5.70 148,612 5.96 83,279 6.11 6,591 6.52 272,036 5.99
Equity securities....... -- -- -- -- -- -- -- -- 3,212 6.93
------- ---- -------- ---- ------- ---- ------ ---- -------- ----
Total securities........ $33,554 5.70% $148,612 5.96% $83,279 6.11% $6,591 6.52% $275,248 6.00%
======= ==== ======== ==== ======= ==== ====== ==== ======== ====
</TABLE>
U.S. Treasury Securities. At March 31, 1999, our U.S. Treasury securities
portfolio totaled $23.9 million, of which $18.9 million was classified as
available for sale. At that date $5.0 million was classified as held to
maturity, with a fair value of $5.0 million. The portfolio consists of
securities that mature in less than three years. Our current strategy is to
maintain investments in instruments with such maturities, as they can be used
for liquidity purposes, as collateral for borrowings and for prepayment
protection. Because alternative taxable and tax-exempt investments provided
more attractive yields than
34
<PAGE>
U.S. Treasury securities, the portion of our portfolio represented by such
securities declined from 9.8% of the portfolio at December 31, 1998 to 8.7% at
March 31, 1999.
U.S. Federal Agency Securities. At March 31, 1999, our U.S. federal agency
securities portfolio totaled $123.1 million, of which $118.6 million was
classified as available for sale. At that date $4.5 million was classified as
held to maturity, with a fair market value of $4.5 million. This portfolio
consists almost exclusively of callable securities. These callable securities
provide additional yield and are maintained at a level consistent with our
interest rate risk profile.
State and Municipal Obligations. At March 31, 1999, our portfolio of state and
municipal obligations totaled $92.5 million, of which $9.2 million was
classified as available for sale. At that date $83.3 million was classified as
held to maturity, with a fair value of $84.3 million. State and municipal
obligations increased $4.7 million from December 31, 1998. More favorable
yields being available on new purchases of this category of security when
compared to other taxable investment alternatives has accounted for the growth
in this portfolio.
Mortgage-Backed Securities. Mortgage-backed securities are created by the
pooling of mortgages and the issuance of a security with an interest rate that
is less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of single-
family or multi-family mortgages, although we focus our investments on
mortgage-backed securities backed by single-family mortgages. The issuers of
such securities (generally U.S. Government agencies and government sponsored
enterprises, including FNMA, Freddie Mac and GNMA) pool and resell the
participation interests in the form of securities to investors and guarantee
the payment of principal and interest to these investors. Mortgage-backed
securities yield less than the loans that underlie such securities because of
the cost of payment guarantees and credit enhancements. In addition, mortgage-
backed securities are usually more liquid than individual mortgage loans and
may be used to collateralize certain of our liabilities and obligations. Our
March 31, 1999 investment in mortgage-backed securities remained relatively
consistent with our December 31, 1998 levels at $23.9 million. As with all
interest rate-sensitive assets and liabilities, investments in mortgage-backed
securities are maintained at a level consistent with our interest rate risk
profile.
Corporate Bonds. Our corporate bond portfolio at March 31, 1999 totaled $8.5
million, all of which was classified as available for sale. The portfolio
increased $5.7 million from December 31, 1998 as a result of our decision to
further diversify our investment portfolio and increase investment yield. Our
policy limits investments in corporate bonds to no more than 10% of total
investments and to bonds rated as Baa or better by Moody's Investors Service,
Inc. or BBB or better by Standard & Poor's Ratings Services.
Equity Securities. At March 31, 1999, our equity securities portfolio totaled
$4.0 million, all of which was classified as available for sale. The portfolio
consisted of a total of $900,000 of common stock issued by seven different
companies. We also had $3.0 million and $94,000 of common stock of the FHLB and
the Federal Reserve Bank, respectively.
Deposits
Deposits are our primary funding source for earning assets. We have a broad
array of core deposit products including checking accounts, interest-bearing
transaction accounts (NOW), savings and money market accounts and certificates
of deposit under $100,000. Our core deposit base consists almost exclusively of
in-market deposits and there are no brokered deposits. We supplement our core
deposits with certificates of deposit over $100,000, which are largely from in-
market municipal, business and individual customers.
Deposits at March 31, 1999 were $860.1 million, an increase of $9.6 million, or
1.1%, from $850.5 million at December 31, 1998. Core deposits decreased $5.5
million to $673.4 million at March 31, 1999, with certificates of deposit over
$100,000 increasing $15.1 million to $186.7 million. Core deposits represented
78.3% of our
35
<PAGE>
total deposits of $860.1 million at March 31, 1999. The daily average balances,
percentage composition and weighted average rates paid on deposits for the
three months ended March 31, 1999 are presented below:
<TABLE>
<CAPTION>
Percent
of Total Weighted
Average Average Average
Balance Deposits Rate
-------- -------- --------
(dollars in thousands)
<S> <C> <C> <C>
Interest-bearing checking............................ $ 97,284 11.4% 1.39%
Savings and money market............................. 176,415 20.8 2.48
Certificates of deposit under $100,000............... 282,156 33.2 5.41
Certificates of deposit over $100,000................ 172,711 20.3 5.13
-------- ----- ----
Total interest-bearing deposits..................... 728,566 85.7 4.10
Demand deposits...................................... 121,659 14.3 --
-------- ----- ----
Total deposits...................................... $850,225 100.0% 3.51%
======== ===== ====
</TABLE>
The following table sets forth our certificates of deposit by time remaining to
maturity at March 31, 1999:
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
-------- ----------- ------------ ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000.............. $ 66,025 $61,533 $ 90,249 $60,783 $278,590
Certificates of deposit over
$100,000................... 133,441 24,830 19,933 8,508 186,712
-------- ------- -------- ------- --------
Total certificates of
deposit................... $199,466 $86,363 $110,182 $69,291 $465,302
======== ======= ======== ======= ========
</TABLE>
Information as of and for the Years Ended December 31, 1998, 1997 and 1996
Results of Operations
Net Interest Income
1998 versus 1997. Net interest income was $41.9 million in 1998 compared with
$39.3 million in 1997, an increase of $2.6 million or 6.6%. Net interest
margin, on a tax-equivalent basis, was 5.06% for 1998 and 5.21% for 1997. Net
interest income increased as a result of a 10.2% increase in average earning
assets, derived primarily from growth in loans and securities, which was
partially offset by a 15 basis point decline in the net interest margin.
Average earning assets grew by $80.6 million in 1998, with average loans
growing by $49.5 million, or 8.7%, and average investment securities growing by
$29.4 million, or 14.8%. Our average core deposits increased by 7.4% or $44.3
million in 1998 to $640.6 million. Our average wholesale funds increased in
1998 by $27.6 million, or 19.1%, to $172.0 million.
Our net interest margin declined by 15 basis points in 1998 as a result of a
declining interest rate environment, a relatively flat yield curve and intense
competitive pressures. The yield on interest-earning assets decreased to 8.65%
in 1998 from 8.76% in 1997, while the cost of interest-bearing liabilities
increased to 4.41% in 1998 from 4.33% in 1997.
Due to an increased volume of average earning assets which more than offsets
the decrease in net interest margin, our tax-equivalent net interest income in
1998 increased by $2.9 million, or 7.2%, from our net interest income in 1997.
36
<PAGE>
1997 versus 1996. Our net interest income in 1997 increased to $39.3 million
from $36.7 million in 1996, representing an increase of $2.6 million, or 7.2%.
This increase was due to average interest-earning assets increasing by $65.3
million, or 9.1%, primarily through loan growth. The increase was, however,
partially offset by an increase in average interest-bearing liabilities of
$53.5 million, or 9.1%, during 1997 and the cost of such liabilities increasing
17 basis points while our interest-earning assets yield increased only four
basis points. As a result, our net interest margin, on a tax-equivalent basis,
declined to 5.21% in 1997 from 5.31% in 1996.
The following table presents, for the years indicated, the total dollar amount
of average balances, the interest income from average interest-earning assets,
the resulting yields and the interest expense on average interest-bearing
liabilities expressed both in dollars and rates. Except as indicated in the
footnotes to this table, no tax-equivalent adjustments have been made and all
average balances are daily average balances. Nonaccruing loans have been
included in the yield calculations in this table.
<TABLE>
<CAPTION>
1998 1997 1996 1995
--------------------------- --------------------------- --------------------------- --------------------
Average Interest Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/
Balance Paid Rate Balance Paid Rate Balance Paid Rate Balance Paid
----------- -------- ------ ----------- -------- ------ ----------- -------- ------ ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning
assets:
Federal funds sold
and interest-
bearing deposits. $ 15,406 $ 842 5.47% $ 14,204 $ 788 5.55% $ 14,875 $ 813 5.47% $ 15,078 $ 923
Investment
securities(1).... 227,352 14,784 6.50 197,992 13,149 6.64 192,860 12,529 6.50 197,722 12,614
Loans(2):
Commercial and
agricultural.... 324,039 30,807 9.51 297,262 28,510 9.59 257,176 25,116 9.77 220,762 22,677
Residential real
estate.......... 174,785 16,211 9.27 161,976 15,007 9.26 150,047 13,816 9.21 131,611 12,228
Consumer and home
equity.......... 122,594 12,072 9.85 112,639 11,213 9.95 103,809 10,383 10.00 96,136 9,922
-------- ------- ------ -------- ------- ------ -------- ------- ------ -------- -------
Total loans...... 621,418 59,090 9.51 571,877 54,730 9.57 511,032 49,315 9.65 448,509 44,827
-------- ------- ------ -------- ------- ------ -------- ------- ------ -------- -------
Total interest-
earning assets. 864,176 74,716 8.65 784,073 68,667 8.76 718,767 62,657 8.72 661,309 58,364
-------- ------- ------ -------- ------- ------ -------- ------- ------ -------- -------
Interest-bearing
liabilities:
Interest-bearing
checking........ 91,627 1,335 1.46 83,271 1,211 1.45 79,976 1,236 1.55 76,272 1,395
Savings and money
market.......... 163,966 4,301 2.62 166,646 4,447 2.67 179,678 4,834 2.69 189,341 5,445
Certificates of
deposit......... 433,067 24,523 5.66 382,670 21,534 5.63 327,180 18,222 5.57 281,326 15,603
Borrowed funds... 13,635 799 5.86 10,585 658 6.22 2,856 222 7.77 1,998 185
-------- ------- ------ -------- ------- ------ -------- ------- ------ -------- -------
Total interest-
bearing
liabilities.... 702,295 30,958 4.41 643,172 27,850 4.33 589,690 24,514 4.16 548,937 22,628
-------- ------- ------ -------- ------- ------ -------- ------- ------ -------- -------
Net interest
income........... $43,758 $40,817 $38,143 $35,736
======= ======= ======= =======
Net interest rate
spread........... 4.24% 4.43% 4.56%
====== ====== ======
Net earning
assets........... $161,881 $140,901 $129,077 $112,372
======== ======== ======== ========
Net interest
margin on earning
assets(3)........ 5.06% 5.21% 5.31%
====== ====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities...... 123.05% 121.91% 121.89%
====== ====== ======
</TABLE>
- -----------------
(1) Amounts shown are amortized cost. In order to make pre-tax income and
resultant yields on tax-exempt securities comparable to those on taxable
securities and loans, a tax-equivalent adjustment to interest earned from
tax-exempt securities has been computed using a federal income tax rate of
35%.
(2) Net of deferred loan fees and expenses.
(3) The net interest margin is equal to net interest income divided by average
interest-earning assets.
37
<PAGE>
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected our interest income and interest expense during the
years indicated. Information is provided in each category with respect to: (1)
changes attributable to changes in volume (changes in volume multiplied by the
prior rate); (2) changes attributable to changes in rate (changes in rate
multiplied by the prior volume); and (3) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
--------------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- --------- --------- ---------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
interest bearing
deposits.............. $ 64 $ (10) $ 54 $ (54) $ 29 $ (25)
Investment securities.. 1,984 (349) 1,635 363 257 620
Loans:
Commercial............ 826 (34) 792 1,195 (180) 1,015
Commercial real
estate............... 16 (52) (36) 910 (67) 843
Agricultural.......... 1,673 (132) 1,541 1,727 (191) 1,536
Residential real
estate............... 1,188 16 1,204 1,104 87 1,191
Consumer and home
equity............... 1,017 (158) 859 934 (104) 830
---------- --------- ------ ---------- --------- ------
Total loans.......... 4,720 (360) 4,360 5,870 (455) 5,415
---------- --------- ------ ---------- --------- ------
Total interest-
earning assets...... 6,768 (719) 6,049 6,179 (169) 6,010
---------- --------- ------ ---------- --------- ------
Interest-bearing
liabilities:
Interest-bearing
checking deposits..... 134 (10) 124 54 (79) (25)
Savings and money
market deposits....... (72) (74) (146) (351) (36) (387)
Certificates of
deposit............... 2,855 134 2,989 3,136 176 3,312
Borrowed funds......... 164 (23) 141 432 4 436
---------- --------- ------ ---------- --------- ------
Total interest-
bearing liabilities. 3,081 27 3,108 3,271 65 3,336
---------- --------- ------ ---------- --------- ------
Net interest income..... $ 3,687 $ (746) $2,941 $ 2,908 $ (234) $2,674
========== ========= ====== ========== ========= ======
</TABLE>
Provision for Loan Losses
1998 versus 1997. The provision for loan losses decreased $97,000, or 3.4%, to
$2.7 million in 1998, from $2.8 million in 1997. Actual loan charge-offs, net
of recoveries, were $1.3 million in 1998 as compared to $1.8 million in 1997.
Charge-offs in 1997 reflect an unusual charge of $460,000 relating to a
borrower's fraudulent credit actions. The 1998 provision reflects our decision
to strengthen our allowance for loan losses to total loans to 1.46% in 1998
from 1.35% in 1997 and an increase in our allowance for loan losses to
nonperforming loans net of government guarantees to 204.49% in 1998 from
134.67% in 1997.
1997 versus 1996. During 1997, we made provisions totaling $2.8 million to the
allowance for loan losses, an increase of $1.1 million compared to $1.7 million
in 1996. Loan charge-offs, net of recoveries, increased by $1.0 million to $1.8
million in 1997 as compared to $794,000 in 1996. The provision for loan losses
and recorded loan charge-offs in 1997 were inflated by a $460,000 charge
related to a borrower's fraudulent credit actions discussed above and our
ongoing efforts to minimize the amount of nonperforming loans in the portfolio.
38
<PAGE>
Noninterest Income
The following table presents the major categories of noninterest income during
the years indicated:
<TABLE>
<CAPTION>
Year Ended December
31,
--------------------
1998 1997 1996
------ ------ ------
(dollars in
thousands)
<S> <C> <C> <C>
Service charges on deposit accounts................. $3,234 $2,706 $2,684
Loan servicing fees................................. 1,190 1,137 925
Mutual fund income.................................. 672 471 404
Insurance income.................................... 238 175 138
Gain on sale of assets.............................. 181 353 253
Other............................................... 866 891 761
------ ------ ------
Total noninterest income........................... $6,381 $5,733 $5,165
====== ====== ======
</TABLE>
1998 versus 1997. Noninterest income increased to $6.4 million in 1998 from
$5.7 million in 1997, representing an increase of 11.3%. Service charges on
deposit accounts increased $528,000, or 19.5%, to $3.2 million in 1998 from
$2.7 million in 1997. This increase resulted from an increase in demand deposit
customers, selected increases in deposit service pricing and reductions in
deposit service charge waivers. Loan servicing fees increased $53,000, or 4.7%,
from $1.1 million in 1997 to $1.2 million in 1998 consistent with the increase
in our portfolio of loans serviced for others. Mutual fund income increased
$201,000, or 42.7%, from $471,000 in 1997 to $672,000 in 1998 due to a greater
emphasis on the sale of such investment products. A decrease of $172,000 in
gains on the sale of assets, principally loans, from $353,000 in 1997 to
$181,000 in 1998, partially offset the increase in other categories of
noninterest income.
1997 versus 1996. Noninterest income increased to $5.7 million in 1997 from
$5.2 million in 1996, representing an increase of 11.0%. Loan servicing fees
increased $212,000, or 22.9%, to $1.1 million in 1997 from $925,000 in 1996 as
a result of the increase in our portfolio of loans serviced for others. Gain on
sale of assets, principally loans, increased $100,000 to $353,000 in 1997.
Mutual fund income increased $67,000 to $471,000 in 1997.
Noninterest Expense
The following table presents the major categories of noninterest expense for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
------- ------- -------
(dollars in thousands)
<S> <C> <C> <C>
Salaries and employee benefits................... $13,092 $11,713 $10,740
Occupancy and equipment.......................... 3,855 3,809 2,987
Supplies and postage............................. 1,363 1,211 1,187
Amortization of intangibles...................... 839 839 839
Professional fees................................ 809 328 273
Advertising...................................... 487 476 422
Other real estate................................ 378 198 103
Other expense.................................... 3,779 3,510 3,245
------- ------- -------
Total noninterest expense....................... $24,602 $22,084 $19,796
======= ======= =======
</TABLE>
1998 versus 1997. Noninterest expense increased to $24.6 million in 1998 from
$22.1 million in 1997, representing an increase of 11.4%. This increase
primarily reflects an investment in our future with additions to
39
<PAGE>
staff and upgrades to facilities and technology. Key members were added to our
management team, several branch facilities were expanded and one new branch was
opened. We also added features to our technological capabilities including an
internet banking product, check imaging and upgrades to our overall data
processing capabilities in preparation for the year 2000. Even with these
expenditures, our efficiency ratio, which measures the amount of overhead
required to produce a dollar of revenue, remained at a relatively low level.
For the year ended December 31, 1998 our efficiency ratio was 48.3%, compared
to 47.0% in 1997.
Salaries and employee benefits increased to $13.1 million in 1998 from $11.7
million in 1997, representing an increase of 11.8%. Upgrades to our salary and
incentive compensation programs, additions to our management team and
additional staff hired at a new branch account for the increase. Occupancy and
equipment costs increased only $46,000, or 1.2%, as additional non-recurring
costs associated with opening our new corporate headquarters and operations
center in 1997 were replaced with costs associated with upgrading branch
facilities and acquiring new technology in 1998. Legal and professional fees
increased $481,000 in 1998 principally as a result of consulting fees incurred
in connection with a "Best Practice and Income Enhancement" project which
should assist us in improving efficiencies and fee income in the future.
1997 versus 1996. Noninterest expense increased to $22.1 million in 1997 from
$19.8 million in 1996, representing an increase of 11.6%. This increase can be
partially attributed to staff increases from the opening of three new branches
and additional lending personnel. Salaries and benefits increased to $11.7
million in 1997 from $10.7 million in 1996, representing an increase of 9.1%.
Occupancy and equipment expense increased to $3.8 million in 1997 from $3.0
million in 1996, representing an increase of 27.5%. These costs were associated
with upgrading the facilities at several of our branch locations, opening the
three new branches and opening our new corporate headquarters and operations
facility.
Income Taxes
Income tax expense increased to $7.4 million in 1998 from $7.3 million in 1997,
representing an increase of 0.8%. Income tax expense was $7.3 million in 1997,
compared to $7.2 million in 1996. The effective tax rate was 35.1% in 1998,
compared to 36.2% in 1997 and 35.6% in 1996. The fluctuation in the effective
tax rate from year to year is attributable to changes in the percentage of our
pre-tax income being derived from interest income on tax-exempt securities.
Financial Condition
Loan Portfolio
Our total loans increased to $655.8 million at December 31, 1998 from $602.9
million at December 31, 1997, representing an increase of $52.9 million or
8.8%. In 1998, our commercial loans increased $11.9 million or 11.3%, while
commercial real estate loans increased by $7.7 million or 7.7%. These increases
demonstrate our ability to attract new commercial lending business in a slow-
growth environment as a result of effective business development and the
dissatisfaction of customers of larger regional banks. At December 31,1998,
commercial loans totaled $117.8 million, representing 17.9% of total loans, and
commercial real estate loans totaled $106.9 million, representing 16.3% of
total loans.
Agricultural loans, which include agricultural real estate loans, represent
18.9% of our total loan portfolio. Between December 31, 1997 and December 31,
1998, agricultural loans increased by $16.2 million, or 15.1%, to $123.7
million.
As of December 31, 1998, our residential loan portfolio had grown by $11.4
million or 6.7% from December 31, 1997, and totaled $182.2 million or 27.8% of
the total loan portfolio. We were able to successfully compete for this
business during the heavy refinancing period of the last few years through
aggressive business development efforts and by providing a broad line of
variable and fixed-rate mortgage products.
40
<PAGE>
Consumer and home equity loans grew by $5.7 million, or 4.8%, in 1998 and ended
the year at $125.2 million, representing 19.1% of the total loan portfolio.
The following table summarizes, as of the dates indicated, our loan portfolio
by type of loan:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $117,750 17.9% $105,811 17.6% $100,854 18.2% $ 82,538 17.1% $ 72,968 17. 3%
Commercial real estate.. 106,948 16.3 99,273 16.5 98,118 17.8 85,774 17.8 76,142 18.1
Agricultural............ 123,754 18.9 107,546 17.8 86,674 15.7 69,223 14.4 57,810 13.7
Residential real estate. 182,177 27.8 170,736 28.3 157,490 28.5 144,407 30.0 122,880 29.2
Consumer and home
equity................. 125,198 19.1 119,506 19.8 109,456 19.8 99,515 20.7 91,600 21.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans, gross..... $655,827 100.0% $602,872 100.0% $552,592 100.0% $481,457 100.0% $421,400 100.0%
===== ===== ===== ===== =====
Net deferred fees....... (400) (395) (403) (452) (431)
Allowance for loan
losses................. (9,570) (8,145) (7,129) (6,183) (5,303)
-------- -------- -------- -------- --------
Total loans, net....... $645,857 $594,332 $545,060 $474,822 $415,666
======== ======== ======== ======== ========
</TABLE>
Loan Maturities. The following table sets forth contractual maturity ranges of
the loan portfolio by loan type as of December 31, 1998. Demand loans having no
stated schedule of repayment and no stated maturity and overdrafts are reported
as due in one year or less.
<TABLE>
<CAPTION>
After One After
Within but Within Five
One Year Five Years Years Total
-------- ---------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Commercial............................... $ 56,583 $ 37,191 $ 23,976 $117,750
Commercial real estate................... 4,716 15,418 86,814 106,948
Agricultural............................. 29,268 28,533 65,953 123,754
Residential real estate.................. 4,210 11,527 166,440 182,177
Consumer and home equity................. 6,572 66,104 52,522 125,198
-------- -------- -------- --------
Total................................... $101,349 $158,773 $395,705 $655,827
======== ======== ======== ========
</TABLE>
Delinquencies and Nonperforming Assets
As of December 31, 1998, we had $8.2 million in nonperforming assets, of which
$1.4 million were government guaranteed, resulting in total nonperforming
assets, net of government guarantees, of $6.8 million or 1.03% of total loans
and other real estate. This reflects an improving trend from December 31, 1997
when $9.8 million in assets were nonperforming, of which $1.4 million were
government guaranteed, resulting in nonperforming assets net of guarantees of
$8.4 million, or 1.38% of total loans and other real estate. This improvement
is a result of successful efforts to liquidate collateral securing several
nonperforming loans, improved milk pricing for our agribusiness nonperforming
loans, tightening underwriting standards in response to general economic
conditions as well as intensified collection efforts overall.
41
<PAGE>
The following table presents information regarding nonperforming assets at the
dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans(1):
Commercial............................ $1,250 $ 970 $1,048 $1,025 $1,360
Commercial real estate................ 995 1,648 1,877 1,550 856
Agricultural.......................... 2,340 2,669 1,218 579 30
Residential real estate............... 733 1,325 679 357 332
Consumer and home equity.............. 423 431 517 402 332
------ ------ ------ ------ ------
Total loans.......................... 5,741 7,043 5,339 3,913 2,910
Accruing loans 90 days or more
delinquent............................ 360 433 528 388 506
------ ------ ------ ------ ------
Total nonperforming loans............ 6,101 7,476 5,867 4,301 3,416
Other real estate owned(2)............. 2,084 2,309 1,801 1,541 989
------ ------ ------ ------ ------
Total nonperforming assets.......... 8,185 9,785 7,668 5,842 4,405
Less: government guaranteed portion of
nonperforming loans................... 1,421 1,428 1,478 661 208
------ ------ ------ ------ ------
Total nonperforming assets, net of
government guaranteed portion......... $6,764 $8,357 $6,190 $5,181 $4,197
====== ====== ====== ====== ======
Nonperforming loans to total loans..... 0.93% 1.24% 1.06% 0.89% 0.81%
====== ====== ====== ====== ======
Nonperforming loans, net of government
guaranteed portion, to total loans(3). 0.71% 1.00% 0.79% 0.76% 0.76%
====== ====== ====== ====== ======
Nonperforming assets to total loans and
other real estate..................... 1.24% 1.62% 1.38% 1.21% 1.04%
====== ====== ====== ====== ======
Nonperforming assets, net of government
guaranteed portion, to total loans and
other real estate..................... 1.03% 1.38% 1.12% 1.07% 0.99%
====== ====== ====== ====== ======
</TABLE>
- ------------------
(1) Loans are placed on nonaccrual status when they become 90 days past due if
they have been identified as presenting uncertainty with respect to the
collectibility of interest or principal.
(2) Other real estate owned balances are shown net of related allowances.
(3) Nonperforming loans, net of government guaranteed portion, is total
nonperforming loans less the portion of the principal amount of all
nonperforming loans that is guaranteed by the SBA or FSA.
The following table summarizes the principal balance of loan delinquencies in
our loan portfolio as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- -------------- --------------- -------------- --------------
60-89 90 Days 60-89 90 Days 60-89 90 Days 60-89 90 Days 60-89 90 Days
Days or More Days or More Days or More Days or More Days or More
------ ------- ----- ------- ------ ------- ----- ------- ----- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 350 $1,407 $ 24 $1,054 $ 150 $1,130 $ 20 $1,251 $ 241 $1,369
Commercial real estate.. 214 995 24 1,648 364 1,877 -- 1,550 263 898
Agricultural............ 40 2,340 -- 2,669 -- 1,220 8 579 2 43
Residential real estate. 638 833 387 1,505 387 976 379 427 61 599
Consumer and home
equity................. 351 526 372 600 248 664 362 494 233 507
------ ------ ---- ------ ------ ------ ---- ------ ----- ------
Total.................. $1,593 $6,101 $807 $7,476 $1,149 $5,867 $769 $4,301 $ 800 $3,416
====== ====== ==== ====== ====== ====== ==== ====== ===== ======
Delinquent loans to
total loans............ 0.24% 0.93% 0.13% 1.24% 0.21% 1.06% 0.16% 0.89% 0.19% 0.81%
====== ====== ==== ====== ====== ====== ==== ====== ===== ======
</TABLE>
42
<PAGE>
Allowance for Loan Losses
Actual charge-offs, net of recoveries, totaled $1.3 million or 0.21% of average
loans outstanding in 1998, compared to net charge-offs of $1.8 million or 0.32%
of average loans outstanding in 1997. Loan charge-offs in 1997 include $460,000
representing an unusual charge caused by a borrower's fraudulent credit
actions. Net charge-offs for 1997 excluding this event were $1.4 million, or
0.24% of average loans outstanding. Net charge-offs were $794,000 or 0.16% of
average loans outstanding in 1996.
The following table presents an analysis of the allowance for loan losses and
other related data for the periods indicated:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of the year... $8,145 $7,129 $6,183 $5,303 $4,528
Charge-offs:
Commercial............................ 263 500 154 119 110
Commercial real estate................ 687 746 237 165 52
Agricultural.......................... 19 -- 74 -- --
Residential real estate............... 215 131 146 38 64
Consumer and home equity.............. 488 620 321 310 391
------ ------ ------ ------ ------
Total charge-offs.................... 1,672 1,997 932 632 617
------ ------ ------ ------ ------
Recoveries:
Commercial............................ 106 12 3 7 51
Commercial real estate................ 84 18 35 10 1
Agricultural.......................... -- 1 -- -- --
Residential real estate............... 42 26 2 1 9
Consumer and home equity.............. 133 127 98 89 99
------ ------ ------ ------ ------
Total recoveries..................... 365 184 138 107 160
------ ------ ------ ------ ------
Net charge-offs........................ 1,307 1,813 794 525 457
Provision for loan losses.............. 2,732 2,829 1,740 1,405 1,232
------ ------ ------ ------ ------
Balance at the end of the year......... $9,570 $8,145 $7,129 $6,183 $5,303
====== ====== ====== ====== ======
Ratio of net charge-offs to average
loans................................. 0.21% 0.32% 0.16% 0.12% 0.12%
====== ====== ====== ====== ======
Allowance for loan losses to total
loans................................. 1.46% 1.35% 1.29% 1.29% 1.26%
====== ====== ====== ====== ======
Allowance for loan losses to
nonperforming loans................... 156.86% 108.95% 121.51% 143.76% 155.24%
====== ====== ====== ====== ======
Allowance of loan losses to
nonperforming loans, net of government
guaranteed portion(1)................. 204.49% 134.67% 162.43% 169.86% 165.31%
====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Nonperforming loans, net of government guaranteed portion, is total
nonperforming loans less the portion of the principal amount of all
nonperforming loans that is guaranteed by the SBA or FSA.
The allowance for loan losses to total loans that are not covered by government
guarantees was 1.52% at December 31, 1998.
43
<PAGE>
The following table describes the allocation of the allowance for loan losses
among various categories of loans and certain other information for the dates
indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of the loan
portfolio.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
Allowance of Total Allowance of Total Allowance of Total Allowance of Total Allowance of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial............. $3,227 17.9% $2,406 17.6% $1,573 18.2% $1,283 17.1% $1,641 17.3%
Commercial real estate. 1,734 16.3 1,237 16.5 1,081 17.8 767 17.8 715 18.1
Agricultural........... 1,288 18.9 1,377 17.8 928 15.7 357 14.4 223 13.7
Residential real
estate................ 1,489 27.8 1,328 28.3 965 28.5 427 30.0 294 29.2
Consumer and home
equity................ 1,643 19.1 1,490 19.8 1,555 19.8 726 20.7 617 21.7
Unallocated............ 189 -- 307 -- 1,027 -- 2,623 -- 1,813 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for
loan losses.......... $9,570 100.0% $8,145 100.0% $7,129 100.0% $6,183 100.0% $5,303 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Securities Activities
Amortized Cost and Fair Value of Securities. As of December 31, 1998, the
carrying value of our securities portfolio was $248.0 million. The following
table sets forth certain information regarding the amortized cost and fair
values of our securities portfolio as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- -------- --------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities held to
maturity:
U.S. Treasury and
agency................ $ 12,476 $ 12,604 $ 42,081 $ 42,122 $ 48,088 $ 47,844
State and municipal
obligations........... 78,540 79,824 57,003 57,781 58,024 58,947
-------- -------- -------- -------- -------- --------
Total securities held
to maturity.......... 91,016 92,428 99,084 99,903 106,112 106,791
-------- -------- -------- -------- -------- --------
Debt securities
available for sale:
U.S. Treasury and
agency................ 117,035 117,662 84,617 84,916 62,251 62,077
Mortgage backed
securities............ 23,357 23,464 17,212 17,311 15,977 15,886
State and municipal
obligations........... 9,028 9,209 4,321 4,362 2,668 2,687
Corporate bonds........ 2,745 2,796 -- -- -- --
-------- -------- -------- -------- -------- --------
Total debt securities
available for sale... 152,165 153,131 106,150 106,589 80,896 80,650
-------- -------- -------- -------- -------- --------
Equity securities
available for sale..... 2,925 3,891 2,704 3,534 2,510 3,081
-------- -------- -------- -------- -------- --------
Total securities...... $246,106 $249,450 $207,938 $210,026 $189,518 $190,522
======== ======== ======== ======== ======== ========
</TABLE>
44
<PAGE>
Contractual Maturities and Weighted Average Yields of Securities at Amortized
Cost. The following table sets forth certain information regarding the
contractual maturities and weighted average yields of our securities portfolio
as of December 31, 1998. The state and municipal obligations are the only
securities for which the weighted average yields are shown on a taxable-
equivalent basis.
<TABLE>
<CAPTION>
At December 31, 1998
----------------------------------------------------------------------------------------------
More Than One More Than Five
One Year or Less Year to Five Years Years to Ten Years After Ten Years Total
------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Treasury and
agency............... $11,291 6.24% $ 74,475 5.91% $43,248 5.98% $ 497 6.69% $129,511 5.97%
Mortgaged-backed
securities........... 551 6.88 11,719 5.94 6,371 6.25 4,716 6.40 23,357 6.14
State and municipal
obligations.......... 17,076 5.46 54,564 6.05 14,824 6.58 1,104 7.63 87,568 6.04
Corporate bonds....... -- -- 2,245 6.18 -- -- 500 6.25 2,745 6.19
------- ---- -------- ---- ------- ---- ------ ---- -------- ----
Total debt securities. 28,918 5.79 143,003 5.97 64,443 6.14 6,817 6.64 243,181 6.01
Equity securities...... -- -- -- -- -- -- -- -- 2,925 6.92
------- ---- -------- ---- ------- ---- ------ ---- -------- ----
Total securities....... $28,918 5.79% $143,003 5.97% $64,443 6.14% $6,817 6.64% $246,106 6.02%
======= ==== ======== ==== ======= ==== ====== ==== ======== ====
</TABLE>
U.S. Treasury Securities. At December 31, 1998, our U.S. Treasury securities
portfolio totaled $24.3 million, of which $18.3 million was classified as
available for sale. At that date $6.0 million was classified as held to
maturity, with a fair value of $6.1 million. Because alternative taxable and
tax-exempt investments provided more attractive yields than U.S. Treasury
securities, the portion of our portfolio represented by such securities
declined from 17.4% of the portfolio at December 31, 1997 to 9.8% at December
31, 1998.
U.S. Federal Agency Securities. At December 31, 1998, our U.S. federal agency
securities portfolio totaled $105.8 million, of which $99.3 million was
classified as available for sale. At that date $6.5 million was classified as
held to maturity, with a fair market value of $6.5 million. This portfolio
consists almost exclusively of callable securities. These callable securities
provide additional yield and are maintained at a level consistent with our
interest rate risk profile.
State and Municipal Obligations. At December 31, 1998, our portfolio of state
and municipal obligations totaled $87.7 million, of which $9.2 million was
classified as available for sale. At that date $78.5 million was classified as
held to maturity, with a fair value of $79.8 million. State and municipal
obligations represented 35.4% of the total investment portfolio at December 31,
1998, compared to 29.3% at December 31, 1997. More favorable yields being
available on new purchases of this category of security when compared to other
taxable investment alternatives has accounted for the growth in this portfolio.
Mortgage-Backed Securities. At December 31, 1998 we had $23.5 million in
mortgage-backed securities, all classified as available for sale. As with all
interest rate-sensitive assets and liabilities, investments in mortgage-backed
securities are maintained at a level consistent with our interest rate risk
profile.
Corporate Bonds. Our corporate bond portfolio at December 31, 1998 totaled $2.8
million, all of which was classified as available for sale. The entire
portfolio was purchased during 1998 to further diversify the investment
portfolio and increase investment yield. Our policy limits investments in
corporate bonds to no
45
<PAGE>
more than 10% of total investments and to bonds rated as Baa or better by
Moody's Investors Service, Inc. or BBB or better by Standard & Poor's Ratings
Services.
Equity Securities. At December 31, 1998, our equity securities portfolio
totaled $3.9 million, all of which was classified as available for sale. The
portfolio consisted of a total of $1.0 million of common stock issued by seven
different companies. We also had $2.8 million and $94,000 of common stock of
the FHLB and the Federal Reserve Bank, respectively.
Deposits
Our core deposits were $678.8 million or 79.8% of our total deposits of $850.5
million at December 31, 1998. Our core deposit base consists almost exclusively
of in-market deposits and there are no brokered deposits. Our core deposits are
supplemented with certificates of deposit over $100,000, which were $171.6
million at December 31, 1998. Our certificates of deposit over $100,000 are
largely from in-market municipal, business and individual customers.
Deposits at December 31, 1998 were $850.5 million, an increase of $82.7 million
or 10.8% from $767.7 million at December 31, 1997. Core deposits, principally
certificates of deposit under $100,000, account for $53.1 million of the
increase with certificates of deposit over $100,000 increasing $29.6 million.
The daily average balances, percentage composition and weighted average rates
paid on deposits for each of the years ended December 31, 1998, 1997 and 1996
are presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- -------------------------- --------------------------
Percent Percent Percent
of Total Weighted of Total Weighted of Total Weighted
Average Average Average Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- -------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing
checking............... $ 91,627 11.5% 1.46% $ 83,271 11.4% 1.45% $ 79,976 11.8% 1.55%
Savings and money
market................. 163,966 20.5 2.62 166,646 22.8 2.67 179,678 26.6 2.69
Certificates of deposit
under $100,000......... 274,750 34.4 5.68 248,871 34.1 5.62 225,719 33.3 5.58
Certificates of deposit
over $100,000.......... 158,317 19.8 5.64 133,799 18.3 5.64 101,461 15.0 5.55
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total interest-bearing
deposits.............. 688,660 86.2 4.38 632,587 86.6 4.30 586,834 86.7 4.14
Demand deposits......... 110,294 13.8 -- 97,510 13.4 -- 90,410 13.3 --
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total deposits......... $798,954 100.0% 3.78% $730,097 100.0% 3.72% $677,244 100.0% 3.59%
======== ===== ==== ======== ===== ==== ======== ===== ====
</TABLE>
The following table sets forth our certificates of deposit by time remaining to
maturity at December 31, 1998:
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
-------- ----------- ------------ ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000.............. $ 65,188 $53,099 $ 93,078 $65,629 $276,994
Certificates of deposit over
$100,000................... 114,540 27,287 19,771 10,017 171,615
-------- ------- -------- ------- --------
Total certificates of
deposit................... $179,728 $80,386 $112,849 $75,646 $448,609
======== ======= ======== ======= ========
</TABLE>
46
<PAGE>
Inflation and Management of Interest Rate Risk
Impact of Inflation
The effects of inflation on the local economy and on our operating results have
been relatively modest for the past several years. Since substantially all of
our assets and liabilities are monetary in nature, such as cash, securities,
loans and deposits, their values are less sensitive to the effects of inflation
than to changing interest rates, which do not necessarily change in accordance
with inflation rates. We try to control the impact of interest rate
fluctuations by managing the relationship between our interest rate sensitive
assets and liabilities.
Management of Interest Rate Risk
The principal objective of our interest rate risk management is to evaluate the
interest rate risk inherent in certain assets and liabilities, determine the
appropriate level of risk given our business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the guidelines approved by our Board of Directors to
reduce the vulnerability of our operations to changes in interest rates. Our
asset/liability committee, which is comprised of senior management, is
responsible for reviewing with the Board its activities and strategies, the
effect of those strategies on the net interest margin, the fair value of the
portfolio and the effect that changes in interest rates will have on the
portfolio and exposure limits, all under the direction of the Board. The
asset/liability committee develops an asset/liability policy that meets our
strategic objectives and regularly reviews the activities of our subsidiary
banks. Each subsidiary bank board adopts an asset/liability policy within the
parameters of the overall asset/liability policy and utilizes an
asset/liability committee comprised of senior management of the bank under the
direction of the bank's board. See "Risk Factors--Changes in interest rates may
make us less profitable."
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring our interest rate sensitivity "gap." An asset or liability is said
to be interest rate sensitive within a specific time period if it will mature
or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest earning-assets
maturing or repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that same time period. A gap
is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. At March 31, 1999, our one-year gap
position, the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year, was $25.0 million, or 2.51% of total assets.
Accordingly, over the one year period following March 31, 1999, we will have
$25.0 million more in assets repricing than liabilities. Generally if rate-
sensitive assets reprice sooner than rate-sensitive liabilities, earnings will
be positively impacted in a rising rate environment and negatively impacted in
a declining rate environment. If rate-sensitive liabilities reprice sooner than
rate-sensitive assets, then earnings generally will be negatively impacted in a
rising rate environment and positively impacted in a declining rate
environment. Management believes that our positive gap position will not have a
material adverse effect on our operating results.
Gap Analysis. The following table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at March 31, 1999 which we
anticipate, based upon certain assumptions, to reprice or mature in each of the
future time periods shown. Except as stated below, the amount of assets and
liabilities shown which reprice or mature during a particular period were
determined in accordance with the earlier of the repricing date or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at March 31,
1999 on the basis of contractual maturities, anticipated prepayments and
scheduled rate adjustments within the selected time intervals. All non-maturity
deposits (demand deposits and savings deposits) were assumed to become rate
sensitive over time, with 2.5%, 12.5%,
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<PAGE>
15%, 30% and 40% of such deposits assumed to reprice in the periods of less
than 30 days, 31 to 180 days, 181 to 365 days, 1 to 3 years and 3 to 5 years,
respectively. Prepayment and repricing rates can have a significant impact on
our estimated gap. While we believe such assumptions are reasonable, there can
be no assurance that assumed repricing rates will approximate actual future
deposit activity.
<TABLE>
<CAPTION>
Volumes Subject to Repricing Within
------------------------------------------------------------------------------
0-30 31-180 181-365 1-3 3-5 5-10 >10
days days days years years years years Total
-------- -------- -------- ------- ------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold..... $ 4,850 $ -- $ -- $ -- $ -- $ -- $ --- $ 4,850
Securities (1)......... 16,261 54,541 42,850 70,649 57,426 26,618 7,669 276,014
Loans (2).............. 267,511 64,097 64,407 99,421 63,318 43,260 58,388 660,402
-------- -------- -------- ------- ------- -------- -------- --------
Total interest-earning
assets................ 288,622 118,638 107,257 170,070 120,744 69,878 66,057 941,266
-------- -------- -------- ------- ------- -------- -------- --------
Interest-bearing
liabilities:
Interest-bearing
checking, savings and
money market deposits. 6,935 34,679 41,613 83,226 106,680 4,288 -- 277,421
Certificates of
deposit............... 110,185 177,109 109,134 61,124 7,738 12 -- 465,302
Borrowed funds......... 9,810 46 56 2,377 267 5,637 -- 18,193
-------- -------- -------- ------- ------- -------- -------- --------
Total interest-bearing
liabilities........... 126,930 211,834 150,803 146,727 114,685 9,937 -- 760,916
-------- -------- -------- ------- ------- -------- -------- --------
Period gap.............. $161,692 $(93,196) $(43,546) $23,343 $ 6,059 $ 59,941 $ 66,057 $180,350
======== ======== ======== ======= ======= ======== ======== ========
Cumulative gap.......... $161,692 $ 68,496 $ 24,950 $48,293 $54,352 $114,293 $180,350
======== ======== ======== ======= ======= ======== ========
Period gap to total
assets................. 16.28% (9.38%) (4.38%) 2.35% 0.61% 6.04% 6.65%
======== ======== ======== ======= ======= ======== ========
Cumulative gap to total
assets................. 16.28% 6.90% 2.51% 4.86% 5.47% 11.51% 18.16%
======== ======== ======== ======= ======= ======== ========
Cumulative interest-
earning assets to
cumulative interest-
bearing liabilities.... 227.39% 120.22% 105.10% 107.59% 107.24% 115.02% 123.70%
======== ======== ======== ======= ======= ======== ========
</TABLE>
- ------------------
(1) Amounts shown are the amortized cost of held to maturity securities and the
fair value of available for sale securities.
(2) Amounts shown include principal balance net of deferred loan fees and
costs, unamortized premiums and discounts.
Certain shortcomings are inherent in the method of analysis presented in the
gap table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates, both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table.
As a result of these shortcomings, we focus more attention on simulation
modeling, such as "net interest income at risk" discussed below, rather than
gap analysis. Even though the gap analysis reflects a ratio of cumulative gap
to total assets within acceptable limits, the net interest income at risk
simulation modeling is considered by management to be more informative in
forecasting future income at risk.
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<PAGE>
Net Interest Income at Risk Analysis. In addition to the Gap Analysis,
management uses a "rate shock" simulation to measure the rate sensitivity of
our balance sheet. Rate shock simulation is a modeling technique used to
estimate the impact of changes in rates on our net interest income and economic
value of equity. The following table sets forth the results of our modeling
analysis at March 31, 1999:
<TABLE>
<CAPTION>
Change in Interest Rates Net Interest Income Economic Value of Equity
in Basis Points (Rate -------------------------- ---------------------------
Shock) $ Amount $ Change % Change $ Amount $ Change % Change
- ------------------------ -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
200..................... $45,681 $ 691 1.54 % $113,095 $(13,609) (10.74)%
100..................... 45,519 529 1.18 % 119,655 (7,049) (5.56)%
Static.................. 44,990 -- -- 126,704 -- --
(100)................... 43,700 (1,290) (2.87)% 130,372 3,668 2.89 %
(200)................... 42,497 (2,493) (5.54)% 134,453 7,749 6.12 %
</TABLE>
We measure net interest income at risk by estimating the changes in net
interest income resulting from instantaneous and sustained parallel shifts in
interest rates of plus or minus 200 basis points over a period of 12 months. As
of March 31, 1999, a 200 basis point increase in rates would increase our net
interest income by $0.7 million, or 1.54%, over the next twelve month period.
Conversely, a 200 basis point decrease in rates would decrease our net interest
income by $2.5 million, or 5.54%, over a 12 month period. This simulation is
based on management's assumption as to the effect of interest rate changes on
assets and liabilities and assumes a parallel shift of the yield curve. It also
includes certain assumptions about the future pricing of loans and deposits in
response to changes in interest rates. Further, it assumes that delinquency
rates would not change as a result of changes in interest rates although there
can be no assurance that this will be the case. While this simulation is a
useful measure as to our net interest income at risk due to a change in
interest rates, it is not a forecast of the future results and is based on many
assumptions that, if changed, could cause a different outcome.
Liquidity and Capital Resources
Our primary sources of funds are deposits, proceeds from the principal and
interest payments on loans, proceeds from the sale of mortgage-backed and debt
and equity securities, and to a lesser extent, borrowings and proceeds from the
sale of fixed-rate mortgage loans to the secondary market. While maturities and
scheduled amortization of loans and securities are predictable sources of
funds, deposit outflows, mortgage prepayments, mortgage loan sales and
borrowings are greatly influenced by general interest rates, economic
conditions and competition. We closely monitor our liquidity position on a
daily basis. Excess short-term liquidity is usually invested in overnight
federal funds sold. In the event we require funds beyond what we are able to
generate internally, additional sources of funds are available through the use
of reverse repurchase agreements and short-term advances from the Federal Home
Loan Bank of New York.
We experienced a net increase in total deposits of $9.6 million from December
31, 1998 to March 31, 1999. Deposit flows are affected by market interest
rates, the interest rates and products offered by local competitors and other
factors.
At March 31, 1999, we had total borrowings of $19.9 million, which consisted
primarily of advances from the FHLB and repurchase agreements entered into with
our business customers. Advances we obtain from the FHLB are collateralized
with the FHLB common stock we own and certain of our residential mortgage
loans, provided such loans meet certain standards related to credit worthiness.
Such advances are available pursuant to several credit programs, each of which
has its own interest rate and range of maturities. At March 31, 1999, we had
$8.3 million of FHLB advances outstanding, an increase of $1.7 million from
$6.6 million at December 31, 1998. At March 31, 1999, we had an additional
$52.6 million available under a line of credit with the FHLB.
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<PAGE>
Repurchase agreements are contracts for the sale of securities which we own
with a corresponding agreement to repurchase those securities at an agreed upon
price and date. Our policies limit the use of repurchase agreements to
collateral consisting of U.S. Treasury and agency securities. We had $9.6
million of repurchase agreements outstanding as of March 31, 1999, an increase
of $4.2 million from $5.4 million at December 31, 1998. Other borrowings at
March 31, 1999 included $1.7 million of 10% unsecured notes we issued to former
shareholders of First Tier Bank & Trust (which are due March 31, 2000),
$210,000 of overnight federal funds purchased and $138,000 of mortgage notes
which bear interest at an average fixed rate of 3.76%.
We had outstanding loan commitments of $118.4 million at March 31, 1999. We
anticipate that we will have sufficient funds available to meet current loan
commitments. Certificates of deposit which are scheduled to mature in one year
or less from March 31, 1999 total $396.0 million. Based upon our experience and
our current pricing strategy, we believe that a significant portion of such
deposits will remain with our banks.
At March 31, 1999, we exceeded all of our regulatory capital requirements with:
. a consolidated leverage capital level of $94.3 million, or 9.63% of First
Quarter 1999 adjusted average assets, which is above the required level of
$39.2 million, or 4.00% of adjusted average assets;
. a Tier 1 risk-based capital of $94.3 million, or 13.89% of risk-weighted
period-end assets, which is above the required level of $27.2 million, or
4.00% of risk-weighted period-end assets; and
. a consolidated risk-based capital of $102.8 million, or 15.15% of risk-
weighted period-end assets, which is above the required level of $54.3
million, or 8.00% of risk-weighted period-end adjusted assets.
See "Supervision and Regulation--The Company--Capital Adequacy Requirements"
and "Supervision and Regulation--The Banks--Capital Adequacy Requirements."
Our most liquid assets are cash, cash due from banks, interest-bearing deposits
and federal funds sold. The levels of these assets are dependent on our
operating, financing, lending and investing activities during any given period.
At March 31, 1999, cash, cash due from banks, interest-bearing deposits and
federal funds sold totaled $27.1 million, or 2.7% of total assets, as compared
to $42.8 million, or 4.4% of total assets, at December 31, 1998.
Impact of Recent Accounting Standards
On January 1, 1998, we adopted the provisions of SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for reporting and
displaying comprehensive income and its components. Comprehensive income,
presented in the consolidated statement of changes in shareholders' equity and
comprehensive income, consists of net income and net unrealized holding gains
and losses on securities available for sale, net of both the related tax effect
and the reclassification adjustment for gains included in net income. Prior
year consolidated financial statements have been reclassified to conform to the
requirements of this statement.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
No. 131 requires public companies to report financial and other information
about key revenue-producing segments of the entity for which such information
is available and is utilized by the chief operating decision maker. Specific
information to be reported for individual segments includes profit or loss,
certain specific revenue and expense items and total assets. A reconciliation
of segment financial information to amounts reported in the financial
statements is also provided. As a community-oriented financial institution,
substantially all of our operations involve the delivery of loan and deposit
products to customers. Management, through its four individual autonomous
banks, makes operating decisions and assesses performance based on an ongoing
review of these community banking operations. Accordingly, the four individual
banks constitute operating segments for financial reporting purposes. The
statement was effective for our year-end 1998 reporting and did not impact our
financial position or results of operations.
50
<PAGE>
The FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other
Post-Retirement Benefits, in February 1998. This statement revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the measurement or the recognition of these plans. The statement was
effective for our year-end 1998 reporting and did not impact our financial
position or results of operations.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires us to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for gains and losses resulting from changes in fair
value of the derivative instrument depends on the intended use of the
derivative and the type of risk being hedged. This statement is effective for
fiscal years beginning after June 15, 1999, although earlier adoption is
permitted. Based upon current activities, the adoption of the statement is not
expected to have an effect on our financial position or results of operations.
SFAS No. 133 also permits certain reclassifications of securities to the
available for sale category from the held to maturity category. We have no
current intention to reclassify any securities pursuant to SFAS No. 133.
In October 1998, the FASB issued SFAS No. 134, Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise which amends SFAS No. 65, Accounting for Certain
Mortgage Banking Activities. This statement conforms the subsequent accounting
for securities retained after the securitization of mortgage loans by a
mortgage banking enterprise with the accounting for such securities by
nonmortgage banking enterprises. We adopted this statement beginning with First
Quarter 1999. We do not expect this statement to have any impact on our
financial position or results of operations as we do not currently securitize
mortgage loans.
Year 2000 Compliance
General
The Year 2000 risk involves computer programs and computer software that are
not able to perform into the Year 2000 without interruption. If computer
systems do not correctly recognize the date change from December 31, 1999 to
January 1, 2000, computer applications that rely on the date field could fail
or create erroneous results. Such erroneous results could affect interest,
payment or due dates or cause a temporary inability to process transactions,
send invoices or engage in similar normal business activities. If these issues
are not addressed by us, our suppliers and our borrowers, there could be a
material adverse impact on our financial condition or results of operations.
State Of Readiness
We formally initiated our Year 2000 project and plan in September 1997 to
ensure that our operational and financial systems would not be adversely
affected by Year 2000 problems. We have formed a Year 2000 project team and our
Board of Directors and management, as well as those of our subsidiary banks,
are supporting all compliance efforts and allocating the necessary resources to
ensure completion. An inventory of all systems and products (including both
information technology and non-informational technology systems) that could be
affected by the Year 2000 date change has been developed, verified and
categorized as to its importance to us. Also, an assessment of all major
information technology and critical non-information technology systems has been
completed. This assessment involved inputting test data which simulates the
Year 2000 date change into such information technology systems and reviewing
the system output for accuracy. Our assessment of critical non-information
technology systems involved reviewing such systems to determine whether they
were date dependent. Based on such assessment, we believe that none of our
critical non-information technology systems is date dependent.
The software for our systems is provided through software vendors. We have
contacted all of our third party vendors and software providers and required
them to demonstrate and represent that their products are or will be Year 2000
compliant. The recommended version upgrades were completed and vendors that
were unable to demonstrate that they were Year 2000 compliant were replaced. We
have in place an ongoing program of
51
<PAGE>
testing compliance with these representations and warranties. Our core banking
software provider, which supports substantially all of our data processing
functions, has warranted in writing that its software is Year 2000 compliant
and complies with applicable regulatory guidelines. We have performed tests to
verify this assertion. The results were validated and accepted with no
exceptions noted. We believe we would have recourse against these vendors and
software providers for actual damages incurred by us in the event the vendors
or software providers breach this warranty. In addition, our compliance and
that of our banks with Year 2000 directives and guidelines issued by the
Federal Financial Institutions Examination Council ("FFIEC") and other bank
regulatory agencies has been reviewed by the FDIC, the Federal Reserve Board,
the Office of Comptroller of the Currency and the New York State Banking
Department in 1998 and 1999.
We have completed the following phases of our Year 2000 plan:
. identifying Year 2000 issues;
. assessing the impact of Year 2000 issues on our mission critical systems;
. upgrading our systems as necessary to resolve those Year 2000 issues which
have been identified; and
. testing and implementing those systems that have been upgraded.
Costs Of Compliance
We do not expect that the costs of bringing our systems into Year 2000
compliance will have a material adverse effect on our financial condition,
results of operations or liquidity. We have budgeted $250,000 to address Year
2000 issues and approximately $110,000 of the budget has been expended through
March 31, 1999. The largest potential risk to us concerning Year 2000 is the
malfunction of our data processing system. In the event our data processing
system does not function properly, we are prepared to perform critical
functions manually. We believe we are in compliance with regulatory guidelines
regarding Year 2000 compliance, including the timetable for achieving
compliance.
Risks Related To Third Parties
We cannot accurately gauge the impact of Year 2000 noncompliance by third
parties with which our banks and we transact business. We have identified our
largest dollar deposit customers (which are aggregate deposits over $250,000)
and our largest commercial/agricultural loan customers (which are loans over
$100,000). Based on information available to us, we conducted a preliminary
evaluation to determine which of those customers are likely to be affected by
Year 2000 issues. We then surveyed those customers deemed at risk to determine
their readiness with respect to Year 2000 issues, including (1) their awareness
of Year 2000 issues, (2) plans to address such issues and (3) progress with
respect to such plans. The survey included 100% of all depositors with average
balances of $250,000 or greater, which is approximately 30% of our total dollar
deposit base. The survey also included approximately 90% of our
commercial/agricultural borrowers of $100,000 or more, which is approximately
50% of our total dollar loan base. The responses to these surveys were due by
December 31, 1998. We are continuing to follow up with those borrowers who have
not responded to the surveys.
As of the date of the prospectus, approximately 40% of such customers have
responded to the survey and (1) all of those customers are aware of Year 2000
issues, (2) all are in the process of updating their systems and (3) all have
informed us that they believe they will be ready for the Year 2000 date change
by the end of 1999. We will continue to review such responses as they are
returned and will encourage customers to resolve any identified problems. To
the extent a problem is identified, we intend to monitor the customer's
progress in resolving such problem. In the event that Year 2000 noncompliance
adversely affects a borrower, we may be required to charge-off the loan to that
borrower. For a discussion of possible effects of such charge-offs, see "--
Contingency Plans" below. In the event that Year 2000 noncompliance causes a
depositor to withdraw funds, we plan to maintain additional cash on hand. We
rely on the Federal Reserve for electronic fund transfers and check clearing
and we understand that the Federal Reserve expects its systems to be Year 2000
52
<PAGE>
compliant in mid-1999. With respect to our borrowers, we include in our loan
documents a Year 2000 disclosure form and an addendum to the loan agreement in
which the borrower represents and warrants its Year 2000 compliance to the
bank.
Contingency Plans
We are finalizing our contingency planning with respect to the Year 2000 date
change and believe that if our own systems should fail, we could convert to a
manual entry system for a period of up to three months without significant
losses. We believe that any mission critical systems could be recovered and
operating within seven days. In the event that the Federal Reserve is unable to
handle electronic funds transfers and check clearing, we do not expect the
impact to be material to our financial condition or results of operations as
long as we are able to utilize an alternative electronic funds transfer and
clearing source. As part of our contingency planning, we have reviewed our loan
customer base and the potential impact on capital of Year 2000 noncompliance.
Based upon such review, using what we consider to be a reasonably likely worst
case scenario, we have assumed that certain of our commercial borrowers whose
businesses are most likely to be affected by Year 2000 noncompliance would be
unable to repay their loans, resulting in charge-offs of loan amounts in excess
of collateral values. If this occurs, we believe that it is unlikely that our
exposure would exceed $280,000, although we cannot assure you of this amount
and the amount could be higher. We do not believe that this amount is material
enough for us to adjust our current methodology for making provisions to the
allowance for loan losses. In addition, we plan to maintain additional cash on
hand to meet any unusual deposit withdrawal activity.
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<PAGE>
Business
Our Company
We are a bank holding company headquartered in Warsaw, New York, which is
located 45 miles southwest of Rochester and 45 miles southeast of Buffalo. We
operate as what is referred to in the banking industry as a super-community
bank holding company--a bank holding company that owns multiple community banks
that are separately managed. We own four commercial banks that provide
consumer, commercial and agricultural banking services in Western and Central
New York State. We were formed in 1931 to facilitate the management of three of
these banks that had been primarily owned by the Humphrey family during the
late 1800s and early 1900s. In recent years, we have grown through a
combination of internal growth, the opening of new branch offices and the
acquisition of a community bank and branches of other banks. On March 31, 1999,
we had assets of $993.2 million, loans of $660.4 million, deposits of $860.1
million and shareholders' equity of $98.5 million.
As a super-community bank holding company, our strategy has been to manage our
bank subsidiaries on a decentralized basis. We feel that this strategy provides
each bank with the flexibility to efficiently serve its markets and respond to
local customer needs. Under our structure, each bank retains its name and board
of directors as well as substantial autonomy in its day-to-day operations. The
presidents of our banks are empowered to set goals and implement employee
incentive programs to maximize their bank's performance. While we generally
operate on a decentralized basis, we have consolidated selected lines of
business, operations and support functions in order to achieve economies of
scale, greater efficiency and operational consistencies.
Our Banks
We operate through four subsidiary banks: Wyoming County Bank, The National
Bank of Geneva, The Pavilion State Bank and First Tier Bank & Trust. Our banks
operate 28 branches and 35 ATMs in eight contiguous counties of Western and
Central New York State: Allegany, Cattaraugus, Genesee, Livingston, Ontario,
Seneca, Wyoming and Yates. We have opened five new branches in the past four
years, and we expect to open a new branch in Monroe County in the second half
of 1999. This new branch will be our first branch in the county in which
Rochester is located. A brief description of each of our banks is set forth
below.
Wyoming County Bank
Wyoming County Bank (or "WYCO") is headquartered in Warsaw, New York and was
chartered in 1851 by the New York State Superintendent of Banks. Prior to the
formation of Financial Institutions, WYCO had been owned and managed by members
of the Humphrey family since 1869. WYCO has 11 full-service banking offices and
12 ATMs in Wyoming, Livingston and Cattaraugus Counties. According to FDIC-
published data, it commands the largest market share of deposits in Wyoming
County, the second-largest share in Livingston County and the eighth-largest
share in Cattaraugus County. In 1997, WYCO ranked as the largest agricultural
lender in New York State and the eighth-largest lender in the United States
under the FSA loan program. It was also rated the most "small-business-friendly
lender" in New York State in the $100 million-$500 million asset size category
by the SBA in 1997. Through its trust department, WYCO provides a wide variety
of trust and fiduciary services. WYCO has an application pending with the New
York State Superintendent of Banks to open a branch in Honeoye Falls in Monroe
County, which is located in one of the fastest-growing towns in that county. As
of March 31, 1999, WYCO had assets of $388.7 million, loans of $260.2 million,
deposits of $343.3 million and shareholders' equity of $39.0 million.
The National Bank of Geneva
The National Bank of Geneva (or "NBG"), founded in 1817, is a national bank
engaged in commercial banking as authorized by the National Bank Act. NBG's
main office is located in Geneva, New York, and it
54
<PAGE>
has six full-service banking offices and 13 ATMs in Ontario, Seneca and Yates
Counties. NBG is one of the top agricultural and Small Business Administration
lenders in New York State. In 1997, it was named "Business of the Year" by the
Geneva Area Chamber of Commerce. NBG has also played a major role in financing
new economic expansion in the region such as the BonaDent Dental Laboratories,
a new resort hotel on Seneca Lake and the Finger Lakes Outlet Mall. NBG is in
the process of obtaining trust powers. According to FDIC-published data, it
enjoys the largest deposit market share in Yates County and the second largest
share in Ontario County. NBG opened its first Seneca County branch in October,
1998 and comparable data for that branch as of June 30, 1998 does not exist. If
the Seneca County branch had been open on June 30, 1998 and had deposits at
that time equal to its deposits on March 31, 1999, it would have had the sixth
largest deposit market share in Seneca County on that date. As of March 31,
1999, NBG had assets of $370.8 million, loans of $245.1 million, deposits of
$319.0 million and shareholders' equity of $35.5 million.
The Pavilion State Bank
The Pavilion State Bank (or "PSB") is a New York State-chartered bank that was
founded in 1928 and has its main office in Pavilion, New York. Prior to the
formation of Financial Institutions, PSB had been owned and managed by members
of the Humphrey family since its inception. PSB has five full-service banking
offices (including an in-store branch at a Tops supermarket in Batavia) and
three ATMs in Genesee and Livingston Counties. Due to its proximity to the
western suburbs of Rochester, PSB attracts deposits from Monroe County as well.
According to FDIC-published data, PSB has the third-largest deposit market
share in Genesee County and the seventh-largest share in Livingston County. In
1998, PSB was named "Business of the Year" by the Genesee County Chamber of
Commerce. As of March 31, 1999, PSB had assets of $124.4 million, loans of
$90.2 million, deposits of $107.6 million and shareholder's equity of $11.1
million.
First Tier Bank & Trust
First Tier Bank & Trust (or "FTB") is a New York State-chartered bank
(chartered in 1902 as the Salamanca Trust Company) headquartered in Salamanca,
New York. We acquired FTB in March 1990. It has six full-service banking
offices and seven ATMs in Allegany and Cattaraugus Counties, and utilizes its
trust powers to provide fiduciary and administrative services to its customers.
According to FDIC-published data, FTB has the third-largest deposit market
share in Cattaraugus County and the fifth-largest share in Allegany County. As
of March 31, 1999, FTB had assets of $106.4 million, loans of $64.8 million,
deposits of $93.8 million and shareholder's equity of $8.5 million. At the time
we acquired FTB, it had assets of $40.0 million, loans of $26.3 million and
deposits of $34.8 million.
Our Services and Products
Our banks provide a wide range of consumer and commercial banking services and
products to individuals, municipalities and small and medium size businesses,
including agribusiness. Our consumer banking services include checking and
savings accounts, money market accounts, debit and credit cards, certificates
of deposit, individual retirement accounts, home equity lines of credit,
residential mortgage loans, home improvement loans, student loans, automobile
loans, personal loans, safe deposit boxes and Christmas clubs. Our commercial
and agricultural banking services and products include business checking
accounts, cash management accounts, commercial and agricultural working capital
and revolving lines of credit, commercial and agricultural mortgages, equipment
loans and leases, crop and cattle loans, letters of credit and accounts
receivable factoring. We also provide payroll direct deposit and cash
management services and act as a depository and collection agent for municipal
tax receipts. Each of our banks offer similar types of services and products,
but they tailor aspects of them to address local market conditions.
In addition to traditional banking services, we provide a variety of fee-based
services. We service a portfolio of mortgages that we originated and sold,
aggregating $186.3 million at March 31, 1999. This portfolio generated $1.2
million in service income during 1998. Since 1994, we have been offering,
through a "dual employee"
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program with Invest Financial Services Corporation, a wide range of mutual fund
and variable annuity products to our customers. During 1998, our sales of these
investment products exceeded $25 million and generated over $672,000 in net
commissions and fees. We are in the process of establishing our own brokerage
operation to enable us to expand the scope of investment products that we offer
and to complement our trust business. Our trust business is presently conducted
by Wyoming County Bank and First Tier Bank & Trust. These banks have trust
powers and render services as trustee, executor, administrator, guardian,
managing agent, custodian and other fiduciary activities authorized by law. The
National Bank of Geneva is in the process of obtaining trust powers. We are
also exploring the acquisition of insurance agency operations that would
further enhance our position as a full-service provider of financial services.
While our banks function as community banks, we provide our customers with a
broad range of competitive services generally provided only by larger, regional
banks. Currently, we provide customers with 24 hour ATM access, telephone
customer service and 24 hour automated telephone account access. Those of our
banks that are located near college communities (such as SUNY Geneseo, Hobart
and William Smith College and St. Bonaventure University) maintain ATMs on
campus to introduce students to the banks. Each of our banks offer interactive
internet banking and bill paying services, and provide general bank information
through web sites maintained by each bank. We are planning to introduce a
corporate cash management account module to our existing internet banking
program during 1999.
Our Operating Structure and Philosophy
All of our banks are separate wholly-owned subsidiaries of Financial
Institutions (except for statutory directors' shares in the case of The
National Bank of Geneva aggregating 0.90% of its outstanding shares and 0.35%
of the shares of Wyoming County Bank). We manage our banks using the super-
community banking model which allows each bank to operate with substantial
autonomy, thereby increasing their responsiveness to local needs and
differentiating them from other large competitors. Each of our banks is managed
by a separate Board of Directors and a local president. Each bank also has
advisory boards of local community leaders and businesspeople, who provide an
important network of business contacts. Our banks are also operated as separate
profit centers, with a significant portion of each bank president's
compensation tied to his bank's performance. Our banks seek to develop broad
customer relationships in the communities they serve by providing exceptional
service, offering local convenience and establishing strong community ties.
Many of our board members and officers actively participate in civic and public
service activities in the local communities we serve in order to maintain
community relationships, to monitor market conditions and customer needs and to
help improve the quality of life in the community. The satisfactory ratings in
Community Reinvestment Act examinations that our banks have consistently
received is one indicator of their commitment to the communities they serve.
We have invested heavily in our officers and employees by recruiting talented
bankers in our various market areas and rewarding performance with economic
incentives. Generally, performance-based compensation accounts for between 20-
30% of the compensation of each member of the senior management team. We seek
to develop a strong sales culture in each of our banks, with an emphasis on
business development at the advisory board and loan officer level, and on
customer relationship development at all levels. Each branch manager is
empowered to offer a range of services and products tailored to the needs of
the customers of that branch, and is encouraged to regard his or her branch as
a franchise to be developed. Under our team incentive program, every branch
employee is incentivized to cross-sell to existing customers and to identify
prospective customers. Other incentives exist at the branch manager level,
designed to motivate "high performance banking" in each branch.
Financial Institutions provides operational and support functions for each bank
which create economies of scale and greater efficiency. In early 1997, we
opened a new operations center at our headquarters in Warsaw where we
consolidated selected lines of business, operations and support functions to
achieve both quality control and cost savings. The consolidated operations
include data processing, accounting, deposit operations, item
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processing, salary and benefits administration, audit and compliance and
training functions. To maximize our ability to perform these functions
efficiently on a consolidated basis, we upgraded our IBM AS/400 mainframe
computer system and telecommunications network in 1998. Our upgraded system,
utilizing Jack Henry & Associates' Silverlake application software, permits us
to maintain financial information on a fully integrated, on-line, consolidated
basis, which allows both the subsidiary banks and us to have access to this
information. We are frequently invited by Jack Henry & Associates to "market
test" new products and applications. Our infrastructure of technological and
back office support has the capacity to serve the current needs of our banks
and has significant excess capacity to service the additional needs created by
our anticipated future expansion, either by means of internal growth or through
acquisitions.
Consistent with our super-community model, Financial Institutions makes
strategic decisions and establishes the overall policies for the combined
entity. Financial Institutions provides the banks with guidance in the areas of
credit policy and administration, strategic planning, marketing,
asset/liability management, investment portfolio management, human resources
management, audit procedures and other financial and administrative services.
Financial Institutions acts as a clearinghouse for information--sharing good
ideas developed at the individual banks with the other banks and communicating
with each of the banks about problems identified or encountered at the other
banks. At present, there are eight holding company level management
committees--executive, asset/liability, loan approval, loan administration,
operations, sales, training and marketing--that contain both holding company
and bank representatives. These committees function to coordinate and
centralize policy-making in these key areas.
Although the super-community banking model has many benefits, there are
inherent risks associated with decentralized management. To counter these
risks, we have implemented measures designed to ensure that the banks
consistently follow our policies and maintain our conservative lending approach
and strong asset quality. For example, our Chief Executive Officer is a member
of the Board of Directors of each of the banks and he must be given advance
notice of all significant actions that will be proposed by the management of a
bank to its board. In addition, we use a third party loan review firm to
systematically review the loan portfolios originated and maintained by each of
our banks. We also actively monitor the financial condition of the banks on a
consolidated basis to ensure that our overall operations are consistent with
our policies and objectives.
Our Market Position
The eight-county market that we serve is predominately a region of dairy and
cash crop farms and small, rural towns; however, it also encompasses the
growing suburbs and exurbs of Rochester and Buffalo, the two largest cities in
New York State outside of New York City, which have combined metropolitan area
populations of over two million people. As of June 30, 1998, according to FDIC-
published data, we had the largest aggregate deposit market share in the eight
counties in which we have branch offices. On an individual county basis, we had
the largest deposit share in Livingston, Wyoming and Yates Counties, the second
largest share in Ontario County, the third largest share in Genesee and
Cattaraugus Counties and the fifth largest share in Allegany County. In 1997,
Wyoming County Bank ranked as the largest agricultural lender under the
federally-guaranteed FSA program in New York State and the eighth largest in
the United States.
Our market area is geographically and economically diversified because we serve
both rural markets and, increasingly, the larger more affluent markets of
suburban Rochester and suburban Buffalo. Our rural markets have a diverse
economic base which includes farming and farm-related industry, light and heavy
manufacturing, educational facilities, natural resources and tourism. The
variety of our rural customer base allows us to spread our lending risk
throughout a number of different industries. The metropolitan economies of
Rochester and Buffalo provide us with the opportunity to further diversify the
industries represented in our loan portfolio. We anticipate allocating more
resources to increase our presence in the markets around these two cities. By
doing so, we hope to fill the void created by the acquisition of many of the
independent community banks that once served those areas.
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Our super-community banking strategy competitively positions us as one of the
few mid-sized financial institutions in our market that combines responsive
community banking with the sophistication, capacity and range of services and
products of a larger regional bank holding company. We believe that we have
been able to compete effectively with larger and smaller financial institutions
by offering a broad range of services and products that respond to specific
needs, emphasizing competitive pricing, providing superior customer service and
utilizing local decision-making. By doing so, we have established long-term
customer relationships and built customer loyalty. We believe that our
competitive advantage in our market is strengthened by our deep roots in the
region and our dominant market share in the communities we presently serve.
Over the course of the last decade, a number of community banks and thrifts
operating in our market have been sold or placed into receivership by the
Resolution Trust Corporation or the FDIC during the banking crisis of the late
1980s and early 1990s. Banks that no longer independently exist include Central
Trust Company, Columbia Savings Bank, Goldome F.S.B., Monroe Savings Bank,
Empire of America FSB, First Federal Savings and Loan Association of Rochester,
First National Bank of Rochester, Onbank and Rochester Community Savings Bank.
In addition, the large commercial banks operating in the region now are less
associated with the area than they once were. For example, The Chase Manhattan
Bank acquired its presence by purchasing Lincoln First Bank of Rochester in
1984. Following its merger with Chemical Bank, it has consolidated many of what
were formerly local functions and decision-making into its New York City
headquarters. Also, HSBC Bank, formerly known as Marine Midland Bank, was
founded and based in Buffalo. It is now a subsidiary of an international bank
holding company based in Hong Kong. Fleet National Bank is the successor entity
of Fleet Bank of New York, which acquired Norstar Bank in the late 1980s. With
the pending merger of Fleet Financial Corporation and BankBoston, we believe
that Fleet National Bank's focus may shift to consolidating its position in New
England, possibly resulting in branch divestitures in rural areas of our
market. We believe that the remaining large banks in our market will find it
increasingly difficult to remain competitive in the more rural areas and will
likely continue to refocus their resources toward the more urban areas. We feel
that we are well positioned to attract customers disaffected with the
metropolitan focus of these large banks and to be an acquiror of any branches
sold by the large banks who choose to reduce their operations in the rural
markets. Further, we believe that we are well positioned to be an attractive
acquiror of community banks in our market who may choose to affiliate with a
larger, locally-based institution with a broader range of services, products
and back-office support.
We have a track record of successfully negotiating the acquisition of and
integrating bank branches and small banks. Our historical acquisition activity
has included the purchase of Wyoming County Bank's Attica branch from Security
Trust Company in 1984, Salamanca Trust Company (now First Tier Bank & Trust) in
1990, First Tier Bank & Trust's Allegany branch from Manufacturer's Hanover
Trust in 1992 and two branches in Yates County (acquired by The National Bank
of Geneva) and Livingston County (acquired by Wyoming County Bank) from the
Resolution Trust Corporation as receiver of Columbia Federal Savings Bank in
1994. All of our acquisitions have been profitably integrated into our
operations.
Competition
The banking business is highly competitive, and our profitability depends
principally upon our ability to compete in the market areas in which our
banking operations are located. We compete with other commercial banks, savings
banks, savings and loan associations, credit unions, finance companies, mutual
funds, insurance companies, brokerage and investment banking firms, asset-based
non-bank lenders and certain other nonfinancial entities, including retail
stores that maintain their own credit programs and certain governmental
organizations which may offer more favorable financing than we offer. Our
primary competitors are large commercial banks such as The Chase Manhattan
Bank, Fleet National Bank, HSBC Bank (formerly Marine Midland Bank), Key Bank
and M&T Bank and small local banks, savings banks and credit unions. We compete
with our competitors by, among other things, offering a broad range of services
and products that respond to specific needs, emphasizing competitive pricing,
providing superior customer service and utilizing local decision-making. See
"--Our Market Position" and "--Our Growth Strategy."
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Our Growth Strategy
Our primary business objectives are to enhance our profitability and be the
dominant financial services provider in our market. We have engaged in long-
term strategic planning for many years and, in 1998, we adopted an updated
comprehensive strategic plan after conducting a detailed examination of the
performance and market prospects of each of our banks and our company as a
whole. This section outlines some key elements of our strategy for future
growth.
Expand Traditional Banking Base
In recent years, we have grown in each of the markets in which we operate. Our
primary goal is to continue to expand our traditional banking base by
increasing the number of households and businesses served in our market and
targeted new markets. We intend to achieve such expansion by continuing to
provide a high level of customer service, competing for customers of recently
acquired banks in our market area, offering a broad range of services and
products at competitive prices and implementing new technologies and delivery
systems. We are continually exploring new and alternative delivery channels for
our services and products, including telephone banking, internet banking, in-
store branches, automated bill payment services and ATMs. We intend to continue
seeking opportunities to expand either by acquiring existing banks or branches
of banks or by establishing new branches. By expanding our traditional banking
base, coupled with careful asset-liability management, low-cost core deposits
and prudent loan underwriting and investments, we seek to increase our net
interest income.
Strengthen Sales Culture
We recognize that our existing customers represent an attractive opportunity to
expand our business. Accordingly, we seek to increase the number of bank
services and products used by each of our customers. This strategy complements
our strategy of increasing noninterest revenues because it emphasizes the sale
of different types of services and products. We actively train employees to
cross-sell our services and products, are expanding our use of software and
other systems to identify cross-selling opportunities and provide performance
incentives to our managers and employees for cross-selling success. Effective
cross-selling aimed at satisfying the needs of our customers should enhance
their satisfaction and our retention of their business. In June 1999, we hired
an experienced marketing director to expand our centralized marketing efforts.
Increase Noninterest Revenues
In order to lessen our reliance on our net interest income we are seeking to
increase our noninterest revenues. We plan to increase our noninterest revenues
by continually offering expanded and new fee-based bank services and products.
We are in the process of expanding the trust operations of our banks beyond the
two which currently have trust powers and establishing our own brokerage
operation to enable us to expand the scope of investment products that we offer
and to complement our trust business. In June 1999, we hired an experienced
trust officer from a major money-center bank to coordinate the trust business
development among our subsidiary banks. We are also exploring the acquisition
of insurance agency operations that would further enhance our position as a
full-service provider of financial services. We are evaluating other types of
services that we can offer such as real estate appraisals, leasing, payroll
processing and title insurance.
Focus on Efficiency
While we have a very favorable efficiency ratio, our goal is to reduce it even
further. We plan to continue to maintain tight control of overhead and expenses
and to further centralize common functions presently performed by all four
banks to the extent that such centralization can be accomplished without
undermining the benefits we get from our super-community banking model. We
believe that by increasing our use of technology that we have already
implemented, and by further centralizing back office operations, we can
accommodate substantial additional growth without incurring proportionately
greater operational costs.
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Preserve Conservative Credit and Interest Rate Risk Profile
While we plan to expand our business, we understand that if we do so by simply
loosening our credit standards, the result may be loan losses that are greater
than the additional revenues generated by such loans. As a result, we are
firmly committed to continuing to maintain our asset quality through our
conservative credit culture and continuing to actively manage our exposure to
interest rate risk.
Retain and Attract Talented Employees
We seek to retain, attract and incent talented management, employees and
directors with a corporate culture emphasizing integrity, teamwork, customer
and community focus and personal initiative. Our decentralized super-community
management structure and emphasis on performance-based compensation provide
significant opportunity for responsibility, accountability and reward for
highly motivated employees. We will continue to offer and expand employee
training, resource support and incentive compensation to retain and attract
individuals who can perform well within our organization.
Our Employees
Together with our banks, we have approximately 340 full-time and 100 part-time
employees. We consider our relationship with our employees to be very good. We
perform an annual corporate culture survey to assist management in continuously
improving this relationship. We believe that we must have a high-performance
team of employees to be a high-performance company. Our human resource
management and compensation programs are designed and managed to support this
philosophy.
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Our Properties
We currently conduct our business through our corporate office and our full
service bank offices and branches. Our new headquarters and operations center
is located in Warsaw, New York. We lease this facility for a nominal rent from
the Wyoming County Industrial Development Agency for local tax reasons and have
the right to purchase it for nominal consideration beginning in November, 2006.
The following table lists the properties of each of our subsidiary banks:
<TABLE>
<CAPTION>
Type of Leased or
Location Facility Owned Expiration of Lease
-------- --------------- ------------ -------------------
<S> <C> <C> <C>
Wyoming County Bank
Warsaw.................. Main Office Own --
Mount Morris............ Branch Own --
Lakeville............... Branch Own --
Attica.................. Branch Own --
North Java.............. Branch Own --
Wyoming................. Branch Own --
North Warsaw............ Branch Own --
Strykersville........... Branch Own --
Yorkshire............... Branch Lease April 2002
Geneseo................. Branch Own --
Dansville............... Branch Lease December 2001
The National Bank of
Geneva
Geneva.................. Main Office Own --
Geneva.................. Drive-up Branch Own --
Canandaigua............. Branch Own --
Seneca County........... Branch Own --
Penn Yan................ Branch Own --
Plaza................... Branch Ground Lease December 2016
The Pavilion State Bank
Pavilion................ Main Office Own --
Caledonia............... Branch Lease April 2006
Leroy................... Branch Own --
Batavia In-Store........ Branch Lease August 2008
Batavia................. Branch Lease October 2001
First Tier Bank & Trust
Salamanca............... Main Office Own --
Ellicottville........... Branch Own --
Allegany................ Branch Own --
Olean................... Branch Own --
Olean................... Drive-up Branch Own --
Cuba.................... Branch Lease November 2007
</TABLE>
Legal Proceedings
From time to time we and our banks are parties to or otherwise involved in
legal proceedings arising in the normal course of our business. We do not
believe that there is any pending or threatened proceeding against us or the
banks which, if determined adversely, would have a material effect on our
business, results of operations or financial condition.
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Supervision and Regulation
The supervision and regulation of bank holding companies and their subsidiaries
is intended primarily for the protection of depositors, the deposit insurance
funds regulated by the FDIC and the banking system as a whole, and not for the
protection of shareholders or creditors of bank holding companies. The various
bank regulatory agencies have broad enforcement power over bank holding
companies and banks, including the power to impose substantial fines,
operational restrictions and other penalties for violations of laws and
regulations.
The following description summarizes some of the laws to which we and our
subsidiaries are subject. References to applicable statutes and regulations are
brief summaries and do not claim to be complete. They are qualified in their
entirety by reference to such statutes and regulations. We believe that we are
in compliance in all material respects with these laws and regulations.
The Company
We are a bank holding company registered under the Bank Holding Company Act,
and are subject to supervision, regulation and examination by the Federal
Reserve Board. The Bank Holding Company Act and other federal laws subject bank
holding companies to particular restrictions on the types of activities in
which they may engage, and to a range of supervisory requirements and
activities, including regulatory enforcement actions for violations of laws and
regulations.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy of
the Federal Reserve Board that bank holding companies should pay cash dividends
on common stock only out of income available over the past year, and only if
prospective earnings retention is consistent with the holding company's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.
Under Federal Reserve Board policy, a bank holding company is expected to act
as a source of financial strength to each of its banking subsidiaries and
commit resources to their support. Such support may be required at times when,
absent this Federal Reserve Board policy, a holding company may not be inclined
to provide it. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.
Safe and Sound Banking Practices. Bank holding companies are not permitted to
engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation. Depending upon the circumstances, the Federal Reserve Board could
take the position that paying a dividend would constitute an unsafe or unsound
banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or
regulations, and can assess civil money penalties for certain activities
conducted on a knowing and reckless basis, if those activities caused a
substantial loss to a depository institution. The penalties can be as high as
$1,000,000 for each day the activity continues.
Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates.
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Capital Adequacy Requirements. The Federal Reserve Board has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk
of the asset. These risk weights are multiplied by corresponding asset balances
to determine a "risk-weighted" asset base. The guidelines require a minimum
total risk-based capital ratio of 8.0% (of which at least 4.0% is required to
consist of Tier 1 capital elements). Total capital is the sum of Tier 1 and
Tier 2 capital. As of March 31, 1999, our ratio of Tier 1 capital to total
risk-weighted period-end assets was 13.89% and our ratio of total capital to
total risk-weighted period-end assets was 15.15%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
In addition to the risk-based capital guidelines, the Federal Reserve Board
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
bank holding companies. The leverage ratio is a company's Tier 1 capital
divided by its average total adjusted assets. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis
points above the regulatory minimum. As of March 31, 1999, our leverage ratio
was 9.63%.
The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to
operate with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances
warrant. Federal Reserve Board guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are
required to take "prompt corrective action" to resolve problems associated with
insured depository institutions whose capital declines below certain levels. In
the event an institution becomes "undercapitalized," it must submit a capital
restoration plan. The capital restoration plan will not be accepted by the
regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is
limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized
or fails to submit a capital restoration plan. For example, a bank holding
company controlling such an institution can be required to obtain prior Federal
Reserve Board approval of proposed dividends, or might be required to consent
to a consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Federal Reserve
Board before it may acquire all or substantially all of the assets of any bank,
or ownership or control of any voting shares of any bank, if after such
acquisition it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank. In approving bank acquisitions by bank holding
companies, the Federal Reserve Board is required to consider the financial and
managerial resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be served, and
various competitive factors.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve Board has been notified and has not objected
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to the transaction. Under a rebuttable presumption established by the Federal
Reserve Board, the acquisition of 10% of more of a class of voting stock of a
bank holding company with a class of securities registered under Section 12 of
the Exchange Act, such as we will be upon consummation of the offering, would,
under the circumstances set forth in the presumption, constitute acquisition of
control of Financial Institutions.
In addition, any entity is required to obtain the approval of the Federal
Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in
the case of an acquiror that is a bank holding company) or more of our
outstanding common stock, or otherwise obtaining control or a "controlling
influence" over us.
The Banks
WYCO, PSB and FTB are New York State-chartered banks, and NBG is a national
bank chartered by the Office of the Comptroller of Currency. All of the
deposits of our four subsidiary banks are insured by the FDIC through the Bank
Insurance Fund. FTB is a member of the Federal Reserve System. Our banks are
subject to supervision and regulation that subject them to special
restrictions, requirements, potential enforcement actions and periodic
examination by the FDIC, the Federal Reserve Board and the New York State
Banking Department (in the case of the state-chartered banks) and the Office of
the Comptroller of Currency (in the case of NBG). Because the Federal Reserve
Board regulates the bank holding company parent of the banks, the Federal
Reserve Board also has supervisory authority which directly affects the banks.
Restrictions on Transactions with Affiliates and Insiders. Transactions between
the holding company and its subsidiaries, including the banks, are subject to
Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits
on the amount of such transactions, and also requires certain levels of
collateral for loans to affiliated parties. It also limits the amount of
advances to third parties which are collateralized by the securities or
obligations of Financial Institutions or our subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal Reserve
Act which generally requires that certain transactions between the holding
company and its affiliates be on terms substantially the same, or at least as
favorable to the banks, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must
be met before such a loan can be made. There is also an aggregate limitation on
all loans to insiders and their related interests. These loans cannot exceed
the institution's total unimpaired capital and surplus, and the FDIC may
determine that a lesser amount is appropriate. Insiders are subject to
enforcement actions for knowingly accepting loans in violation of applicable
restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends
paid by the banks have provided a substantial part of our operating funds and,
for the foreseeable future, we anticipate that dividends paid by the banks will
continue to be our principal source of operating funds. Capital adequacy
requirements serve to limit the amount of dividends that may be paid by the
subsidiaries. Under federal law, the subsidiaries cannot pay a dividend if,
after paying the dividend, a particular subsidiary will be "undercapitalized."
The FDIC may declare a dividend payment to be unsafe and unsound even though
the bank would continue to meet its capital requirements after the dividend.
Because we are a legal entity separate and distinct from our subsidiaries, our
right to participate in the distribution of assets of any subsidiary upon the
subsidiary's liquidation or reorganization will be subject to the prior claims
of the subsidiary's creditors. In the event of a liquidation or other
resolution of an insured depository institution, the claims of depositors and
other general or subordinated creditors are entitled to a priority of payment
over the claims of holders of any obligation of the institution to its
shareholders, including any depository institution holding company (such as us)
or any shareholder or creditor thereof.
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<PAGE>
Examinations. The New York State Banking Department (in the case of WYCO, PSB
and FTB), the Office of the Comptroller of the Currency (in the case of NBG),
the Federal Reserve Board and the FDIC periodically examine and evaluate our
banks. Based upon such examinations, the appropriate regulator may revalue the
assets of the institution and require that it establish specific reserves to
compensate for the difference between what the regulator determines the value
to be and the book value of such assets.
Audit Reports. Insured institutions with total assets of $500 million or more
must submit annual audit reports prepared by independent auditors to federal
and state regulators. In some instances, the audit report of the institution's
holding company can be used to satisfy this requirement. Auditors must receive
examination reports, supervisory agreements and reports of enforcement actions.
In addition, financial statements prepared in accordance with generally
accepted accounting principles, management's certifications concerning
responsibility for the financial statements, internal controls and compliance
with legal requirements designated by the FDIC, and an attestation by the
auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. The FDIC Improvement Act of 1991 requires that independent audit
committees be formed, consisting of outside directors only. The committees of
such institutions must include members with experience in banking or financial
management, must have access to outside counsel and must not include
representatives of large customers.
Capital Adequacy Requirements. The FDIC has adopted regulations establishing
minimum requirements for the capital adequacy of insured institutions. The FDIC
may establish higher minimum requirements if, for example, a bank has
previously received special attention or has a high susceptibility to interest
rate risk.
The FDIC's risk-based capital guidelines generally require state banks to have
a minimum ratio of Tier 1 capital to total risk-weighted period-end assets of
4.0% and a ratio of total capital to total risk-weighted period-end assets of
8.0%. The capital categories have the same definitions for us. As of March 31,
1999, the ratio of Tier 1 capital to total risk-weighted period-end assets for
our banks was 14.89% for WYCO, 12.45% for NBG, 12.68% for PSB and 12.76% for
FTB, and the ratio of total capital to total risk-weighted period-end assets
was 16.15% for WYCO, 13.67% for NBG, 13.93% for PSB and 14.02% for FTB. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The FDIC's leverage guidelines require state banks to maintain Tier 1 capital
of no less than 5.0% of average total assets, except in the case of certain
highly rated banks for which the requirement is 3.0% of average total assets.
As of March 31, 1999, the ratio of Tier 1 capital to average total assets
(leverage ratio) was 9.82% for WYCO, 9.28% for NBG, 8.73% for PSB and 7.97% for
FTB. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Corrective Measures for Capital Deficiencies. The federal banking regulators
are required to take "prompt corrective action" with respect to capital-
deficient institutions. Agency regulations define, for each capital category,
the levels at which institutions are "well-capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." A "well-capitalized" bank has a total risk-based
capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or
higher; a leverage ratio of 5.0% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk-
based capital ratio of 8.0% or higher; a Tier 1 risk-based capital ratio of
4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank
was rated a composite 1 in its most recent examination report and is not
experiencing significant growth); and does not meet the criteria for a well-
capitalized bank. A bank is "undercapitalized" if it fails to meet any one of
the ratios required to be adequately capitalized.
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In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from
paying management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
As an institution's capital decreases, the FDIC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other restrictions. The
FDIC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver or
conservator.
Banks with risk-based capital and leverage ratios below the required minimums
may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.
Deposit Insurance Assessments. The bank subsidiaries must pay assessments to
the FDIC for federal deposit insurance protection. The FDIC has adopted a risk-
based assessment system as required by the FDIC Improvement Act. Under this
system, FDIC-insured depository institutions pay insurance premiums at rates
based on their risk classification. Institutions assigned to higher risk
classifications (that is, institutions that pose a greater risk of loss to
their respective deposit insurance funds) pay assessments at higher rates than
institutions that pose a lower risk. An institution's risk classification is
assigned based on its capital levels and the level of supervisory concern the
institution poses to the regulators. In addition, the FDIC can impose special
assessments in certain instances.
The FDIC maintains a process for raising or lowering all rates for insured
institutions semi-annually if conditions warrant a change. Under this system,
the FDIC has the flexibility to adjust the assessment rate schedule twice a
year without seeking prior public comment, but only within a range of five
cents per $100 above or below the premium schedule adopted. Changes in the rate
schedule outside the five cent range above or below the current schedule can be
made by the FDIC only after a full rulemaking with opportunity for public
comment.
The Deposit Insurance Fund Act of 1996 contained a comprehensive approach to
recapitalizing the Savings Association Insurance Fund and to assuring the
payment of the Financing Corporation's bond obligations. Under this law, banks
insured under the Bank Insurance Fund are required to pay a portion of the
interest due on bonds that were issued by the Financing Corporation in 1987 to
help shore up the ailing Federal Savings and Loan Insurance Corporation. The
Bank Insurance Fund rate must equal one-fifth of the Savings Association
Insurance Fund rate through year-end 1999, or until the insurance funds are
merged, whichever occurs first. Thereafter Bank Insurance Fund and Savings
Association Insurance Fund payers will be assessed pro rata for the Financing
Corporation bond obligations. With regard to the assessment for the Financing
Corporation obligation, the current Bank Insurance Fund rate is 0.0122% of
deposits.
Enforcement Powers. The FDIC and the other federal banking agencies have broad
enforcement powers, including the power to terminate deposit insurance, impose
substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations
and supervisory agreements could subject us or our banking subsidiaries, as
well as the officers, directors and other institution-affiliated parties of
these organizations, to administrative sanctions and potentially substantial
civil money penalties. The appropriate federal banking agency may appoint the
FDIC as conservator or receiver for a banking institution (or the FDIC may
appoint itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation: the banking institution is
undercapitalized and has no reasonable prospect of becoming adequately
capitalized; fails to become adequately capitalized when
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<PAGE>
required to do so; fails to submit a timely and acceptable capital restoration
plan; or materially fails to implement an accepted capital restoration plan.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the
FDIC, and are subject to restrictions on the interest rates that can be paid on
such deposits. Undercapitalized institutions may not accept, renew or roll over
brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.
Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA") and
the regulations issued thereunder are intended to encourage banks to help meet
the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks.
These regulations also provide for regulatory assessment of a bank's record in
meeting the needs of its service area when considering applications regarding
establishing branches, mergers or other bank or branch acquisitions. FIRREA
requires federal banking agencies to make public a rating of a bank's
performance under the CRA. In the case of a bank holding company, the CRA
performance record of the banks involved in the transaction are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction.
Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, our subsidiary banks are also subject to certain consumer
laws and regulations that are designed to protect consumers in transactions
with banks. While the list set forth herein is not exhaustive, these laws and
regulations include, among others, the Truth in Lending Act, the Truth in
Savings Act, the Electronic Funds Transfer Act, the Expedited Funds
Availability Act, the Equal Credit Opportunity Act and the Fair Housing Act.
These laws and regulations mandate certain disclosure requirements and regulate
the manner in which financial institutions must deal with customers when taking
deposits or making loans to such customers. Our banks must comply with the
applicable provisions of these consumer protection laws and regulations as part
of their ongoing customer relations.
Instability of Regulatory Structure
Various legislation is introduced in Congress from time to time that includes
proposals to overhaul the bank regulatory system, expand the powers of banking
institutions and bank holding companies and limit the investments that a
depository institution may make with insured funds. Recently, both the House
and Senate Banking Committees have approved a major financial services reform
bill, the Financial Services Act of 1999 (H.R. 10) which, if it becomes law,
would repeal the Glass-Steagall Act and permit cross-ownership and affiliations
among bank holding companies, securities and insurance firms, as well as permit
new investments by bank holding companies in non-banking businesses. While it
is uncertain what the final form of the legislation will be, and whether any
reform legislation will be enacted at all, if enacted, such legislation could
change a number of banking statutes and our operating environment in
substantial and possibly unpredictable ways. We cannot determine the ultimate
effect that such legislation, if enacted, or implementing regulations with
respect thereto, would have upon our financial condition or results of
operations.
Expanding Enforcement Authority
One of the major additional burdens imposed on the banking industry by the FDIC
Improvement Act is the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition, the Federal
Reserve Board, the Office of the Comptroller of Currency, the New York State
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Superintendent of Banks and the FDIC are possessed of extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. For
example, the FDIC may terminate the deposit insurance of any institution which
it determines has engaged in an unsafe or unsound practice. The agencies can
also assess civil money penalties, issue cease and desist or removal orders,
seek injunctions, and publicly disclose such actions. The FDIC Improvement Act,
FIRREA and other laws have expanded the agencies' authority in recent years,
and the agencies have not yet fully tested the limits of their powers.
Effect On Economic Environment
The policies of regulatory authorities, including the monetary policy of the
Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the operating
results of commercial banks in the past and are expected to continue to do so
in the future. The nature of future monetary policies and the effect of such
policies on our business and earnings cannot be predicted.
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Management
Directors And Executive Officers
The following is a list of the directors and executive officers of Financial
Institutions:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
W.J. Humphrey, Jr........... 75 Director, Chairman of the Board
Peter G. Humphrey........... 44 Director, President and Chief Executive
Officer
Jon J. Cooper............... 46 Director, Senior Vice President of
Financial Institutions, President of WCB
Barton P. Dambra............ 57 Director
James R. Hardie............. 56 Director
Donald G. Humphrey.......... 68 Director
W.J. Humphrey, III.......... 48 Director, Senior Vice President of
Financial Institutions, President of PSB
Thomas L. Kime.............. 45 Director, Senior Vice President of
Financial Institutions, President of NBG
H. Jack South............... 72 Director
Donald I. Wickham........... 65 Director
James H. Wyckoff............ 47 Director
Randolph C. Brown........... 45 Senior Vice President of Financial
Institutions, President of FTB
Regina R. Colegrove......... 49 Vice President, Manager of Human Resources
Sonia M. Dumbleton.......... 37 Vice President, Manager of Internal Audit
& Compliance
David L. MacIntyre.......... 53 Assistant Vice President, Manager of
Investment Services
R. Mitchell McLaughlin...... 41 Vice President, Manager of Operations
Ronald A. Miller............ 50 Senior Vice President, Chief Financial
Officer
Steven S. Perl.............. 32 Vice President, Controller
</TABLE>
Biographical Information
W. J. Humphrey, Jr. has been a director since 1948 and Chairman of the Board
since 1991. He is the retired President of Financial Institutions and WYCO. He
serves as director of WYCO, PSB and is a Director Emeritus of NBG. He is a
former director of Rochester Telephone (Frontier Corp.) and The Automobile Club
of Buffalo. He is a former Chairman of the Genesee State Park and Recreation
Commission and served as Commissioner from 1963-1981. He served as Director and
President of the Society for the Genesee and the Lakes and is a former
President of the Wyoming County Industrial Development Corporation.
Peter G. Humphrey has served as a director since 1983. Since 1994, he has been
President and Chief Executive Officer of Financial Institutions. He joined WYCO
in 1979 after completing Marine Midland Bank's management training program. He
became President of WYCO in 1986 and is currently a director and Chairman of
that bank. He is also a director and Chairman of FTB and a director of PSB and
NBG. He is a past president of the Independent Bankers Association of New York
State and was recently elected Treasurer of the New York Bankers Association.
Long active in community and trade association affairs, he was appointed in
1994 by Governor George Pataki as Chairman of the Genesee Region of the New
York State Parks, Recreation and Historic Preservation Commission.
Jon J. Cooper has served as a director since 1997. Since 1998, he has been the
President and Chief Executive Officer of WYCO after serving as the President
and Chief Operating Officer starting in 1997. Prior to joining
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WYCO he was a Senior Vice President with Fleet Bank in Buffalo in the small
business lending group. As a member of their consumer banking division, he was
responsible for managing the key retail branch locations in the Western New
York area. He serves on the Board of Directors of the Wyoming County Business
Development Council and the Genesee Community College Foundation. He is a
member of the SUNY Geneseo College Advisory Council.
Barton P. Dambra has served as a director since 1993 and is a director of PSB.
He is currently President of Markin Tubing and has served in that position
since 1978. Prior to that he was a partner with Knauf & Knauf, an accounting
firm located in Rochester, New York. He has been a certified public accountant
since 1967. He is a board member of the LeRoy Historical Society and a member
of the American Institute of Certified Public Accountants, New York State
Society of Certified Public Accountants and the LeRoy Sports Boosters. He is a
past President and board member of the LeRoy Rotary, served on the LeRoy United
Way Committee, was a charter member of the Private Industry Council and was
previously a member of the Wyoming County Business Development Corporation.
James R. Hardie has served as director since 1997. He is the President and
founder of Austin Hardie Wise Agency, Inc., an insurance agency located in
Attica, New York. He also serves as a director of the WCB. He is a director of
the Wyoming County Business Development Corp. and Chairman of the Wyoming
County Republican Booster Club. He is Vice President of Combined Financial
Services. He is a past President of the Attica Lions Club, a past President of
the Bennington Jaycees, and a past Vice President of the Attica Central School
Board. He previously served as Chairman of the Town of Bennington Zoning Board
and as a director of Genesee Country Bank and the Automobile Club of Western
New York.
Donald G. Humphrey has served as a director since 1958. He is the retired Vice
President and Chief Mortgage Officer of WCB. He volunteers for the Coast Guard
Auxiliary and is a member of the Warsaw Kiwanis Club. He is a board member of
the Silver Lake Country Club, of which he is a past President.
W. J. Humphrey, III has served as a director since 1982. He has been the
President and Chief Executive Officer of PSB since 1981 and a Senior Vice
President of Financial Institutions since 1982. Prior to joining Financial
Institutions, he was an employee of Marine Midland Bank and is a graduate of
its credit training program. He is Chairman of the Genesee County Comprehensive
Master Plan, Genesee 2000 and President of the Genesee County Business
Education Alliance. He is President of GLOW School to Work and, in 1996, was
appointed by Governor George Pataki as a trustee of Genesee Community College
SUNY. He serves on the Board of Directors of the New York Bankers Association
and is Chairman of the New York Bankers Group 1. He is a member of the
Rochester/Finger Lakes Regional Advisory Board of Empire State Development
Corporation.
Thomas L. Kime has served as a director since 1989. He has been the President
and Chief Executive Officer of NBG since 1989 where he began in 1976 as an
agricultural and commercial lender. He has also served as an investment
officer. He became a director of NBG in 1981. He is active in the City of
Geneva, Seneca County and Ontario County economic development organizations,
and is a member of the board of directors of the Independent Bankers
Association of New York State. He serves as a director of the Finger Lakes
Regional Health System, is Chairman of the Board of the Finger Lakes
Cooperative Insurance Company and is a member of the Finger Lakes Community
College Foundation Board.
H. Jack South has served as a director since 1998. He has been a director of
FTB since 1989. He is a past director and treasurer of Holimont ski resort. He
is a past national President of Ductile Iron Society and served as trustee of
the Foundry Educational Foundation.
Donald I. Wickham has served as a director since 1993 and has been a director
of NGB since 1973. Since 1996 he has been an associate with Klassen Associates,
a business brokerage firm located in Rochester, New York. Prior to that he was
President of Globe Travel in Fairport, New York. From 1984 to 1988 he served as
a director of the Buffalo Branch of the Federal Reserve Board (New York City).
He previously served as a director of Curtice Burns Foods, Inc. and is a past
President of Pro-Fac Cooperative, Inc. He is a former member of the Cornell
University Agriculture Advisory Board.
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James H. Wyckoff has served as a director since 1985. He is currently serving a
dual appointment as Associate Professor of the Department of Public
Administration and the Department of Economics at SUNY Albany. He is a faculty
member of the Public Policy Program. He is a director of the American Education
Finance Association, the Albany Academy of Finance and is a member of the
National Academy of Sciences. He has been an active member of various New York
State Regents study groups. He teaches graduate and undergraduate courses in
public finance, public affairs and economics.
Randolph C. Brown has served as Vice President since 1991 and was elected
Senior Vice President in 1998. He has been the President and Chief Executive
Officer of FTB since 1991. Prior to joining FTB, he was a commercial loan
officer with Community Bank Systems and, before that, was a regional senior
lender at Fleet Bank.
Regina R. Colegrove has served as Vice President since 1991. Previously she
served as Assistant Vice President and Director of Human Resources at WYCO.
Sonia M. Dumbleton has served as Vice President since 1996. She has been a
Senior Internal Auditor with Financial Institutions since 1984.
David L. MacIntyre has served as an Assistant Vice President since 1998 and has
been Financial Institutions' investment products manager since 1993. Previously
he was a financial services consultant with Citicorp Investment Services in
Rochester, New York.
R. Mitchell McLaughlin has served as Vice President since 1995. He previously
served as Senior Vice President and Financial Officer of WYCO.
Ronald A. Miller has served as Senior Vice President and Chief Financial
Officer since 1996. From 1994 to 1996 he was Senior Vice President and
Controller of a Retail Banking Division of Fleet Financial Group. From 1988 to
1994 he served as Senior Vice President and Controller of Fleet Bank, Albany,
New York.
Steven S. Perl has served as Vice President since 1998 and Controller since
1997. From 1995 to 1997 he was Vice President and Financial Officer of FTB.
From 1992 to 1995 he was employed by Citibank, N.A. in its trust and cash
management divisions.
Family Relationships
W. J. Humphrey, Jr. and Donald G. Humphrey are brothers. W. J. Humphrey, Jr. is
the father of Peter G. Humphrey and W. J. Humphrey III. James H. Wyckoff is the
son of Margaret Wyckoff, the sister of W. J. Humphrey, Jr. and Donald G.
Humphrey.
Terms and Committees of the Board of Directors
Directors are elected for three year terms, classified into Classes I, II and
III. Messrs. W. J. Humphrey, III, Wickham and Wyckoff are Class I directors
with terms of office expiring on the date of our annual meeting of shareholders
in 2000; Messrs. Cooper, Hardie, W. J. Humphrey, Jr. and Kime are Class II
directors with terms of office expiring on the date of our annual meeting of
shareholders in 2001; and Messrs. Dambra, Donald G. Humphrey, Peter G. Humphrey
and South are Class III directors with terms of office expiring on the date of
our annual meeting of shareholders in 2002. Each of our officers is elected by
the Board of Directors and holds office until his or her successor is duly
elected and qualified or until his or her earlier death, resignation or
removal.
The Board of Directors has established Audit, Compensation and Nominating
Committees. The Audit Committee reviews the general scope of the audit
conducted by our independent auditors and matters relating to our internal
control systems. In performing its function, the Audit Committee meets
separately with representatives of our independent auditors and with
representatives of senior management. The Audit Committee is composed of
Messrs. Dambra, South, Wickham and Hardie, all of whom are outside directors.
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The Compensation Committee is responsible for making recommendations to the
Board of Directors with respect to the compensation of our executive officers
and for establishing policies to deal with various compensation and employee
benefit matters. The Compensation Committee administers our management stock
incentive plan and grants awards to our key employees under such plan. The
Compensation Committee is comprised of Messrs. Wyckoff, Dambra, Hardie, Donald
G. Humphrey, South and Wickham, all of whom are non-employee directors.
The Nominating Committee is responsible for nominating individuals to serve on
the Board of Directors. The Nominating Committee is comprised of Messrs.
Wyckoff, D. G. Humphrey, South, Wickham, Dambra and Hardie, all of whom are
outside directors, and Peter G. Humphrey and W. J. Humphrey, Jr., both of whom
are officers of Financial Institutions.
Executive Compensation
The following table sets forth information about the compensation paid to or
earned by our Chief Executive Officer and our four other most highly
compensated executive officers for the year ended December 31, 1998
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
Annual
Compensation
-----------------
All Other
Name and Principal Position Salary Bonus Compensation(1)
- --------------------------- -------- -------- --------------
<S> <C> <C> <C>
Peter G. Humphrey........................... $249,956 $104,465 $41,149
President & Chief Executive Officer of
Financial Institutions
Jon J. Cooper............................... 135,000 52,198 7,394
Senior Vice President of Financial
Institutions
and President & Chief Executive Officer of
WYCO
Thomas L. Kime.............................. 151,672 66,611 27,423
Senior Vice President of Financial
Institutions
and President & Chief Executive Officer of
NBG
W.J. Humphrey III........................... 114,000 50,401 19,594
Senior Vice President of Financial
Institutions
and President & Chief Executive Officer of
PSB
Randolph C. Brown........................... 100,000 40,984 14,237
Senior Vice President of Financial
Institutions
and President & Chief Executive Officer of
FTB
</TABLE>
- ------------------
(1) Includes matching and additional performance contributions made by us under
our 401(k) plan in the amounts of $7,300, $7,394, $8,100, $6,500 and $3,295
for Messrs. Peter Humphrey, Cooper, Kime, W. J. Humphrey III and Brown,
respectively. Also includes the entire amount of split-dollar life
insurance premiums paid by us (including amounts that will be recovered by
us upon payment of the policy or other events) in the amounts of $33,849,
$19,323, $13,094 and $10,942 for life insurance policies which cover
Messrs. Peter Humphrey, Kime, W. J. Humphrey III and Brown, respectively.
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Management Stock Incentive Plan
On May 27, 1999, our shareholders approved the 1999 Management Stock Incentive
Plan, under which we may grant stock options to purchase shares of our common
stock, shares of restricted stock and stock appreciation rights to our key
employees. Grants may be made under the plan with respect to up to 10% of the
number of shares of common stock issued, including treasury shares which, after
the completion of the offering, will permit grants to be made under the plan
with respect to an aggregate of 1,110,353 shares of common stock. The
management incentive plan is administered by our Compensation Committee which
much consist of at least two non-employee directors. The Compensation Committee
is authorized under the option plan to select employees eligible for
participation in the plan, to make grants under the plan to such employees and
determine the terms and conditions of the grants under the plan. Upon the
consummation of the offering, non-qualified options to acquire an aggregate of
282,142 shares of our common stock will be granted under the plan. These
options will vest at a rate of 20% per year with the first installment vesting
in June 2000. It is anticipated that additional stock options will be granted
to other key employees shortly after the completion of the offering.
The following table sets forth certain information regarding the options which
will be granted under the management incentive plan to the Named Executive
Officers upon consummation of the offering:
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Option Term (1)
-------------------
Number of Percentage of
Securities Total Options
Underlying Granted to Exercise Expiration
Name Options Employees Price (1) Date 5% 10%
---- ---------- ------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter G. Humphrey....... 94,000 33.3% $14.00 6/25/09 $827,625 $2,097,365
Jon J. Cooper........... 51,665 18.3% $14.00 6/25/09 454,886 1,152,770
Thomas L. Kime.......... 55,000 19.5% $14.00 6/25/09 484,249 1,227,182
W. J. Humphrey III...... 41,665 14.8% $14.00 6/25/09 366,841 929,646
Randolph C. Brown....... 36,335 12.9% $14.00 6/25/09 319,912 810,721
</TABLE>
- ------------------
(1) The exercise price will be equal to the initial public offering price.
In the event of a change in control as defined in the management stock
incentive plan, all options shall vest and become exercisable and all
restrictions on restricted stock shall automatically be satisfied unless the
Compensation Committee directs otherwise in a resolution adopted prior to the
change in control. Under certain circumstances following a change in control,
holders of options may surrender them in exchange for cash in an amount equal
to the difference between the exercise price of such option and the fair market
value of our common stock on the date of surrender. If a holder does not
exercise that right, such holder may exercise the option at any time during the
term of such option.
Defined Benefit Plan
We maintain a defined benefit retirement plan that covers all of our full- and
part-time employees who satisfy the eligibility requirements. Employees are
eligible to participate in the plan if they have completed one year of
employment and are at least 21 years of age. Participants with five or more
years of service are entitled to annual pension benefits beginning at 62 years
of age. The amount of the retirement benefit is 1.75% of the participant's
highest average five consecutive years' compensation multiplied by the number
of years of service up to 35 years, plus 1.25% of the participant's highest
average five consecutive years' compensation for service in excess of 35 years,
not to exceed 40 years of creditable service, less 0.49% of the average of the
participant's final three years' compensation multiplied by the number of years
of service up to 35 years. If a
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<PAGE>
participant terminates employment with us before completing five years of
service, such person forfeits the right to receive plan benefits. Total plan
expense charged to our operations for 1998, 1997 and 1996 was $35,000, $126,000
and 224,000, respectively, and the market value of the assets held by the plan
at December 31, 1998 was approximately $13.5 million.
The following table sets forth the estimated plan benefits payable upon
retirement for various levels of compensation and years of service:
<TABLE>
<CAPTION>
Years of Service
--------------------------------------------------------------------------
Compensation 15 20 25 30 35
- ------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
100,000 23,962 31,949 39,937 47,924 55,912
125,000 30,525 40,699 50,874 61,049 71,224
150,000 37,087 49,449 61,812 74,174 86,537
175,000 39,712 52,949 66,187 79,424 92,662
200,000 39,712 52,949 66,187 79,424 92,662
250,000 39,712 52,949 66,187 79,424 92,662
300,000 39,712 52,949 66,187 79,424 92,662
350,000 39,712 52,949 66,187 79,424 92,662
400,000 39,712 52,949 66,187 79,424 92,662
450,000 39,712 52,949 66,187 79,424 92,662
500,000 39,712 52,949 66,187 79,424 92,662
</TABLE>
For purposes of determining benefits under the plan, compensation includes
salary and bonus but cannot exceed $160,000. The benefit computation is based
on a life annuity with a five year certain. The Social Security Offset
(included in the above figures) is 0.49% times the three year final average
salary up to covered compensation times the number of years of creditable
service up to 35 years. This offset assumes a 1999 benefit for a participant of
age 65. The estimated credited years of service for each of the Named Executive
Officers as of December 31, 1998 was:
<TABLE>
<S> <C>
. Peter G. Humphrey 19.417
. Jon J. Cooper 0.750
. Thomas L. Kime 19.917
. W. J. Humphrey III 22.750
. Randolph C. Brown 6.167
</TABLE>
401(k) Plan
We maintain a contributory profit sharing plan pursuant to Internal Revenue
Code Section 401(k) covering substantially all employees. At least one year of
service is required to be eligible for employer-matching contributions.
Participants may contribute up to 15% of their compensation to the Plan. Each
year we determine, at our discretion, the amount of matching contributions.
Total plan expense charged to our operations for 1998, 1997 and 1996 was
$398,000, $389,000 and $400,000, respectively.
Director Compensation
We pay our directors who are not employed by us or the banks an annual retainer
of $2,500 and a separate fee for each board or committee meeting that they
attend. The fees for attending a Board meeting are $500 and the fees for
attending an Audit Committee meeting are $400 for the committee chairman and
$300 for each other member of the committee. The fees for attending a
Compensation Committee or Nominating Committee meeting are $200 for the
committee chairman and $150 for each other member of the committee. We do not
pay the directors who are employed by us or our banks any annual retainer or
any compensation for attending Board or committee meetings.
74
<PAGE>
Directors' Stock Incentive Plan
On May 27, 1999, our shareholders approved the 1999 Directors' Stock Incentive
Plan, under which we may issue non-qualified stock options to purchase shares
of our common stock to our non-employee directors and non-employee directors of
our subsidiaries. Options may be granted under the directors' stock incentive
plan with respect to an aggregate of 500,000 shares of our common stock. The
directors' stock incentive plan is administered by our Board of Directors.
Under the plan, the non-employee directors of Financial Institutions will
receive options to purchase an aggregate of 14,000 shares of common stock as
soon as practicable after the completion of this offering. The directors' stock
incentive plan contemplates future annual grants of 1,000 shares upon re-
election; however, no grants are contemplated until two years after the
offering. Non-employee directors of our subsidiaries will be granted such
options as our Board of Directors may determine, however, it is anticipated
that non-employee directors will initially be granted options to purchase 500
shares at the same times as directors of Financial Institutions are granted
options.
In the event of a change in control as defined in the directors' stock
incentive plan, all options shall vest and become exercisable unless our Board
of Directors directs otherwise in a resolution adopted prior to the change in
control. Under certain circumstances following a change in control, holders of
options may surrender them in exchange for cash in an amount equal to the
difference between the exercise price of such option and the fair market value
of our common stock on the date of surrender. If a holder does not exercise
that right, such holder may exercise the option at any time during the term of
such option.
75
<PAGE>
Principal and Selling Shareholders
The following table sets forth certain information regarding the beneficial
ownership of our common stock and preferred stock as of June 10, 1999 by (1)
each of our directors and the Named Executive Officers, (2) all directors and
executive officers as a group and (3) each person who is known by us to own
beneficially 5% or more of our common stock. Unless otherwise indicated, each
person has sole voting and dispositive power over the shares indicated as owned
by such person and the address of each shareholder is the same as our address.
<TABLE>
<CAPTION>
Percentage of
Common Shares(1) Percentage Percentage
Number of ----------------- Shares of of Series Shares of of Series
Common Before After Series A A Series B B
Name of Beneficial Owner Shares Offering Offering Preferred Preferred Preferred Preferred
- ------------------------ --------- -------- -------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
W.J. Humphrey, Jr....... 505,500 5.1% 4.7% -- -- 27,797 15.7%
Peter G. Humphrey....... 276,600(2) 2.8 2.6 54 2.9% 4,334(2) 2.5
Jon J. Cooper........... 1,000 * * -- -- -- --
Barton P. Dambra........ 4,000 * * -- -- 72 *
James R. Hardie......... 1,000 * * -- -- -- --
Donald G. Humphrey...... 627,100 6.3 5.8 -- -- 29,512 16.7
W.J. Humphrey, III...... 345,900(3) 3.5 3.2 73 4.0 5,257(3) 3.0
Thomas L. Kime.......... 6,600 * * -- -- 18 *
H. Jack South........... 1,000 * * -- -- -- --
Donald I. Wickham....... -- -- -- -- -- -- --
James H. Wyckoff........ 256,600 2.6 2.4 19 1.0 5,936 3.4
Randolph C. Brown....... 1,000 * -- -- -- 18 *
Executive officers and
directors as a group
(12 persons)........... 2,026,300 20.4 18.7 146 7.9 72,944 41.3
Wyoming County Bank..... 650,100(4) 6.6 6.0 -- -- -- --
</TABLE>
- ------------------
*Denotes less than one percent.
(1) Based on 9,915,600 shares outstanding before the offering and 10,818,733
shares outstanding after the offering, assuming 903,133 shares are issued
by Financial Institutions in the offering.
(2) Includes 54,000 shares of common stock, 810 shares of Series B Preferred
Stock and 19 shares of Series A Preferred Stock held by Peter G. Humphrey
as custodian for Christopher G. Humphrey. Peter G. Humphrey disclaims
beneficial ownership of such shares.
(3) Includes 50,000 shares of common stock, 738 shares of Series B Preferred
Stock and 19 shares of Series A Preferred Stock held by W. J. Humphrey, III
as custodian for W.J. Humphrey, V and 49,000 shares of common stock, 702
shares of Series B Preferred Stock and 19 shares of Series A Preferred
Stock held by W. J. Humphrey, III as custodian for Jamie P. Humphrey. W. J.
Humphrey, III disclaims beneficial ownership of such shares.
(4) 450,100 shares are held by WCB as trustee under certain educational trusts
established by W. J. Humphrey, Jr. and 200,000 shares are held by WCB as
trustee under a charitable lead annuity trust established by Margaret H.
Wyckoff.
The YMCA of Batavia, the selling shareholder, presently owns 430,200 shares of
common stock, or 4.34% of the presently outstanding shares of common stock,
that were contributed to it by certain members of the Humphrey Family. The YMCA
of Batavia is offering all of its shares in the offering and, following the
offering, will not own any of our common stock.
76
<PAGE>
Certain Transactions
Our directors, executive officers and many of our principal shareholders (i.e.,
those who own 10% or more of the common stock) and their associates are also
our customers. Such associates would include corporations, partnerships and
other organizations in which they are officers or partners or in which they and
their immediate families have at least a 5% interest. During 1998 and First
Quarter 1999, we made loans in the ordinary course of business to many of our
directors, executive officers and principal shareholders and their affiliates.
All of these loans were on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with persons unaffiliated with us. Also, the loans did not involve
more than the normal risk of collectibility or present other unfavorable
features. On March 31, 1999, the aggregate principal amount of loans to our
directors, named executive officers and their affiliates was $980,000 and the
principal amount of loans to all of the directors and officers of Financial
Institutions and our banks and their affiliates was $12.1 million. Loans to
directors, executive officers and principal shareholders are subject to
limitations contained in the Federal Reserve Act, which requires that such
loans satisfy certain criteria.
We expect to have such transactions or transactions on a similar basis with our
directors, executive officers and principal shareholders and their affiliates
in the future.
77
<PAGE>
Description of Capital Stock
Authorized Capital Stock
Our authorized capital stock consists of:
. 50,000,000 shares of common stock, $.01 par value per share, of which
10,200,400 shares were issued and 9,915,600 were outstanding as of March
31, 1999 (after giving effect to the stock split);
. 10,000 shares of Class A Preferred Stock, $100.00 par value per share, of
which there were 1,842 shares of Series A 3% Preferred Stock issued and
outstanding as of March 31, 1999; and
. 200,000 shares of Class B Preferred Stock, $100.00 par value per share, of
which 180,000 shares have been designated as Series B-1 8.48% Preferred
Stock (of which 176,734 shares were issued and outstanding as of March 31,
1999).
The terms of any new series of preferred stock may be fixed by our Board of
Directors within certain limits set by our Certificate of Incorporation.
The following discussion of the terms and provisions of our capital stock is
qualified in its entirety by reference to our Certificate of Incorporation and
By-laws, copies of which have been filed as exhibits to the Registration
Statement of which this prospectus is a part.
Common Stock
The holders of the common stock are entitled to one vote for each share of
common stock owned. Except as expressly provided by law and except for any
voting rights which may be conferred by the Board of Directors on any shares of
preferred stock issued, the holders of our preferred stock do not have the
right to vote. Holders of common stock may not cumulate their votes for the
election of directors. Holders of common stock do not have pre-emptive rights
to acquire any additional, unissued or treasury shares of Financial
Institutions, or securities of Financial Institutions convertible into or
carrying a right to subscribe for or acquire shares of Financial Institutions.
Holders of common stock are entitled to receive dividends out of funds legally
available therefor, if and when properly declared by the Board of Directors.
See "Dividend Policy."
On the liquidation of Financial Institutions, the holders of common stock are
entitled to share pro rata in any distribution of our assets after the holders
of shares of preferred stock have received the liquidation preference of their
shares plus accumulated but unpaid dividends (whether or not earned or
declared), if any, and after all of our other indebtedness has been provided
for or satisfied.
Preferred Stock
There are two classes of preferred stock, Class A preferred stock and Class B
preferred stock. The Certificate of Incorporation provides that both classes of
preferred stock are issuable in one or more series. There is one series of
Class A preferred stock that has been created, Series A 3% Preferred Stock, and
one class of Series B preferred stock that has been created, Series B-1 8.48%
Preferred Stock.
Holders of Series A 3% Preferred Stock are entitled to receive an annual
dividend of $3.00 per share, which is cumulative and payable quarterly. Holders
of Series A 3% Preferred Stock have no pre-emptive right in, or right to
purchase or subscribe for, any additional shares of Financial Institutions
stock and have no voting rights. Dividend or dissolution payments to the Class
A shareholders must be declared and paid, or set apart for payment, before any
dividends or dissolution payments can be declared and paid, or set apart for
payment, to the holders of Class B preferred stock or common stock. The Series
A 3% Preferred Stock is not convertible into any other Financial Institutions
security.
78
<PAGE>
Holders of Series B-1 8.48% Preferred Stock are entitled to receive an annual
dividend of $8.48 per share, which is cumulative and payable quarterly. Holders
of Series B-1 8.48% Preferred Stock have no pre-emptive right in, or right to
purchase or subscribe for, any additional shares of Financial Institutions
stock and have no voting rights. Accumulated dividends on the Series B-1 8.48%
Preferred Stock do not bear interest, and the Series B-1 8.48% Preferred Stock
is not subject to redemption. Dividend or dissolution payments to the Class B
shareholders must be declared and paid, or set apart for payment, before any
dividends or dissolution payments are declared and paid, or set apart for
payment, to the holders of common stock. The Series B-1 8.48% Preferred Stock
is not convertible into any other Financial Institutions security.
The Board of Directors of Financial Institutions may, in the future, designate
additional series of preferred stock, and to fix the relative rights,
preferences and limitations of each such series. The unissued shares of Series
A 3% preferred stock, Series B-1 8.48% Preferred Stock and any new series of
preferred stock designated by the Board of Directors may be issued by the Board
of Directors in the future.
New York Law and Certain Provisions of Our Certificate of Incorporation and By-
laws
Certain provisions of New York law, our Certificate of Incorporation and our
By-laws could make more difficult the acquisition of Financial Institutions by
means of a tender offer, a proxy contest or otherwise and the removal of
incumbent officers and directors. These provisions are intended to discourage
certain types of coercive takeover practices and inadequate takeover bids. This
also encourages persons seeking to acquire control of us to negotiate with us
first.
The following discussion is a summary of certain material provisions of our
Certificate of Incorporation and our By-laws, copies of which are filed as
exhibits to the Registration Statement of which this prospectus is a part.
Classified Board of Directors. Under our By-laws, the Board of Directors is
classified into three classes, with the directors being elected for staggered,
three-year terms. The classification of our Board of Directors will have the
effect of making it more difficult to change the composition of the Board of
Directors because at least two annual meetings of the shareholders would be
required to change the control of the Board of Directors rather than one. In
addition, the By-laws provide that directors may be removed by the shareholders
only for cause and that vacancies on the Board of Directors may be filled by
the remaining directors.
Advance Notice of Shareholder Proposals and Nominations. Our By-laws establish
an advance notice procedure for shareholders to make nominations of candidates
for election as directors or bring other business before any meeting of our
shareholders. The shareholder notice procedure provides that only persons who
are nominated by, or at the direction of, the Board, or by a shareholder who
has given timely written notice prior to the meeting at which directors are to
be elected, will be eligible for election as directors and that, at a
shareholders' meeting, only such business may be conducted as has been brought
before the meeting by, or at the direction of, the Board of Directors or by a
shareholder who has given timely written notice of such shareholder's intention
to bring such business before such meeting.
Under the shareholder notice procedure, for notice of shareholder nominations
or other business to be made at a shareholders' meeting to be timely, such
notice must be received by us not less than 60 nor more than 90 days prior to
the meeting.
A shareholder's notice to us proposing to nominate a person for election as a
director or proposing other business must contain certain information specified
in the By-laws, including the identity and address of the nominating
shareholder, a representation that the shareholder is a record holder of our
stock entitled to vote at the meeting and information regarding each proposed
nominee or each proposed matter of business that would be required under the
federal securities laws to be included in a proxy statement soliciting proxies
for the proposed nominee or the proposed matter of business.
79
<PAGE>
The shareholder notice procedure may have the effect of precluding a contest
for the election of directors or the consideration of shareholder proposals if
the proper procedures are not followed, and of discouraging or deterring a
third party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
us and our shareholders.
Special Meetings of Shareholders. Our By-laws provide that special meetings of
shareholders can be called by the Board of Directors, the President or the
holders of at least a majority of the outstanding shares entitled to vote at
the meeting.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
Shares Eligible For Future Sale
When the offering is completed, Financial Institutions will have a total of
10,818,733 shares of common stock outstanding. The 1,333,333 shares offered by
this prospectus will be freely tradeable unless they are purchased by
"affiliates" of Financial Institutions, as defined in Rule 144 under the
Securities Act. The remaining 9,485,400 shares are "restricted," which means
they were originally sold in certain types of offerings that were not subject
to a registration statement filed with the SEC. These restricted shares may be
resold only through registration under the Securities Act of 1933 or under an
available exemption from registration, such as provided through Rule 144. Sales
under Rule 144 may be subject to certain volume limitations and other
conditions. Any holders of these outstanding shares who have held them for over
two years (or acquired them from someone who held them for more than two years)
will be able to immediately sell them without restriction pursuant to Rule 144
unless they are an affiliate of Financial Institutions, in which case they will
be required to comply with certain requirements of Rule 144.
In addition, 296,142 shares are issuable upon exercise of options that will be
outstanding upon consummation of the offering. If any options are exercised,
the shares issued upon exercise will also be restricted, but may be sold under
Rule 144 after the shares have been held for one year.
Our executive officers and directors and certain of our shareholders have
agreed to a 180-day "lock-up" with respect to the shares of our common stock
which they own. This generally means that they cannot sell these shares during
the 180-day period following the date of this prospectus. See "Underwriting."
After the 180-day lock-up period, these shares may be sold in accordance with
applicable securities laws, including Rule 144.
80
<PAGE>
Underwriting
Financial Institutions and the YMCA of Batavia have entered into an
underwriting agreement with the underwriters named below. CIBC World Markets
Corp. and Keefe, Bruyette & Woods, Inc. are acting as representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number of
shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
CIBC World Markets Corp..................................... 604,168
Keefe, Bruyette & Woods, Inc................................ 604,165
A.G. Edwards & Sons, Inc. .................................. 25,000
Salomon Smith Barney Inc. .................................. 25,000
Advest, Inc. ............................................... 12,500
First Albany Corporation.................................... 12,500
Ryan, Beck & Co., Inc. ..................................... 12,500
Sage, Rutty & Co., Inc. .................................... 12,500
Trubee, Collins & Co. ...................................... 12,500
Tucker Anthony Cleary Gull.................................. 12,500
---------
Total..................................................... 1,333,333
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The shares should be ready for delivery on or about June 30, 1999 against
payment in immediately available funds. The representatives have advised
Financial Institutions and the YMCA of Batavia that the underwriters propose to
offer the shares directly to the public at the public offering price that
appears on the cover page of this prospectus. In addition, the representatives
may offer some of the shares to certain securities dealers at such price less a
concession of $0.50 per share. The underwriters may also allow, and such
dealers may reallow, a concession not in excess of $0.10 per share to certain
other dealers. After the shares are released for sale to the public, the
representatives may change the offering price and other selling terms at
various times.
Financial Institutions has granted the underwriters an over-allotment option.
This option, which is exercisable for up to 30 days after the date of this
prospectus, permits the underwriters to purchase a maximum of 200,000
additional shares from Financial Institutions to cover over-allotments. If the
underwriters exercise all or part of this option, they will purchase shares
covered by the option at the initial public offering price that appears on the
cover page of this prospectus, less the underwriting discount. If this option
is exercised in full, the total price to public will be $21,466,662 and the
total proceeds to Financial Institutions will be $14,362,792. The underwriters
have severally agreed that, to the extent the over-allotment option is
exercised, they will each purchase a number of additional shares proportionate
to the underwriter's initial amount reflected in the foregoing table.
81
<PAGE>
The following table provides information regarding the amount of the discount
to be paid to the underwriters by Financial Institutions and the YMCA of
Batavia:
<TABLE>
<CAPTION>
Total without Exercise of Total with Full Exercise of
Per Share Over-Allotment Option Over-Allotment Option
--------- ------------------------- ---------------------------
<S> <C> <C> <C>
Financial Institutions.. $0.98 $ 885,070 $1,081,070
YMCA of Batavia......... $0.98 $ 421,596 $ 421,596
----- ---------- ----------
Total........................... $1,306,666 $1,502,666
========== ==========
</TABLE>
Financial Institutions estimates that its total expenses in connection with the
offering, excluding the underwriting discount, will be approximately $500,000.
The YMCA of Batavia will pay the legal fees and expenses that it incurs in
connection with the offering.
Financial Institutions and the YMCA of Batavia have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
Financial Institutions, its officers and directors and certain other
shareholders have agreed to a 180-day "lock up" with respect to the shares of
common stock and certain other Financial Institutions securities that they
beneficially own, including securities that are convertible into shares of
common stock and securities that are exchangeable or exercisable for shares of
common stock. This means that, subject to certain exceptions, for a period of
180 days following the date of this prospectus, Financial Institutions and such
persons may not offer, sell, pledge or otherwise dispose of these Financial
Institutions securities without the prior written consent of CIBC World Markets
Corp.
The representatives have informed Financial Institutions that they do not
expect discretionary sales by the underwriters to exceed 5% of the shares
offered by this prospectus.
The underwriters have reserved for sale up to 10% of the shares offered by this
prospectus for employees, directors and certain other persons associated with
Financial Institutions. These reserved shares will be sold at the initial
public offering price that appears on the cover page of this prospectus. The
number of shares available for sale to the general public in the offering will
be reduced to the extent reserved shares are purchased by such persons. The
underwriters will offer to the general public, on the same terms as other
shares offered by this prospectus, any reserved shares that are not purchased
by such persons.
There is no established trading market for the shares. The offering price for
the shares has been determined by Financial Institutions and the
representatives, based on the following factors: prevailing market and general
economic conditions; the market capitalizations, trading histories and stages
of development of other traded companies that Financial Institutions and the
representatives believed to be comparable to Financial Institutions; Financial
Institutions' results of operations in recent periods; Financial Institutions'
current financial position; estimates of Financial Institutions' business
potential; and the present state of Financial Institutions' development.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the shares,
so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is created
in connection with the offering, the representatives may engage in
syndicate covering transactions
82
<PAGE>
by purchasing shares in the open market. The representatives may also elect
to reduce any short position by exercising all or part of the over-allotment
option.
. Penalty bids--If the representatives purchase shares in the open market in
a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither Financial Institutions nor the underwriters make any representation or
prediction as to the effect that the transactions described above may have on
the price of the shares. These transactions may occur on the Nasdaq National
Market or otherwise. If such transactions are commenced, they may be
discontinued without notice at any time.
83
<PAGE>
Legal Matters
The validity of the shares of common stock offered hereby will be passed upon
by Nixon, Hargrave, Devans & Doyle LLP, Rochester, New York. Certain legal
matters with respect to the common stock offered hereby will be passed upon for
the underwriters by Gibson, Dunn & Crutcher LLP, New York, New York.
Experts
The consolidated financial statements of Financial Institutions, Inc. and
subsidiaries as of December 31, 1998 and 1997 and for each of the years in the
three-year period ended December 31, 1998 have been included in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as "experts" in accounting and auditing.
Where You Can Find More Information
We have not previously been subject to the reporting requirements of the
Securities Exchange Act of 1934. We have filed with the SEC a Registration
Statement on Form S-1 under the Securities Act with respect to the offer and
sale of common stock pursuant to this prospectus. This prospectus, filed as a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement or the exhibits and schedules thereto as
permitted by the rules and regulations of the SEC. Statements made in this
prospectus concerning the contents of any contract, agreement or other document
filed as an exhibit to the Registration Statement are summaries of the terms of
such contracts, agreements or documents and are not necessarily complete.
Reference is made to each such exhibit for a more complete description of the
matters involved and such statements shall be deemed qualified in their
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto filed with the SEC may be inspected, without charge, and
copies may be obtained at prescribed rates, at the public reference facility
maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the SEC located at 7 World Trade
Center, 13th Floor, New York, New York 10048 and CitiCorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60621-2511. The Registration
Statement and other information filed by us with the SEC are also available at
the SEC's World Wide Web site on the internet at http://www.sec.gov.
As a result of the offering, Financial Institutions and its shareholders will
become subject to the proxy solicitation rules, annual and periodic reporting
requirements, restrictions of stock purchases and sales by affiliates and
certain other requirements of the Exchange Act. We will furnish our
shareholders with annual reports containing audited financial statements
certified by independent auditors and quarterly reports containing unaudited
financial statements for the first three quarters of each fiscal year.
84
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Statements of Financial Condition as of March 31, 1999
(unaudited), and December 31, 1998 and 1997.............................. F-3
Consolidated Statements of Income for the three months ended March 31,
1999 and 1998 (unaudited) and for the years ended December 31, 1998, 1997
and 1996................................................................. F-4
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income for the three months ended March 31, 1999 and 1998
(unaudited) and for the years ended December 31, 1998, 1997 and 1996..... F-5
Consolidated Statements of Cash Flows for the three months ended March 31,
1999 and 1998 (unaudited) and for the years ended December 31, 1998, 1997
and 1996................................................................. F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
All schedules are omitted because they are not required or applicable, or the
required information is shown in the consolidated financial statements or notes
thereto.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Financial Institutions, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Financial Institutions, Inc. and subsidiaries as of December 31, 1998 and
1997 and the related consolidated statements of income, changes in
shareholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Financial
Institutions, Inc. and subsidiaries as of December 31, 1998 and 1997 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Buffalo, New York
January 29, 1999, except for note 2,
which is as of June 9, 1999
KPMG LLP
F-2
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
March 31, ------------------
1999 1998 1997
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash, due from banks and interest-bearing
deposits...................................... $ 22,284 $ 26,365 $ 39,775
Federal funds sold............................. 4,850 16,478 400
Securities available for sale, at fair value... 183,225 157,022 110,123
Securities held to maturity.................... 92,789 91,016 99,084
Loans: 660,402 655,427 602,477
Allowance for loan losses..................... (9,860) (9,570) (8,145)
-------- -------- --------
Loans, net.................................... 650,542 645,857 594,332
Premises and equipment, net.................... 17,415 18,081 16,203
Intangible assets.............................. 3,747 3,957 4,796
Other assets................................... 18,318 17,409 15,799
-------- -------- --------
Total assets................................. $993,170 $976,185 $880,512
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand........................................ $117,365 $128,216 $114,952
Savings, money market and interest-bearing
checking..................................... 277,421 273,630 248,980
Certificates of deposit....................... 465,302 448,609 403,794
-------- -------- --------
Total deposits............................... 860,088 850,455 767,726
Accrued expenses and other liabilities......... 14,642 15,290 13,877
Short-term borrowings.......................... 9,801 5,362 8,849
Long-term borrowings........................... 10,128 8,500 3,217
-------- -------- --------
Total liabilities............................ 894,659 879,607 793,669
-------- -------- --------
Shareholders' equity:
3% cumulative preferred stock, $100 par value,
authorized 10,000 shares, issued and
outstanding 1,829 shares at March 31, 1999
and 1,842 shares and 1,847 shares at December
31, 1998 and 1997, respectively.............. 183 184 185
8.48% cumulative preferred stock, $100 par
value, authorized 200,000 shares, issued and
outstanding 176,734 shares at March 31, 1999
and December 31, 1998 and 177,427 shares at
December 31, 1997............................ 17,673 17,673 17,743
Common stock, $0.01 par value, authorized
50,000,000 shares, issued 10,200,400 shares.. 102 102 102
Additional paid-in capital.................... 2,838 2,837 2,787
Retained earnings............................. 77,788 75,167 65,661
Accumulated other comprehensive income........ 453 1,141 749
Treasury stock--common, at cost--284,800
shares at March 31, 1999 and December 31,
1998 and 271,900 shares at December 31, 1997. (526) (526) (384)
-------- -------- --------
Total shareholders' equity................... 98,511 96,578 86,843
-------- -------- --------
Total liabilities and shareholders' equity... $993,170 $976,185 $880,512
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Years ended December
March 31, 31,
------------------- -----------------------
1999 1998 1998 1997 1996
--------- --------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans............................. $ 14,759 $ 14,423 $59,090 $54,730 $49,315
Securities........................ 3,538 3,039 12,938 11,650 11,064
Other............................. 155 208 842 788 813
--------- --------- ------- ------- -------
Total interest income............ 18,452 17,670 72,870 67,168 61,192
--------- --------- ------- ------- -------
Interest expense:
Deposits.......................... 7,362 7,233 30,159 27,193 24,292
Borrowings........................ 274 220 799 658 222
--------- --------- ------- ------- -------
Total interest expense........... 7,636 7,453 30,958 27,851 24,514
--------- --------- ------- ------- -------
Net interest income................ 10,816 10,217 41,912 39,317 36,678
Provision for loan losses.......... 525 573 2,732 2,829 1,740
--------- --------- ------- ------- -------
Net interest income after provi-
sion for
loan losses..................... 10,291 9,644 39,180 36,488 34,938
--------- --------- ------- ------- -------
Noninterest income:
Service charges on deposits....... 953 668 3,234 2,706 2,684
Loan servicing fees............... 297 290 1,190 1,137 925
Other............................. 575 392 1,957 1,890 1,556
--------- --------- ------- ------- -------
Total noninterest income......... 1,825 1,350 6,381 5,733 5,165
--------- --------- ------- ------- -------
Noninterest expense:
Salaries and employee benefits.... 3,524 3,108 13,092 11,713 10,740
Occupancy and equipment........... 1,045 942 3,855 3,809 2,987
Supplies and postage.............. 346 293 1,363 1,211 1,187
Amortization of intangibles....... 210 210 839 839 839
Professional fees................. 126 121 809 328 273
Other............................. 1,070 1,004 4,644 4,184 3,770
--------- --------- ------- ------- -------
Total noninterest expense........ 6,321 5,678 24,602 22,084 19,796
--------- --------- ------- ------- -------
Income before income taxes....... 5,795 5,316 20,959 20,137 20,307
Income taxes...................... 2,049 1,930 7,354 7,295 7,232
--------- --------- ------- ------- -------
Net income....................... 3,746 3,386 13,605 12,842 13,075
Preferred stock dividends......... 376 378 1,506 1,513 1,522
--------- --------- ------- ------- -------
Net income available to common
shareholders.................... $ 3,370 $ 3,008 $12,099 $11,329 $11,553
========= ========= ======= ======= =======
Net income per common share:
Basic........................... $ 0.34 $ 0.30 $ 1.22 $ 1.14 $ 1.16
========= ========= ======= ======= =======
Diluted......................... $ 0.34 $ 0.30 $ 1.22 $ 1.14 $ 1.16
========= ========= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
3% 8.48% Additional Other Total
Preferred Preferred Common Paid-In Retained Comprehensive Treasury Shareholders'
Stock Stock Stock Capital Earnings Income Stock Equity
--------- --------- ------ ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--December 31,
1995................... $194 $17,881 $102 $2,760 $46,900 $480 $(316) $68,001
Purchase of 18 shares of
3% preferred stock..... (2) -- -- 1 -- -- -- (1)
Purchase of 207 shares
of 8.48%
preferred stock........ -- (21) -- -- -- -- -- (21)
Purchase of 12,500
shares of common stock. -- -- -- -- -- -- (53) (53)
Comprehensive income:
Net income............. -- -- -- -- 13,075 -- -- 13,075
Unrealized loss on
securities available
for sale, net......... -- -- -- -- -- (288) -- (288)
-------
Total comprehensive
income 12,787
-------
Cash dividends declared:
3% Preferred--$3.00 per
share................. -- -- -- -- (6) -- -- (6)
8.48% Preferred--$8.48
per share............. -- -- -- -- (1,516) -- -- (1,516)
Common--$0.20 per
share................. -- -- -- -- (1,937) -- -- (1,937)
---- ------- ---- ------ ------- ---- ----- -------
Balance--December 31,
1996................... 192 17,860 102 2,761 56,516 192 (369) 77,254
Purchase of 72 shares of
3% preferred stock..... (7) -- -- 4 -- -- -- (3)
Purchase of 1,176 shares
of 8.48%
preferred stock........ -- (117) -- (5) -- -- -- (122)
Purchase of 5,200 shares
of common stock........ -- -- -- -- -- -- (23) (23)
Sale of 6,000 shares of
treasury stock......... -- -- -- 27 -- -- 8 35
Comprehensive income:
Net income............. -- -- -- -- 12,842 -- -- 12,842
Unrealized gain on
securities available
for sale, net......... -- -- -- -- -- 557 -- 557
-------
Total comprehensive
income 13,399
-------
Cash dividends declared:
3% Preferred--$3.00 per
share................. -- -- -- -- (6) -- -- (6)
8.48% Preferred--$8.48
per share............. -- -- -- -- (1,507) -- -- (1,507)
Common--$0.22 per
share................. -- -- -- -- (2,184) -- -- (2,184)
---- ------- ---- ------ ------- ---- ----- -------
Balance--December 31,
1997................... 185 17,743 102 2,787 65,661 749 (384) 86,843
---- ------- ---- ------ ------- ---- ----- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
3% 8.48% Additional Other Total
Preferred Preferred Common Paid-in Retained Comprehensive Treasury Shareholders'
Stock Stock Stock Capital Earnings Income Stock Equity
--------- --------- ------ ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--December 31,
1997, Continued $ 185 $17,743 $102 $2,787 $65,661 $ 749 $(384) $86,843
Purchase of 5 shares of
3% preferred stock..... (1) -- -- -- -- -- -- (1)
Purchase of 693 shares
of 8.48%
preferred stock........ -- (70) -- (7) -- -- -- (77)
Purchase of 23,500
shares of common stock. -- -- -- -- -- (162) (162)
Sale of 10,600 shares of
treasury stock......... -- -- 57 -- -- 20 77
Comprehensive income:
Net income............. -- -- -- 13,605 -- -- 13,605
Unrealized gain on
securities
available for sale,
net................... -- -- -- -- -- 392 -- 392
-------
Total comprehensive
income................ 13,997
-------
Cash dividends declared:
3% Preferred--$3.00 per
share................. -- -- -- -- (6) -- -- (6)
8.48% Preferred--$8.48
per share............. -- -- -- -- (1,500) -- -- (1,500)
Common--$0.26 per
share................. -- -- -- -- (2,593) -- -- (2,593)
----- ------- ---- ------ ------- ----- ----- -------
Balance--December 31,
1998 184 17,673 102 2,837 75,167 1,141 (526) 96,578
Purchase of 13 shares of
3% preferred stock,
unaudited.............. (1) -- -- 1 -- -- -- --
Comprehensive income,
unaudited:.............
Net income............. -- -- -- -- 3,746 -- -- 3,746
Unrealized loss on
securities
available for sale,
net................... -- -- -- -- -- (688) -- (688)
-------
Total comprehensive
income................ 3,058
-------
Cash dividends declared,
unaudited:
3% Preferred--$0.75 per
share................. -- -- -- -- (1) -- -- (1)
8.48% Preferred--$2.12
per share............. -- -- -- -- (375) -- -- (375)
Common--$0.07 per
share................. -- -- -- -- (749) -- -- (749)
----- ------- ---- ------ ------- ----- ----- -------
Balance--March 31, 1999
(unaudited) $ 183 $17,673 $102 $2,838 $77,788 $ 453 $(526) $98,511
===== ======= ==== ====== ======= ===== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended Years ended
March 31, December 31,
-------------------- --------------------------
1999 1998 1998 1997 1996
--------- --------- -------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income................... $ 3,746 $ 3,386 $ 13,605 $12,842 $13,075
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization............... 845 713 3,117 2,798 2,337
Provision for loan losses... 525 573 2,732 2,829 1,740
Deferred income tax benefit. (153) -- (670) (533) (203)
Gain on sale of loans and
premises and equipment..... (107) (41) (181) (353) (245)
Minority interest in net
income of subsidiary banks. 18 17 68 68 73
Increase in other assets.... (281) (766) (1,210) (1,536) (1,027)
Increase (decrease) in
accrued expenses and other
liabilities................ (313) 1,783 1,231 2,367 455
--------- -------- -------- ------- -------
Net cash provided by
operating activities...... 4,280 5,665 18,692 18,482 16,205
--------- -------- -------- ------- -------
Cash flows from investing
activities:
Purchase of securities:
Available for sale.......... (51,445) (45,558) (141,300) (61,916) (46,913)
Held to maturity............ (8,635) (16,066) (46,008) (33,693) (45,371)
Proceeds from maturities of
securities:
Available for sale.......... 24,001 25,139 94,841 36,467 34,898
Held to maturity............ 6,763 14,938 53,766 40,505 39,287
Proceeds from sales of
securities available for
sale........................ -- -- -- -- 12,968
Net increase in loans........ (5,167) (2,560) (54,025) (51,743) (71,854)
Purchase of premises and
equipment, net.............. 276 (1,153) (3,673) (4,172) (3,528)
--------- -------- -------- ------- -------
Net cash used in investing
activities................ (34,207) (25,260) (96,399) (74,552) (80,513)
--------- -------- -------- ------- -------
Cash flows from financing
activities:
Net increase in deposits..... 9,633 9,534 82,729 60,023 67,466
Increase (decrease) in short-
term borrowings, net........ 4,439 1,057 (3,487) 4,959 3,000
Proceeds from long-term
borrowings.................. 1,650 3,314 5,344 1,314 --
Repayment of long-term
borrowings.................. (22) (14) (61) (21) --
Repurchase of preferred and
common shares, net.......... -- -- (163) (113) (75)
Dividends paid............... (1,482) (1,370) (3,987) (3,750) (3,432)
--------- -------- -------- ------- -------
Net cash provided by
financing activities...... 14,218 12,521 80,375 62,412 66,959
--------- -------- -------- ------- -------
Net increase (decrease) in
cash and cash equivalents.... (15,709) (7,074) 2,668 6,342 2,651
Cash and cash equivalents at
the beginning of the period.. 42,843 40,175 40,175 33,833 31,182
--------- -------- -------- ------- -------
Cash and cash equivalents at
the end of the period........ $ 27,134 $ 33,101 $ 42,843 $40,175 $33,833
========= ======== ======== ======= =======
Supplemental disclosure of
cash flow information:
Cash paid during period for:
Interest.................... $ 7,351 $ 6,597 $ 29,920 $25,782 $24,512
========= ======== ======== ======= =======
Income taxes................ $ 1,360 $ 408 $ 8,431 $ 7,462 $ 7,454
========= ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
Financial Institutions, Inc. ("FII") and subsidiaries (the "Company") provide
deposit, lending and other financial services to individuals and businesses in
Western New York State and are subject to regulation by certain federal and
state banking agencies.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of FII, its banking
subsidiaries, Wyoming County Bank (99.65%-owned) ("WCB"), The National Bank of
Geneva (99.10%-owned) ("NBG"), The Pavilion State Bank (100%-owned) ("PSB"),
and First Tier Bank & Trust (100%-owned) ("FTB"), and Financial Institutions
Services, Inc., a wholly-owned nonbanking subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
(b) Interim Financial Information
Financial information as of March 31, 1999 and for the three months ended March
31, 1999 and 1998 is unaudited. Such information includes all adjustments
(consisting of only normal recurring adjustments) that are necessary in the
opinion of management, for a fair statement of the financial information in the
interim periods. The results from operations for the periods ended March 31,
1999 and March 31, 1998 are not necessarily indicative of the results which can
be expected for the full fiscal year.
(c) Securities
The Company classifies its debt securities as either available for sale or held
to maturity. Debt securities which the Company has the ability and positive
intent to hold to maturity are carried at amortized cost and classified as held
to maturity. Investments in other debt and equity securities are classified as
available for sale and are carried at estimated fair value. Unrealized gains or
losses related to securities available for sale are reported as a component of
accumulated other comprehensive income in shareholders' equity, net of the
related deferred income tax effect until realized. Transfers of securities
between categories are recorded at fair value at the date of transfer.
A decline in the fair value of any security below cost that is deemed other
than temporary is charged to income resulting in the establishment of a new
cost basis for the security. Interest income includes interest earned on the
securities adjusted for amortization of premiums and accretion of discounts on
the related securities using the interest method. Gains or losses on
dispositions are recognized on the trade date using the specific identification
method.
(d) Loans
Loans are stated at the principal amount outstanding, net of discounts and
deferred loan origination fees and costs which are accrued to income based on
the interest method. Mortgage loans held for sale are valued at the lower of
aggregate cost or market value as determined by outstanding commitments from
investors or, in the absence of such commitments, the current investor yield
requirements.
Interest income on loans is recognized based on loan principal amounts
outstanding at applicable interest rates. Accrual of interest on loans is
suspended and all unpaid accrued interest is reversed when management believes,
after considering collection efforts and period of time past due, reasonable
doubt exists with respect to the collectibility of interest. Income is
subsequently recognized to the extent amounts are collected and the principal
balance is expected to be recovered.
F-8
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
The Company services residential mortgage loans for the Federal Home Loan
Mortgage Corporation (Freddie Mac). Servicing fees are recognized when payments
are received. The cost of originating these loans is attributed to the loans
and is considered in the calculation of the gain or loss on sale of the loans.
(e) Allowance for Loan Losses
The allowance for loan losses is established through charges to income and is
maintained at a level which management considers adequate to provide for loan
losses. The adequacy of the allowance is determined by management's periodic
evaluation of the loan portfolio based on such factors as: current economic
conditions; the current financial condition of the borrowers; the economic
environment in which they operate; any delinquency in payments; and the value
of any collateral held. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses and may require additions to the
allowance based on their judgments about information available to them at the
time of their examinations.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts of principal
and interest under the original terms of the agreement. Accordingly, the
Company measures certain impaired commercial loans based on the present value
of future cash flows discounted at the loan's effective interest rate, or at
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. The Company has excluded large groups of small
balance, homogeneous loans which include commercial and agricultural loans less
than $100,000, all residential mortgages, home equity and consumer loans that
are collectively evaluated for impairment. The Company accounts for troubled
debt restructurings involving a modification of terms at fair value as of the
date of the restructuring.
(f) Federal Home Loan Bank (FHLB) Stock
As a member of the FHLB system, the Company is required to maintain a specified
investment in FHLB stock. This amount, which is carried at cost, is equal to
the greater of 5% of the outstanding advance balance or 1% of the aggregate
outstanding mortgage loans held by the Company.
(g) Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using straight-line and accelerated
methods over estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of lease terms or the useful lives of the assets.
(h) Intangible assets
Deposit base premiums and goodwill are being amortized over 10 years on the
straight-line method. Intangible assets are periodically reviewed for possible
impairment or when events or changed circumstances may affect the underlying
basis of the assets.
(i) Other Real Estate
Other real estate owned includes property acquired through, or in lieu of,
formal foreclosure. Write downs from cost to estimated fair value at the time
of foreclosure are charged to the allowance for loan losses. After transfer,
the property is carried at the lower of cost or fair value, less estimated
selling expenses. Adjustments to the carrying value of such properties that
result from subsequent declines in value are charged to income in the period in
which the declines occur.
F-9
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
(j) Pension Plan
The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Post Retirement Benefits" in 1998. This statement revised employers'
disclosures about pension and other post retirement benefit plans. It does not
change the measurement or the recognition of these plans. The adoption of the
statement did not impact its financial position or results of operations.
(k) Net Income Per Common Share
Basic net income per common share, after giving effect to preferred stock
dividends, has been computed using weighted average common shares outstanding.
The Company has no common stock equivalents and therefore, diluted net income
per share is equivalent to basic net income per share.
(l) Financial Instruments With Off-Balance Sheet Risk
The Company does not engage in the use of derivative financial instruments and
the Company's only financial instruments with off-balance sheet risk are
commercial letters of credit and mortgage, commercial and credit card loan
commitments. These financial instruments are reflected in the statement of
financial condition upon funding.
(m) Cash Equivalents
For purposes of the statement of cash flows, cash, due from banks, interest-
bearing deposits, and federal funds sold are considered cash equivalents.
(n) Comprehensive Income
On January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components. Comprehensive
income, presented in the consolidated statement of shareholders' equity and
comprehensive income, consists of net income and net unrealized holding gains
and losses on securities available for sale, net of both the related tax effect
and the reclassification adjustment for gains included in net income. Prior
year financial statements have been reclassified to conform to the requirements
of this statement.
(o) New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 requires public companies to report financial and other
information about key revenue-producing segments of the entity for which such
information is available and is utilized by the chief operating decision maker.
Specific information to be reported for individual segments includes profit or
loss, certain specific revenue and expense items and total assets. A
reconciliation of segment financial information to amounts reported in the
financial statements is also provided. As a community-oriented financial
institution, substantially all of, the Company's operations involve the
delivery of loan and deposit products to customers. Management, through its
four individual autonomous banks, makes operating decisions and assesses
performance based on an ongoing review of these community banking operations.
Accordingly, the four individual banks constitute operating segments for
financial reporting purposes. The statement was effective for the Company's
year-end 1998 reporting and did not impact its financial position or results of
operations.
F-10
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires the Company to
recognize all derivatives as either assets or liabilities, with the instruments
measured at fair value. The accounting for gains and losses resulting from
changes in fair value of the derivative instrument depends on the intended use
of the derivative and the type of risk being hedged. This statement is
effective for fiscal years beginning after June 15, 1999, although earlier
adoption is permitted. Based upon current activities, the adoption of this
statement will not have an effect on the Company's financial position or
results of operations. SFAS No. 133 also permits certain reclassification of
securities to the available for sale category from the held to maturity
category. The Company has no current intention to reclassify any securities
pursuant to SFAS No 133.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which amends SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
by a mortgage banking enterprise with the accounting for such securities by
nonmortgage banking enterprises. This statement is effective beginning on
January 1, 1999 and is not expected to have any impact on the Company's
financial position or results of operations as the Company does not currently
securitize mortgage loans.
(p) Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
(2) Initial Public Offering
On April 16, 1999, the Company's Board of Directors authorized the filing of a
registration statement for the initial public offering of its common stock. On
May 7, 1999, the Board of Directors approved an increase in the authorized
number of shares of common stock to 50,000,000, and a corresponding reduction
in the par value of common stock from $1.00 to $0.01 per share. On May 27,
1999, the Company's shareholders approved an amended and restated Certificate
of Incorporation to effect this recapitalization which was filed and became
effective on June 7, 1999. On June 9, 1999 the Board of Directors approved a
100-for-one common stock split in the form of a dividend. All share and per
share amounts included in the consolidated financial statements retroactively
reflect the stock split.
In conjunction with the initial public offering, the Company's Board of
Directors on May 7, 1999 approved the establishment of a management stock
incentive plan and a directors' stock incentive plan. Under the management
stock incentive plan, up to 10% of the number of shares of common stock issued,
including treasury shares, are available for granting of incentive stock
options, non-qualified stock options, stock appreciation rights and restricted
stock grants to key employees. Under the directors' stock incentive plan,
500,000 shares of common stock are available for granting non-qualified stock
options to non-employee directors of the Company. The shareholders approved
these plans on May 27, 1999.
F-11
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
(3) Securities
The amortized cost and fair value of debt and equity securities at March 31,
1999 (unaudited) and December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------ Fair
Cost Gains Losses Value
--------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
March 31, 1999 (unaudited)
Securities available for sale:
U.S. Treasury and agency............. $137,808 $ 363 $ 595 $137,576
Mortgage-backed securities........... 23,898 101 50 23,949
State and municipal obligations...... 9,020 121 -- 9,141
Corporate bonds...................... 8,521 19 16 8,524
Equity securities.................... 3,212 823 -- 4,035
-------- --------- ------- --------
Total securities available for sale. $182,459 $ 1,427 $ 661 $183,225
======== ========= ======= ========
Securities held to maturity:
U.S. Treasury and agency............. 9,469 66 -- 9,535
State and municipal obligations...... 83,320 1,016 75 84,261
-------- --------- ------- --------
Total securities held to maturity... $ 92,789 $ 1,082 $ 75 $ 93,796
======== ========= ======= ========
December 31, 1998
Securities available for sale:
U.S. Treasury and agency............. $117,035 $ 712 $ 85 $117,662
Mortgage-backed securities........... 23,357 131 24 23,464
State and municipal obligations...... 9,028 181 -- 9,209
Corporate bonds...................... 2,745 51 -- 2,796
Equity securities.................... 2,925 966 -- 3,891
-------- --------- ------- --------
Total securities available for sale. $155,090 $ 2,041 $ 109 $157,022
======== ========= ======= ========
Securities held to maturity:
U.S. Treasury and agency............. 12,476 128 -- 12,604
State and municipal obligations...... 78,540 1,316 32 79,824
-------- --------- ------- --------
Total securities held to maturity... $ 91,016 $ 1,444 $ 32 $ 92,428
======== ========= ======= ========
</TABLE>
F-12
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Gross Unrealized
------------------
Amortized Fair
Cost Gains Losses Value
--------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1997
Securities available for sale:
U.S. Treasury and agency............. $ 84,617 $ 366 $ 67 $ 84,916
Mortgage-backed securities........... 17,212 139 40 17,311
State and municipal obligations...... 4,321 42 1 4,362
Equity securities.................... 2,704 830 -- 3,534
--------- --------- ------- --------
Total securities available for sale. $ 108,854 $ 1,377 $ 108 $110,123
========= ========= ======= ========
Securities held to maturity:
U.S. Treasury and agency............. 42,081 85 44 42,122
State and municipal obligations...... 57,003 809 31 57,781
--------- --------- ------- --------
Total securities held to maturity... $ 99,084 $ 894 $ 75 $ 99,903
========= ========= ======= ========
</TABLE>
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------ -----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1998
Due in one year or less................ $ 7,103 $ 7,185 $21,815 $21,917
Due after one year through five years.. 85,716 86,287 57,287 58,151
Due after five years through ten years. 53,057 53,340 11,386 11,807
Due after ten years.................... 6,289 6,319 528 553
--------- -------- ------- -------
$ 152,165 $153,131 $91,016 $92,428
========= ======== ======= =======
</TABLE>
The Company did not sell any securities in the three months ended March 31,
1999 or in 1998 or 1997. Proceeds from the sale of securities available for
sale during 1996 were $12,968,000, with gross gains of $27,000 and gross losses
of $34,000 realized on those sales. No securities held to maturity were sold in
1996. The reclassification adjustment for net losses on sales of securities
included in net income, net of tax, was $5,000, which adjusted the change in
unrealized loss on securities available for sale for 1996 to $288,000. The
Company had no reclassification adjustment for the three months ended March 31,
1999 (unaudited) or in 1998 or 1997.
Securities carried at approximately $226,053,000, $204,586,000 and $173,556,000
at March 31, 1999 (unaudited) and December 31, 1998 and 1997, respectively,
were pledged to secure public funds on deposit, repurchase agreements and for
other purposes as required by law.
F-13
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
(4) Loans
Loans outstanding are summarized as follows:
<TABLE>
<CAPTION>
December 31,
March 31, ------------------
1999 1998 1997
----------- -------- --------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
Commercial.................................. $121,780 $117,750 $105,811
Commercial real estate...................... 111,716 106,948 99,273
Agricultural................................ 121,793 123,754 107,546
Residential real estate..................... 179,940 182,177 170,736
Consumer and home equity.................... 125,567 125,198 119,506
-------- -------- --------
Loans, gross.............................. 660,796 655,827 602,872
Net deferred fees........................... (394) (400) (395)
Allowance for loan losses................... (9,860) (9,570) (8,145)
-------- -------- --------
Loans, net................................ $650,542 $645,857 $594,332
======== ======== ========
</TABLE>
Loans serviced for others, amounting to $186,277,000, $177,797,000 and
$153,218,000 at March 31, 1999 (unaudited) and December 31, 1998 and 1997,
respectively, are not included in the consolidated statements of financial
condition. Proceeds from the sale of loans were $16,919,000 and $10,244,000 for
the three months ended March 31, 1999 and 1998 (unaudited), respectively, and
$55,725,000, $45,525,000 and $36,498,000 in 1998, 1997 and 1996, respectively.
Net gain on the sale of loans was $42,000 and $41,000 for the three months
ended March 31, 1999 and 1998 (unaudited), and $232,000, $341,000 and $140,000
in 1998, 1997 and 1996, respectively.
Loans outstanding to certain officers, directors or companies in which they
have 10% or more beneficial ownership approximated $12,062,000, $11,562,000 and
$11,351,000 at March 31, 1999, (unaudited) and December 31, 1998 and 1997,
respectively. These loans were made in the ordinary course of business on
substantially the same terms, including interest rate and collateral, as
comparable transactions with other customers, and do not involve more than a
normal risk of collectibility.
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments are primarily commitments to extend credit. The
instruments involve, to varying degrees, elements of credit and interest rate
risk and at March 31, 1999 and December 31, 1998 and 1997 are not reflected in
the consolidated statement of financial condition. Commitments outstanding
under unused lines of credit, unadvanced construction loans and to originate
loans at March 31, 1999 (unaudited) and December 31, 1998 and 1997 amounted to
$118,389,173, $107,995,000 and $106,755,000, respectively. Outstanding
commitments on letters of credit at March 31, 1999 (unaudited) and December 31,
1998 and 1997 amounted to $6,152,027, $3,640,000 and $4,488,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Generally, commitments to extend credit, if
exercised, will represent loans secured by collateral. Commitments to sell
F-14
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
loans were $2,317,386, $6,109,000 and $1,023,000 at March 31, 1999 (unaudited)
and December 31, 1998 and 1997, respectively. The Company enters into forward
contracts for future delivery of residential mortgage loans at a specified
yield to reduce the interest rate risk associated with fixed rate residential
mortgages held for sale and commitments to fund residential mortgages. Credit
risk arises from the possible inability of the other parties to comply with the
contract terms. Substantially all of the Company's contracts are with U.S.
government-sponsored agencies (FHLMC and FHA).
As of March 31, 1999 and December 31, 1998, the Company had no significant
concentration of credit risk in the loan portfolio outside of the natural
geographic concentration pertaining to the communities that the Company serves,
or significant exposure to highly leveraged transactions. There are no foreign
credits in the loan portfolio.
(5) Allowance for Loan Losses
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Three months ended Years ended
March 31, December 31,
------------------ ------------------------
1999 1998 1998 1997 1996
----------- ------ ------- ------- ------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period...................... $9,570 $8,145 $ 8,145 $ 7,129 $6,183
Provision for loan losses.... 525 573 2,732 2,829 1,740
Charge-offs.................. (286) (215) (1,672) (1,997) (932)
Recoveries................... 51 48 365 184 138
------ ------ ------- ------- ------
Balance at end of period..... $9,860 $8,551 $ 9,570 $ 8,145 $7,129
====== ====== ======= ======= ======
</TABLE>
Nonperforming assets are as follows:
<TABLE>
<CAPTION>
December 31,
March 31, --------------
1999 1998 1997
----------- ------ ------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
Nonaccrual loans............................... $5,245 $5,741 $7,043
Accruing loans 90 or more days delinquent...... 883 360 433
Other real estate owned........................ 1,943 2,084 2,309
------ ------ ------
Total nonperforming assets..................... 8,071 8,185 9,785
Less: government guaranteed portion of
nonperforming loans........................... 1,455 1,421 1,428
------ ------ ------
Total nonperforming assets, net of government
guaranteed portion ........................... $6,616 $6,764 $8,357
====== ====== ======
Nonperforming assets as a percent of loans and
other real estate owned:
Total........................................ 1.22% 1.24% 1.62%
====== ====== ======
Net of government guaranteed portion......... 1.00% 1.03% 1.38%
====== ====== ======
</TABLE>
F-15
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
The following table reflects loans that are considered impaired:
<TABLE>
<CAPTION>
At or for the
three months
ended March At or for the years
31, ended December 31,
------------- --------------------
1999 1998 1998 1997 1996
------ ------ ------ ------ ------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Impaired loans with an allowance......... $4,291 $6,680 $4,863 $5,206 $3,855
Impaired loans without an allowance...... -- 740 203 237 2,931
------ ------ ------ ------ ------
Total impaired loans................... $4,291 $7,420 $5,066 $5,443 $6,786
====== ====== ====== ====== ======
Allowance for losses on impaired loans... $ 889 $1,232 $ 941 $ 954 $ 673
====== ====== ====== ====== ======
Average balance of impaired loans during
the period.............................. $4,066 $7,519 $8,111 $7,184 $6,023
====== ====== ====== ====== ======
Interest income recognized on impaired
loans................................... $ 22 $ 82 $ 246 $ 369 $ 483
====== ====== ====== ====== ======
</TABLE>
(6) Premises and Equipment
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
March 31, -----------------
1999 1998 1997
----------- -------- -------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
Land.......................................... $ 1,992 $ 1,621 $ 1,666
Buildings..................................... 13,940 13,902 12,429
Furniture and equipment....................... 11,197 11,056 9,438
Leasehold improvements........................ 927 927 925
Construction-in-progress...................... 81 863 640
-------- -------- -------
28,137 28,369 25,098
Accumulated depreciation and amortization..... (10,722) (10,288) (8,895)
-------- -------- -------
Premises and equipment, net................. $ 17,415 $ 18,081 $16,203
======== ======== =======
</TABLE>
(7) Deposits
Scheduled maturities of certificates of deposit at December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Mature in year ending December 31
1999..................................................... $ 372,963
2000..................................................... 60,157
2001..................................................... 7,269
2002..................................................... 4,106
2003..................................................... 4,114
---------
Total time deposits..................................... $ 448,609
=========
</TABLE>
F-16
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
Certificates of deposit include $186,712,000, $171,615,000 and $141,979,000 of
certificates of deposit of $100,000 or more at March 31, 1999 (unaudited) and
December 31, 1998 and 1997, respectively. Interest expense on these deposits
amounted to $2,185,000 and $2,099,000 for the three months ended March 31, 1999
and 1998 (unaudited), respectively, and $8,928,000, $7,551,000 and $5,632,000
in fiscal 1998, 1997 and 1996.
(8) Borrowings
Short-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
At or for the
At or for the three years ended
months ended March December 31,
31, --------------
1999 1998 1997
------------------- ------ ------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
Repurchase agreements................... $ 9,591 $5,362 $3,849
Federal funds purchased................. 210 -- --
FHLB advances........................... -- -- 5,000
------- ------ ------
Total................................. $ 9,801 $5,362 $8,849
======= ====== ======
Average rate at period-end.............. 4.55% 4.33% 5.27%
======= ====== ======
Average rate during period.............. 4.48% 5.02% 5.46%
======= ====== ======
</TABLE>
Short-term borrowings generally mature within 90 days. Securities sold under
repurchase agreements of $9,591,000, $5,362,000 and $3,849,000 at March 31,
1999 (unaudited) and December 31, 1998 and 1997, respectively, are secured by
U.S. Treasury and agency securities. The maximum amount of outstanding
repurchase agreements at any month end was $10,711,000 for the three months
ended March 31, 1999 (unaudited) and $6,547,000 and $3,849,000 for the years
ended December 31, 1998 and 1997, respectively. The average amount of
outstanding repurchase agreements was $10,042,000 for the three months ended
March 31, 1999 (unaudited) and $6,900,000 and $1,627,000 for the years ended
December 31, 1998 and 1997, respectively.
The Company has approximately $52,600,000 and $43,300,000 of remaining credit
available under a line of credit with the FHLB at March 31, 1999 (unaudited)
and December 31, 1998 which is collateralized by FHLB stock and real estate
mortgage loans.
Long-term borrowings are summarized at follows:
<TABLE>
<CAPTION>
December 31,
March 31, -------------
1999 1998 1997
----------- ------ ------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances..................................... $ 8,251 $6,617 $1,314
10% notes......................................... 1,739 1,739 1,739
Other............................................. 138 144 164
------- ------ ------
Total........................................... $10,128 $8,500 $3,217
======= ====== ======
</TABLE>
F-17
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
Advances payable to the FHLB are collateralized by FHLB stock and real estate
mortgage loans. The advances mature from 1999 through 2008 and have a fixed
interest rate with a weighted average rate of 5.77% as of December 31, 1998.
The Company issued $1,739,000 of 10% unsecured notes to former shareholders of
FTB due March 31, 2000 with interest payable quarterly. Other debt at March 31,
1999 and December 31, 1998 and 1997 includes mortgage notes which mature from
1999 through 2005 and bear interest at a fixed average rate of 3.76%. Long-term
borrowings have aggregate maturities for the five years 1999 through 2003 as
follows: $73,000 in 1999; $2,816,000 in 2000; $1,081,000 in 2001; $86,000 in
2002; and $88,000 in 2003.
(9) Income Taxes
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
Three months ended Years ended
March 31, December 31,
------------------------------------------
1999 1998 1998 1997 1996
--------- --------------- ------ ------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income from operations......... $ 2,049 $ 1,930 $7,354 $7,295 $7,232
Shareholders' equity, for
change in unrealized gain on
securities available for sale. (478) 83 273 385 (201)
--------- -------- ------ ------ ------
$ 1,571 $ 2,013 $7,627 $7,680 $7,031
========= ======== ====== ====== ======
Income tax expense (benefit) from operations comprised of:
<CAPTION>
Three months ended Years ended
March 31, December 31,
------------------------------------------
1999 1998 1998 1997 1996
--------- --------------- ------ ------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Current:
Federal....................... $ 1,728 $ 1,514 $6,339 $6,187 $5,814
State......................... 474 416 1,685 1,641 1,621
--------- -------- ------ ------ ------
Total current................ 2,202 1,930 8,024 7,828 7,435
--------- -------- ------ ------ ------
Deferred:
Federal....................... (120) -- (524) (420) (155)
State......................... (33) -- (146) (113) (48)
--------- -------- ------ ------
Total deferred............... (153) -- (670) (533) (203)
--------- -------- ------ ------ ------
Total income taxes........... $ 2,049 $ 1,930 $7,354 $7,295 $7,232
========= ======== ====== ====== ======
</TABLE>
F-18
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
The actual and statutory tax rates on operations differ as follows:
<TABLE>
<CAPTION>
Three months Years ended
ended March 31, December 31,
---------------- ----------------
1999 1998 1998 1997 1996
------- ------- ---- ---- ----
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statutory rate.............. 35.0% 35.0% 35.0% 35.0% 34.8%
Increase (decrease)
resulting from:
Tax-exempt interest income. (5.9) (4.9) (5.6) (4.8) (4.9)
State taxes, net of federal
income tax benefit........ 4.9 5.1 4.8 4.9 5.1
Other...................... 1.4 1.1 0.9 1.1 0.6
------- ------- ---- ---- ----
Actual rate................. 35.4% 36.3% 35.1% 36.2% 35.6%
======= ======= ==== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the Company's net deferred tax assets and liabilities included the
following:
<TABLE>
<CAPTION>
December 31,
March 31, --------------------
1999 1998 1997 1996
----------- ------ ------ ------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Deferred tax assets:
Allowance for loan losses.................... $ 3,927 $3,808 $3,208 $2,764
Deferred loan origination fees............... 161 163 161 165
Core deposit intangible...................... 454 431 337 243
Interest on nonaccrual loans................. 372 372 16 16
Other........................................ 138 134 99 158
------- ------ ------ ------
Total gross deferred tax assets............. 5,052 4,908 3,821 3,346
------- ------ ------ ------
Deferred tax liabilities:
Depreciation and amortization of premises and
equipment................................... 595 592 490 495
Accrued pension costs........................ 1,309 1,331 1,097 1,108
Unrealized gains on securities available for
sale........................................ 313 791 518 133
Other........................................ 172 162 81 121
------- ------ ------ ------
Total gross deferred tax liabilities........ 2,389 2,876 2,186 1,857
------- ------ ------ ------
Net deferred tax asset, included in other
assets..................................... $ 2,663 $2,032 $1,635 $1,489
======= ====== ====== ======
</TABLE>
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the carry-
back period. A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax assets will not be realized. In assessing
the need for a valuation allowance, management considers the scheduled reversal
of the deferred tax liabilities, the level of historical taxable income and
projected future taxable income over the periods in which the temporary
differences comprising the deferred tax assets will be deductible. Based on its
assessment, management determined that no valuation allowance is necessary at
March 31, 1999 (unaudited) and December 31, 1998.
F-19
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
(10) Retirement Plans
The Company has a defined benefit pension plan covering substantially all
employees. The benefits are based on years of service and the employee's
highest average compensation during five consecutive years of employment. The
Company's funding policy is to contribute annually an actuarially determined
amount to cover current service cost plus amortization of prior service costs.
The following table sets forth the defined benefit pension plan's change in
benefit obligation and change in plan assets for fiscal 1998, 1997 and 1996
using the most recent actuarial data measured at September 30, 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in thousands)
--------------------------
1998 1997 1996
-------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year....... $ (8,913) $(7,858) $(7,847)
Service cost.................................. (543) (463) (481)
Interest cost................................. (653) (613) (575)
Actuarial gain (loss)......................... (1,389) (609) 578
Benefits paid................................. 439 530 373
Plan expenses................................. 112 100 94
-------- ------- -------
Benefit obligation at end of year............ (10,947) (8,913) (7,858)
-------- ------- -------
Change in plans assets:
Fair value of plan assets at beginning of
year......................................... 13,395 10,956 9,489
Actual return on plan assets.................. 594 2,424 1,291
Employer contribution......................... 70 646 643
Plan expenses................................. (111) (101) (94)
Benefits paid................................. (439) (530) (373)
-------- ------- -------
Fair value of plan assets at end of year..... 13,509 13,395 10,956
-------- ------- -------
Funded status (deficit)........................ 2,562 4,482 3,098
Unamortized net (asset) obligation at
transition.................................... (293) (331) (370)
Unrecognized net (gain) loss subsequent to
transition.................................... 455 (1,460) (554)
Unamortized prior service cost................. (62) (64) (67)
-------- ------- -------
Prepaid benefit cost........................... $ 2,662 $ 2,627 $ 2,107
======== ======= =======
</TABLE>
F-20
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
Pension costs consist of the following components:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1998 1997 1996
--------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Service cost................................... $ 543 $ 463 $ 481
Interest cost on projected benefit obligation.. 653 613 575
Expected return on plan assets................. (1,113) (909) (791)
Amortization of transition net asset........... (38) (38) (38)
Amortization of unrecognized (gain) loss....... (7) -- --
Amortization of unrecognized prior service
cost.......................................... (3) (3) (3)
--------- ------- -------
Net periodic pension expense................... $ 35 $ 126 $ 224
========= ======= =======
Weighted average discount rate................. 6.50% 7.50% 8.00%
========= ======= =======
Expected long-term rate of return.............. 8.50% 8.50% 8.50%
========= ======= =======
</TABLE>
The projected benefit obligation assumed a long-term rate of increase in future
compensation levels of 4.5% for 1998 and 5.0% for both 1997 and 1996. The
unamortized net asset at transition is being amortized over a 15-year period
through 2006.
The Company sponsors a defined contribution profit sharing (401(k)) plan
covering substantially all employees. The Company matches certain percentages
of each eligible employee's contribution to the plan. Expense for the plan
amounted to $398,000, $389,000 and $400,000, in 1998, 1997 and 1996,
respectively.
(11) Regulatory Capital Requirement
The Company is subject to various regulatory capital requirements administered
by the Federal Deposit Insurance Corporation (FDIC). Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements.
For evaluating regulatory capital adequacy, the FDIC requires companies to
determine capital and assets under regulatory accounting practices.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios. The leverage ratio
requirement is based on period-end capital to average total assets during the
previous three months. Compliance with risk-based capital requirements is
determined by dividing regulatory capital by the sum of a company's weighted
asset values. Risk weightings are established by the regulators for each asset
category according to the perceived degree of risk. Management believes, as of
March 31, 1999 and December 31, 1998 and 1997, that the Company and each
subsidiary bank met all capital adequacy requirements to which they are
subject.
F-21
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
As of March 31, 1999, the most recent notification from the FDIC categorized
the Company and the subsidiary banks as well-capitalized under the regulatory
capital framework. To be categorized as well-capitalized, the Company and each
subsidiary bank must maintain a minimum Tier 1 leverage, Tier 1 risk-based, and
total risk-based ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Company's or any subsidiary bank's category. A comparison of the Company's and
each of the subsidiary bank's regulatory capital amounts and ratios with the
minimum FDIC requirements and the capital levels necessary to be considered a
well-capitalized institution by the FDIC are presented in the following table.
<TABLE>
<CAPTION>
Minimum
Actual Requirements
Regulatory as Defined by Well-Capitalized
Capital FDIC as Defined by FDIC
------------- ------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ---------- --------
March 31, 1999 (unaudited) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Leverage capital (Tier 1)
as percent of three-month
average assets:
Company.................. $94,311 9.63% $39,171 4.00% $ 48,963 5.00%
FTB...................... 8,375 7.97 4,204 4.00 5,255 5.00
NBG...................... 33,870 9.28 14,604 4.00 18,255 5.00
PSB...................... 10,952 8.73 5,017 4.00 6,272 5.00
WCB...................... 37,320 9.82 15,209 4.00 19,011 5.00
As percent of risk-
weighted, period-end
assets:
Core capital (Tier 1):
Company................. 94,311 13.89 27,150 4.00 40,725 6.00
FTB..................... 8,375 12.76 2,625 4.00 3,937 6.00
NBG..................... 33,870 12.45 10,881 4.00 16,322 6.00
PSB..................... 10,952 12.68 3,456 4.00 5,184 6.00
WCB..................... 37,320 14.89 10,023 4.00 15,035 6.00
Total capital (Tiers 1
and 2):
Company................. 102,812 15.15 54,301 8.00 67,876 10.00
FTB..................... 9,198 14.02 5,250 8.00 6,562 10.00
NBG..................... 37,181 13.67 21,762 8.00 27,203 10.00
PSB..................... 12,034 13.93 6,912 8.00 8,640 10.00
WCB..................... 40,468 16.15 20,047 8.00 25,059 10.00
</TABLE>
F-22
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Minimum Well-Capitalized
Actual Regulatory Requirements as as Defined
Capital Defined by FDIC by FDIC
------------------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
December 31, 1998 --------- -------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leverage capital (Tier
1) as percent of three-
month average assets:
Company................ $ 91,480 9.58% $ 38,210 4.00% $ 47,762 5.00%
FTB.................... 8,019 8.14 3,941 4.00 4,926 5.00
NBG.................... 32,421 9.14 14,196 4.00 17,745 5.00
PSB.................... 10,865 8.74 4,971 4.00 6,214 5.00
WCB.................... 36,854 9.88 14,927 4.00 18,659 5.00
As percent of risk-
weighted, period-end
assets:
Core capital (Tier 1):
Company............... 91,480 13.71 26,686 4.00 40,029 6.00
FTB................... 8,019 12.74 2,517 4.00 3,776 6.00
NBG................... 32,421 12.08 10,738 4.00 16,107 6.00
PSB................... 10,865 12.82 3,390 4.00 5,084 6.00
WCB................... 36,854 14.96 9,856 4.00 14,784 6.00
Total capital (Tiers 1
and 2):
Company............... 99,835 14.96 53,372 8.00 66,715 10.00
FTB................... 8,808 14.00 5,034 8.00 6,293 10.00
NBG................... 35,475 13.21 21,477 8.00 26,846 10.00
PSB................... 11,926 14.07 6,779 8.00 8,474 10.00
WCB................... 39,950 16.21 19,712 8.00 24,640 10.00
December 31, 1997
Leverage capital (Tier
1) as percent of three-
month average assets:
Company................ $ 81,695 9.53% $ 34,287 4.00% $ 42,859 5.00%
FTB.................... 7,318 8.20 3,571 4.00 4,463 5.00
NBG.................... 29,083 9.31 12,500 4.00 15,625 5.00
PSB.................... 9,881 9.12 4,332 4.00 5,415 5.00
WCB.................... 32,970 9.61 13,730 4.00 17,163 5.00
As percent of risk-
weighted, period-end
assets:
Core capital (Tier 1):
Company............... 81,695 13.56 24,098 4.00 36,148 6.00
FTB................... 7,318 12.49 2,343 4.00 3,515 6.00
NBG................... 29,083 12.14 9,585 4.00 14,378 6.00
PSB................... 9,881 13.57 2,913 4.00 4,369 6.00
WCB................... 32,970 14.49 9,103 4.00 13,654 6.00
Total capital (Tiers 1
and 2):
Company............... 89,234 14.81 48,197 8.00 60,246 10.00
FTB................... 8,051 13.74 4,686 8.00 5,858 10.00
NBG................... 31,883 13.30 19,171 8.00 23,964 10.00
PSB................... 10,793 14.82 5,826 8.00 7,282 10.00
WCB................... 35,824 15.74 18,206 8.00 22,757 10.00
</TABLE>
Payments of dividends by the subsidiary banks to FII are limited or restricted
in certain circumstances under banking regulations. At December 31, 1998 an
aggregate of approximately $16,500,00 was available for payment of dividends by
the subsidiary banks to FII without the approval from the appropriate
regulatory authorities.
F-23
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
(12) Fair Value of Financial Instruments
The "fair value" of a financial instrument is defined as the price a willing
buyer and a willing seller would exchange in other than a distressed sale
situation. The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Securities.............................. $248,038 $249,450 $209,207 $210,027
Loans, net.............................. 645,857 660,109 594,332 604,560
Financial Liabilities:
Deposits:
Interest Bearing:
Savings and NOW....................... 273,630 273,630 248,980 248,980
Time deposit.......................... 448,609 451,204 403,794 403,951
Noninterest bearing................... 128,216 128,216 114,952 114,952
-------- -------- -------- --------
Total deposits....................... $850,455 $853,050 $767,726 $767,883
======== ======== ======== ========
Short-term borrowings................... $ 5,362 $ 5,362 $ 8,849 $ 8,849
======== ======== ======== ========
Long-term borrowings.................... $ 8,500 $ 8,920 $ 3,217 $ 3,390
======== ======== ======== ========
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.
Securities
Fair value is based on quoted market prices, where available. Where quoted
market prices are not available, fair value is based on quoted market prices of
comparable instruments.
Loans
For variable rate loans that reprice frequently, fair value approximates
carrying amount. The fair value for fixed rate loans is estimated through
discounted cash flow analysis using interest rates currently being offered for
loans with similar terms and credit quality. The fair value of loans available
for sale is based on quoted market prices. For nonperforming loans, fair value
is estimated by discounting expected cash flows at a rate commensurate with the
risk associated with the estimated cash flows.
Deposits
The fair value for savings, money market and noninterest bearing accounts is
equal to the carrying amount because of the customer's ability to withdraw
funds immediately. The fair value of time deposits is estimated using a
discounted cash flow approach that applies prevailing market interest rates for
similar maturity instruments.
F-24
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
Short-term borrowings
Carrying value approximates fair value.
Long-term borrowing
The fair value is estimated using a discounted cash flow approach that applies
prevailing market interest rates for similar maturity instruments.
Commitments to extend credit and standby letters of credit
The fair value is equal to the deferred fees outstanding as the contractual
rate and fees approximate those currently charged to originate similar
commitments. Carrying amounts which are comprised of unamortized fee income are
immaterial.
(13) Net Income Per Common Share
The following is a summary of the basic and dilutive net income per common
share calculation:
<TABLE>
<CAPTION>
Three months ended
March 31, Years ended December 31,
---------------------- ----------------------------------
1999 1998 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net income.............. $ 3,746 $ 3,386 $ 13,605 $ 12,842 $ 13,075
Preferred stock
dividends.............. (376) (378) (1,506) (1,513) (1,522)
---------- ---------- ---------- ---------- ----------
Net income available to
common stockholders.... $ 3,370 $ 3,008 $ 12,099 $ 11,329 $ 11,553
========== ========== ========== ========== ==========
Average shares
outstanding............ 9,915,600 9,928,500 9,915,921 9,926,678 9,939,197
========== ========== ========== ========== ==========
Basic and dilutive net
income per common
share.................. $ 0.34 $ 0.30 $ 1.22 $ 1.14 $ 1.16
========== ========== ========== ========== ==========
</TABLE>
F-25
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
(14) Segment Information
At December 31, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." Segment accounting policies
are the same as the policies described in Note 1 above.
Segments are determined based upon the individual subsidiary banks as the
Company evaluates performance on an individual bank basis. Accordingly, the
reportable segments are comprised of WCB, NBG, PSB and FTB. The reportable
segment information is as follows:
<TABLE>
<CAPTION>
As of and for
the three
months ended As of and for the years
March 31, ended December 31,
---------------- -------------------------
1999 1998 1998 1997 1996
------- ------- ------- ------- -------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net interest income:
WCB.................... $ 4,546 $ 4,213 $17,504 $16,193 $15,335
NBG.................... 3,707 3,595 14,600 14,116 12,994
PSB.................... 1,474 1,327 5,608 5,215 4,953
FTB.................... 1,118 1,093 4,266 3,873 3,517
------- ------- ------- ------- -------
Total segment net
interest income...... 10,845 10,228 41,978 39,397 36,799
Parent Company and
eliminations, net...... (29) (11) (66) (80) (121)
------- ------- ------- ------- -------
Total net interest
income............... $10,816 $10,217 $41,914 $39,317 $36,678
======= ======= ======= ======= =======
Net interest income plus
noninterest income:
WCB.................... 5,177 4,706 19,795 18,201 17,048
NBG.................... 4,377 4,103 16,986 16,472 15,209
PSB.................... 1,729 1,532 6,630 6,060 5,714
FTB.................... 1,395 1,259 5,027 4,474 3,978
------- ------- ------- ------- -------
Total segment net
interest income plus
noninterest income... 12,678 11,600 48,438 45,207 41,949
Parent Company and
eliminations, net...... (37) (33) (145) (157) (106)
------- ------- ------- ------- -------
Total net interest
income plus
noninterest income... $12,641 $11,567 $48,293 $45,050 $41,843
======= ======= ======= ======= =======
Net income:
WCB.................... 1,662 1,488 5,943 5,486 5,736
NBG.................... 1,366 1,335 5,272 5,408 5,159
PSB.................... 460 353 1,638 1,595 1,674
FTB.................... 348 286 1,102 834 829
------- ------- ------- ------- -------
Total segment net
income............... 3,836 3,462 13,955 13,323 13,398
Parent Company and
eliminations, net...... (90) (76) (350) (481) (323)
------- ------- ------- ------- -------
Total net income...... $ 3,746 $ 3,386 $13,605 $12,842 $13,075
======= ======= ======= ======= =======
</TABLE>
(Continued)
F-26
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
As of and for the
three As of and for the years
months ended ended
March 31, December 31.
----------------- --------------------------
1999 1998 1998 1997 1996
-------- -------- -------- -------- --------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
WCB.................... $388,675 $361,320 $372,931 $353,613 $323,071
NBG.................... 370,782 327,394 372,130 326,485 297,042
PSB.................... 124,396 111,692 125,508 108,714 103,276
FTB.................... 106,437 93,134 100,253 91,075 77,692
-------- -------- -------- -------- --------
Total segment assets.. 990,290 893,540 970,822 879,887 801,081
Parent Company and
eliminations, net..... 2,880 4,801 5,363 625 1,185
-------- -------- -------- -------- --------
Total assets.......... $993,170 $898,341 $976,185 $880,512 $802,266
======== ======== ======== ======== ========
Depreciation and
amortization expense:
WCB.................... 191 185 757 723 672
NBG.................... 193 171 728 681 638
PSB.................... 37 35 148 129 94
FTB.................... 54 50 203 346 166
-------- -------- -------- -------- --------
Total segment
depreciation and
amortization expense. 475 441 1,836 1,879 1,570
Parent Company and
eliminations, net...... 194 198 748 704 534
-------- -------- -------- -------- --------
Total depreciation and
amortization expense.. $ 669 $ 639 $ 2,584 $ 2,583 $ 2,104
======== ======== ======== ======== ========
</TABLE>
(15) Condensed Parent Company Only Financial Statements
The following condensed statements of condition and the condensed statements of
income and cash flows should be read in conjunction with the consolidated
financial statements and related notes (in thousands):
<TABLE>
<CAPTION>
December 31,
March 31, ----------------
1999 1998 1997
----------- -------- -------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C>
Condensed Statements of
Condition
Assets:
Cash and due from
banks................ $ 3,847 $ 3,708 $ 2,012
Securities available
for sale, at fair
value................ 717 877 815
Investment in
subsidiary banks..... 94,162 92,161 83,644
Other assets.......... 3,382 4,598 4,445
--------- -------- -------
Total assets......... $ 102,108 $101,344 $90,916
========= ======== =======
Liabilities and equity:
Long-term borrowings.. 1,739 1,739 1,739
Other liabilities..... 1,858 3,027 2,334
Shareholders' equity.. 98,511 96,578 86,843
--------- -------- -------
Total liabilities and
equity.............. $ 102,108 $101,344 $90,916
========= ======== =======
</TABLE>
F-27
<PAGE>
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Three Months Ended March 31, 1999 and 1998 (unaudited) and
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Three months ended
March 31, Years ended December 31,
-------------------- ----------------------------
1999 1998 1998 1997 1996
--------- --------- -------- -------- --------
(unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Condensed Statements of
Income
Income..................... $ 1,218 $ 1,083 $ 4,328 $ 3,778 $ 3,340
Expenses................... 1,314 1,162 4,715 4,302 3,697
--------- --------- -------- -------- --------
Loss before income taxes
and equity in earnings of
subsidiaries.............. (96) (79) (387) (524) (357)
Income tax benefit......... (24) (20) (105) (112) (108)
--------- --------- -------- -------- --------
Loss before equity in
earnings of subsidiaries.. (72) (59) (282) (412) (249)
Equity in earnings of
subsidiaries.............. 3,818 3,445 13,887 13,254 13,324
--------- --------- -------- -------- --------
Net income................. $ 3,746 $ 3,386 $ 13,605 $ 12,842 $ 13,075
========= ========= ======== ======== ========
Condensed Statement of Cash
Flows
Cash flows from operating
activities:
Net income................ $ 3,746 $ 3,386 $ 13,605 $ 12,842 $ 13,075
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization............ 194 198 748 704 534
Equity in earnings of
subsidiaries............ (3,818) (3,445) (13,887) (13,254) (13,324)
Deferred income tax
expense (benefit)....... (4) -- 102 127 10
Decrease (increase) in
other assets............ 55 (73) (161) (189) (153)
Increase (decrease) in
accrued expense and
other liabilities....... (145) (104) 454 (68) 231
--------- --------- -------- -------- --------
Net cash provided (used)
by operating
activities............. 28 (38) 861 162 373
--------- --------- -------- -------- --------
Cash flows from investing
activities:
Dividends from
subsidiaries............. 1,649 1,523 5,723 4,928 3,998
Equity investment in
subsidiaries, net........ -- -- -- (35) --
Purchase of available
securities for sale...... -- -- -- -- (10)
Purchase of premises and
equipment, net........... (56) (131) (739) (2,394) (939)
--------- --------- -------- -------- --------
Net cash provided by
investing activities... 1,593 1,392 4,984 2,499 3,049
--------- --------- -------- -------- --------
Cash flows from financing
activities:
Repurchase of preferred
and common shares, net... -- -- (163) (113) (75)
Preferred dividends paid.. (376) (378) (1,506) (1,515) (1,522)
Common dividends paid..... (1,106) (992) (2,480) (2,235) (1,889)
--------- --------- -------- -------- --------
Net cash used in
financing activities... (1,482) (1,370) (4,149) (3,863) (3,486)
--------- --------- -------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............ 139 (16) 1,696 (1,202) (64)
Cash and cash equivalents
at the beginning of the
period.................... 3,708 2,012 2,012 3,214 3,278
--------- --------- -------- -------- --------
Cash and cash equivalents
at the end of the period.. $ 3,847 $ 1,996 $ 3,708 $ 2,012 $ 3,214
========= ========= ======== ======== ========
</TABLE>
F-28
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
- ---------------------------------------------------------------
[LOGO]
FINANCIAL INSTITUTIONS, INC.
1,333,333 Shares
Common Stock
--------------
PROSPECTUS
--------------
June 25, 1999
CIBC World Markets
Keefe, Bruyette & Woods, Inc.
- ---------------------------------------------------------------
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.
Until July 20, 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
