UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from __________________ to ____________________
Commission File Number: 0-26481
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FINANCIAL INSTITUTIONS, INC.
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(Exact Name of Registrant as specified in its Charter)
NEW YORK 16-0816610
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(State of Incorporation) (I.R.S. Employer Identification Number)
220 Liberty Street Warsaw, NY 14569
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(Address of Principal Executive Offices) (Zip Code)
(716)786-1100
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(Registrant's Telephone Number Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file reports) and (2) has been subject to such requirements for the
past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |X|
As of March 3, 2000 there were issued and outstanding, exclusive of treasury
shares, 11,017,733 shares of the Registrant's Common Stock.
The aggregate market value of the 8,308,993 shares of voting stock held by
non-affiliates of the Registrant was $93,995,000, as computed by reference to
the last sales price on March 3, 2000, as reported by the Nasdaq National
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Market. Solely for purposes of this calculation, all persons who are directors
and executive officers of the Registrant and all persons who are believed by the
Registrant to be beneficial owners of more than 5% of its outstanding stock have
been deemed to be affiliates.
DOCUMENTS INCORPORATED
BY REFERENCE
Portions of the Registrant's proxy statement for its 2000 Annual Meeting of
Shareholders and its 1999 Annual Report to Shareholders are incorporated by
reference in Parts II and III of this Annual Report on Form 10-K:
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PART I
ITEM 1. BUSINESS
GENERAL
Financial Institutions, Inc. (the "Company") is a bank holding company
headquartered in Warsaw, New York, which is located 45 miles southwest of
Rochester and 45 miles southeast of Buffalo. The Company operates 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. The Company owns 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 (collectively, the "Banks"). The Company was 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, the Company has 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, the Company's strategy has been to
manage its bank subsidiaries on a decentralized basis. The Company's management
feels that this strategy provides the Banks the flexibility to efficiently serve
its markets and respond to local customer needs. While generally operating on a
decentralized basis, the Company has consolidated selected lines of business,
operations and support functions in order to achieve economies of scale, greater
efficiency and operational consistency. While increasing the use of existing
technology and by further centralizing back-office operations, management
believes substantial additional growth can be accomplished without incurring
proportionately greater operational costs.
FORWARD LOOKING STATEMENTS
This Report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that involve substantial risks and uncertainties. When used in
this report, or in the documents incorporated by reference herein, the words
"anticipate", "believe", "estimate", "expect", "intend", "may", and similar
expressions identify such forward-looking statements. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained herein. These
forward-looking statements are based largely on the expectations of the Company
or the Company's management and are subject to a number of risks and
uncertainties, including but not limited to, economic, competitive, regulatory,
and other factors affecting the Company's operations, markets, products and
services, as well as expansion strategies and other factors discussed elsewhere
in this report filed by the Company with the Securities and Exchange Commission.
Many of these factors are beyond the Company's control.
MARKET AREA AND COMPETITION
The Company operates 29 branches and has 37 ATMs in nine contiguous counties of
Western and Central New York State: Allegany, Cattaraugus, Genesee, Livingston,
Monroe, Ontario, Seneca, Wyoming and Yates Counties. Six new branches have been
opened in the past four years, one of which was its first new branch in Monroe
County near Rochester in the second half of 1999.
The Company's market area is geographically and economically diversified in that
it serves 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. The Company
anticipates allocating more resources to increase its presence in the markets
around these two cities.
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The Company faces significant competition in both making loans and attracting
deposits. The Western New York area has a high density of financial
institutions, most of which are branches of significantly larger institutions.
The Company's competition for loans comes principally from commercial banks,
savings banks, savings and loan associations, mortgage banking companies, credit
unions, insurance companies and other financial service companies. Its most
direct competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Company
faces additional competition for deposits from non-depository competitors such
as the mutual fund industry, securities and brokerage firms and insurance
companies.
LENDING ACTIVITIES
General. The Company offers a broad range of loans including commercial and
agricultural working capital and revolving lines of credit, commercial and
agricultural mortgages, equipment loans, crop and livestock loans, residential
mortgage loans and home equity lines of credit, home improvement loans, student
loans, automobile loans, personal loans and credit cards. The Company sells some
of its residential mortgage loans in the secondary market. Under the Company's
decentralized management philosophy, each of the banks determines which loans
are sold and which are retained for portfolio individually. The Company retains
the servicing rights on all mortgage loans it sells and realizes monthly service
fee income.
Underwriting Standards. The Company's loan policy establishes the general
parameters of the types of loans that are desirable, emphasizing cash flow and
collateral coverage. Under the 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 credit
decisions. Each subsidiary bank approves its own loan policy that must comply
with the Company's overall loan policy. Revisions to these bank subsidiary
policies are reviewed 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. In particular, to assure the maximum
salability of the residential loan products for possible resale into the
secondary mortgage markets, the Company has formally adopted the underwriting,
appraisal, and servicing guidelines of the Federal Home Loan Mortgage
Corporation ("Freddie Mac") as part of its standard loan policy and procedures
manual.
Commercial Loans. The Company originates commercial loans in its primary
market areas and underwrites them based on the borrower's ability to service the
loan from operating income. The Company offers 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. As a general practice, a collateral lien is placed on
any available real estate, equipment or other assets owned by the borrower and a
personal guarantee of the borrower is obtained. At December 31, 1999, $27.5
million, or 19.6%, of the aggregate commercial loan portfolio was at fixed rates
while $112.9 million, or 80.4%, was at variable rates. The Company also utilizes
government loan guarantee programs offered by the Small Business Administration
(or "SBA") and Rural Economic and Community Development (or "RECD") when
appropriate. See "Government Guarantee Programs" below.
Commercial Real Estate Loans. In addition to commercial loans secured by
real estate, the Company makes commercial real estate loans to finance the
purchase of real property which generally consists of real estate with completed
structures. 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 20
year period. The underwriting analysis includes credit verification, appraisals
and a
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review of the borrower's financial condition. At December 31, 1999, $33.8
million, or 24.6%, of the aggregate commercial real estate loan portfolio was at
fixed rates while $103.9 million, or 75.4%, was at variable rates.
Agricultural Loans. Agricultural loans are offered for short-term crop
production, farm equipment and livestock 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 livestock), business expansion (including acquisition of real
estate, expansion and improvement) and the purchase of equipment. The Banks 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 the borrowers' ability to repay their loans. At December
31, 1999, $14.1 million, or 9.3%, of the agricultural loan portfolio was at
fixed rates while $137.4 million, or 90.7%, was at variable rates. The Banks
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.
Residential Real Estate Loans. The Company originates fixed and variable
rate one-to-four family residential real estate loans collateralized by
owner-occupied properties located in its market areas. A variety of real estate
loan products which generally are amortized over five to 30 years are offered.
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. Mortgage title insurance and hazard insurance is normally
required. The Company sells most 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 December 31, 1999, the servicing
portfolio totaled $166.7 million in residential mortgages, all of which have
been sold to Freddie Mac. At December 31, 1999, $98.4 million, or 52.0%, of
residential real estate loans retained in portfolio was at fixed rates while
$91.0 million, or 48.0%, was at variable rates.
Consumer and Home Equity Loans. The Company originates direct and indirect
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. Visa Cards that provide consumer credit lines are also
issued. 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 recreational
vehicle as collateral. At December 31, 1999, $107.3 million, or 74.0%, of
aggregate consumer and home equity loans was at fixed rates while $37.7 million,
or 26.0%, was at variable rates.
Government Guarantee Programs. The Banks participate in government loan
guarantee programs offered by the Small Business Administration, Rural Economic
and Community Development and the Farm Service Agency. At December 31, 1999, the
Banks had loans with an aggregate principal balance of $45.7 million that were
covered by guarantees under these programs. The guarantees only cover a certain
percentage of these loans. By participating in these programs, the Banks are
able to broaden their base of borrowers while minimizing credit risk.
Loan Maturities. The following table sets forth contractual maturity ranges of
the Company's loan portfolio by loan type as of December 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.
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After One
Within but Within After
One Year Five Years Five Years Total
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(in thousands)
Commercial................... $67,225 $40,206 $32,945 $140,376
Commercial real estate....... 7,768 12,491 117,435 137,694
Agricultural................. 39,518 27,085 84,931 151,534
Residential real estate...... 4,816 10,932 173,718 189,466
Consumer and home equity..... 10,430 80,976 53,632 145,038
-------- -------- -------- --------
Total...................... $129,757 $171,690 $462,661 $764,108
======== ======== ======== ========
Delinquencies and Nonperforming Assets. The Banks have several procedures in
place to assist in maintaining the overall quality of the Company's loan
portfolio. Specific underwriting guidelines have been established to be followed
by the lending officers. The Company monitors each bank subsidiary's delinquency
levels on a monthly basis for any adverse trends.
Classification of Assets. Through the loan review process, the Banks maintain
internally classified loan lists 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.
A loan is generally placed on nonaccrual status and ceases 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 December 31, 1999, the Company had $6.7 million in nonperforming assets,
of which $0.7 million were government guaranteed, resulting in total
nonperforming assets, net of government guarantees, of $6.0 million, or 0.78% 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
guarantees of $6.8 million, or 1.03%, 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 agribusiness
nonperforming loans, tightening underwriting standards in response to general
economic conditions as well as intensified collection efforts overall.
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The following table presents information regarding nonperforming assets at
December 31, 1999:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
Nonaccruing loans(1):
Commercial ......................................................... $1,159
Commercial real estate ............................................. 1,373
Agricultural ....................................................... 1,455
Residential real estate ............................................ 413
Consumer and home equity ........................................... 375
------
Total nonaccruing loans .......................................... 4,775
Accruing loans 90 days or more delinquent ............................ 969
------
Total nonperforming loans ........................................ 5,744
Other real estate owned(2) ........................................... 969
------
Total nonperforming assets ..................................... 6,713
Less: government guaranteed portion of nonperforming loans .......... 734
------
Total nonperforming assets, net of government guaranteed portion ..... $5,979
======
Nonperforming loans to total loans ................................... 0.75%
======
Nonperforming loans, net of government guaranteed portion,
to total loans(3) ................................................... 0.66%
======
Nonperforming assets to total loans and other real estate ............ 0.88%
======
Nonperforming assets, net of government guaranteed portion, to total
loans and other real estate ........................................ 0.78%
======
</TABLE>
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(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, RECD or FSA.
The following table summarizes the principal balance of loan delinquencies in
the loan portfolio as of December 31, 1999:
60-89 90 Days
Days or More
---- -------
(dollars in thousands)
Commercial ....................................... $136 $567
Commercial real estate ........................... 79 74
Agricultural ..................................... -- --
Residential real estate .......................... 137 139
Consumer and home equity ......................... 382 189
---- ----
Total ......................................... $734 $969
==== ====
Delinquent loans to total loans .................. 0.10% 0.13%
==== ====
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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 management's estimate of the amount of reasonably foreseeable losses,
based on the following factors:
o the amount of historical charge-off experience;
o the evaluation of the loan portfolio by the loan review function;
o levels and trends in delinquencies and non-accruals;
o trends in volume and terms;
o effects of changes in lending policy;
o experience, ability and depth of management;
o national and local economic trends and conditions; and
o concentration of credit.
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, the risk
classification and delinquency status of loans and other factors are considered,
such as collateral value, government guarantees, portfolio composition, trends
in economic conditions and the financial strength of borrowers. Specific
allowances for loans which require reserves greater than those allocated
according to their classification or delinquency status may be established. An
allowance is also established for each loan type based upon average historical
charge-off experience taking into account levels and trends in delinquencies,
loan volumes, economic and industry trends and concentrations of credit.
INVESTMENT ACTIVITIES
General. The Company's investment securities policy is contained within the
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, the Company considers 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 the
Company's 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.
The Company's 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:
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o U.S. Treasury securities;
o U.S. government agency securities;
o pass-through mortgage-backed securities and collateralized mortgage
obligations (CMOs) issued by the Federal National Mortgage
Association (FNMA), the Government National Mortgage Association
(GNMA) and Freddie Mac;
o investment grade municipal securities, including tax, revenue and
bond anticipation notes and general obligation and revenue notes and
bonds;
o certain creditworthy un-rated securities issued by municipalities;
and
o investment grade corporate debt.
The Company currently does not participate in hedging programs, interest rate
swaps, or other activities involving the use of off-balance sheet derivative
financial instruments. Additionally, the Company does not invest in privately
issued securities which are rated below investment grade.
SOURCES OF FUNDS
General. Deposits and borrowed funds, primarily Federal Home Loan Bank ("FHLB")
advances and sweep repurchase agreements, are the primary sources of the
Company's funds for use in lending, investing and for other general purposes. In
addition, repayments on loans, proceeds from sales of loans and securities, and
cash flows from operations have historically been additional sources of funds.
Deposits. The Company offers a variety of deposit account products with a range
of interest rates and terms. The deposit accounts consist of savings, NOW
accounts, checking accounts, money market accounts, savings, club accounts and
certificates of deposit. The Company offers certificates of deposit with
balances in excess of $100,000 at preferential rates (jumbo certificates) to
local municipalities, businesses, and individuals as well as Individual
Retirement Accounts ("IRAs") and other qualified plan accounts. To enhance its
deposit product offerings, the Company provides commercial checking accounts for
small to moderately-sized commercial businesses, as well as a low-cost checking
account service for low-income customers.
The flow of deposits is influenced significantly by general economic conditions,
changes in money market rates, prevailing interest rates and competition. The
Company's deposits are obtained predominantly from the areas in which the Banks'
branch offices are located. The Company relies primarily on competitive pricing
of its deposit products, customer service and long-standing relationships with
customers to attract and retain these deposits. Historically, the Company has
not used brokers to obtain deposits.
Borrowed Funds. Borrowings consist primarily of advances entered into with the
FHLB and sweep repurchase agreements. The Company intends to continue to utilize
borrowings as a source of funds to leverage the balance sheet.
SUBSIDIARIES
Other than its four commercial banks, there were no other subsidiaries of the
Company that were operational during 1999.
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.
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The following description summarizes some of the laws to which the Company and
its 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. Management believes the
Company is in compliance in all material respects with these laws and
regulations.
The Company
The Company is a bank holding company registered under the Bank Holding Company
Act, and is 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.
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 December 31, 1999, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 14.94% and the ratio of total capital to total
risk-weighted assets was
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16.19%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition--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 consolidated 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 December 31, 1999, the Company's leverage
ratio was 10.80%.
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 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, would, under the
circumstances set forth in the presumption, constitute acquisition of control of
the Company.
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
- --------------------------------------------------------------------------------
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<PAGE>
acquiror that is a bank holding company) or more of the Company's outstanding
common stock, or otherwise obtaining control or a "controlling influence" over
the Company.
The Banks
Wyoming County Bank (WCB), Pavilion State Bank (PSB) and First Tier Bank & Trust
(FTB) are New York State-chartered banks. National Bank of Geneva (NBG) is a
national bank chartered by the Office of the Comptroller of Currency. All of the
deposits of the four subsidiary banks are insured by the FDIC through the Bank
Insurance Fund. FTB is a member of the Federal Reserve System. The 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 the Company or its 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 the Company's operating
funds and, for the foreseeable future, it is anticipated that dividends paid by
the banks will continue to be its 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 the Company is a legal entity separate and distinct from its
subsidiaries, the Company's 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.
Examinations. The New York State Banking Department (in the case of WCB, 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 the Banks.
- --------------------------------------------------------------------------------
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<PAGE>
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 assets of 4.0% and a
ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for the Company. As of December 31, 1999,
the ratio of Tier 1 capital to total risk-weighted assets for the Banks was
14.04% for WCB, 11.48% for NBG, 12.44% for PSB and 12.45% for FTB, and the ratio
of total capital to total risk-weighted assets was 15.29% for WCB, 12.73% for
NBG, 13.69% for PSB and 13.70% for FTB. See "Management's Discussion and
Analysis of Financial Condition and Result of Operation--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
December 31, 1999, the ratio of Tier 1 capital to average total assets (leverage
ratio) was 9.66% for WCB, 9.05% for NBG, 8.89% for PSB and 7.66% for FTB. See
"Management's Discussion and Analysis of Financial Condition and Result of
Operation of the Company--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.
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
- --------------------------------------------------------------------------------
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<PAGE>
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.
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 the Company or its 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.
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,
- --------------------------------------------------------------------------------
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<PAGE>
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, the 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. The 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. The Gramm-Leach-Bliley Act
("Gramm-Leach") was signed into law on November 12, 1999. Gramm-Leach enables
combinations among banks, securities firms and insurance companies beginning
March 11, 2000. Under Gramm-Leach, bank holding companies are permitted to offer
their customers virtually any type of financial service including banking,
securities underwriting, insurance (both underwriting and agency), and merchant
banking. In order to engage in these additional financial activities, a bank
holding company must qualify and register with the Board of Governors of the
Federal Reserve System as a "financial holding company" by demonstrating that
each of its bank subsidiaries is "well capitalized," "well managed," and has at
least a "satisfactory" rating under the Community Reinvestment Act of 1977
("CRA"). Gramm-Leach establishes that the federal banking agencies will regulate
the banking activities of financial holding companies and banks' financial
subsidiaries, the U.S. Securities and Exchange Commission will regulate their
securities activities and state insurance regulators will regulate their
insurance activities. Gramm-Leach also provides new protections against the
transfer and use by financial institutions of consumers' nonpublic, personal
information.
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
Superintendent of Banks and the FDIC possess 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.
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
- --------------------------------------------------------------------------------
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<PAGE>
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.
ITEM 2. PROPERTIES
The Company conducts business through its corporate office, full service bank
offices and branches. The Company's headquarters and operations center is
located in Warsaw, New York. This facility is leased for a nominal rent from the
Wyoming County Industrial Development Agency for local tax reasons and the
Company has the right to purchase it for nominal consideration beginning in
November, 2006. The following table lists the properties of each of the
subsidiary banks:
<TABLE>
<CAPTION>
LOCATION TYPE OF LEASED OR EXPIRATION
FACILITY OWNED 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
Honeoye Falls.......................... Branch Lease April 2008
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>
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company and its subsidiaries are parties to or otherwise
involved in legal proceedings arising in the normal course of business.
Management does not believe that there is any pending or threatened proceeding
against the Company or its subsidiaries which, if determined adversely, would
have a material effect on the Company's business, results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended December
31, 1999 to a vote of security holders.
PART II
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<PAGE>
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is traded under the symbol of FISI on the Nasdaq
National Market. At March 3, 2000, the Company had 11,017,733 shares of common
stock outstanding (exclusive of treasury shares) and had approximately 1,800
shareholders of record. Between June 25, 1999, the day the common stock of the
Company commenced trading on Nasdaq, and December 31, 1999, the high and low
price of the common stock was $15.625 and $12.00, respectively. The Company paid
a dividend of $.08 per common share on October 1, 1999 to shareholders of record
on September 17, 1999 and on January 3, 2000 to shareholders of record on
December 17, 1999.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets ................... $1,136,460 $ 976,185 $ 880,512 $ 802,266 $ 721,994
Loans, net ..................... 752,324 645,857 594,332 545,060 474,822
Securities available for sale .. 200,272 157,022 110,123 83,731 85,179
Securities held to maturity .... 81,356 91,016 99,084 106,112 100,266
Deposits ....................... 949,531 850,455 767,726 707,703 640,237
Borrowed funds ................. 56,336 13,862 12,066 5,814 1,739
Shareholders' equity ........... 117,539 96,578 86,843 77,254 68,001
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Interest income ................ $ 78,899 $ 72,870 $ 67,168 $ 61,192 $ 57,016
Interest expense ............... 31,883 30,958 27,851 24,514 22,628
---------- ---------- ---------- ---------- ----------
Net interest income .......... 47,016 41,912 39,317 36,678 34,388
Provision for loan losses ...... 3,062 2,732 2,829 1,740 1,405
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses .... 43,954 39,180 36,488 34,938 32,983
---------- ---------- ---------- ---------- ----------
Service charges on deposits .... 4,289 3,234 2,706 2,684 2,580
Net gain (loss) on sale of
securities available for sale 71 -- -- 8 (22)
Other noninterest income ....... 3,488 3,147 3,027 2,473 1,847
---------- ---------- ---------- ---------- ----------
Total noninterest income ..... 7,848 6,381 5,733 5,165 4,405
---------- ---------- ---------- ---------- ----------
Noninterest expense ............ 27,032 24,602 22,084 19,796 20,062
---------- ---------- ---------- ---------- ----------
Income before income taxes ..... 24,770 20,959 20,137 20,307 17,326
Income taxes ................... 8,813 7,354 7,295 7,232 6,223
---------- ---------- ---------- ---------- ----------
Net income ..................... $ 15,957 $ 13,605 $ 12,842 $ 13,075 $ 11,103
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA (1):
PERFORMANCE RATIOS:
Return on assets (ratio of net
income to average total assets) .......... 1.54% 1.48% 1.54% 1.71% 1.58%
Return on common equity (ratio of net
income to average common equity) .......... 16.16 16.28 17.62 20.86 21.34
Net interest rate spread .................... 4.20 4.24 4.43 4.56 4.71
Net interest margin (2) .................... 5.00 5.06 5.21 5.31 5.40
Noninterest income to
average total assets (3) .................. 0.75 0.69 0.69 0.68 0.63
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Noninterest expenses to average total assets 2.61 2.68 2.65 2.59 2.86
Average interest-earning assets
to average interest-bearing liabilities .. 124.86 123.05 121.91 121.89 120.47
ASSET QUALITY RATIOS:
Excluding impact of government guarantees
Non-performing loans to total loans ......... 0.75% 0.93% 1.24% 1.06% 0.89%
Non-performing assets to total
loans and other real estate ............... 0.88 1.24 1.62 1.38 1.21
Allowance for loan losses to non-
performing loans .......................... 198.83 156.86 108.95 121.51 143.76
Allowance for loan losses to total loans .... 1.50 1.46 1.35 1.29 1.29
Net charge-offs during the period
to average loans outstanding during the
year ...................................... 0.17 0.21 0.32 0.16 0.12
Including impact of government guarantees
Non-performing loans to total loans ......... 0.66% 0.71% 1.00% 0.79% 0.76%
Non-performing assets to total
loans and other real estate ............... 0.78 1.03 1.38 1.12 1.07
CAPITAL RATIOS:
Equity to total assets ...................... 10.34% 9.89% 9.86% 9.63% 9.42%
Average common equity to
average assets ............................ 8.63 8.09 7.70 7.25 6.39
OTHER DATA:
Number of full-service offices .............. 29 28 27 24 23
Loans serviced for others (in millions) ..... $ 200.2 $ 177.8 $ 153.2 $ 134.9 $ 118.3
Full time equivalent employees .............. 411 384 383 380 375
</TABLE>
- ----------
(1) Averages presented are daily averages.
(2) Net interest income divided by average interest earning assets. A tax-
equivalent adjustment to interest earned from tax-exempt securities has
been computed using a federal tax rate of 35%.
(3) Noninterest income excludes net gain (loss) on sale of securities
available for sale.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations of Financial Institutions, Inc. and
subsidiaries are contained in pages 14 through 26 of the 1999 Annual Report to
Shareholders, and are incorporated herein by reference thereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The principal objective of the Company's interest rate risk management is to
evaluate the interest rate risk inherent in certain assets and liabilities,
determine the appropriate level of risk given its business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with the guidelines approved by the Company's Board
of Directors to reduce the vulnerability of operations to changes in interest
rates. The Company's 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
strategic objectives and regularly reviews the activities of the 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.
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 the Company's 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 re-price 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 December 31, 1999, the one-year gap position,
the difference between the amount of interest-earning assets maturing or
re-pricing within one year and interest-bearing liabilities maturing or
repricing within one year, was $(74.1) million, or 7.6% of total assets.
Accordingly, over the one year period following December 31, 1999, the Company
will have $74.1 million more in liabilities re-pricing than assets. Generally if
rate-sensitive assets re-price sooner than rate-sensitive liabilities, earnings
will be positively impacted in a rising rate environment. Conversely, in a
declining rate environment, earnings will generally be negatively impacted. If
rate-sensitive liabilities re-price sooner than rate-sensitive assets then
generally earnings will be negatively impacted in a rising rate environment.
Conversely, in a declining rate environment earnings will generally be
positively impacted. Management believes that the negative gap position will not
have a material adverse effect on the Company's operating results.
Gap Analysis. The following table (the "Gap Table") sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at December
31, 1999 which management anticipates, 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 December 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%, 15%, 30%, and 40% of such
deposits assumed to reprice in the
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<PAGE>
periods of less than 30 days, 31 to 180 days, 181 to 365 days, 1 to 3 years and
more than 3 years, respectively. Prepayment and repricing rates can have a
significant impact on the estimated gap. While management believes such
assumptions are reasonable, there can be no assurance that assumed repricing
rates will approximate actual future deposit activity.
<TABLE>
<CAPTION>
Gap Table Volumes Subject to Repricing Within
-----------------------------------------------------------------------------------------------
0-30 31-180 181-365
days days days 1-3 years 3-5 years 5-10 years >10 years Total
-----------------------------------------------------------------------------------------------
December 31, 1999
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold ........... $ 11,554 $ -- $ -- $ -- $ -- $ -- $ -- $ 11,554
Securities (1) ............... 1,273 21,181 15,522 65,092 108,857 66,546 3,157 281,628
Loans (2) .................... 309,942 60,530 69,263 124,567 88,988 48,102 62,354 763,746
-------- --------- -------- --------- --------- --------- --------- ----------
Total interest-earning
assets ................... 322,769 81,711 84,785 189,659 197,845 114,648 65,511 1,056,928
-------- --------- -------- --------- --------- --------- --------- ----------
Interest-bearing liabilities:
Interest-bearing checking,
savings and money
market deposits ............ 7,671 38,350 46,022 92,044 118,323 4,403 -- 306,813
Certificates of deposit ...... 122,230 175,887 124,280 71,885 6,479 157 -- 500,918
Borrowed funds ............... 4,610 43,257 1,076 1,326 351 5,625 91 56,336
-------- --------- -------- --------- --------- --------- --------- ----------
Total interest-bearing
liabilities .............. 134,511 257,494 171,378 165,255 125,153 10,185 91 864,067
-------- --------- -------- --------- --------- --------- --------- ----------
Period gap ..................... $188,258 $(175,783) $(86,593) $ 24,404 $ 72,692 $ 104,463 $ 65,420 $ 192,861
======== ========= ======== ========= ========= ========= ========= ==========
Cumulative gap ................. $188,258 $ 12,475 $(74,118) $ (49,714) $ 22,978 $ 127,441 $ 192,861
======== ========= ======== ========= ========= ========= =========
Period gap to total assets ..... 16.62% (15.52%) (7.64%) 2.15% 6.42% 9.22% 5.77% 17.02%
======== ========= ======== ========= ========= ========= ========= ==========
Cumulative gap to
total assets ................ 16.62% 1.10% (6.54%) (4.39%) 2.03% 11.25% 17.02%
======== ========= ======== ========= ========= ========= =========
Cumulative interest-earning
assets to cumulative interest-
bearing liabilities .......... 239.96% 103.18% 86.84% 93.18% 102.69% 114.75% 122.32%
======== ========= ======== ========= ========= ========= =========
</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, the Company directs 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.
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
December 31, 1999:
- --------------------------------------------------------------------------------
Page 20
<PAGE>
<TABLE>
<CAPTION>
Change in Interest Net Interest Income Economic Value of Equity
Rates in Basis Points -------------------------------- --------------------------------
(Rate Shock) $ Amount $ Change % Change $ Amount $ Change % Change
- --------------------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
200 .................. $ 54,844 $ 1,314 2.45% $121,090 $(11,988) (9.01%)
100 .................. 54,254 724 1.35% 126,676 (6,402) (4.81%)
Static ............... 53,530 -- -- 133,078 -- --
(100) ................ 52,919 (611) (1.14%) 139,520 6,442 4.84%
(200) ................ 51,324 (2,206) (4.12%) 142,826 9,748 7.33%
</TABLE>
The Company measures 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 December 31, 1999, a 200 basis point increase in rates would increase net
interest income by $1.3 million, or 2.45%, over the next twelve month period.
Conversely, a 200 basis point decrease in rates would decrease net interest
income by $2.2 million, or 4.12%, 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 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding the consolidated financial statements of Financial
Institutions, Inc. and subsidiaries are contained in pages 28 through 43 of the
1999 Annual Report to Shareholders, and are incorporated herein by reference
thereto.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Registrant on page
3 of the Proxy Statement for its 2000 Annual Meeting of Shareholders to be filed
with the U.S. Securities and Exchange Commission is incorporated herein by
reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation on pages 5, 6 and 9 of the
Registrant's Proxy Statement for its 2000 Annual Meeting of Shareholders to be
filed with the U.S. Securities and Exchange Commission is incorporated herein by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners of the
Company's management on page 4 of the Registrant's Proxy Statement for its 2000
Annual Meeting of Shareholders to be filed with the U.S. Securities and Exchange
Commission is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions on pages 12
and 13 of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders to be filed with the U.S. Securities and Exchange Commission is
incorporated herein by reference thereto.
- --------------------------------------------------------------------------------
Page 21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of this Report
(1) Financial Statements
The financial statements listed below and the report of Independent
Auditors' are incorporated herein by reference to the Registrant's
Annual Report to Shareholders for the year ended December 31, 1999,
in Item 8. Page references are to the Annual Report.
Financial Statements Page Reference
-------------------- --------------
Financial Institutions, Inc. and Subsidiaries
Independent Auditors' Report 27
Consolidated Statements of Financial Condition 28
Consolidated Statements of Income 29
Consolidated Statements of Changes in
Shareholders' Equity and Comprehensive Income 30
Consolidated Statements of Cash Flows 31
Notes to Consolidated Financial Statements 32-42
(b) Reports on Form 8-K
The Registrant filed no current Report on Form 8-K during the fourth
quarter of 1999.
(c) Exhibits
The exhibits listed below are filed herewith or are incorporated by
reference to other filings.
Exhibit Index to Form 10-K
--------------------------
Exhibit 3.1 Articles of Incorporation **
Exhibit 3.2 Bylaws **
Exhibit 10.1 1999 Management Stock Incentive Plan
Exhibit 10.2 1999 Directors' Stock Incentive Plan
Exhibit 10.3 Employment Agreement - Peter G. Humphrey
Exhibit 10.4 Employment Agreement - Jon J. Cooper
Exhibit 10.5 Employment Agreement - Thomas L. Kime
Exhibit 10.6 Employment Agreement - W. J. Humphrey III
Exhibit 10.7 Employment Agreement - Randolph C. Brown
Exhibit 11 Calculations of Basic Earnings Per Share
and Diluted Earnings Per Share
- --------------------------------------------------------------------------------
Page 22
<PAGE>
Exhibit 13 Annual Report to Shareholders for the year
ended December 31, 1999
Exhibit 21 Subsidiaries of Financial Institutions,
Inc.
Exhibit 27.1 Financial Data Schedule - Fiscal Year End
1999
** Incorporated by reference from Financial Institutions, Inc., Form S-1,
filed on June 11, 1999.
- --------------------------------------------------------------------------------
Page 23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FINANCIAL INSTITUTIONS, INC.
Date: March 24, 2000 By: /s/ Peter G. Humphrey
-------------------------
Peter G. Humphrey
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Peter G. Humphrey President, Chief March 24, 2000
- ----------------------- Executive Officer (Principal
Peter G. Humphrey Executive Officer) and Director
/s/ Ronald A. Miller Senior Vice President March 24, 2000
- ----------------------- and Chief Financial Officer
Ronald A. Miller (Principal Accounting Officer)
/s/ W. J. Humphrey, Jr. Director and March 24, 2000
- ----------------------- Chairman of the Board
W. J. Humphrey, Jr.
/s/ W. J. Humphrey, III Director and March 24, 2000
- ----------------------- Senior Vice President
W. J. Humphrey, III
/s/ Jon J. Cooper Director and March 24, 2000
- ----------------------- Senior Vice President
Jon J. Cooper
/s/ Barton P. Dambra Director March 24, 2000
- -----------------------
Barton P. Dambra
/s/ Samuel M. Gullo Director March 24, 2000
- -----------------------
- --------------------------------------------------------------------------------
Page 24
<PAGE>
Samuel M. Gullo
/s/ Donald Humphrey Director March 24, 2000
- -----------------------
Donald Humphrey
/s/ Thomas L. Kime Director and March 24, 2000
- ----------------------- Senior Vice President
Thomas L. Kime
/s/ H. Jack South Director March 24, 2000
- -----------------------
H. Jack South
/s/ James H. Wycoff Director March 24, 2000
- -----------------------
James H. Wycoff
/s/ Donald I. Wickham Director March 24, 2000
- -----------------------
Donald I. Wickham
- --------------------------------------------------------------------------------
Page 25
<PAGE>
F I N A N C I A L I N S T I T U T I O N S, I N C .
DIRECTORS:
Jon J. Cooper
President & Chief Executive Officer
Wyoming County Bank
Barton P. Dambra
President
Markin Tubing
Samuel M. Gullo
Owner
Family Furniture, Inc.
Donald G. Humphrey
Retired
Former Vice President of Wyoming County Bank
Peter G. Humphrey
President & Chief Executive Officer
Financial Institutions, Inc.
W. J. Humphrey, Jr.
Chairman of the Board
Financial Institutions, Inc.
W. J. Humphrey, III
President & Chief Executive Officer
Pavilion State Bank
Thomas L. Kime
President & Chief Executive Officer
National Bank of Geneva
H. Jack South
Retired
Former Vice President of Operations of Abex Corporation
Donald I. Wickham
Associate
Klassen Associates
James H. Wyckoff
Associate Professor - SUNY
OFFICERS:
Peter G. Humphrey
President and
Chief Executive Officer
Randolph C. Brown
Senior Vice President
Jon J. Cooper
Senior Vice President
W. J. Humphrey, III
Senior Vice President
Thomas L. Kime
Senior Vice President
Ronald A. Miller
Senior Vice President and
- --------------------------------------------------------------------------------
Page 26
<PAGE>
Chief Financial Officer
Regina R. Colegrove
Vice President - Human Resources
Sonia M. Dumbleton
Vice President - Internal Audit & Compliance
R. Mitchell McLaughlin
Vice President - Operations
Steven S. Perl
Vice President - Controller
David L. MacIntyre
Assistant Vice President - Investment Services
- --------------------------------------------------------------------------------
Page 27
EX-10.1
(Exhibit 10.1)
FINANCIAL INSTITUTIONS, INC.
1999 MANAGEMENT STOCK INCENTIVE PLAN
1. BACKGROUND AND PURPOSE
Financial Institutions, Inc. (the "Company") hereby establishes the
Financial Institutions, Inc. 1999 Management Stock Incentive Plan (the "Plan").
The purpose of this Plan is to enable the Company and its subsidiaries to
attract and retain key employees and provide them with an incentive to maintain
and enhance the Company's longterm performance record. It is intended that this
purpose will best be achieved by granting eligible key employees incentive stock
options ("ISOs"), nonqualified stock options ("NQSOs"), stock appreciation
rights ("SARs") and restricted stock grants, individually or in combination,
under this Plan pursuant to the rules set forth in Sections 83, 162(m), 421 and
422 of the Internal Revenue Code, as amended from time to time.
2. ADMINISTRATION
The Plan shall be administered by the Company's Compensation Committee
(the "Committee"). This Committee shall consist of at least two members of the
Company's Board of Directors all of whom shall, unless the Board determines
otherwise, be "outside directors" as this term is defined in Code Section 162(m)
and regulations thereunder and "non-employee directors" as this term is used in
Rule 16b-3, or any successor provision, promulgated pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and none of whom during
the twelve months prior to commencement of service on the Committee, or during
such service, has been granted or awarded any equity security or derivative
security of the Company pursuant to the Plan or, except as permitted by Rule
16b3 (c)(2)(i) of the Exchange Act, or any other plan of the Company. Subject to
the provisions of the Plan, the Committee shall possess the authority, in its
discretion, (a) to determine the employees of the Company to whom, and the time
or times at which, ISOs and/or NQSOs (ISOs and NQSOs are collectively referred
to as "options"), SARs and restricted stock grants (all four types of grants are
collectively referred to as "awards") shall be granted; (b) to determine at the
time of grant whether an award will be an ISO, a NQSO, a SAR, a restricted stock
grant or a combination of these awards and the number of shares to be subject to
each award; (c) to prescribe the form of the award agreements and any
appropriate terms and conditions applicable to the awards and to make any
amendments to such agreements or awards; (d) to interpret the Plan; (e) to make
and amend rules and regulations relating to the Plan; and (f) to make all other
determinations necessary or advisable for the administration of the Plan. The
Committee's determinations shall be conclusive and binding. No member of the
Committee shall be liable for any action taken or decision made in good faith
relating to the Plan or any award granted hereunder.
3. ELIGIBLE EMPLOYEES
Awards may be granted under the Plan only to employees of the Company and
its subsidiaries (which shall include all corporations of which at least fifty
percent of the voting stock is owned by the Company directly or through one or
more
- --------------------------------------------------------------------------------
Page 28
<PAGE>
corporations at least fifty percent of the voting stock of which is so owned)
who have the capability of making a substantial contribution to the success of
the Company.
4. SHARES AVAILABLE
The total number of shares of the Company's Common Stock (par value of
$.01 per share) available in the aggregate for awards under this Plan shall not
exceed ten percent (10%) of the number of issued shares of the Company's Common
Stock, including treasury shares. In addition, not more than 800,000 shares of
Common Stock shall be available for ISO awards during the term of the Plan.
Finally, the aggregate number of shares which may be issued under restricted
stock grants at any one time during the life of the Plan may not exceed three
percent (3%) of the number of issued shares, including treasury shares, of the
Company's Common Stock. Shares to be granted may be authorized and unissued
shares or may be treasury shares.
The total number of shares covered by all awards granted under this Plan
to any one participant in any one calendar year may not exceed 300,000. The
Committee may issue awards in any combination it may choose provided that the
total shares under all such awards to any one participant does not exceed the
300,000 individual aggregate limit.
If an award expires, terminates or is canceled without being exercised or
becoming vested, new awards may thereafter be granted under the Plan covering
such shares unless Rule 16b-3 provides otherwise. No award may be granted more
than 10 years after the effective date of the Plan.
5. TERMS AND CONDITIONS OF ISOS
Each ISO granted under the Plan shall be evidenced by an ISO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform with this Plan and contain the following terms and
conditions:
(a) Exercise Price. The exercise price under each option shall equal
the fair market value of the Common Stock at the time such option is
granted, or, if there was no trading in such stock on the date of
such grant, the closing price on the last preceding day on which
there was such trading. If an option is granted to an officer or
employee who at the time of grant owns stock possessing more than
ten percent of the total combined voting power of all classes of
stock of the Company (a "10-percent Shareholder"), the purchase
price shall be at least 110 percent of the fair market value of the
stock subject to the option.
(b) Duration of Option. Each option by its terms shall not be
exercisable after the expiration of ten years from the date such
option is granted. In the case of an option granted to a 10-percent
Shareholder, the option by its terms shall not be exercisable after
the expiration of five years from the date such option is granted.
(c) Options Nontransferable. Each option by its terms shall not be
transferable by the participant otherwise than by will or the laws
of descent and distribution and shall be exercisable, during the
participant's lifetime, only by the participant, the participant's
guardian or the participant's legal representative. To the extent
- --------------------------------------------------------------------------------
Page 29
<PAGE>
required for the option grant and/or exercise to be exempt under
Rule 16b-3, options (or the shares of Common Stock underlying the
options) must be held by the participant for at least six months
following the date of grant.
(d) Exercise Terms. Each option granted under the Plan shall become
exercisable pursuant to a vesting schedule established by the
Committee at the time an option is granted. Options may be partially
exercised from time to time during the period extending from the
time they first become exercisable until the tenth anniversary
(fifth anniversary for a 10-percent Shareholder) of the date of
grant. The Committee may impose such other terms and conditions on
the exercise of options as it deems appropriate to serve the
purposes for which this Plan has been established.
(e) Maximum Value of ISO Shares. No ISO shall be granted to an
employee under this Plan or any other ISO plan of the Company or its
subsidiaries to purchase shares as to which the aggregate fair
market value (determined as of the date of grant) of the Common
Stock which first become exercisable by the employee in any calendar
year exceeds $100,000.
(f) Payment of Exercise Price. An option shall be exercised upon
written notice to the Company accompanied by payment in full for the
shares being acquired. The payment shall be made in cash, by check
or, if the option agreement so permits, by delivery of shares of
Common Stock of the Company beneficially owned by the participant,
duly assigned to the Company with the assignment guaranteed by a
bank, trust company or member firm of the New York Stock Exchange,
or by a combination of the foregoing. Any such shares so delivered
shall be deemed to have a value per share equal to the fair market
value of the shares on such date. For this purpose, fair market
value shall equal the closing price of the Company's Common Stock on
the listing exchange on the date the option is exercised, or, if
there was no trading in such stock on the date of such exercise, the
closing price on the last preceding day on which there was such
trading.
With the approval of the Committee, the Company may loan to
the participant a sum equal to an amount up to 100 percent of the
purchase price of the shares so purchased, such loan to be evidenced
by the execution and delivery of a promissory note. Interest shall
be paid annually on the unpaid balance of the promissory note at
such rate as shall be determined by the Committee. Such promissory
note shall be secured by the pledge to the Company as collateral
security of shares having an aggregate purchase price equal to or
greater than the amount of the note. A participant shall have, as to
such pledged shares, all rights of ownership, including dividend and
voting rights, even though subject to the security interest of the
Company. Such shares shall be released by the Company when the
proportionate amount of the note secured thereby is repaid to the
Company. All notes executed hereunder shall be payable at such times
and in such amounts and shall contain such other terms as shall be
designated by the Committee and stated in the option agreement.
- --------------------------------------------------------------------------------
Page 30
<PAGE>
6. TERMS AND CONDITIONS FOR NQSOS
Each NQSO granted under the Plan shall be evidenced by a NQSO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform to this Plan and contain the same terms and conditions
as the ISO option agreement except that the 10-percent Shareholder restrictions
in Sections 5(a) and 5(b) and the maximum value of share rules of Section 5(e)
shall not apply to NQSO grants. To the extent an option initially designated as
an ISO exceeds the value limit of Section 5(e), it shall be deemed a NQSO and
shall otherwise remain in full force and effect.
7. TERMS AND CONDITIONS OF RESTRICTED STOCK GRANTS
The Committee may, evidenced by such written agreement as the Committee
shall from time to time prescribe, grant to an eligible employee a specified
number of shares of the Company's Common Stock which shall vest only after the
attainment of the relevant restrictions described in Section 7(b) below
("restricted stock"). Such restricted stock shall have an appropriate
restrictive legend affixed thereto. A restricted stock grant shall be neither an
option nor a sale, but shall be subject to the following conditions and
restrictions:
(a) Restricted stock may not be sold or otherwise transferred by the
participant until ownership vests, provided however, to the extent
required for the restricted stock grant to be exempt under Rule 16b-3, the
restricted stock must be held by the participant for at least six months
following the date of vesting.
(b) Ownership shall vest only following satisfaction of one or more of the
following criteria as the Committee may prescribe:
(1) the passage of two years, or such longer period of time as the
Committee in its discretion may provide, from the date of
grant.
(2) the attainment of performance-based goals established by the
Committee as of the date of grant. If the participant's
compensation is subject to the $1 million cap of Code Section
162(m), the Committee may establish such performance goals
based on one or more of the following targets:
o total shareholder return
o earnings per share growth
o cash flow growth
o return on equity and/or
If the participant's compensation is not subject to the $1
million cap of Code Section 162(m), the Committee may
establish the performance goal on the basis of the preceding
four targets or any other target it may from time to time deem
appropriate in its discretion.
- --------------------------------------------------------------------------------
Page 31
<PAGE>
(3) any other conditions the Committee may prescribe, including a
non-compete requirement.
(c) Unless the Committee shall determine otherwise with respect to
participants whose compensation is not governed by Code Section 162(m),
the Committee shall grant and administer all performance-based awards
under (b)(2) above with the intent of meeting the criteria of Code Section
162(m) for performance-based compensation. To this end, the outcome of all
targeted goals shall be substantially uncertain on the date of grant; the
goals shall be established no later than 90 days following the
commencement of service to which the goals relate; the minimum period for
attaining each performance goal shall be one year; and the Committee shall
certify at the conclusion of the performance period whether the
performance-based goals have been attained. Such certification may be made
by noting the attainment of the goals in the minutes of the Committee's
meetings.
(d) Except as otherwise determined by the Committee, all rights and title
to restricted stock granted to a participant under the Plan shall
terminate and be forfeited to the Company upon failure to fulfill all
conditions and restrictions applicable to such restricted stock.
(e) Except for the restrictions set forth in this Plan and those specified
by the Committee in any restricted stock agreement, a holder of restricted
stock shall possess all the rights of a holder of the Company's Common
Stock (including voting and dividend rights); provided, however, that
prior to vesting the certificates representing such shares of restricted
stock (and the amount of any dividends issued with respect thereto) shall
be held by the Company for the benefit of the participant and the
participant shall deliver to the Company a stock power executed in blank
covering such shares. As the shares vest, certificates representing such
shares shall be released to the participant. Until such time as the
restricted shares vest, all dividends payable on such shares shall be
reinvested in the Company's Common Stock, treated as restricted stock
until the underlying restricted shares vest, and, upon such vesting,
released to the participant. If the underlying shares do not vest, all
shares purchased with the reinvested dividends shall be forfeited.
(f) All other provisions of the Plan not inconsistent with this section
shall apply to restricted stock or the holder thereof, as appropriate,
unless otherwise determined by the Committee.
8. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
The Committee may, in its discretion, award stock appreciation rights to
any eligible employee of the Company either independent of or related to ISOs or
NQSOs then being granted to him, or to be related to one or more such options
theretofore granted and at the time held unexercised by such employee.
If an independent SAR is granted to a participant, it shall be exercisable
at such time and under such terms and conditions as may be set forth in the SAR
agreement. Upon exercise, the participant shall receive an amount (in cash or in
Common Stock, or a combination thereof, all in the sole discretion of the
Committee) equal to 100% of the excess of:
- --------------------------------------------------------------------------------
Page 32
<PAGE>
(a) the fair market value per share of the Company's Common Stock on the
date of exercise of such right, multiplied by the number of shares
with respect to which the right is being exercised, over
(b) the aggregate option exercise price for such number of shares.
If a SAR is granted in conjunction with an option, it shall entitle him to
receive payment from the Company in accordance with the following provisions,
the terms of the SAR agreement and such additional terms and conditions as the
Committee shall determine from time to time:
(c) A related SAR granted hereunder may be made part of an option at the
time of grant of the option or at any time thereafter up to six
months prior to the expiration of the option.
(d) Such related SAR will entitle the holder to elect to receive, in
lieu of exercising the option to which it relates, an amount (in
cash or in Common Stock, or a combination thereof, all in the sole
discretion of the Committee) equal to 100% of the excess of:
(1) the fair market value per share of the Company's Common Stock
on the date of exercise of such right, multiplied by the
number of shares with respect to which the right is being
exercised, over
(2) the aggregate option exercise price for such number of shares.
(e) Such related SAR will be exercisable only to the extent that it has
a positive value and the option to which it relates is exercisable,
except that no SAR shall be exercisable during the first six (6)
months after the date of its grant.
(f) Upon exercise of a related SAR, the option (or portion thereof) with
respect to which such right is exercised shall be surrendered and
shall not thereafter be exercisable.
(g) The exercise of a related SAR will reduce the number of shares
purchasable pursuant to the related option and available under the
Plan to the extent of the number of shares with respect to which the
right is exercised.
9. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Company shall not be required to deliver any certificate upon the
grant, vesting or exercise of any award or option until it has been furnished
with such opinion, representation or other document as it may reasonably deem
necessary to insure compliance with any law or regulation of the Securities and
Exchange Commission or any other governmental authority having jurisdiction
under this Plan. Certificates delivered upon such grant or exercise may bear a
legend restricting transfer absent such compliance. Each award shall be subject
to the requirement that, if at any time the Committee shall determine, in its
discretion, that the listing, registration or qualification of the shares
subject to such award upon any securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in
- --------------------------------------------------------------------------------
Page 33
<PAGE>
connection with, the granting of such awards or the issue or purchase of shares
thereunder, such awards may not vest or be exercised in whole or in part unless
such listing, registration, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Committee in
the exercise of its reasonable judgment.
10. IMPACT OF TERMINATION OF EMPLOYMENT
(a) Options
If the employment of a participant terminates by reason of the
participant's disability or death, any option may be exercised, in the case of
disability, by the participant or, in the case of death, the participant's
designated beneficiary (or personal representative if there is no designated
beneficiary) at any time prior to the earlier of the expiration date of the
option or the expiration of one year after the date of disability or death, but
only if, and to the extent that the participant was entitled to exercise the
option at the date of disability or death. If the employment of a participant
terminates on account of retirement, all of the participant's outstanding
options shall become immediately vested and these options together with
previously vested but unexercised options may be exercised prior to the earlier
of the expiration date of the option or the expiration of 13 months from the
date of retirement. For this purpose, "retirement" means any termination of
employment on or after a participant is entitled to receive an early retirement
benefit under any defined benefit pension plan maintained by the Company or an
affiliate in which the participant has any accrued benefit. If the participant
does not have an accrued benefit in any such plan, "retirement" means the
participant's termination of employment on or after he has reached age 55. Upon
termination of the participant's employment for any reason other than
retirement, disability or death, all nonvested options held by the participant
shall be forfeited and any options that are vested on the date of termination
may be exercised prior to the earlier of the expiration date of the option or
the expiration of 90 days from the date of termination. An option that remains
exercisable after the expiration of three months from termination of employment
shall be treated as a NQSO after three months even if it would have been treated
as an ISO if exercised within three months of termination. Notwithstanding the
foregoing, an option may not be exercised after retirement if the Committee
reasonably determines that the termination of employment of such participant
resulted from willful acts, or failure to act, by the participant detrimental to
the Company or any of its subsidiaries.
(b) SARs
A participant or, in the event of his death, his beneficiary, may
exercise SARs under the same circumstances and according to the same terms
and conditions as apply to the exercise of options following termination
of employment.
(c) Restricted Stock Grants
(i) Passage of Time Vesting. If a participant has been awarded
restricted stock whose vesting is conditioned solely on the passage of
time, any termination of employment for any reason, shall result in the
forfeiture of all restricted stock awards that were not vested prior to
the termination of employment except as otherwise provided by the
Committee.
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<PAGE>
(ii) Performance-Based Vesting. If a participant has been awarded
restricted stock whose vesting is based solely on the attainment of
performance-based goals or partly on the attainment of performance-based
goals and partly on the passage of time, any termination of employment
except death, disability or retirement on or after age 62 (or early
retirement after age 55) shall result in the forfeiture of all restricted
stock awards that were not vested prior to the termination of employment.
A participant who terminates employment on account of death, disability or
retirement may, if the performance-based criteria are eventually attained,
be awarded (or, in the event of death, the participant's designated
beneficiary or personal representative if there is no designated
beneficiary shall be awarded) up to a pro rata portion of the restricted
shares based on the participant's length of service as of his or her
termination of employment over the length of the award period ending on
the date the performance-based criteria are satisfied (or the passage of
time would have been satisfied, if later, for an award based in part on
performance goals and in part on the passage of time). The Committee shall
have the discretion whether to grant a full pro rata portion of the
restricted shares, a lesser portion or no shares at all under this
subsection (c)(ii).
(d) Acts Not Constituting Termination of Employment.
Unless otherwise determined by the Committee, an authorized leave of
absence shall not constitute a termination of employment for purposes of
this Plan. In addition, participants who transfer employment within the
Financial Institutions group of companies shall not be considered to have
terminated employment. Any such transferred participants shall remain
eligible to exercise previously granted options and to vest in restricted
stock awards in accordance with their terms as if no termination occurred
and shall be eligible to receive additional awards pursuant to the terms
of employment with their new employer.
(e) Effect on Outstanding Loans
If employment of the participant terminates for any reason other
than disability, retirement or death, any unpaid balance remaining on any
promissory note used in the purchase of stock shall become due and payable
upon not less than three months' notice from the Company, which notice may
be given at any time after such termination; provided, however, that,
unless the note has an earlier due date, such unpaid balance on such
promissory note shall become due and payable five years from the date of
such termination. In the case of termination due to death, any unpaid
balance remaining on such note on the date of death shall become due and
payable one year from such date.
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<PAGE>
11. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Company by reason of
any stock dividend, stock split, recapitalization, reorganization, merger,
consolidation, splitup, combination, or exchange of shares, or rights offering
to purchase Common Stock at a price substantially below fair market value, or of
any similar change affecting the Common Stock, the number and kind of shares
authorized under Section 4, the number and kind of shares which thereafter are
subject to an award under the Plan and the number and kind of unexercised
options and unvested shares set forth in awards under outstanding agreements and
the price per share shall be adjusted automatically consistent with such change
to prevent substantial dilution or enlargement of the rights granted to, or
available for, participants in the Plan.
12. WITHHOLDING TAXES
All cash payments upon the exercise of SARs are subject to the customary
federal, state and/or local income and employment taxes to which compensation
payments are subject. Whenever the Company proposes or is required to issue or
transfer shares of Common Stock under the Plan, or whenever restricted stock
vests, the Company shall have the right to require the recipient to remit to the
Company an amount sufficient to satisfy any federal, state and/or local income
and employment withholding tax requirements prior to the delivery of any
certificate or certificates for such shares or to take any other appropriate
action to satisfy such withholding requirements. Notwithstanding the foregoing,
subject to such rules as the Committee may promulgate and compliance with any
requirements under Rule 16b-3, the recipient may satisfy such obligation in
whole or in part by electing to have the Company withhold shares of Common Stock
from the shares to which the recipient is otherwise entitled.
13. NO EMPLOYMENT RIGHTS
The Plan and any awards granted under the Plan shall not confer upon any
participant any right with respect to continuance as an employee of the Company
or any subsidiary, nor shall they interfere in any way with the right of the
Company or any subsidiary to terminate the participant's position as an employee
at any time.
14. RIGHTS AS A SHAREHOLDER
The recipient of any option under the Plan shall have no rights as a
shareholder with respect thereto unless and until certificates for the
underlying shares of Common Stock are issued to the recipient. The recipient of
a restricted stock grant shall have all rights of a shareholder except as
otherwise limited by the terms of this Plan.
15. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the Committee or by
the shareholders of the Company, except that the Committee may not, without
approval of the shareholders, materially increase the benefits accruing to
participants under the Plan, increase the maximum number of shares as to which
awards may be granted under the Plan, change the basis for making
performance-based awards for participants whose compensation is subject to
Section 162(m), change the minimum exercise price of options, change the class
of eligible persons, extend the period
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<PAGE>
for which awards may be granted or exercised, or withdraw the authority to
administer the Plan from the Committee or a committee of the Committee
consisting solely of outside directors unless the Board determines that inside
directors may serve on the Committee. Notwithstanding the foregoing, to the
extent permitted by law, the Committee may amend the Plan without the approval
of shareholders, to the extent it deems necessary to cause the Plan to comply
with Securities and Exchange Commission Rule 16b3 or any successor rule, as it
may be amended from time to time. Except as required by law, no amendment,
modification, or termination of the Plan may, without the written consent of a
participant to whom any award shall theretofore have been granted, adversely
affect the rights of such participant under such award.
16. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in the event of a
change in control of the Company (as defined in subsection (c) below), all of a
participant's restricted stock awards shall become immediately vested to the
same extent as if all restrictions had been satisfied and all options shall
become immediately vested and exercisable, unless directed otherwise by a
resolution of the Committee adopted prior to and specifically relating to the
occurrence of such change in control.
(b) In the event of a change in control each participant holding an
exercisable option (i) shall have the right at any time thereafter during the
term of such option to exercise the option in full notwithstanding any
limitation or restriction in any option agreement or in the Plan, and (ii) may,
subject to Committee approval and after written notice to the Company within 60
days after the change in control, or, if the participant is an officer subject
to Section 16 of the Exchange Act and to the extent required to exempt the
transaction under Rule 16b-3, during the period beginning on the third business
day and ending on the twelfth business day following the first release for
publication by the Company after such change of control of a quarterly or annual
summary statement of earnings, which release occurs at least six months
following grant of the option, whichever period is longer, receive, in exchange
for the surrender of the option or any portion thereof to the extent the option
is then exercisable in accordance with clause (i), an amount of cash equal to
the difference between the fair market value (as determined by the Committee) on
the date of surrender of the Common Stock covered by the option or portion
thereof which is so surrendered and the option price of such Common Stock under
the option.
(c) For purposes of this section, "change in control" means:
1) there shall be consummated
i. any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to which
any shares of the Company's common stock are to be converted into
cash, securities or other property, provided that the consolidation
or merger is not with a corporation which was a whollyowned
subsidiary of the Company immediately before the consolidation or
merger; or
ii. any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all,
of the assets of the Company; or
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<PAGE>
2) the shareholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company; or
3) any person (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) shall become the beneficial owner (within the meaning of
Rule 13d3 under the Exchange Act), directly or indirectly, of 20% or more
of the Company's then outstanding common stock, provided that such person
shall not be a wholly owned subsidiary of the Company immediately before
it becomes such 20% beneficial owner; or
4) individuals who constitute the Company's Board of Directors on the date
hereof (the "Incumbent Board") cease for any reason to constitute at least
a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election
by the Company's shareholders, was approved by a vote of at least three
quarters of the directors comprising the Incumbent Board (either by a
specific vote or by approval of the proxy statement of the Company in
which such person is named as a nominee for director, without objection to
such nomination) shall be, for purposes of this clause (d), considered as
though such person were a member of the Incumbent Board.
17. EFFECTIVE DATE
The effective date of the Plan shall be the date this Plan is approved by
the affirmative vote of the owners of a majority of the Company's outstanding
shares of Common Stock.
18. DEFINITIONS
Any terms or provisions used herein which are defined in Sections 83,
162(m), 421, or 422 of the Internal Revenue Code as amended, or the regulations
thereunder or corresponding provisions of subsequent laws and regulations in
effect at the time awards are made hereunder, shall have the meanings as therein
defined.
19. GOVERNING LAW
To the extent not inconsistent with the provisions of the Internal Revenue
Code that relate to awards, this Plan and any award agreement adopted pursuant
to it shall be construed under the laws of the State of New York.
Dated: May 11, 1999 FINANCIAL INSTITUTIONS, INC.
By: /s/ Peter G. Humphrey
---------------------
Peter G. Humphrey
Title: President & CEO
Date of Shareholder Approval: May 27, 1999
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EX-10.2
(Exhibit 10.2)
FINANCIAL INSTITUTIONS, INC.
1999 DIRECTORS' STOCK INCENTIVE PLAN
Financial Institutions, Inc. hereby establishes the Financial
Institutions, Inc. 1999 Directors' Stock Incentive Plan (the "Plan") as follows:
1. PURPOSE
The purpose of the Plan is to enable Financial Institutions, Inc. (the "Company)
to attract and retain outside directors and provide them with an incentive to
maintain and enhance the Company's long term performance record. It is intended
that this purpose will best be achieved by granting eligible directors
nonqualified stock options ("options" or "awards") under this Plan pursuant to
the rules set forth in Section 83 of the Internal Revenue Code, as amended from
time to time.
2. ADMINISTRATION
The Plan shall be administered by the Company's Board of Directors (the
"Board"). Subject to the provisions of the Plan, the Board shall possess the
authority, in its discretion, (a) to prescribe the form of the stock option
agreements, including any appropriate terms and conditions applicable to these
awards, and to make any amendments to such agreements or awards; (b) to
interpret the Plan; (c) to make and amend rules and regulations relating to the
Plan; and (d) to make all other determinations necessary or advisable for the
administration of the Plan. The Board's determinations shall be conclusive and
binding. No member of the Board shall be liable for any action taken or decision
made in good faith relating to the Plan or any award granted hereunder.
3. ELIGIBLE DIRECTORS
Members of the Board of Directors of the Company and the directors of its
subsidiaries who, in either case, are not also employees of the Company or its
subsidiaries are eligible to participate in this Plan.
4. SHARES AVAILABLE
An aggregate of 500,000 shares of the Common Stock (par value $.01 per share) of
the Company (subject to substitution or adjustment as provided in Section 8
hereof) shall be available for the grant of awards under the Plan. Such shares
may be authorized and unissued shares. If an option expires, terminates or is
cancelled without being exercised, new options may thereafter be granted
covering such shares. No award may be granted more than ten years after the
effective date of the Plan.
5. TERMS AND CONDITIONS OF OPTIONS
Each option granted under the Plan shall be evidenced by an option agreement in
such form as the Board shall approve from time to time, which agreement shall
conform with this Plan and contain the following terms and conditions:
(a) Number of Shares. As soon as administratively practicable on or
following the Company's initial public offering and following the
date of each annual meeting of shareholders thereafter, each
newly-elected or continuing eligible director of the Company shall
receive an option to purchase shares of the Company's Common Stock.
An eligible director
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<PAGE>
of the Company who begins Board service on a date other than the
date of an annual meeting of shareholders shall receive a pro rata
grant to cover the partial year remaining to the date of the next
annual meeting of shareholders. The number of shares subject to such
option shall be 1000 multiplied by a fraction (not to exceed 1.0),
the numerator of which is the number of full or partial months in
the period commencing on the first day of the month following the
new Board member's appointment and ending on the next annual meeting
of shareholders and the denominator of which is twelve. Any
fractional share shall be rounded up to the next highest whole
number of shares.
An eligible director of a subsidiary of the Company shall be granted
such number of options at such times and under such terms and
conditions consistent with the subsequent provisions of this Plan as
the Compensation Committee of Company's Board of Directors, or the
full Board, may in its sole discretion determine to grant. The
number of such options as may be granted and their terms and
conditions need not be uniform among the directors of the different
subsidiaries or among the directors on a single subsidiary board.
(b) Exercise Price. The exercise price under each option shall equal
the fair market value of the Common Stock at the time such option is
granted.
(c) Duration of Option. Each option by its terms shall not be
exercisable after the expiration of ten years from the date such
option is granted.
(d) Options Nontransferable. Each option by its terms shall not be
transferable by the participant otherwise than by will or the laws
of descent and distribution, and shall be exercisable, during the
participant's lifetime, only by the participant, the participant's
guardian or the participant's legal representative.
(e) Exercise Terms. Each option granted under the Plan shall become
exercisable pursuant to a vesting schedule set forth in the option
agreement. Options may be partially exercised from time to time
during the period extending from the time they first become
exercisable until the tenth anniversary of the date of grant.
(f) Payment of Exercise Price. An option shall be exercised upon
written notice to the Company accompanied by payment in full for the
shares being acquired. The payment shall be made in cash, by check
or, if the option agreement so permits, by delivery of shares of
Common Stock of the Company registered in the name of the
participant, duly assigned to the Company with the assignment
guaranteed by a bank, trust company or member firm of the New York
Stock Exchange, or by a combination of the foregoing. Any such
shares so delivered shall be deemed to have a value per share equal
to the fair market value of the shares on such date. For this
purpose, fair market value shall equal the closing price of the
Company's Common Stock on the listing exchange on the date the
option is exercised, or, if there was no trading in such stock on
the date of such exercise, the closing price on the last preceding
day on which there was such trading.
6. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Company shall not be required to deliver any certificate upon the grant of
any award, the exercise of an option or the satisfaction of any condition with
respect to any award until it has been furnished with such opinion,
representation or other document as it may reasonably deem necessary to insure
compliance with any law or regulation of the Securities and Exchange Commission
or any other governmental
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<PAGE>
authority having jurisdiction under this Plan. Certificates delivered upon such
grant, exercise or satisfaction of any condition may bear a legend restricting
transfer absent such compliance. Each award shall be subject to the requirement
that, if at any time the Board shall determine, in its discretion, that the
listing, registration or qualification of the shares subject to such award upon
any securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, the granting of such award or the issue or
purchase of shares thereunder, such award may not be granted or exercised in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Board of Directors in the exercise of its reasonable judgment.
7. TERMINATION OF EMPLOYMENT
If a director dies, either before or after termination as a director, resigns
from the Board as a result of a conflict of interest or is removed from the
Board for cause, any option may be exercised by the director or by the
director's personal representative, as the case may be, at any time prior to the
earlier of the expiration date of the option or the first anniversary of the
director's date of death, resignation or removal but only if, and to the extent
that, the director was entitled to exercise the option at the date of death,
resignation or removal. If a director's employment as a director terminates for
any reason other than death, resignation due to a conflict or removal for cause,
option rights shall continue to vest in accordance with the terms of the option
agreement without regard to the termination of employment and may be exercised
by the director pursuant to the terms of that agreement.
8. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Company by reason of any
stock dividend, stock split, recapitalization, reorganization, merger,
consolidation, splitup, combination, or exchange of shares, or rights offering
to purchase Common Stock at a price substantially below fair market value, or of
any similar change affecting the Common Stock, the number and kind of shares
authorized under Section 4, the number and kind of shares which thereafter are
subject to an award under the Plan and the number and kind of shares set forth
in options under outstanding agreements and the price per share shall be
adjusted automatically consistent with such change to prevent substantial
dilution or enlargement of the rights granted to, or available for, participants
in the Plan.
9. NO EMPLOYMENT RIGHTS
The Plan and any awards granted under the Plan shall not confer upon any
director any right with respect to continuance as a director of the Company, nor
shall they interfere in any way with any right the Company may have to terminate
the director's position as a director at any time.
10. RIGHTS AS A SHAREOWNER
The recipient of any option under the Plan shall have no rights as a shareowner
with respect thereto unless and until certificates for shares of Common Stock
are issued to the recipient.
11. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the shareholders of the
Company or by the Company's Board of Directors, provided that Plan provisions
relating to the amount, price and timing of awards may not be amended more than
once every six months other than to comport with changes in the Internal Revenue
Code or the regulations thereunder and provided further that the Board may not,
without approval of the shareowners, materially increase the benefits accruing
to participants under the Plan, increase the maximum number of shares as to
which awards may be granted
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<PAGE>
under the Plan, change the minimum exercise price, change the class of eligible
persons, extend the period for which options may be granted or exercised, or
withdraw the authority to administer the Plan from the Board or a Committee of
the Board. Notwithstanding the foregoing, to the extent permitted by law, the
Board may amend the Plan without the approval of shareowners, to the extent it
deems necessary to cause the Plan to comply with Securities and Exchange
Commission Rule 16b3 or any successor rule, as it may be amended from time to
time. Except as required by law, no amendment, modification, or termination of
the Plan may, without the written consent of a director to whom any option shall
theretofore have been granted, adversely affect the rights of such director
under such option.
12. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in the event of a change in
control of the Company (as defined in subsection (c) below), all of a
participant's options shall become immediately vested and exercisable unless
directed otherwise by a resolution of the Board adopted prior to and
specifically relating to the occurrence of such change in control.
(b) In the event of a change in control each participant holding an exercisable
option (i) shall have the right at any time thereafter during the term of such
option to exercise the option in full notwithstanding any limitation or
restriction in any option agreement or in the Plan, and (ii) may, subject to
Board approval and after written notice to the Company within 60 days after the
change in control, or during the period beginning on the third business day and
ending the twelfth business day following the first release for publication by
the Company after such change of control of a quarterly or annual summary
statement of earnings, which release occurs at least six months following grant
of the option, whichever period is longer, receive, in exchange for the
surrender of the option or any portion thereof to the extent the option is then
exercisable in accordance with clause (i), an amount of cash equal to the
difference between the fair market value (as determined by the Board) on the
date of surrender of the Common Stock covered by the option or portion thereof
which is so surrendered and the option price of such Common Stock under the
option.
(c) For purposes of this section "change in control" means:
1) there shall be consummated
i. any consolidation or merger of the Company in which the
Company is not the continuing or surviving corporation or
pursuant to which any shares of the Company's common stock are
to be converted into cash, securities or other property,
provided that the consolidation or merger is not with a
corporation which was a whollyowned subsidiary of the Company
immediately before the consolidation or merger; or
ii. any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company; or
2) the shareholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or
3) any person (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
shall become the beneficial owner (within the meaning of Rule 13d3 under
the Exchange Act), directly or indirectly, of 20% or more of the Company's
then outstanding common stock, provided that such person shall not be a
wholly owned subsidiary of the Company immediately before it becomes such
20% beneficial owner; or
4) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
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<PAGE>
thereof, provided that any person becoming a director subsequent to the
date hereof whose election, or nomination for election by the Company's
shareowners, was approved by a vote of at least three quarters of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Company in which such person is
named as a nominee for director, without objection to such nomination)
shall be, for purposes of this clause (d), considered as though such
person were a member of the Incumbent Board.
13. EFFECTIVE DATE
The effective date of the Plan shall be the date this Plan is approved by the
affirmative vote of the owners of a majority of the Company's outstanding shares
of Common Stock.
14. DEFINITIONS
Any terms or provisions used herein which are defined in Section 83 of the
Internal Revenue Code as amended, or the regulations thereunder or corresponding
provisions of subsequent laws and regulations in effect at the time options are
made hereunder, shall have the meanings as therein defined.
15. GOVERNING LAW
To the extent not inconsistent with the provisions of the Internal Revenue Code
that relate to nonqualified stock options and stock grants, this Plan and any
agreement adopted pursuant to it shall be construed under the laws of the State
of New York.
Dated: May 11, 1999 FINANCIAL INSTITUTIONS, INC.
By: /s/ Peter G. Humphrey
---------------------
Peter G. Humphrey
Title: President & CEO
Date of Shareholder Approval:
May 27, 1999
- -----------------------------
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EX-10.3
(Exhibit 10.3)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as of
the 25th day of June, 1999, between Financial Institutions, Inc. ("Employer"), a
bank chartered under the laws of New York having its principal office at 220
Liberty Street, Warsaw, New York 14569 and Peter G. Humphrey ("Executive"), an
individual residing at 230 W. Buffalo Street, Warsaw, Nwe York 14569.
WHEREAS, Employer wishes to employ Executive in an executive capacity, as its
President, and Executive wishes to accept such employment on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants
herein contained, Employer and Executive hereby agree as follows:
1. Effective Date; Term.
1.1 Effective Date. This Agreement shall be effective commencing on the date
hereof (the "Effective Date").
1.2 Initial Term. Employer employs Executive, and Executive accepts such
employment, for a three (3) year period commencing on the Effective Date (the
"Initial Term").
1.3 Renewal Term. This Agreement will automatically renew for successive three
year terms (each a "Renewal Term") upon the expiration of the Initial Term or a
subsequent Renewal Term unless either party provides written notice to the other
at least ninety (90) days before the end of the Initial Term or Renewal Term
that such party does not intend to renew this Agreement upon the expiration
thereof.
1.4 Termination. This Agreement may be terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this Agreement.
2. Scope of Employment.
2.1 Position and Duties. During the term of this Agreement, Employer shall
employ Executive to serve as the President of Employer. In such capacity,
Executive shall perform such executive, administrative and operational duties as
may be assigned to Executive from time to time by the Board of Directors of
Employer.
2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the
best of Executive's ability and to devote Executive's entire business time,
attention and efforts to the interests and business of Employer, its
subsidiaries and their affiliates.
2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to
and perform all his duties in accordance with applicable laws, rules and
regulations and the written policies and procedures of Employer in effect from
time to time.
3. Compensation, Benefits and Expenses.
3.1 Base Salary. Except as otherwise provided in this Agreement, during the
period from the Effective Date through December 31, 1999 (the "First Year")
Employer shall pay to Executive a base salary at a rate of $282,000 per year
(the "Base Salary"). The Base Salary may be increased, in the sole discretion of
Employer,
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<PAGE>
during the second and third years of the terms of this Agreement, but may not be
decreased. Employer shall pay the Base Salary to Executive in equal installments
pursuant to Employer's standard payroll policies and Executive's salary shall be
subject to such withholding or deductions as may be mutually agreed between
Employer and Executive or required by law.
3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may
receive bonuses as follows:
3.2.1 If the Employer meets or exceeds its budget for revenue and profit,
the Executive is eligible for a bonus which shall be determined by the
Compensation Committee of the Board of Directors of Employer.
3.2.3 The bonus earned by Executive during the term of this Agreement, if
any, shall be paid to Executive in a lump sum promptly after the
Employer's audited annual financial results are publicly disclosed.
3.2.4 Employer does not guarantee that any bonus will be awarded or paid
to Executive. Payment of any bonus shall be subject to such withholding or
deductions as may be mutually agreed between Employer and Executive or
required by law.
3.3 Incentive Stock Plan Benefits. During the period of his employment,
Executive shall be entitled to receive grants of options under any incentive
stock plan operated by Financial Institutions, Inc. ("FII") for its employees
and those of its subsidiaries, in such amounts as may be determined by the
appropriate Committee of the Board of Directors or the Board of Directors of
Employer, or by the FII Compensation Committee.
3.4 Fringe Benefits. During the period of his employment, Executive shall be
entitled to participate in FII's plans for the welfare and benefit of its
employees to the extent Executive satisfies the requirements provided in such
plans, health and other qualifications for participation. In the event Executive
becomes a "Retired Early Employee" as defined in subparagraph 4.4.1 and 4.4.2,
or is terminated for reasons other than those set forth in subparagraphs 4.1.3,
4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as
if Executive continued to remain an employee for the remaining term of this
Agreement or until Executive obtains a position offering comparable benefits,
whichever occurs first.
3.5 Vacation and Holidays. During the term of this Agreement, Executive shall
accrue paid vacation in accordance with Employer's policies of four (4) weeks
per year. Executive shall be entitled to take accrued vacation days and paid
holidays in accordance with Employer's policies applicable to its employees
generally. Executive may not carry forward vacation days from year to year.
3.6 Expenses. During the term of this Agreement, Employer authorizes Executive
to incur reasonable and necessary out-of-pocket business expenses in the course
of performing his duties and rendering services hereunder in accordance with
Employer's policies with respect thereto, and Employer shall reimburse Executive
for all such expenses, provided (i) such expenses and the purpose for which they
were incurred, are in accordance with Employer's policies, and (ii) Executive
timely submits to Employer expense reports and substantiation of the expenses in
accordance with Employer's policies.
3.7 Country Club Dues and Automobile Expenses. During the term of this
Agreement, in the discretion of the Board of Directors, Employer shall reimburse
Executive for monthly membership dues at a country club of Executive's choosing,
and shall provide Executive with use of a suitable automobile.
4. Termination.
4.1 Termination. Executive's Employment by Employer shall terminate at the
expiration of the Initial Term or any Renewal Term provided timely notice is
given
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as provided in Section 1.3 and shall terminate prior to the expiration of the
then current term on the earlier of:
4.1.1 the death of Executive;
4.1.2 the date on which Executive is (i) determined to be "permanently
disabled" as defined under the disability insurance policy covering
Executive, or (ii) if Executive is not covered by any such disability
policy, Executive is determined to be "totally disabled" by the Board of
Directors of Employer based upon the advice of a board certified physician
reasonably acceptable to Employer and Executive or his legal
representative, which may include a determination that Executive is
unable, because of physical or mental illness or incapacity or otherwise,
to fulfill his duties under this Agreement for six consecutive months or
appears unable to perform such duties for an indefinite period of time;
4.1.3 the commission by Executive of (i) a felony conviction which is
final and non-appealable, (ii) a breach of fiduciary duty, (iii) a
material act of dishonesty, fraud or misrepresentation, or (iv) any act of
moral turpitude which the Board of Directors determines has or may be
reasonably expected to have a material detrimental impact on Employer's
business or operations or prevent, because of its demonstrated or
demonstrable effect on employees, regulatory agencies or customers,
Executive from effectively performing his executive and other duties under
this Agreement;
4.1.4 Executive neglects to satisfactorily perform the duties which
Executive is required to perform under this Agreement or performs such
duties other than in good faith, as determined by the Board of Directors.
The Board will provide a written notice to the Executive, specifying the
unsatisfactory performance and suggest what must be done to improve and
maintain such performance. The written notice will also specify the time
period (considered probationary period) given the Executive to correct
such conduct.
4.1.5 the termination of Executive's employment by Employer during the
term of this Agreement for any reason without cause other than pursuant to
Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4;
4.1.6 Executive's resignation or retirement; or
4.1.7 the mutual consent to such termination in writing by Executive and
Employer.
4.2 Time of Termination. Executive's employment with Employer shall terminate
immediately upon Executive's death, upon written notice of termination from
Employer or Executive upon the occurrence of an event specified in Sections
4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified
in Section 4.1.4, upon the execution of a writing terminating Executive's
employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or
a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable,
the "Termination Date"). Employer's obligations under this Agreement shall
terminate upon such termination of employment without any further action by the
parties except to the extent specifically provided herein.
4.3 Effect of Termination of Employment. Following the Termination Date:
4.3.1 Executive shall return all property of Employer as provided in
Section 6 of this Agreement;
4.3.2 Executive's salary shall cease to accrue;
4.3.3 subject to Section 4.4, the Board of Directors shall determine an
appropriate bonus to pay to Executive as his bonus or other incentive
compensation for the period through the Termination Date computed
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consistently with the manner in which Executive's bonus or incentive
compensation would have been determined for such period if Executive's
employment had not terminated;
4.3.4 Executive's participation in FII's benefit plans shall cease except
as required by law, the terms of the plan(s) or as provided in
subparagraph 3.4 of this Agreement;
4.3.5 Executive shall cease to accrue vacation days and shall be paid for
unused vacation time accrued since the beginning of the then current
Initial or Renewal Term in accordance with Employer's policies applicable
to employees generally; and
4.3.6 Executive shall submit any claims for reimbursement of business
expenses incurred in accordance with Section 3.5 within the time period
required under Employer's policies generally or Employer will not be
obligated to reimburse such expenses.
4.3.7 If this Agreement is terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this
Agreement, the Employer shall have no further liability to Executive
hereunder, except as explicitly stated in this Agreement, other than for
earned but unpaid compensation and those benefits (accrued but unpaid) to
which Executive is entitled under this Agreement through the date of
termination, provided, however, that in the event Executive becomes a
"Retired Early Employee" as defined in subparagraph 4.4.1 or is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, health insurance and dental benefits to
Executive will be continued as if Executive continued to remain an
employee for the remaining term of this Agreement or until Executive
obtains another position offering comparable benefits, whichever occurs
first.
4.3.8 If, during the term of this Agreement, the Executive is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the two year period
after the Termination Date, make equal monthly payments or a single lump
sum payment to the Executive (which shall not be deemed base annual salary
payments) in an amount such that the present value of all such payments,
determined as of the Termination Date, equals the sum of two times the
Base Salary Amount, as such term is defined in subparagraph 4.4.7 below,
plus the average of the annual incentive compensation paid by Employer to
Executive, as determined over the most recent two (2) tax years ending
before the date on which the termination occurred. It shall be at the
discretion of the Compensation Committee, as to whether the payment is
made as a single lump sum payment or equal monthly payments.
4.4. Change of Control and Change of Authority
4.4.1 Retired Early Employee. If a Change of Control and Change of
Authority, as such terms are defined in subparagraph 4.4.7 below, occurs
during the term of the Executive's employment under this Employment
Agreement, either the Executive, on the one hand, or Employer, on the
other, may elect by written notice, given to the other party or parties,
at any time within twelve (12) months after such Change of Control and
Change of Authority, to terminate the employment of the Executive by
Employer, whereupon the Executive will become a "Retired Early Employee,"
and will be entitled to receive such payments as are provided hereafter in
this Section 4.4. Such election and the termination of the Executive's
employment shall become effective on the first day of the second calendar
month commencing after delivery of the notice or on such earlier date as
the Executive in his sole discretion may specify (the "Effective Date").
4.4.2 Cash Payments. If the Executive should become a Retired Early
Employee hereunder, Employer shall, during the period commencing on the
Effective Date and ending three years thereafter (the "Pay-Out Period"),
make
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equal monthly payments or a single lump sum payment to the Executive
(which shall not be deemed base annual salary payments) in an amount such
that the present value of all such payments, determined as of the
Effective Date, equals the sum of three times the Base Salary Amount, as
such term is defined in subparagraph 4.4.7 below, plus the average of the
annual incentive compensation paid by Employer to Executive, as determined
over the most recent three (3) tax years ending before the date on which
the Change of Control and Change of Authority occurred. It shall be at the
discretion of the Compensation Committee, as to whether the payment is
made as a single lump sum payment or equal monthly payments. The
payment(s) provided for in subparagraph 4.3.8 do not apply to Retired
Early Employees who receive cash payment(s) pursuant to this subparagraph.
If at any time during the Pay-Out Period the Compensation Committee of the
Board in its sole discretion shall determine, upon application of the
Retired Early Employee supported by substantial evidence, that the Retired
Early Employee is then under a severe financial hardship resulting from
(i) a sudden and unexpected illness or accident of the Retired Early
Employee or any of his dependents (as defined in section 152(a) of the
Internal Revenue Code), (ii) loss of the Retired Early Employee's property
due to casualty, or (iii) other similar extraordinary and unforeseeable
circumstance arising as a result of events beyond the control of the
Retired Early Employee, Employer shall make available to the Retired Early
Employee, in one (1) lump sum, an amount up to but not greater than the
present value of all monthly payments remaining to be paid to him in the
Pay-Out Period, calculated as of the date of such determination by the
Compensation Committee of the Board, for the purpose of relieving such
severe financial hardship to the extent the same has not been or may not
be relieved by (xi) reimbursement or compensation by insurance or
otherwise, (xii) liquidation of the Retired Early Employee's assets (to
the extent such liquidation would not itself cause severe financial
hardship), or (xiii) distributions from other benefit plans. If (a) the
lump sum amount thus made available is less than (b) the present value of
all such remaining monthly payments, Employer shall continue to pay to the
Retired Early Employee monthly payments for the duration of the Pay-Out
Period, but from such date forward such monthly payments will be in a
reduced amount such that the present value of all such reduced payments
will equal the difference between (b) and (a), above. The Retired Early
Employee may elect to waive any or all payments due him under this
subparagraph.
4.4.3 Acceleration of Stock Options. All options and other rights that
Executive may hold to purchase or otherwise acquire Common Stock of FII
shall immediately become exercisable in full for the total number of
shares that are or might become purchasable thereunder, in each case
without further condition or limitation except the giving of notice of
exercise and the payment of the purchase price thereunder (but without
amendment of the plan under which they were issued). At his discretion,
Executive may elect to surrender to Employer his rights in any such
options and rights held by him and, upon that surrender, Employer shall
pay him an amount in cash equal to the aggregate spread between the
exercise prices of all those options and rights and the value of the
Common Stock purchasable thereunder (or of any other security into which
the Common Stock has been exchanged or converted) as of the date of the
termination of employment, the value to be determined by the reported last
sale price of the Common Stock or that other security (or the mean between
the reported last bid and asked prices) on that date on NASDAQ (or, if it
is not NASDAQ, on whatever may then be the principal exchange or quotation
system on which the Employer's Common Stock or that other security is
traded at that time).
4.4.4 Life Insurance Policies. Employer shall repay any policy loans
previously taken on the Employer's insurance policies on Executive's life
(provided that the directors of Employer were given written notice
promptly after the making of any such loans which were made while
Executive was the president and chief executive officer of Employer), and
then shall transfer to Executive any and all of its right, title, and
interest in and to all Employer life insurance policies on Executive's
life (and upon that transfer, Executive shall be deemed to have released
Employer from any and all
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obligations it then owes to him to maintain and pay premiums on those
policies, all other provisions of any agreements under which those
policies were agreed to be maintained, however, to remain in effect).
4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies
before receiving all monthly payments payable to him under subparagraph
4.4(b), above, Employer shall pay to the Retired Early Employee's estate,
one (1) lump sum payment in an amount equal to the present value of all
such remaining unpaid monthly payments, determined as of the date of death
of the Retired Early Employee.
4.4.6 Indemnification of Executive. In the event a Change of Control and
Change of Authority occurs, Employer shall indemnify Executive for all
reasonable legal fees and expenses subsequently incurred by Executive
through legal counsel approved in advance by Employer in seeking to obtain
or enforce any right or benefit provided under this Employment Agreement,
including but not limited to the rights and benefits provided under this
Section 4.4 and whether or not Executive has become a Retired Early
Employee hereunder, provided, however, that such right to indemnification
will not apply if and to the extent that a court of competent jurisdiction
shall determine that any such fees and expenses have been incurred as a
result of Executive's bad faith or willful misconduct. Indemnification
payments payable hereunder by Employer shall be made not later than thirty
(30) days after a request for payment has been received from Executive
with such evidence of indemnifiable fees and expenses as Employer may
reasonably request.
4.4.7 Definitions.
(i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall
equal the annual compensation payable by Employer to Executive and
includable by Executive in gross income for the most recent year ending
before the date on which the Change of Control and Change of Authority
occurred.
(ii) A "Change of Control" shall be deemed to have occurred if
(A) any individual corporation (other than FII),
partnership, trust, association, pool, syndicate, or any other
entity or any group of persons acting in concert becomes the
beneficial owner, as that concept is defined in Rule 13d-3
promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as the result of any one
or more securities transactions (including gifts and stock
repurchases but excluding transactions described in
subdivision (B), following), of securities of FII possessing
twenty percent (20%) or more of the voting power for the
election of directors of suchentity,
(B) there shall be consummated any consolidation, merger
or stock-for-stock exchange involving FII or the securities of
FII in which the holders of voting securities of FII
immediately prior to such consummation own, as a group,
immediately after such consummation, voting securities of FII
(or, if FII does not survive such transaction voting
securities of the corporation surviving such transaction)
having less than fifty percent (50%) of the total voting power
in an election of directors of FII (or such other surviving
corporation), excluding securities received by any members of
such group which represent disproportionate percentage
increases in their shareholdings vis-a-vis the other members
of such group,
(C) "approved directors" shall constitute less than a
majority of the entire Board of Directors, with "approved
directors" defined to mean the members of the Board of
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Directors of Employer as of the date of this Agreement and any
subsequently elected members who shall be nominated or
approved by a majority of the approved directors on the Board
prior to such election, or
(D) there shall be consummated any sale, lease, exchange
or other transfer (in one transaction or a series of related
transactions, excluding any transaction described in
subdivision (B), above), of all, or substantially all, of the
assets of FII to a party which is not controlled by or under
common control with FII.
(iii) A "Change of Authority" shall be deemed to have occurred if
upon the occurrence of a Change in Control, Executive elects to
voluntarily terminate his employment following any demotion, loss of
title, or office, reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 25 miles from
its location immediately prior to the Change in Control; provided,
however, that Executive may consent in writing to any such demotion, loss,
reduction or relocation.
5. Confidentiality; Inventions.
5.1 Confidential Information. Executive has and will have access to and
participate in the development of or be acquainted with confidential or
proprietary information and trade secrets related to the business of Employer,
its subsidiaries and any affiliates (collectively, the "Companies"), including
but not limited to (i) business plans, software programs, operating plans,
marketing plans, financial reports, operating data, budgets, wage and salary
rates, pricing strategies and information, terms of agreements with suppliers or
customers and others, customer lists, reports, correspondence, tapes, disks,
tangible property and specifications owned by or used in the Companies'
businesses; (ii) operating strengths and weaknesses of the Companies' officers,
directors, employees, agents, suppliers and customers, and/or (iii) information
pertaining to future developments such as, but not limited to, research and
development, software development or enhancement, future marketing plans or
ideas, and plans or ideas for new services or products, (iv) all information
which is learned or developed by Executive in the course and performance of his
duties under this Employment Agreement, including without limitation, reports,
information and data relating to the Employer's acquisition strategies, and (v)
other tangible and intangible property which is used in the business and
operations of the Companies but not made publicly available ((i) through (v)
are, collectively, (the "Confidential Information").
5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive
shall not, directly or indirectly, disclose, use or make known for his or
another's benefit any Confidential Information of the Companies or use such
Confidential Information in any way except in the best interests of the
Companies in the performance of Executive's duties under this Agreement. In
addition, to the extent that Employer has entered into a confidentiality
agreement with any other person or entity Executive agrees to comply with the
terms of such confidentiality agreement and to be subject to the restrictions
and limitations imposed by such confidentiality agreements as if he was a party
thereto.
5.3 Inventions. Executive shall promptly disclose both orally and in
writing to Employer all discoveries, ideas, software, developments, discoveries,
designs, improvements, innovations and inventions (collectively referred to
herein as "Inventions"), whether patentable or not, either relating to the
existing or contemplated business, products, services, plans, processes, or
procedures of Employer, or suggested by or resulting from Executive's work at
Employer, or resulting wholly or in part from the use of Employer's time,
material, facilities or ideas, which Executive made or conceived or may make or
conceive, whether or not during working hours, alone or with others, at any time
during the term of this Agreement or within one year thereafter, and Executive
agrees that all such inventions shall be the exclusive property of the Employer.
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5.4 Assignment of Inventions. Executive hereby assigns to Employer all his
rights and interests in and to all such inventions and all patents, copyrights,
trademarks or other types of intellectual property protection which may be
obtained on them, in this and all foreign countries. At Employer's expense, but
without charge to it, Executive agrees to execute, acknowledge and deliver to
Employer any specific assignments to any such inventions or other relevant
documents and to take any such further action as may be considered necessary by
Employer at any time to obtain or defend letters patent in any and all
countries, to obtain documents relating to registration, ownership or transfer
of copyrights, to vest title in such inventions in Employer or its assigns, or
to obtain for Employer any other legal protection for such inventions.
5.5 Survival of Obligations. The obligations of Executive under this Section 5
shall survive the termination of Executive's employment and the expiration or
termination of this Agreement.
6. Return of Employer's Property. Immediately upon termination of
Executive's employment with Employer, Executive shall deliver to Employer all
copies of data, information and knowledge, including, without limitation, all
notes, reference materials, sketches, diagrams, reproductions, memoranda,
documentation and records incorporating or reflecting any Confidential
Information, documents, correspondence, notebooks, reports, computer programs,
names of full-time and part-time employees and consultants, and all other
materials and copies thereof (including computer disks and other electronic
media) relating in any way to the business of Employer in any way obtained by
Executive during the period of his employment with Employer, along with any
automobile provided by Employer for Executive's use (the "Employer's Property").
The Employer's Property shall belong exclusively to the Employer and shall be
delivered to the Employer immediately upon termination of Executive's employment
with the Employer, for whatever reason said termination occurs. The obligations
of Executive under this Section 6 shall survive the termination of Executive's
employment and the expiration or termination of this Agreement.
7. Non-competition and Non-solicitation.
7.1 Non-competition. During the term of this Agreement, and for the
greater time period of eighteen (18) months, or during the period for which
Executive is entitled to receive compensation after the termination of this
Agreement pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such
compensation is paid in a lump sum rather than monthly payments, employee shall
not engage, anywhere within New York State, whether directly or indirectly, as
principal, owner, officer, director, agent, employee, consultant or partner, in
the management of a bank holding company, commercial bank, savings bank, credit
union or any other financial services provider that competes with FII, its
subsidiaries or its products or programs ("Restricted Activities"), provided
that the foregoing shall not restrict Executive from engaging in any Restricted
Activities which Employer directs Executive to undertake or which Employer
otherwise expressly authorizes. The foregoing shall not restrict Executive from
owning less than 1% of the outstanding capital stock of any company which
engages in Restricted Activities, provided that Executive is not otherwise
involved with such company as an officer, director, agent, employee or
consultant.
7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing
compliance with the provisions of Section 7.1, Executive may be a principal,
owner, officer, director, agent, consultant or partner, of any corporation,
partnership or other entity. The foregoing provisions of Section 7.1 shall not
be held invalid because of the scope of the territory covered, the actions
restricted thereby, or the period of time such covenant is operative. In the
event of a breach or threatened breach by the Executive of Section 7.1, Employer
shall be entitled to a temporary restraining order and an injunction restraining
Executive from the commission of such breach. Nothing herein shall be construed
as prohibiting Employer from pursuing any other remedies available to it for
such breach or threatened breach, including the recovery of money damages.
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7.3 Non-solicitation. During the term of this Agreement and for a two (2) year
period following the Termination Date, Executive shall not, directly or
indirectly, without the written consent of Employer: (i) recruit or solicit for
employment any employee of Employer or FII or encourage any such employee to
leave their employment with Employer or FII, or (ii) solicit, induce or
influence any customer, supplier, lessor or any other person or entity which has
a business relationship with Employer or FII to discontinue or reduce the extent
of such relationship with Employer or FII.
7.4 In the event that the Executive breaches any of the provisions of paragraphs
7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2
shall cease immediately. Executive shall have no further entitlement to receive
cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have
no further liability for such payments after the date of Executive's breach.
7.5 The Executive and the Employer believe that the restrictions and covenants
in this section are reasonable and enforceable under the circumstances. However,
if any one or more of the provisions in this section shall, for any, reason be
held to be excessively broad as to time, duration, geographic scope, activity,
or subject, it shall be construed by limiting and reducing it so as to be
enforceable to the extent compatible with law and with the Executive's and the
Employer's intentions as stated herein.
7.6 Survival of Obligations. The obligations of Executive and Employer under
this Section 7 shall survive the termination of Executive's employment and the
expiration or termination of this Agreement.
8. Miscellaneous.
8.1 Remedies. Each of the parties hereto shall have all rights and remedies set
forth in this Agreement. All remedies hereunder are cumulative and are not
exclusive of any other remedies provided by law or any other agreement or
contract to which such person is a party. Each party shall be entitled to
enforce such rights specifically (without the requirement of posting a bond or
other security), to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights granted by law. Without limiting
the generality of the foregoing, Executive specifically agrees that any breach
or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to
Employer, that money damages would not provide an adequate remedy to Employer,
and that Employer shall accordingly have the right and remedy (i) to obtain an
injunction prohibiting Executive from violating or threatening to violate such
provisions, (ii) to have such provisions specifically enforced by any court of
competent jurisdiction, and (iii) to require Executive to account for and pay
over to Employer all compensation, profits, monies, accruals, increments or
other benefits derived or received by Executive as the result of any
transactions constituting a breach of such provisions.
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8.2 Entire Agreement; Amendments and Waivers. This Agreement (including
the schedule hereto) represents the entire understanding and agreement between
the parties hereto with respect to the subject matter hereof and can be amended,
supplemented or changed, and any provision hereof can be waived, only by a
written instrument making specific reference to this Agreement signed by the
party against whom enforcement of any such amendment, supplement, modification
or waiver is sought. The waiver by any party hereto of a breach of any provision
of this Agreement shall not operate or be construed as a further or continuing
waiver of such breach or as a waiver of any other or subsequent breach. No
failure on the part of any party to exercise, and no delay in exercising, any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of such right, power or remedy by such party
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
8.3 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York without reference to its
principles of conflicts of law.
8.4 Notices. All notices, demands, solicitations of consent or approval,
and other communications hereunder shall be in writing and shall be delivered
personally, mailed, sent by telefax or sent by recognized commercial courier
(e.g., Federal Express). If delivered personally, such notice shall be deemed to
be given when delivered to the intended recipient. If delivered by mail, such
notice shall be deemed to be given five (5) days after having been deposited in
the United States mail so addressed, with postage thereon prepaid. If delivered
by telefax, such notice shall be deemed given when transmission of the notice is
complete to the telefax number of the other party. If delivered by recognized
commercial carrier, such notice shall be deemed given one (1) day after having
been delivered to a recognized commercial carrier for overnight delivery. All
such notices shall be addressed to the address set forth in the preamble to this
Agreement or to such other address which such party shall have given to the
other party for such purpose by notice hereunder.
8.5 Captions. The headings used in this Agreement are intended for
reference purposes only and shall not control or affect in any manner the
meaning or interpretation of any of the provisions of is Agreement.
8.6 Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions of this Agreement, and this Agreement shall be construed in all
respects as if such invalid or unenforceable provision were omitted. All
provisions of this Agreement shall be enforced to the full extent permitted by
law.
8.7 Interpretation. The parties acknowledge and agree that: (i) each party
and its counsel reviewed and negotiated the terms and provisions of this
Agreement and have contributed to its revision; (ii) the rule of construction to
the effect that any ambiguities are resolved against the drafting party shall
not be employed in the interpretation of this Agreement; and (iii) the terms and
provisions of this Agreement shall be construed fairly as to all parties hereto,
regardless of which party was generally responsible for the preparation of this
Agreement.
8.8 Counterparts. This Agreement may be executed in any number of copies,
each of which shall be deemed an original, and all of which together will be
deemed one and the same instrument.
8.9 Successors and Assigns. All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind, and inure to
the benefit of the respective successors and permitted assigns of the parties
hereto whether so expressed or not. Neither party shall transfer or assign this
Agreement or any of their rights or obligations hereunder, whether by operation
of law or otherwise, without the prior written consent of the other party
hereto. Any attempted transfer or assignment of this Agreement or any rights or
obligations hereunder in violation of this provision shall be void ab initio.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first above written.
Financial Institutions, Inc.
By:
Name: James I Wyckoff
Title: Chairman, Compensation Committee
Financial Institutions, Inc.
_________________________________________
Peter G. Humphrey
President & CEO
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EX-10.4
(Exhibit 10.4)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as of
the 15th day of March, 2000, between Wyoming County Bank ("Employer"), a bank
chartered under the laws of New York having its principal office at 55 North
Main Street, Warsaw, New York 14569 and Jon J. Cooper ("Executive"), an
individual residing at 3244 Dick Road,Warsaw, New York 14569.
WHEREAS, Employer wishes to employ Executive in an executive capacity, as its
President, and Executive wishes to accept such employment on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants
herein contained, Employer and Executive hereby agree as follows:
1. Effective Date; Term.
1.1 Effective Date. This Agreement shall be effective commencing on the date
hereof (the "Effective Date").
1.2 Initial Term. Employer employs Executive, and Executive accepts such
employment, for a three (3) year period commencing on the Effective Date (the
"Initial Term").
1.3 Renewal Term. This Agreement will automatically renew for successive three
year terms (each a "Renewal Term") upon the expiration of the Initial Term or a
subsequent Renewal Term unless either party provides written notice to the other
at least ninety (90) days before the end of the Initial Term or Renewal Term
that such party does not intend to renew this Agreement upon the expiration
thereof.
1.4 Termination. This Agreement may be terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this Agreement.
2. Scope of Employment.
2.1 Position and Duties. During the term of this Agreement, Employer shall
employ Executive to serve as the President of Employer. In such capacity,
Executive shall perform such executive, administrative and operational duties as
may be assigned to Executive from time to time by the Board of Directors of
Employer.
2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the
best of Executive's ability and to devote Executive's entire business time,
attention and efforts to the interests and business of Employer, its
subsidiaries and their affiliates.
2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to
and perform all his duties in accordance with applicable laws, rules and
regulations and the written policies and procedures of Employer in effect from
time to time.
3. Compensation, Benefits and Expenses.
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3.1 Base Salary. Except as otherwise provided in this Agreement, during the
period from the Effective Date through December 31, 1999 (the "First Year")
Employer shall pay to Executive a base salary at a rate of $155,000 per year
(the "Base Salary"). The Base Salary may be increased, in the sole discretion of
Employer, during the second and third years of the terms of this Agreement, but
may not be decreased. Employer shall pay the Base Salary to Executive in equal
installments pursuant to Employer's standard payroll policies and Executive's
salary shall be subject to such withholding or deductions as may be mutually
agreed between Employer and Executive or required by law.
3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may
receive bonuses as follows:
3.2.1 If the Employer meets or exceeds its budget for revenue and profit,
the Executive is eligible for a bonus which shall be determined by the
Compensation Committee of the Board of Directors of Employer.
3.2.3 The bonus earned by Executive during the term of this Agreement, if
any, shall be paid to Executive in a lump sum promptly after the
Employer's audited annual financial results are publicly disclosed.
3.2.4 Employer does not guarantee that any bonus will be awarded or paid
to Executive. Payment of any bonus shall be subject to such withholding or
deductions as may be mutually agreed between Employer and Executive or
required by law.
3.3 Incentive Stock Plan Benefits. During the period of his employment,
Executive shall be entitled to receive grants of options under any incentive
stock plan operated by Financial Institutions, Inc. ("FII") for its employees
and those of its subsidiaries, in such amounts as may be determined by the
appropriate Committee of the Board of Directors or the Board of Directors of
Employer, or by the FII Compensation Committee.
3.4 Fringe Benefits. During the period of his employment, Executive shall be
entitled to participate in FII's plans for the welfare and benefit of its
employees to the extent Executive satisfies the requirements provided in such
plans, health and other qualifications for participation. In the event Executive
becomes a "Retired Early Employee" as defined in subparagraph 4.4.1 and 4.4.2,
or is terminated for reasons other than those set forth in subparagraphs 4.1.3,
4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as
if Executive continued to remain an employee for the remaining term of this
Agreement or until Executive obtains a position offering comparable benefits,
whichever occurs first.
3.5 Vacation and Holidays. During the term of this Agreement, Executive shall
accrue paid vacation in accordance with Employer's policies of four (4) weeks
per year. Executive shall be entitled to take accrued vacation days and paid
holidays in accordance with Employer's policies applicable to its employees
generally. Executive may not carry forward vacation days from year to year.
3.6 Expenses. During the term of this Agreement, Employer authorizes Executive
to incur reasonable and necessary out-of-pocket business expenses in the course
of performing his duties and rendering services hereunder in accordance with
Employer's policies with respect thereto, and Employer shall reimburse Executive
for all such expenses, provided (i) such expenses and the purpose for which they
were incurred, are in accordance with Employer's policies, and (ii) Executive
timely submits to Employer expense reports and substantiation of the expenses in
accordance with Employer's policies.
3.7 Country Club Dues and Automobile Expenses. During the term of this
Agreement, in the discretion of the Board of Directors, Employer shall reimburse
Executive for monthly membership dues at a country club of Executive's choosing,
and shall provide Executive with use of a suitable automobile.
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4. Termination.
4.1 Termination. Executive's Employment by Employer shall terminate at the
expiration of the Initial Term or any Renewal Term provided timely notice is
given as provided in Section 1.3 and shall terminate prior to the expiration of
the then current term on the earlier of:
4.1.1 the death of Executive;
4.1.2 the date on which Executive is (i) determined to be "permanently
disabled" as defined under the disability insurance policy covering
Executive, or (ii) if Executive is not covered by any such disability
policy, Executive is determined to be "totally disabled" by the Board of
Directors of Employer based upon the advice of a board certified physician
reasonably acceptable to Employer and Executive or his legal
representative, which may include a determination that Executive is
unable, because of physical or mental illness or incapacity or otherwise,
to fulfill his duties under this Agreement for six consecutive months or
appears unable to perform such duties for an indefinite period of time;
4.1.3 the commission by Executive of (i) a felony conviction which is
final and non-appealable, (ii) a breach of fiduciary duty, (iii) a
material act of dishonesty, fraud or misrepresentation, or (iv) any act of
moral turpitude which the Board of Directors determines has or may be
reasonably expected to have a material detrimental impact on Employer's
business or operations or prevent, because of its demonstrated or
demonstrable effect on employees, regulatory agencies or customers,
Executive from effectively performing his executive and other duties under
this Agreement;
4.1.4 Executive neglects to satisfactorily perform the duties which
Executive is required to perform under this Agreement or performs such
duties other than in good faith, as determined by the Board of Directors.
The Board will provide a written notice to the Executive, specifying the
unsatisfactory performance and suggest what must be done to improve and
maintain such performance. The written notice will also specify the time
period (considered probationary period) given the Executive to correct
such conduct.
4.1.5 the termination of Executive's employment by Employer during the
term of this Agreement for any reason without cause other than pursuant to
Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4;
4.1.6 Executive's resignation or retirement; or
4.1.7 the mutual consent to such termination in writing by Executive and
Employer.
4.2 Time of Termination. Executive's employment with Employer shall terminate
immediately upon Executive's death, upon written notice of termination from
Employer or Executive upon the occurrence of an event specified in Sections
4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified
in Section 4.1.4, upon the execution of a writing terminating Executive's
employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or
a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable,
the "Termination Date"). Employer's obligations under this Agreement shall
terminate upon such termination of employment without any further action by the
parties except to the extent specifically provided herein.
4.3 Effect of Termination of Employment. Following the Termination Date:
4.3.1 Executive shall return all property of Employer as provided in
Section 6 of this Agreement;
4.3.2 Executive's salary shall cease to accrue;
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4.3.3 subject to Section 4.4, the Board of Directors shall determine an
appropriate bonus to pay to Executive as his bonus or other incentive
compensation for the period through the Termination Date computed
consistently with the manner in which Executive's bonus or incentive
compensation would have been determined for such period if Executive's
employment had not terminated;
4.3.4 Executive's participation in FII's benefit plans shall cease except
as required by law, the terms of the plan(s) or as provided in
subparagraph 3.4 of this Agreement;
4.3.5 Executive shall cease to accrue vacation days and shall be paid for
unused vacation time accrued since the beginning of the then current
Initial or Renewal Term in accordance with Employer's policies applicable
to employees generally; and
4.3.6 Executive shall submit any claims for reimbursement of business
expenses incurred in accordance with Section 3.5 within the time period
required under Employer's policies generally or Employer will not be
obligated to reimburse such expenses.
4.3.7 If this Agreement is terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this
Agreement, the Employer shall have no further liability to Executive
hereunder, except as explicitly stated in this Agreement, other than for
earned but unpaid compensation and those benefits (accrued but unpaid) to
which Executive is entitled under this Agreement through the date of
termination, provided, however, that in the event Executive becomes a
"Retired Early Employee" as defined in subparagraph 4.4.1 or is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, health insurance and dental benefits to
Executive will be continued as if Executive continued to remain an
employee for the remaining term of this Agreement or until Executive
obtains another position offering comparable benefits, whichever occurs
first.
4.3.8 If, during the term of this Agreement, the Executive is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period
after the Termination Date, make equal monthly payments or a single lump
sum payment to the Executive (which shall not be deemed base annual salary
payments) in an amount such that the present value of all such payments,
determined as of the Termination Date, equals the sum of (a) the Base
Salary Amount, and (b) the annual incentive compensation paid by Employer
to Executive for the most recent tax year ending before the date on which
the termination occurred. It shall be at the discretion of the
Compensation Committee, as to whether the payment is made as a single lump
sum payment or equal monthly payments.
4.4. Change of Control and Change of Authority
4.4.1 Retired Early Employee. If a Change of Control and Change of
Authority, as such terms are defined in subparagraph 4.4.7 below, occurs
during the term of the Executive's employment under this Employment
Agreement, either the Executive, on the one hand, or Employer, on the
other, may elect by written notice, given to the other party or parties,
at any time within twelve (12) months after such Change of Control and
Change of Authority, to terminate the employment of the Executive by
Employer, whereupon the Executive will become a "Retired Early Employee,"
and will be entitled to receive such payments as are provided hereafter in
this Section 4.4. Such election and the termination of the Executive's
employment shall become effective on the first day of the second calendar
month commencing after delivery of the notice or on such earlier date as
the Executive in his sole discretion may specify (the "Effective Date").
4.4.2 Cash Payments. If the Executive should become a Retired Early
Employee hereunder, Employer shall, during the period commencing on the
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Effective Date and ending two years thereafter (the "Pay-Out Period"),
make equal monthly payments or a single lump sum payment to the Executive
(which shall not be deemed base annual salary payments) in an amount such
that the present value of all such payments, determined as of the
Effective Date, equals the sum of two times the Base Salary Amount, as
such term is defined in subparagraph 4.4.7 below, plus the average of the
annual incentive compensation paid by Employer to Executive, as determined
over the most recent two (2) tax years ending before the date on which the
Change of Control and Change of Authority occurred. It shall be at the
discretion of the Compensation Committee, as to whether the payment is
made as a single lump sum payment or equal monthly payments. The
payment(s) provided for in subparagraph 4.3.8 do not apply to Retired
Early Employees who receive cash payment(s) pursuant to this subparagraph.
If at any time during the Pay-Out Period the Compensation Committee of the
Board in its sole discretion shall determine, upon application of the
Retired Early Employee supported by substantial evidence, that the Retired
Early Employee is then under a severe financial hardship resulting from
(i) a sudden and unexpected illness or accident of the Retired Early
Employee or any of his dependents (as defined in section 152(a) of the
Internal Revenue Code), (ii) loss of the Retired Early Employee's property
due to casualty, or (iii) other similar extraordinary and unforeseeable
circumstance arising as a result of events beyond the control of the
Retired Early Employee, Employer shall make available to the Retired Early
Employee, in one (1) lump sum, an amount up to but not greater than the
present value of all monthly payments remaining to be paid to him in the
Pay-Out Period, calculated as of the date of such determination by the
Compensation Committee of the Board, for the purpose of relieving such
severe financial hardship to the extent the same has not been or may not
be relieved by (xi) reimbursement or compensation by insurance or
otherwise, (xii) liquidation of the Retired Early Employee's assets (to
the extent such liquidation would not itself cause severe financial
hardship), or (xiii) distributions from other benefit plans. If (a) the
lump sum amount thus made available is less than (b) the present value of
all such remaining monthly payments, Employer shall continue to pay to the
Retired Early Employee monthly payments for the duration of the Pay-Out
Period, but from such date forward such monthly payments will be in a
reduced amount such that the present value of all such reduced payments
will equal the difference between (b) and (a), above. The Retired Early
Employee may elect to waive any or all payments due him under this
subparagraph.
4.4.3 Acceleration of Stock Options. All options and other rights that
Executive may hold to purchase or otherwise acquire Common Stock of FII
shall immediately become exercisable in full for the total number of
shares that are or might become purchasable thereunder, in each case
without further condition or limitation except the giving of notice of
exercise and the payment of the purchase price thereunder (but without
amendment of the plan under which they were issued). At his discretion,
Executive may elect to surrender to Employer his rights in any such
options and rights held by him and, upon that surrender, Employer shall
pay him an amount in cash equal to the aggregate spread between the
exercise prices of all those options and rights and the value of the
Common Stock purchasable thereunder (or of any other security into which
the Common Stock has been exchanged or converted) as of the date of the
termination of employment, the value to be determined by the reported last
sale price of the Common Stock or that other security (or the mean between
the reported last bid and asked prices) on that date on NASDAQ (or, if it
is not NASDAQ, on whatever may then be the principal exchange or quotation
system on which the Employer's Common Stock or that other security is
traded at that time).
4.4.4 Life Insurance Policies. Employer shall repay any policy loans
previously taken on the Employer's insurance policies on Executive's life
(provided that the directors of Employer were given written notice
promptly after the making of any such loans which were made while
Executive was the president and chief executive officer of Employer), and
then shall transfer to Executive any and all of its right, title, and
interest in and to all Employer life insurance policies on Executive's
life (and upon that transfer,
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Executive shall be deemed to have released Employer from any and all
obligations it then owes to him to maintain and pay premiums on those
policies, all other provisions of any agreements under which those
policies were agreed to be maintained, however, to remain in effect).
4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies
before receiving all monthly payments payable to him under subparagraph
4.4(b), above, Employer shall pay to the Retired Early Employee's estate,
one (1) lump sum payment in an amount equal to the present value of all
such remaining unpaid monthly payments, determined as of the date of death
of the Retired Early Employee.
4.4.6 Indemnification of Executive. In the event a Change of Control and
Change of Authority occurs, Employer shall indemnify Executive for all
reasonable legal fees and expenses subsequently incurred by Executive
through legal counsel approved in advance by Employer in seeking to obtain
or enforce any right or benefit provided under this Employment Agreement,
including but not limited to the rights and benefits provided under this
Section 4.4 and whether or not Executive has become a Retired Early
Employee hereunder, provided, however, that such right to indemnification
will not apply if and to the extent that a court of competent jurisdiction
shall determine that any such fees and expenses have been incurred as a
result of Executive's bad faith or willful misconduct. Indemnification
payments payable hereunder by Employer shall be made not later than thirty
(30) days after a request for payment has been received from Executive
with such evidence of indemnifiable fees and expenses as Employer may
reasonably request.
4.4.7 Definitions.
(i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall
equal the annual compensation payable by Employer to Executive and
includable by Executive in gross income for the most recent year ending
before the date on which the Change of Control and Change of Authority
occurred.
(ii) A "Change of Control" shall be deemed to have occurred if
(A) any individual corporation (other than FII),
partnership, trust, association, pool, syndicate, or any other
entity or any group of persons acting in concert becomes the
beneficial owner, as that concept is defined in Rule 13d-3
promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as the result of any one
or more securities transactions (including gifts and stock
repurchases but excluding transactions described in
subdivision (B), following), of securities of FII possessing
twenty percent (20%) or more of the voting power for the
election of directors of such entity,
(B) there shall be consummated any consolidation, merger
or stock-for-stock exchange involving FII or the securities of
FII in which the holders of voting securities of FII
immediately prior to such consummation own, as a group,
immediately after such consummation, voting securities of FII
(or, if FII does not survive such transaction voting
securities of the corporation surviving such transaction)
having less than fifty percent (50%) of the total voting power
in an election of directors of FII (or such other surviving
corporation), excluding securities received by any members of
such group which represent disproportionate percentage
increases in their shareholdings vis-a-vis the other members
of such group,
(C) "approved directors" shall constitute less than a
majority of the entire Board of Directors, with "approved
directors" defined to mean the members of the Board of
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Directors of Employer as of the date of this Agreement and any
subsequently elected members who shall be nominated or
approved by a majority of the approved directors on the Board
prior to such election, or
(D) there shall be consummated any sale, lease, exchange
or other transfer (in one transaction or a series of related
transactions, excluding any transaction described in
subdivision (B), above), of all, or substantially all, of the
assets of FII to a party which is not controlled by or under
common control with FII.
(iii) A "Change of Authority" shall be deemed to have occurred if
upon the occurrence of a Change in Control, Executive elects to
voluntarily terminate his employment following any demotion, loss of
title, or office, reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 25 miles from
its location immediately prior to the Change in Control; provided,
however, that Executive may consent in writing to any such demotion, loss,
reduction or relocation.
5. Confidentiality; Inventions.
5.1 Confidential Information. Executive has and will have access to and
participate in the development of or be acquainted with confidential or
proprietary information and trade secrets related to the business of Employer,
its subsidiaries and any affiliates (collectively, the "Companies"), including
but not limited to (i) business plans, software programs, operating plans,
marketing plans, financial reports, operating data, budgets, wage and salary
rates, pricing strategies and information, terms of agreements with suppliers or
customers and others, customer lists, reports, correspondence, tapes, disks,
tangible property and specifications owned by or used in the Companies'
businesses; (ii) operating strengths and weaknesses of the Companies' officers,
directors, employees, agents, suppliers and customers, and/or (iii) information
pertaining to future developments such as, but not limited to, research and
development, software development or enhancement, future marketing plans or
ideas, and plans or ideas for new services or products, (iv) all information
which is learned or developed by Executive in the course and performance of his
duties under this Employment Agreement, including without limitation, reports,
information and data relating to the Employer's acquisition strategies, and (v)
other tangible and intangible property which is used in the business and
operations of the Companies but not made publicly available ((i) through (v)
are, collectively, (the "Confidential Information").
5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive
shall not, directly or indirectly, disclose, use or make known for his or
another's benefit any Confidential Information of the Companies or use such
Confidential Information in any way except in the best interests of the
Companies in the performance of Executive's duties under this Agreement. In
addition, to the extent that Employer has entered into a confidentiality
agreement with any other person or entity Executive agrees to comply with the
terms of such confidentiality agreement and to be subject to the restrictions
and limitations imposed by such confidentiality agreements as if he was a party
thereto.
5.3 Inventions. Executive shall promptly disclose both orally and in
writing to Employer all discoveries, ideas, software, developments, discoveries,
designs, improvements, innovations and inventions (collectively referred to
herein as "Inventions"), whether patentable or not, either relating to the
existing or contemplated business, products, services, plans, processes, or
procedures of Employer, or suggested by or resulting from Executive's work at
Employer, or resulting wholly or in part from the use of Employer's time,
material, facilities or ideas, which Executive made or conceived or may make or
conceive, whether or not during working hours, alone or with others, at any time
during the term of this Agreement or within one year thereafter, and Executive
agrees that all such inventions shall be the exclusive property of the Employer.
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5.4 Assignment of Inventions. Executive hereby assigns to Employer all his
rights and interests in and to all such inventions and all patents, copyrights,
trademarks or other types of intellectual property protection which may be
obtained on them, in this and all foreign countries. At Employer's expense, but
without charge to it, Executive agrees to execute, acknowledge and deliver to
Employer any specific assignments to any such inventions or other relevant
documents and to take any such further action as may be considered necessary by
Employer at any time to obtain or defend letters patent in any and all
countries, to obtain documents relating to registration, ownership or transfer
of copyrights, to vest title in such inventions in Employer or its assigns, or
to obtain for Employer any other legal protection for such inventions.
5.5 Survival of Obligations. The obligations of Executive under this Section 5
shall survive the termination of Executive's employment and the expiration or
termination of this Agreement.
6. Return of Employer's Property. Immediately upon termination of
Executive's employment with Employer, Executive shall deliver to Employer all
copies of data, information and knowledge, including, without limitation, all
notes, reference materials, sketches, diagrams, reproductions, memoranda,
documentation and records incorporating or reflecting any Confidential
Information, documents, correspondence, notebooks, reports, computer programs,
names of full-time and part-time employees and consultants, and all other
materials and copies thereof (including computer disks and other electronic
media) relating in any way to the business of Employer in any way obtained by
Executive during the period of his employment with Employer, along with any
automobile provided by Employer for Executive's use (the "Employer's Property").
The Employer's Property shall belong exclusively to the Employer and shall be
delivered to the Employer immediately upon termination of Executive's employment
with the Employer, for whatever reason said termination occurs. The obligations
of Executive under this Section 6 shall survive the termination of Executive's
employment and the expiration or termination of this Agreement.
7. Non-competition and Non-solicitation.
7.1 Non-competition. During the term of this Agreement, and for the
greater time period of eighteen (18) months, or during the period for which
Executive is entitled to receive compensation after the termination of this
Agreement pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such
compensation is paid in a lump sum rather than monthly payments, Employee shall
not engage, anywhere within New York State, whether directly or indirectly, as
principal, owner, officer, director, agent, employee, consultant or partner, in
the management of a bank holding company, commercial bank, savings bank, credit
union or any other financial services provider that competes with FII, its
subsidiaries or its products or programs ("Restricted Activities"), provided
that the foregoing shall not restrict Executive from engaging in any Restricted
Activities which Employer directs Executive to undertake or which Employer
otherwise expressly authorizes. The foregoing shall not restrict Executive from
owning less than 1% of the outstanding capital stock of any company which
engages in Restricted Activities, provided that Executive is not otherwise
involved with such company as an officer, director, agent, employee or
consultant
7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing
compliance with the provisions of Section 7.1, Executive may be a principal,
owner, officer, director, agent, consultant or partner, of any corporation,
partnership or other entity. The foregoing provisions of Section 7.1 shall not
be held invalid because of the scope of the territory covered, the actions
restricted thereby, or the period of time such covenant is operative. In the
event of a breach or threatened breach by the Executive of Section 7.1, Employer
shall be entitled to a temporary restraining order and an injunction restraining
Executive from the commission of such breach. Nothing herein shall be construed
as prohibiting Employer from pursuing any other remedies available to it for
such breach or threatened breach, including the recovery of money damages.
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7.3 Non-solicitation. During the term of this Agreement and for a two (2) year
period following the Termination Date, Executive shall not, directly or
indirectly, without the written consent of Employer: (i) recruit or solicit for
employment any employee of Employer or FII or encourage any such employee to
leave their employment with Employer or FII, or (ii) solicit, induce or
influence any customer, supplier, lessor or any other person or entity which has
a business relationship with Employer or FII to discontinue or reduce the extent
of such relationship with Employer or FII.
7.4 In the event that the Executive breaches any of the provisions of paragraphs
7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2
shall cease immediately. Executive shall have no further entitlement to receive
cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have
no further liability for such payments after the date of Executive's breach.
7.5 The Executive and the Employer believe that the restrictions and covenants
in this section are reasonable and enforceable under the circumstances. However,
if any one or more of the provisions in this section shall, for any, reason be
held to be excessively broad as to time, duration, geographic scope, activity,
or subject, it shall be construed by limiting and reducing it so as to be
enforceable to the extent compatible with law and with the Executive's and the
Employer's intentions as stated herein.
7.6 Survival of Obligations. The obligations of Executive and Employer under
this Section 7 shall survive the termination of Executive's employment and the
expiration or termination of this Agreement.
8. Miscellaneous.
8.1 Remedies. Each of the parties hereto shall have all rights and remedies set
forth in this Agreement. All remedies hereunder are cumulative and are not
exclusive of any other remedies provided by law or any other agreement or
contract to which such person is a party. Each party shall be entitled to
enforce such rights specifically (without the requirement of posting a bond or
other security), to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights granted by law. Without limiting
the generality of the foregoing, Executive specifically agrees that any breach
or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to
Employer, that money damages would not provide an adequate remedy to Employer,
and that Employer shall accordingly have the right and remedy (i) to obtain an
injunction prohibiting Executive from violating or threatening to violate such
provisions, (ii) to have such provisions specifically enforced by any court of
competent jurisdiction, and (iii) to require Executive to account for and pay
over to Employer all compensation, profits, monies, accruals, increments or
other benefits derived or received by Executive as the result of any
transactions constituting a breach of such provisions.
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8.2 Entire Agreement; Amendments and Waivers. This Agreement (including
the schedule hereto) represents the entire understanding and agreement between
the parties hereto with respect to the subject matter hereof and can be amended,
supplemented or changed, and any provision hereof can be waived, only by a
written instrument making specific reference to this Agreement signed by the
party against whom enforcement of any such amendment, supplement, modification
or waiver is sought. The waiver by any party hereto of a breach of any provision
of this Agreement shall not operate or be construed as a further or continuing
waiver of such breach or as a waiver of any other or subsequent breach. No
failure on the part of any party to exercise, and no delay in exercising, any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of such right, power or remedy by such party
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
8.3 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York without reference to its
principles of conflicts of law.
8.4 Notices. All notices, demands, solicitations of consent or approval,
and other communications hereunder shall be in writing and shall be delivered
personally, mailed, sent by telefax or sent by recognized commercial courier
(e.g., Federal Express). If delivered personally, such notice shall be deemed to
be given when delivered to the intended recipient. If delivered by mail, such
notice shall be deemed to be given five (5) days after having been deposited in
the United States mail so addressed, with postage thereon prepaid. If delivered
by telefax, such notice shall be deemed given when transmission of the notice is
complete to the telefax number of the other party. If delivered by recognized
commercial carrier, such notice shall be deemed given one (1) day after having
been delivered to a recognized commercial carrier for overnight delivery. All
such notices shall be addressed to the address set forth in the preamble to this
Agreement or to such other address which such party shall have given to the
other party for such purpose by notice hereunder.
8.5 Captions. The headings used in this Agreement are intended for
reference purposes only and shall not control or affect in any manner the
meaning or interpretation of any of the provisions of is Agreement.
8.6 Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions of this Agreement, and this Agreement shall be construed in all
respects as if such invalid or unenforceable provision were omitted. All
provisions of this Agreement shall be enforced to the full extent permitted by
law.
8.7 Interpretation. The parties acknowledge and agree that: (i) each party
and its counsel reviewed and negotiated the terms and provisions of this
Agreement and have contributed to its revision; (ii) the rule of construction to
the effect that any ambiguities are resolved against the drafting party shall
not be employed in the interpretation of this Agreement; and (iii) the terms and
provisions of this Agreement shall be construed fairly as to all parties hereto,
regardless of which party was generally responsible for the preparation of this
Agreement.
8.8 Counterparts. This Agreement may be executed in any number of copies,
each of which shall be deemed an original, and all of which together will be
deemed one and the same instrument.
8.9 Successors and Assigns. All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind, and inure to
the benefit of the respective successors and permitted assigns of the parties
hereto whether so expressed or not. Neither party shall transfer or assign this
Agreement or any of their rights or obligations hereunder, whether by operation
of law or otherwise, without the prior written consent of the other party
hereto. Any attempted transfer or assignment of this Agreement or any rights or
obligations hereunder in violation of this provision shall be void ab initio.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first above written.
Wyoming County Bank
By:
Name: Peter G. Humphrey
Title: President & CEO
Financial Institutions, Inc.
_________________________________________
Jon J. Cooper
President & CEO
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EX-10.5
(Exhibit 10.5)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as of
the 15th day of March, 2000, between The National Bank of Geneva ("Employer"), a
bank chartered under the laws of New York having its principal office at 2
Seneca Street, Geneva, New York 14456 and Thomas L. Kime ("Executive"), an
individual residing at 3784 Kime Beach Road, Geneva, New York 14456.
WHEREAS, Employer wishes to employ Executive in an executive capacity, as its
President, and Executive wishes to accept such employment on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants
herein contained, Employer and Executive hereby agree as follows:
1. Effective Date; Term.
1.1 Effective Date. This Agreement shall be effective commencing on the date
hereof (the "Effective Date").
1.2 Initial Term. Employer employs Executive, and Executive accepts such
employment, for a three (3) year period commencing on the Effective Date (the
"Initial Term").
1.3 Renewal Term. This Agreement will automatically renew for successive three
year terms (each a "Renewal Term") upon the expiration of the Initial Term or a
subsequent Renewal Term unless either party provides written notice to the other
at least ninety (90) days before the end of the Initial Term or Renewal Term
that such party does not intend to renew this Agreement upon the expiration
thereof.
1.4 Termination. This Agreement may be terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this Agreement.
2. Scope of Employment.
2.1 Position and Duties. During the term of this Agreement, Employer shall
employ Executive to serve as the President of Employer. In such capacity,
Executive shall perform such executive, administrative and operational duties as
may be assigned to Executive from time to time by the Board of Directors of
Employer.
2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the
best of Executive's ability and to devote Executive's entire business time,
attention and efforts to the interests and business of Employer, its
subsidiaries and their affiliates.
2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to
and perform all his duties in accordance with applicable laws, rules and
regulations and the written policies and procedures of Employer in effect from
time to time.
3. Compensation, Benefits and Expenses.
3.1 Base Salary. Except as otherwise provided in this Agreement, during the
period from the Effective Date through December 31, 1999 (the "First Year")
Employer shall pay to Executive a base salary at a rate of $165,000 per year
(the "Base Salary"). The Base Salary may be increased, in the sole discretion of
Employer,
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during the second and third years of the terms of this Agreement, but may not be
decreased. Employer shall pay the Base Salary to Executive in equal installments
pursuant to Employer's standard payroll policies and Executive's salary shall be
subject to such withholding or deductions as may be mutually agreed between
Employer and Executive or required by law.
3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may
receive bonuses as follows:
3.2.1 If the Employer meets or exceeds its budget for revenue and profit,
the Executive is eligible for a bonus which shall be determined by the
Compensation Committee of the Board of Directors of Employer.
3.2.3 The bonus earned by Executive during the term of this Agreement, if
any, shall be paid to Executive in a lump sum promptly after the
Employer's audited annual financial results are publicly disclosed.
3.2.4 Employer does not guarantee that any bonus will be awarded or paid
to Executive. Payment of any bonus shall be subject to such withholding or
deductions as may be mutually agreed between Employer and Executive or
required by law.
3.3 Incentive Stock Plan Benefits. During the period of his employment,
Executive shall be entitled to receive grants of options under any incentive
stock plan operated by Financial Institutions, Inc. ("FII") for its employees
and those of its subsidiaries, in such amounts as may be determined by the
appropriate Committee of the Board of Directors or the Board of Directors of
Employer, or by the FII Compensation Committee.
3.4 Fringe Benefits. During the period of his employment, Executive shall be
entitled to participate in FII's plans for the welfare and benefit of its
employees to the extent Executive satisfies the requirements provided in such
plans, health and other qualifications for participation. In the event Executive
becomes a "Retired Early Employee" as defined in subparagraph 4.4.1 and 4.4.2,
or is terminated for reasons other than those set forth in subparagraphs 4.1.3,
4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as
if Executive continued to remain an employee for the remaining term of this
Agreement or until Executive obtains a position offering comparable benefits,
whichever occurs first.
3.5 Vacation and Holidays. During the term of this Agreement, Executive shall
accrue paid vacation in accordance with Employer's policies of four (4) weeks
per year. Executive shall be entitled to take accrued vacation days and paid
holidays in accordance with Employer's policies applicable to its employees
generally. Executive may not carry forward vacation days from year to year.
3.6 Expenses. During the term of this Agreement, Employer authorizes Executive
to incur reasonable and necessary out-of-pocket business expenses in the course
of performing his duties and rendering services hereunder in accordance with
Employer's policies with respect thereto, and Employer shall reimburse Executive
for all such expenses, provided (i) such expenses and the purpose for which they
were incurred, are in accordance with Employer's policies, and (ii) Executive
timely submits to Employer expense reports and substantiation of the expenses in
accordance with Employer's policies.
3.7 Country Club Dues and Automobile Expenses. During the term of this
Agreement, in the discretion of the Board of Directors, Employer shall reimburse
Executive for monthly membership dues at a country club of Executive's choosing,
and shall provide Executive with use of a suitable automobile.
4. Termination.
4.1 Termination. Executive's Employment by Employer shall terminate at the
expiration of the Initial Term or any Renewal Term provided timely notice is
given
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as provided in Section 1.3 and shall terminate prior to the expiration of the
then current term on the earlier of:
4.1.1 the death of Executive;
4.1.2 the date on which Executive is (i) determined to be "permanently
disabled" as defined under the disability insurance policy covering
Executive, or (ii) if Executive is not covered by any such disability
policy, Executive is determined to be "totally disabled" by the Board of
Directors of Employer based upon the advice of a board certified physician
reasonably acceptable to Employer and Executive or his legal
representative, which may include a determination that Executive is
unable, because of physical or mental illness or incapacity or otherwise,
to fulfill his duties under this Agreement for six consecutive months or
appears unable to perform such duties for an indefinite period of time;
4.1.3 the commission by Executive of (i) a felony conviction which is
final and non-appealable, (ii) a breach of fiduciary duty, (iii) a
material act of dishonesty, fraud or misrepresentation, or (iv) any act of
moral turpitude which the Board of Directors determines has or may be
reasonably expected to have a material detrimental impact on Employer's
business or operations or prevent, because of its demonstrated or
demonstrable effect on employees, regulatory agencies or customers,
Executive from effectively performing his executive and other duties under
this Agreement;
4.1.4 Executive neglects to satisfactorily perform the duties which
Executive is required to perform under this Agreement or performs such
duties other than in good faith, as determined by the Board of Directors.
The Board will provide a written notice to the Executive, specifying the
unsatisfactory performance and suggest what must be done to improve and
maintain such performance. The written notice will also specify the time
period (considered probationary period) given the Executive to correct
such conduct.
4.1.5 the termination of Executive's employment by Employer during the
term of this Agreement for any reason without cause other than pursuant to
Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4;
4.1.6 Executive's resignation or retirement; or
4.1.7 the mutual consent to such termination in writing by Executive and
Employer.
4.2 Time of Termination. Executive's employment with Employer shall terminate
immediately upon Executive's death, upon written notice of termination from
Employer or Executive upon the occurrence of an event specified in Sections
4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified
in Section 4.1.4, upon the execution of a writing terminating Executive's
employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or
a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable,
the "Termination Date"). Employer's obligations under this Agreement shall
terminate upon such termination of employment without any further action by the
parties except to the extent specifically provided herein.
4.3 Effect of Termination of Employment. Following the Termination Date:
4.3.1 Executive shall return all property of Employer as provided in
Section 6 of this Agreement;
4.3.2 Executive's salary shall cease to accrue;
4.3.3 subject to Section 4.4, the Board of Directors shall determine an
appropriate bonus to pay to Executive as his bonus or other incentive
compensation for the period through the Termination Date computed
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consistently with the manner in which Executive's bonus or incentive
compensation would have been determined for such period if Executive's
employment had not terminated;
4.3.4 Executive's participation in FII's benefit plans shall cease except
as required by law, the terms of the plan(s) or as provided in
subparagraph 3.4 of this Agreement;
4.3.5 Executive shall cease to accrue vacation days and shall be paid for
unused vacation time accrued since the beginning of the then current
Initial or Renewal Term in accordance with Employer's policies applicable
to employees generally; and
4.3.6 Executive shall submit any claims for reimbursement of business
expenses incurred in accordance with Section 3.5 within the time period
required under Employer's policies generally or Employer will not be
obligated to reimburse such expenses.
4.3.7 If this Agreement is terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this
Agreement, the Employer shall have no further liability to Executive
hereunder, except as explicitly stated in this Agreement, other than for
earned but unpaid compensation and those benefits (accrued but unpaid) to
which Executive is entitled under this Agreement through the date of
termination, provided, however, that in the event Executive becomes a
"Retired Early Employee" as defined in subparagraph 4.4.1 or is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, health insurance and dental benefits to
Executive will be continued as if Executive continued to remain an
employee for the remaining term of this Agreement or until Executive
obtains another position offering comparable benefits, whichever occurs
first.
4.3.8 If, during the term of this Agreement, the Executive is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period
after the Termination Date, make equal monthly payments or a single lump
sum payment to the Executive (which shall not be deemed base annual salary
payments) in an amount such that the present value of all such payments,
determined as of the Termination Date, equals the sum of (a) the Base
Salary Amount, and (b) the annual incentive compensation paid by Employer
to Executive for the most recent tax year ending before the date on which
the termination occurred. It shall be at the discretion of the
Compensation Committee as to whether the payment is made as a single lump
sum payment or equal monthly payments.
4.4. Change of Control and Change of Authority
4.4.1 Retired Early Employee. If a Change of Control and Change of
Authority, as such terms are defined in subparagraph 4.4.7 below, occurs
during the term of the Executive's employment under this Employment
Agreement, either the Executive, on the one hand, or Employer, on the
other, may elect by written notice, given to the other party or parties,
at any time within twelve (12) months after such Change of Control and
Change of Authority, to terminate the employment of the Executive by
Employer, whereupon the Executive will become a "Retired Early Employee,"
and will be entitled to receive such payments as are provided hereafter in
this Section 4.4. Such election and the termination of the Executive's
employment shall become effective on the first day of the second calendar
month commencing after delivery of the notice or on such earlier date as
the Executive in his sole discretion may specify (the "Effective Date").
4.4.2 Cash Payments. If the Executive should become a Retired Early
Employee hereunder, Employer shall, during the period commencing on the
Effective Date and ending two years thereafter (the "Pay-Out Period"),
make, in the discretion of the Compensation Committee, equal monthly
payments or a single lump sum payment to the Executive (which shall not be
deemed base
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annual salary payments) in an amount such that the present value of all
such payments, determined as of the Effective Date, equals the sum of two
times the Base Salary Amount, as such term is defined in subparagraph
4.4.7 below, plus the average of the annual incentive compensation paid by
Employer to Executive, as determined over the most recent two (2) tax
years ending before the date on which the Change of Control and Change of
Authority occurred. It shall be at the discretion of the Compensation
Committee as to whether the payment is made as a single lump sum payment
or equal monthly payments.
The payment(s) provided for in subparagraph 4.3.8 do not apply to Retired
Early Employees who receive cash payment(s) pursuant to this subparagraph.
If at any time during the Pay-Out Period the Compensation Committee of the
Board in its sole discretion shall determine, upon application of the
Retired Early Employee supported by substantial evidence, that the Retired
Early Employee is then under a severe financial hardship resulting from
(i) a sudden and unexpected illness or accident of the Retired Early
Employee or any of his dependents (as defined in section 152(a) of the
Internal Revenue Code), (ii) loss of the Retired Early Employee's property
due to casualty, or (iii) other similar extraordinary and unforeseeable
circumstance arising as a result of events beyond the control of the
Retired Early Employee, Employer shall make available to the Retired Early
Employee, in one (1) lump sum, an amount up to but not greater than the
present value of all monthly payments remaining to be paid to him in the
Pay-Out Period, calculated as of the date of such determination by the
Compensation Committee of the Board, for the purpose of relieving such
severe financial hardship to the extent the same has not been or may not
be relieved by (xi) reimbursement or compensation by insurance or
otherwise, (xii) liquidation of the Retired Early Employee's assets (to
the extent such liquidation would not itself cause severe financial
hardship), or (xiii) distributions from other benefit plans. If (a) the
lump sum amount thus made available is less than (b) the present value of
all such remaining monthly payments, Employer shall continue to pay to the
Retired Early Employee monthly payments for the duration of the Pay-Out
Period, but from such date forward such monthly payments will be in a
reduced amount such that the present value of all such reduced payments
will equal the difference between (b) and (a), above. The Retired Early
Employee may elect to waive any or all payments due him under this
subparagraph.
4.4.3 Acceleration of Stock Options. All options and other rights that
Executive may hold to purchase or otherwise acquire Common Stock of FII
shall immediately become exercisable in full for the total number of
shares that are or might become purchasable thereunder, in each case
without further condition or limitation except the giving of notice of
exercise and the payment of the purchase price thereunder (but without
amendment of the plan under which they were issued). At his discretion,
Executive may elect to surrender to Employer his rights in any such
options and rights held by him and, upon that surrender, Employer shall
pay him an amount in cash equal to the aggregate spread between the
exercise prices of all those options and rights and the value of the
Common Stock purchasable thereunder (or of any other security into which
the Common Stock has been exchanged or converted) as of the date of the
termination of employment, the value to be determined by the reported last
sale price of the Common Stock or that other security (or the mean between
the reported last bid and asked prices) on that date on NASDAQ (or, if it
is not NASDAQ, on whatever may then be the principal exchange or quotation
system on which the Employer's Common Stock or that other security is
traded at that time).
4.4.4 Life Insurance Policies. Employer shall repay any policy loans
previously taken on the Employer's insurance policies on Executive's life
(provided that the directors of Employer were given written notice
promptly after the making of any such loans which were made while
Executive was the president and chief executive officer of Employer), and
then shall transfer to Executive any and all of its right, title, and
interest in and to all Employer life insurance policies on Executive's
life (and upon that transfer, Executive shall be deemed to have released
Employer from any and all obligations it then owes to him to maintain and
pay premiums on those
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policies, all other provisions of any agreements under which those
policies were agreed to be maintained, however, to remain in effect).
4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies
before receiving all monthly payments payable to him under subparagraph
4.4(b), above, Employer shall pay to the Retired Early Employee's estate,
one (1) lump sum payment in an amount equal to the present value of all
such remaining unpaid monthly payments, determined as of the date of death
of the Retired Early Employee.
4.4.6 Indemnification of Executive. In the event a Change of Control and
Change of Authority occurs, Employer shall indemnify Executive for all
reasonable legal fees and expenses subsequently incurred by Executive
through legal counsel approved in advance by Employer in seeking to obtain
or enforce any right or benefit provided under this Employment Agreement,
including but not limited to the rights and benefits provided under this
Section 4.4 and whether or not Executive has become a Retired Early
Employee hereunder, provided, however, that such right to indemnification
will not apply if and to the extent that a court of competent jurisdiction
shall determine that any such fees and expenses have been incurred as a
result of Executive's bad faith or willful misconduct. Indemnification
payments payable hereunder by Employer shall be made not later than thirty
(30) days after a request for payment has been received from Executive
with such evidence of indemnifiable fees and expenses as Employer may
reasonably request.
4.4.7 Definitions.
(i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall
equal the annual compensation payable by Employer to Executive and
includable by Executive in gross income for the most recent year ending
before the date on which the Change of Control and Change of Authority
occurred.
(ii) A "Change of Control" shall be deemed to have occurred if
(A) any individual corporation (other than FII),
partnership, trust, association, pool, syndicate, or any other
entity or any group of persons acting in concert becomes the
beneficial owner, as that concept is defined in Rule 13d-3
promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as the result of any one
or more securities transactions (including gifts and stock
repurchases but excluding transactions described in
subdivision (B), following), of securities of FII possessing
twenty percent (20%) or more of the voting power for the
election of directors of such entity,
(B) there shall be consummated any consolidation, merger
or stock-for-stock exchange involving FII or the securities of
FII in which the holders of voting securities of FII
immediately prior to such consummation own, as a group,
immediately after such consummation, voting securities of FII
(or, if FII does not survive such transaction voting
securities of the corporation surviving such transaction)
having less than fifty percent (50%) of the total voting power
in an election of directors of FII (or such other surviving
corporation), excluding securities received by any members of
such group which represent disproportionate percentage
increases in their shareholdings vis-a-vis the other members
of such group,
(C) "approved directors" shall constitute less than a
majority of the entire Board of Directors, with "approved
directors" defined to mean the members of the Board of
Directors of Employer as of the date of this Agreement and any
subsequently elected members who shall be nominated or
approved
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by a majority of the approved directors on the Board prior to
such election, or
(D) there shall be consummated any sale, lease, exchange
or other transfer (in one transaction or a series of related
transactions, excluding any transaction described in
subdivision (B), above), of all, or substantially all, of the
assets of FII to a party which is not controlled by or under
common control with FII.
(iii) A "Change of Authority" shall be deemed to have occurred if
upon the occurrence of a Change in Control, Executive elects to
voluntarily terminate his employment following any demotion, loss of
title, or office, reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 25 miles from
its location immediately prior to the Change in Control; provided,
however, that Executive may consent in writing to any such demotion, loss,
reduction or relocation.
5. Confidentiality; Inventions.
5.1 Confidential Information. Executive has and will have access to and
participate in the development of or be acquainted with confidential or
proprietary information and trade secrets related to the business of Employer,
its subsidiaries and any affiliates (collectively, the "Companies"), including
but not limited to (i) business plans, software programs, operating plans,
marketing plans, financial reports, operating data, budgets, wage and salary
rates, pricing strategies and information, terms of agreements with suppliers or
customers and others, customer lists, reports, correspondence, tapes, disks,
tangible property and specifications owned by or used in the Companies'
businesses; (ii) operating strengths and weaknesses of the Companies' officers,
directors, employees, agents, suppliers and customers, and/or (iii) information
pertaining to future developments such as, but not limited to, research and
development, software development or enhancement, future marketing plans or
ideas, and plans or ideas for new services or products, (iv) all information
which is learned or developed by Executive in the course and performance of his
duties under this Employment Agreement, including without limitation, reports,
information and data relating to the Employer's acquisition strategies, and (v)
other tangible and intangible property which is used in the business and
operations of the Companies but not made publicly available ((i) through (v)
are, collectively, (the "Confidential Information").
5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive
shall not, directly or indirectly, disclose, use or make known for his or
another's benefit any Confidential Information of the Companies or use such
Confidential Information in any way except in the best interests of the
Companies in the performance of Executive's duties under this Agreement. In
addition, to the extent that Employer has entered into a confidentiality
agreement with any other person or entity Executive agrees to comply with the
terms of such confidentiality agreement and to be subject to the restrictions
and limitations imposed by such confidentiality agreements as if he was a party
thereto.
5.3 Inventions. Executive shall promptly disclose both orally and in
writing to Employer all discoveries, ideas, software, developments, discoveries,
designs, improvements, innovations and inventions (collectively referred to
herein as "Inventions"), whether patentable or not, either relating to the
existing or contemplated business, products, services, plans, processes, or
procedures of Employer, or suggested by or resulting from Executive's work at
Employer, or resulting wholly or in part from the use of Employer's time,
material, facilities or ideas, which Executive made or conceived or may make or
conceive, whether or not during working hours, alone or with others, at any time
during the term of this Agreement or within one year thereafter, and Executive
agrees that all such inventions shall be the exclusive property of the Employer.
5.4 Assignment of Inventions. Executive hereby assigns to Employer all his
rights and interests in and to all such inventions and all patents, copyrights,
trademarks or other types of intellectual property protection which may be
obtained
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on them, in this and all foreign countries. At Employer's expense, but without
charge to it, Executive agrees to execute, acknowledge and deliver to Employer
any specific assignments to any such inventions or other relevant documents and
to take any such further action as may be considered necessary by Employer at
any time to obtain or defend letters patent in any and all countries, to obtain
documents relating to registration, ownership or transfer of copyrights, to vest
title in such inventions in Employer or its assigns, or to obtain for Employer
any other legal protection for such inventions.
5.5 Survival of Obligations. The obligations of Executive under this Section 5
shall survive the termination of Executive's employment and the expiration or
termination of this Agreement.
6. Return of Employer's Property. Immediately upon termination of
Executive's employment with Employer, Executive shall deliver to Employer all
copies of data, information and knowledge, including, without limitation, all
notes, reference materials, sketches, diagrams, reproductions, memoranda,
documentation and records incorporating or reflecting any Confidential
Information, documents, correspondence, notebooks, reports, computer programs,
names of full-time and part-time employees and consultants, and all other
materials and copies thereof (including computer disks and other electronic
media) relating in any way to the business of Employer in any way obtained by
Executive during the period of his employment with Employer, along with any
automobile provided by Employer for Executive's use (the "Employer's Property").
The Employer's Property shall belong exclusively to the Employer and shall be
delivered to the Employer immediately upon termination of Executive's employment
with the Employer, for whatever reason said termination occurs. The obligations
of Executive under this Section 6 shall survive the termination of Executive's
employment and the expiration or termination of this Agreement.
7. Non-competition and Non-solicitation.
7.1 Non-competition. During the term of this Agreement, and for the
greater time period of eighteen (18) months, or during the period for which
Executive is entitled to receive compensation after the termination of this
Agreement pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such
compensation is paid in a lump sum rather than monthly payments, Employee shall
not engage, anywhere within New York State, whether directly or indirectly, as
principal, owner, officer, director, agent, employee, consultant or partner, in
the management of a bank holding company, commercial bank, savings bank, credit
union or any other financial services provider that competes with FII, its
subsidiaries or its products or programs ("Restricted Activities"), provided
that the foregoing shall not restrict Executive from engaging in any Restricted
Activities which Employer directs Executive to undertake or which Employer
otherwise expressly authorizes. The foregoing shall not restrict Executive from
owning less than 1% of the outstanding capital stock of any company which
engages in Restricted Activities, provided that Executive is not otherwise
involved with such company as an officer, director, agent, employee or
consultant
7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing
compliance with the provisions of Section 7.1, Executive may be a principal,
owner, officer, director, agent, consultant or partner, of any corporation,
partnership or other entity. The foregoing provisions of Section 7.1 shall not
be held invalid because of the scope of the territory covered, the actions
restricted thereby, or the period of time such covenant is operative. In the
event of a breach or threatened breach by the Executive of Section 7.1, Employer
shall be entitled to a temporary restraining order and an injunction restraining
Executive from the commission of such breach. Nothing herein shall be construed
as prohibiting Employer from pursuing any other remedies available to it for
such breach or threatened breach, including the recovery of money damages.
7.3 Non-solicitation. During the term of this Agreement and for a two (2) year
period following the Termination Date, Executive shall not, directly or
indirectly, without the written consent of Employer: (i) recruit or solicit for
employment any employee of Employer or FII or encourage any such employee to
leave their employment
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with Employer or FII, or (ii) solicit, induce or influence any customer,
supplier, lessor or any other person or entity which has a business relationship
with Employer or FII to discontinue or reduce the extent of such relationship
with Employer or FII.
7.4 In the event that the Executive breaches any of the provisions of paragraphs
7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2
shall cease immediately. Executive shall have no further entitlement to receive
cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have
no further liability for such payments after the date of Executive's breach.
7.5 The Executive and the Employer believe that the restrictions and covenants
in this section are reasonable and enforceable under the circumstances. However,
if any one or more of the provisions in this section shall, for any, reason be
held to be excessively broad as to time, duration, geographic scope, activity,
or subject, it shall be construed by limiting and reducing it so as to be
enforceable to the extent compatible with law and with the Executive's and the
Employer's intentions as stated herein.
7.6 Survival of Obligations. The obligations of Executive and Employer under
this Section 7 shall survive the termination of Executive's employment and the
expiration or termination of this Agreement.
8. Miscellaneous.
8.1 Remedies. Each of the parties hereto shall have all rights and remedies set
forth in this Agreement. All remedies hereunder are cumulative and are not
exclusive of any other remedies provided by law or any other agreement or
contract to which such person is a party. Each party shall be entitled to
enforce such rights specifically (without the requirement of posting a bond or
other security), to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights granted by law. Without limiting
the generality of the foregoing, Executive specifically agrees that any breach
or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to
Employer, that money damages would not provide an adequate remedy to Employer,
and that Employer shall accordingly have the right and remedy (i) to obtain an
injunction prohibiting Executive from violating or threatening to violate such
provisions, (ii) to have such provisions specifically enforced by any court of
competent jurisdiction, and (iii) to require Executive to account for and pay
over to Employer all compensation, profits, monies, accruals, increments or
other benefits derived or received by Executive as the result of any
transactions constituting a breach of such provisions.
8.2 Entire Agreement; Amendments and Waivers. This Agreement (including
the schedule hereto) represents the entire understanding and agreement between
the parties hereto with respect to the subject matter hereof and can be amended,
supplemented or changed, and any provision hereof can be waived, only by a
written instrument making specific reference to this Agreement signed by the
party against whom enforcement of any such amendment, supplement, modification
or waiver is sought. The waiver by any party hereto of a breach of any provision
of this Agreement shall not operate or be construed as a further or continuing
waiver of such breach or as a waiver of any other or subsequent breach. No
failure on the part of any party to exercise, and no delay in exercising, any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of such right, power or remedy by such party
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
8.3 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York without reference to its
principles of conflicts of law.
8.4 Notices. All notices, demands, solicitations of consent or approval,
and other communications hereunder shall be in writing and shall be delivered
personally, mailed, sent by telefax or sent by recognized commercial courier
(e.g., Federal Express). If delivered personally, such notice shall be deemed to
be given
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when delivered to the intended recipient. If delivered by mail, such notice
shall be deemed to be given five (5) days after having been deposited in the
United States mail so addressed, with postage thereon prepaid. If delivered by
telefax, such notice shall be deemed given when transmission of the notice is
complete to the telefax number of the other party. If delivered by recognized
commercial carrier, such notice shall be deemed given one (1) day after having
been delivered to a recognized commercial carrier for overnight delivery. All
such notices shall be addressed to the address set forth in the preamble to this
Agreement or to such other address which such party shall have given to the
other party for such purpose by notice hereunder.
8.5 Captions. The headings used in this Agreement are intended for
reference purposes only and shall not control or affect in any manner the
meaning or interpretation of any of the provisions of is Agreement.
8.6 Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions of this Agreement, and this Agreement shall be construed in all
respects as if such invalid or unenforceable provision were omitted. All
provisions of this Agreement shall be enforced to the full extent permitted by
law.
8.7 Interpretation. The parties acknowledge and agree that: (i) each party
and its counsel reviewed and negotiated the terms and provisions of this
Agreement and have contributed to its revision; (ii) the rule of construction to
the effect that any ambiguities are resolved against the drafting party shall
not be employed in the interpretation of this Agreement; and (iii) the terms and
provisions of this Agreement shall be construed fairly as to all parties hereto,
regardless of which party was generally responsible for the preparation of this
Agreement.
8.8 Counterparts. This Agreement may be executed in any number of copies,
each of which shall be deemed an original, and all of which together will be
deemed one and the same instrument.
8.9 Successors and Assigns. All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind, and inure to
the benefit of the respective successors and permitted assigns of the parties
hereto whether so expressed or not. Neither party shall transfer or assign this
Agreement or any of their rights or obligations hereunder, whether by operation
of law or otherwise, without the prior written consent of the other party
hereto. Any attempted transfer or assignment of this Agreement or any rights or
obligations hereunder in violation of this provision shall be void ab initio.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first above written.
The National Bank of Geneva
By:
Name: Peter G. Humphrey
Title: President & CEO
Financial Institutions, Inc.
_________________________________________
Thomas L. Kime
President & CEO
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EX-10.6
(Exhibit 10.6)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as of
the 15th day of March, 2000, between The Pavilion State Bank ("Employer"), a
bank chartered under the laws of New York having its principal office at 6948
Cato Street, Pavilion, New York 14525 and W. J. Humphrey III ("Executive"), an
individual residing at 7989 Oatka Trail, LeRoy, New York 14482.
WHEREAS, Employer wishes to employ Executive in an executive capacity, as its
President, and Executive wishes to accept such employment on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants
herein contained, Employer and Executive hereby agree as follows:
1. Effective Date; Term.
1.1 Effective Date. This Agreement shall be effective commencing on the date
hereof (the "Effective Date").
1.2 Initial Term. Employer employs Executive, and Executive accepts such
employment, for a three (3) year period commencing on the Effective Date (the
"Initial Term").
1.3 Renewal Term. This Agreement will automatically renew for successive three
year terms (each a "Renewal Term") upon the expiration of the Initial Term or a
subsequent Renewal Term unless either party provides written notice to the other
at least ninety (90) days before the end of the Initial Term or Renewal Term
that such party does not intend to renew this Agreement upon the expiration
thereof.
1.4 Termination. This Agreement may be terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this Agreement.
2. Scope of Employment.
2.1 Position and Duties. During the term of this Agreement, Employer shall
employ Executive to serve as the President of Employer. In such capacity,
Executive shall perform such executive, administrative and operational duties as
may be assigned to Executive from time to time by the Board of Directors of
Employer.
2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the
best of Executive's ability and to devote Executive's entire business time,
attention and efforts to the interests and business of Employer, its
subsidiaries and their affiliates.
2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to
and perform all his duties in accordance with applicable laws, rules and
regulations and the written policies and procedures of Employer in effect from
time to time.
3. Compensation, Benefits and Expenses.
3.1 Base Salary. Except as otherwise provided in this Agreement, during the
period from the Effective Date through December 31, 1999 (the "First Year")
Employer shall pay to Executive a base salary at a rate of $125,001 per year
(the "Base Salary"). The Base Salary may be increased, in the sole discretion of
Employer,
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during the second and third years of the terms of this Agreement, but may not be
decreased. Employer shall pay the Base Salary to Executive in equal installments
pursuant to Employer's standard payroll policies and Executive's salary shall be
subject to such withholding or deductions as may be mutually agreed between
Employer and Executive or required by law.
3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may
receive bonuses as follows:
3.2.1 If the Employer meets or exceeds its budget for revenue and profit,
the Executive is eligible for a bonus which shall be determined by the
Compensation Committee of the Board of Directors of Employer.
3.2.3 The bonus earned by Executive during the term of this Agreement, if
any, shall be paid to Executive in a lump sum promptly after the
Employer's audited annual financial results are publicly disclosed.
3.2.4 Employer does not guarantee that any bonus will be awarded or paid
to Executive. Payment of any bonus shall be subject to such withholding or
deductions as may be mutually agreed between Employer and Executive or
required by law.
3.3 Incentive Stock Plan Benefits. During the period of his employment,
Executive shall be entitled to receive grants of options under any incentive
stock plan operated by Financial Institutions, Inc. ("FII") for its employees
and those of its subsidiaries, in such amounts as may be determined by the
appropriate Committee of the Board of Directors or the Board of Directors of
Employer, or by the FII Compensation Committee.
3.4 Fringe Benefits. During the period of his employment, Executive shall be
entitled to participate in FII's plans for the welfare and benefit of its
employees to the extent Executive satisfies the requirements provided in such
plans, health and other qualifications for participation. In the event Executive
becomes a "Retired Early Employee" as defined in subparagraph 4.4.1 and 4.4.2,
or is terminated for reasons other than those set forth in subparagraphs 4.1.3,
4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as
if Executive continued to remain an employee for the remaining term of this
Agreement or until Executive obtains a position offering comparable benefits,
whichever occurs first.
3.5 Vacation and Holidays. During the term of this Agreement, Executive shall
accrue paid vacation in accordance with Employer's policies of four (4) weeks
per year. Executive shall be entitled to take accrued vacation days and paid
holidays in accordance with Employer's policies applicable to its employees
generally. Executive may not carry forward vacation days from year to year.
3.6 Expenses. During the term of this Agreement, Employer authorizes Executive
to incur reasonable and necessary out-of-pocket business expenses in the course
of performing his duties and rendering services hereunder in accordance with
Employer's policies with respect thereto, and Employer shall reimburse Executive
for all such expenses, provided (i) such expenses and the purpose for which they
were incurred, are in accordance with Employer's policies, and (ii) Executive
timely submits to Employer expense reports and substantiation of the expenses in
accordance with Employer's policies.
3.7 Country Club Dues and Automobile Expenses. During the term of this
Agreement, in the discretion of the Board of Directors, Employer shall reimburse
Executive for monthly membership dues at a country club of Executive's choosing,
and shall provide Executive with use of a suitable automobile.
4. Termination.
4.1 Termination. Executive's Employment by Employer shall terminate at the
expiration of the Initial Term or any Renewal Term provided timely notice is
given
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as provided in Section 1.3 and shall terminate prior to the expiration of the
then current term on the earlier of:
4.1.1 the death of Executive;
4.1.2 the date on which Executive is (i) determined to be "permanently
disabled" as defined under the disability insurance policy covering
Executive, or (ii) if Executive is not covered by any such disability
policy, Executive is determined to be "totally disabled" by the Board of
Directors of Employer based upon the advice of a board certified physician
reasonably acceptable to Employer and Executive or his legal
representative, which may include a determination that Executive is
unable, because of physical or mental illness or incapacity or otherwise,
to fulfill his duties under this Agreement for six consecutive months or
appears unable to perform such duties for an indefinite period of time;
4.1.3 the commission by Executive of (i) a felony conviction which is
final and non-appealable, (ii) a breach of fiduciary duty, (iii) a
material act of dishonesty, fraud or misrepresentation, or (iv) any act of
moral turpitude which the Board of Directors determines has or may be
reasonably expected to have a material detrimental impact on Employer's
business or operations or prevent, because of its demonstrated or
demonstrable effect on employees, regulatory agencies or customers,
Executive from effectively performing his executive and other duties under
this Agreement;
4.1.4 Executive neglects to satisfactorily perform the duties which
Executive is required to perform under this Agreement or performs such
duties other than in good faith, as determined by the Board of Directors.
The Board will provide a written notice to the Executive, specifying the
unsatisfactory performance and suggest what must be done to improve and
maintain such performance. The written notice will also specify the time
period (considered probationary period) given the Executive to correct
such conduct.
4.1.5 the termination of Executive's employment by Employer during the
term of this Agreement for any reason without cause other than pursuant to
Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4;
4.1.6 Executive's resignation or retirement; or
4.1.7 the mutual consent to such termination in writing by Executive and
Employer.
4.2 Time of Termination. Executive's employment with Employer shall terminate
immediately upon Executive's death, upon written notice of termination from
Employer or Executive upon the occurrence of an event specified in Sections
4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified
in Section 4.1.4, upon the execution of a writing terminating Executive's
employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or
a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable,
the "Termination Date"). Employer's obligations under this Agreement shall
terminate upon such termination of employment without any further action by the
parties except to the extent specifically provided herein.
4.3 Effect of Termination of Employment. Following the Termination Date:
4.3.1 Executive shall return all property of Employer as provided in
Section 6 of this Agreement;
4.3.2 Executive's salary shall cease to accrue;
4.3.3 subject to Section 4.4, the Board of Directors shall determine an
appropriate bonus to pay to Executive as his bonus or other incentive
compensation for the period through the Termination Date computed
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consistently with the manner in which Executive's bonus or incentive
compensation would have been determined for such period if Executive's
employment had not terminated;
4.3.4 Executive's participation in FII's benefit plans shall cease except
as required by law, the terms of the plan(s) or as provided in
subparagraph 3.4 of this Agreement;
4.3.5 Executive shall cease to accrue vacation days and shall be paid for
unused vacation time accrued since the beginning of the then current
Initial or Renewal Term in accordance with Employer's policies applicable
to employees generally; and
4.3.6 Executive shall submit any claims for reimbursement of business
expenses incurred in accordance with Section 3.5 within the time period
required under Employer's policies generally or Employer will not be
obligated to reimburse such expenses.
4.3.7 If this Agreement is terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this
Agreement, the Employer shall have no further liability to Executive
hereunder, except as explicitly stated in this Agreement, other than for
earned but unpaid compensation and those benefits (accrued but unpaid) to
which Executive is entitled under this Agreement through the date of
termination, provided, however, that in the event Executive becomes a
"Retired Early Employee" as defined in subparagraph 4.4.1 or is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, health insurance and dental benefits to
Executive will be continued as if Executive continued to remain an
employee for the remaining term of this Agreement or until Executive
obtains another position offering comparable benefits, whichever occurs
first.
4.3.8 If, during the term of this Agreement, the Executive is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period
after the Termination Date, make equal monthly payments or a single lump
sum payment to the Executive (which shall not be deemed base annual salary
payments) in an amount such that the present value of all such payments,
determined as of the Termination Date, equals the sum of (a) the Base
Salary Amount, and (b) the annual incentive compensation paid by Employer
to Executive for the most recent tax year ending before the date on which
the termination occurred. It shall be at the discretion of the
Compensation Committee, as to whether the payment is made as a single lump
sum payment or equal monthly payments.
4.4. Change of Control and Change of Authority
4.4.1 Retired Early Employee. If a Change of Control and Change of
Authority, as such terms are defined in subparagraph 4.4.7 below, occurs
during the term of the Executive's employment under this Employment
Agreement, either the Executive, on the one hand, or Employer, on the
other, may elect by written notice, given to the other party or parties,
at any time within twelve (12) months after such Change of Control and
Change of Authority, to terminate the employment of the Executive by
Employer, whereupon the Executive will become a "Retired Early Employee,"
and will be entitled to receive such payments as are provided hereafter in
this Section 4.4. Such election and the termination of the Executive's
employment shall become effective on the first day of the second calendar
month commencing after delivery of the notice or on such earlier date as
the Executive in his sole discretion may specify (the "Effective Date").
4.4.2 Cash Payments. If the Executive should become a Retired Early
Employee hereunder, Employer shall, during the period commencing on the
Effective Date and ending two years thereafter (the "Pay-Out Period"),
make equal monthly payments or a single lump sum payment to the Executive
(which shall not be deemed base annual salary payments) in an amount such
that the
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present value of all such payments, determined as of the Effective Date,
equals the sum of two times the Base Salary Amount, as such term is
defined in subparagraph 4.4.7 below, plus the average of the annual
incentive compensation paid by Employer to Executive, as determined over
the most recent two (2) tax years ending before the date on which the
Change of Control and Change of Authority occurred. It shall be at the
discretion of the Compensation Committee, as to whether the payment is
made as a single lump sum payment or equal monthly payments. The
payment(s) provided for in subparagraph 4.3.8 do not apply to Retired
Early Employees who receive cash payment(s) pursuant to this subparagraph.
If at any time during the Pay-Out Period the Compensation Committee of the
Board in its sole discretion shall determine, upon application of the
Retired Early Employee supported by substantial evidence, that the Retired
Early Employee is then under a severe financial hardship resulting from
(i) a sudden and unexpected illness or accident of the Retired Early
Employee or any of his dependents (as defined in section 152(a) of the
Internal Revenue Code), (ii) loss of the Retired Early Employee's property
due to casualty, or (iii) other similar extraordinary and unforeseeable
circumstance arising as a result of events beyond the control of the
Retired Early Employee, Employer shall make available to the Retired Early
Employee, in one (1) lump sum, an amount up to but not greater than the
present value of all monthly payments remaining to be paid to him in the
Pay-Out Period, calculated as of the date of such determination by the
Compensation Committee of the Board, for the purpose of relieving such
severe financial hardship to the extent the same has not been or may not
be relieved by (xi) reimbursement or compensation by insurance or
otherwise, (xii) liquidation of the Retired Early Employee's assets (to
the extent such liquidation would not itself cause severe financial
hardship), or (xiii) distributions from other benefit plans. If (a) the
lump sum amount thus made available is less than (b) the present value of
all such remaining monthly payments, Employer shall continue to pay to the
Retired Early Employee monthly payments for the duration of the Pay-Out
Period, but from such date forward such monthly payments will be in a
reduced amount such that the present value of all such reduced payments
will equal the difference between (b) and (a), above. The Retired Early
Employee may elect to waive any or all payments due him under this
subparagraph.
4.4.3 Acceleration of Stock Options. All options and other rights that
Executive may hold to purchase or otherwise acquire Common Stock of FII
shall immediately become exercisable in full for the total number of
shares that are or might become purchasable thereunder, in each case
without further condition or limitation except the giving of notice of
exercise and the payment of the purchase price thereunder (but without
amendment of the plan under which they were issued). At his discretion,
Executive may elect to surrender to Employer his rights in any such
options and rights held by him and, upon that surrender, Employer shall
pay him an amount in cash equal to the aggregate spread between the
exercise prices of all those options and rights and the value of the
Common Stock purchasable thereunder (or of any other security into which
the Common Stock has been exchanged or converted) as of the date of the
termination of employment, the value to be determined by the reported last
sale price of the Common Stock or that other security (or the mean between
the reported last bid and asked prices) on that date on NASDAQ (or, if it
is not NASDAQ, on whatever may then be the principal exchange or quotation
system on which the Employer's Common Stock or that other security is
traded at that time).
4.4.4 Life Insurance Policies. Employer shall repay any policy loans
previously taken on the Employer's insurance policies on Executive's life
(provided that the directors of Employer were given written notice
promptly after the making of any such loans which were made while
Executive was the president and chief executive officer of Employer), and
then shall transfer to Executive any and all of its right, title, and
interest in and to all Employer life insurance policies on Executive's
life (and upon that transfer, Executive shall be deemed to have released
Employer from any and all obligations it then owes to him to maintain and
pay premiums on those
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policies, all other provisions of any agreements under which those
policies were agreed to be maintained, however, to remain in effect).
4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies
before receiving all monthly payments payable to him under subparagraph
4.4(b), above, Employer shall pay to the Retired Early Employee's estate,
one (1) lump sum payment in an amount equal to the present value of all
such remaining unpaid monthly payments, determined as of the date of death
of the Retired Early Employee.
4.4.6 Indemnification of Executive. In the event a Change of Control and
Change of Authority occurs, Employer shall indemnify Executive for all
reasonable legal fees and expenses subsequently incurred by Executive
through legal counsel approved in advance by Employer in seeking to obtain
or enforce any right or benefit provided under this Employment Agreement,
including but not limited to the rights and benefits provided under this
Section 4.4 and whether or not Executive has become a Retired Early
Employee hereunder, provided, however, that such right to indemnification
will not apply if and to the extent that a court of competent jurisdiction
shall determine that any such fees and expenses have been incurred as a
result of Executive's bad faith or willful misconduct. Indemnification
payments payable hereunder by Employer shall be made not later than thirty
(30) days after a request for payment has been received from Executive
with such evidence of indemnifiable fees and expenses as Employer may
reasonably request.
4.4.7 Definitions.
(i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall
equal the annual compensation payable by Employer to Executive and
includable by Executive in gross income for the most recent year ending
before the date on which the Change of Control and Change of Authority
occurred.
(ii) A "Change of Control" shall be deemed to have occurred if
(A) any individual corporation (other than FII),
partnership, trust, association, pool, syndicate, or any other
entity or any group of persons acting in concert becomes the
beneficial owner, as that concept is defined in Rule 13d-3
promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as the result of any one
or more securities transactions (including gifts and stock
repurchases but excluding transactions described in
subdivision (B), following), of securities of FII possessing
twenty percent (20%) or more of the voting power for the
election of directors of suchentity,
(B) there shall be consummated any consolidation, merger
or stock-for-stock exchange involving FII or the securities of
FII in which the holders of voting securities of FII
immediately prior to such consummation own, as a group,
immediately after such consummation, voting securities of FII
(or, if FII does not survive such transaction voting
securities of the corporation surviving such transaction)
having less than fifty percent (50%) of the total voting power
in an election of directors of FII (or such other surviving
corporation), excluding securities received by any members of
such group which represent disproportionate percentage
increases in their shareholdings vis-a-vis the other members
of such group,
(C) "approved directors" shall constitute less than a
majority of the entire Board of Directors, with "approved
directors" defined to mean the members of the Board of
Directors of Employer as of the date of this Agreement and any
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subsequently elected members who shall be nominated or
approved by a majority of the approved directors on the Board
prior to such election, or
(D) there shall be consummated any sale, lease, exchange
or other transfer (in one transaction or a series of related
transactions, excluding any transaction described in
subdivision (B), above), of all, or substantially all, of the
assets of FII to a party which is not controlled by or under
common control with FII.
(iii) A "Change of Authority" shall be deemed to have occurred if
upon the occurrence of a Change in Control, Executive elects to
voluntarily terminate his employment following any demotion, loss of
title, or office, reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 25 miles from
its location immediately prior to the Change in Control; provided,
however, that Executive may consent in writing to any such demotion, loss,
reduction or relocation.
5. Confidentiality; Inventions.
5.1 Confidential Information. Executive has and will have access to and
participate in the development of or be acquainted with confidential or
proprietary information and trade secrets related to the business of Employer,
its subsidiaries and any affiliates (collectively, the "Companies"), including
but not limited to (i) business plans, software programs, operating plans,
marketing plans, financial reports, operating data, budgets, wage and salary
rates, pricing strategies and information, terms of agreements with suppliers or
customers and others, customer lists, reports, correspondence, tapes, disks,
tangible property and specifications owned by or used in the Companies'
businesses; (ii) operating strengths and weaknesses of the Companies' officers,
directors, employees, agents, suppliers and customers, and/or (iii) information
pertaining to future developments such as, but not limited to, research and
development, software development or enhancement, future marketing plans or
ideas, and plans or ideas for new services or products, (iv) all information
which is learned or developed by Executive in the course and performance of his
duties under this Employment Agreement, including without limitation, reports,
information and data relating to the Employer's acquisition strategies, and (v)
other tangible and intangible property which is used in the business and
operations of the Companies but not made publicly available ((i) through (v)
are, collectively, (the "Confidential Information").
5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive
shall not, directly or indirectly, disclose, use or make known for his or
another's benefit any Confidential Information of the Companies or use such
Confidential Information in any way except in the best interests of the
Companies in the performance of Executive's duties under this Agreement. In
addition, to the extent that Employer has entered into a confidentiality
agreement with any other person or entity Executive agrees to comply with the
terms of such confidentiality agreement and to be subject to the restrictions
and limitations imposed by such confidentiality agreements as if he was a party
thereto.
5.3 Inventions. Executive shall promptly disclose both orally and in
writing to Employer all discoveries, ideas, software, developments, discoveries,
designs, improvements, innovations and inventions (collectively referred to
herein as "Inventions"), whether patentable or not, either relating to the
existing or contemplated business, products, services, plans, processes, or
procedures of Employer, or suggested by or resulting from Executive's work at
Employer, or resulting wholly or in part from the use of Employer's time,
material, facilities or ideas, which Executive made or conceived or may make or
conceive, whether or not during working hours, alone or with others, at any time
during the term of this Agreement or within one year thereafter, and Executive
agrees that all such inventions shall be the exclusive property of the Employer.
5.4 Assignment of Inventions. Executive hereby assigns to Employer all his
rights and interests in and to all such inventions and all patents, copyrights,
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trademarks or other types of intellectual property protection which may be
obtained on them, in this and all foreign countries. At Employer's expense, but
without charge to it, Executive agrees to execute, acknowledge and deliver to
Employer any specific assignments to any such inventions or other relevant
documents and to take any such further action as may be considered necessary by
Employer at any time to obtain or defend letters patent in any and all
countries, to obtain documents relating to registration, ownership or transfer
of copyrights, to vest title in such inventions in Employer or its assigns, or
to obtain for Employer any other legal protection for such inventions.
5.5 Survival of Obligations. The obligations of Executive under this Section 5
shall survive the termination of Executive's employment and the expiration or
termination of this Agreement.
6. Return of Employer's Property. Immediately upon termination of
Executive's employment with Employer, Executive shall deliver to Employer all
copies of data, information and knowledge, including, without limitation, all
notes, reference materials, sketches, diagrams, reproductions, memoranda,
documentation and records incorporating or reflecting any Confidential
Information, documents, correspondence, notebooks, reports, computer programs,
names of full-time and part-time employees and consultants, and all other
materials and copies thereof (including computer disks and other electronic
media) relating in any way to the business of Employer in any way obtained by
Executive during the period of his employment with Employer, along with any
automobile provided by Employer for Executive's use (the "Employer's Property").
The Employer's Property shall belong exclusively to the Employer and shall be
delivered to the Employer immediately upon termination of Executive's employment
with the Employer, for whatever reason said termination occurs. The obligations
of Executive under this Section 6 shall survive the termination of Executive's
employment and the expiration or termination of this Agreement.
7. Non-competition and Non-solicitation.
7.1 Non-competition. During the term of this Agreement, and for the
greater period of eighteen (18) months, or during the period for which Executive
is entitled to receive compensation after the termination of this Agreement
pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such
compensation is paid in a lump sum rather than monthly payments, employee shall
not engage, anywhere within New York State, whether directly or indirectly, as
principal, owner, officer, director, agent, employee, consultant or partner, in
the management of a bank holding company, commercial bank, savings bank, credit
union or any other financial services provider that competes with FII, its
subsidiaries or its products or programs ("Restricted Activities"), provided
that the foregoing shall not restrict Executive from engaging in any Restricted
Activities which Employer directs Executive to undertake or which Employer
otherwise expressly authorizes. The foregoing shall not restrict Executive from
owning less than 1% of the outstanding capital stock of any company which
engages in Restricted Activities, provided that Executive is not otherwise
involved with such company as an officer, director, agent, employee or
consultant.
7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing
compliance with the provisions of Section 7.1, Executive may be a principal,
owner, officer, director, agent, consultant or partner, of any corporation,
partnership or other entity. The foregoing provisions of Section 7.1 shall not
be held invalid because of the scope of the territory covered, the actions
restricted thereby, or the period of time such covenant is operative. In the
event of a breach or threatened breach by the Executive of Section 7.1, Employer
shall be entitled to a temporary restraining order and an injunction restraining
Executive from the commission of such breach. Nothing herein shall be construed
as prohibiting Employer from pursuing any other remedies available to it for
such breach or threatened breach, including the recovery of money damages.
7.3 Non-solicitation. During the term of this Agreement and for a two (2) year
period following the Termination Date, Executive shall not, directly or
indirectly, without the written consent of Employer: (i) recruit or solicit for
employment any
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employee of Employer or FII or encourage any such employee to leave their
employment with Employer or FII, or (ii) solicit, induce or influence any
customer, supplier, lessor or any other person or entity which has a business
relationship with Employer or FII to discontinue or reduce the extent of such
relationship with Employer or FII.
7.4 In the event that the Executive breaches any of the provisions of paragraphs
7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2
shall cease immediately. Executive shall have no further entitlement to receive
cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have
no further liability for such payments after the date of Executive's breach.
7.5 The Executive and the Employer believe that the restrictions and covenants
in this section are reasonable and enforceable under the circumstances. However,
if any one or more of the provisions in this section shall, for any, reason be
held to be excessively broad as to time, duration, geographic scope, activity,
or subject, it shall be construed by limiting and reducing it so as to be
enforceable to the extent compatible with law and with the Executive's and the
Employer's intentions as stated herein.
7.6 Survival of Obligations. The obligations of Executive and Employer under
this Section 7 shall survive the termination of Executive's employment and the
expiration or termination of this Agreement.
8. Miscellaneous.
8.1 Remedies. Each of the parties hereto shall have all rights and remedies set
forth in this Agreement. All remedies hereunder are cumulative and are not
exclusive of any other remedies provided by law or any other agreement or
contract to which such person is a party. Each party shall be entitled to
enforce such rights specifically (without the requirement of posting a bond or
other security), to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights granted by law. Without limiting
the generality of the foregoing, Executive specifically agrees that any breach
or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to
Employer, that money damages would not provide an adequate remedy to Employer,
and that Employer shall accordingly have the right and remedy (i) to obtain an
injunction prohibiting Executive from violating or threatening to violate such
provisions, (ii) to have such provisions specifically enforced by any court of
competent jurisdiction, and (iii) to require Executive to account for and pay
over to Employer all compensation, profits, monies, accruals, increments or
other benefits derived or received by Executive as the result of any
transactions constituting a breach of such provisions.
8.2 Entire Agreement; Amendments and Waivers. This Agreement (including
the schedule hereto) represents the entire understanding and agreement between
the parties hereto with respect to the subject matter hereof and can be amended,
supplemented or changed, and any provision hereof can be waived, only by a
written instrument making specific reference to this Agreement signed by the
party against whom enforcement of any such amendment, supplement, modification
or waiver is sought. The waiver by any party hereto of a breach of any provision
of this Agreement shall not operate or be construed as a further or continuing
waiver of such breach or as a waiver of any other or subsequent breach. No
failure on the part of any party to exercise, and no delay in exercising, any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of such right, power or remedy by such party
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
8.3 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York without reference to its
principles of conflicts of law.
8.4 Notices. All notices, demands, solicitations of consent or approval,
and other communications hereunder shall be in writing and shall be delivered
personally, mailed, sent by telefax or sent by recognized commercial courier
(e.g.,
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Federal Express). If delivered personally, such notice shall be deemed to be
given when delivered to the intended recipient. If delivered by mail, such
notice shall be deemed to be given five (5) days after having been deposited in
the United States mail so addressed, with postage thereon prepaid. If delivered
by telefax, such notice shall be deemed given when transmission of the notice is
complete to the telefax number of the other party. If delivered by recognized
commercial carrier, such notice shall be deemed given one (1) day after having
been delivered to a recognized commercial carrier for overnight delivery. All
such notices shall be addressed to the address set forth in the preamble to this
Agreement or to such other address which such party shall have given to the
other party for such purpose by notice hereunder.
8.5 Captions. The headings used in this Agreement are intended for
reference purposes only and shall not control or affect in any manner the
meaning or interpretation of any of the provisions of is Agreement.
8.6 Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions of this Agreement, and this Agreement shall be construed in all
respects as if such invalid or unenforceable provision were omitted. All
provisions of this Agreement shall be enforced to the full extent permitted by
law.
8.7 Interpretation. The parties acknowledge and agree that: (i) each party
and its counsel reviewed and negotiated the terms and provisions of this
Agreement and have contributed to its revision; (ii) the rule of construction to
the effect that any ambiguities are resolved against the drafting party shall
not be employed in the interpretation of this Agreement; and (iii) the terms and
provisions of this Agreement shall be construed fairly as to all parties hereto,
regardless of which party was generally responsible for the preparation of this
Agreement.
8.8 Counterparts. This Agreement may be executed in any number of copies,
each of which shall be deemed an original, and all of which together will be
deemed one and the same instrument.
8.9 Successors and Assigns. All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind, and inure to
the benefit of the respective successors and permitted assigns of the parties
hereto whether so expressed or not. Neither party shall transfer or assign this
Agreement or any of their rights or obligations hereunder, whether by operation
of law or otherwise, without the prior written consent of the other party
hereto. Any attempted transfer or assignment of this Agreement or any rights or
obligations hereunder in violation of this provision shall be void ab initio.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first above written.
The Pavilion State Bank
By:
Name: Peter G. Humphrey
Title: President & CEO
Financial Institutions, Inc.
_________________________________________
W. J. Humphrey III
President & CEO
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EX-10.7
(Exhibit 10.7)
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is made and entered into as of
the 15th day of March, 2000, between First Tier Bank & Trust ("Employer"), a
bank chartered under the laws of New York having its principal office at 107
Main Street, Salamanca, New York 14779 and Randolph C. Brown ("Executive"), an
individual residing at 114 Bradley Drive, Olean, New York 14760.
WHEREAS, Employer wishes to employ Executive in an executive capacity, as its
President, and Executive wishes to accept such employment on the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises, benefits and covenants
herein contained, Employer and Executive hereby agree as follows:
1. Effective Date; Term.
1.1 Effective Date. This Agreement shall be effective commencing on the date
hereof (the "Effective Date").
1.2 Initial Term. Employer employs Executive, and Executive accepts such
employment, for a three (3) year period commencing on the Effective Date (the
"Initial Term").
1.3 Renewal Term. This Agreement will automatically renew for successive three
year terms (each a "Renewal Term") upon the expiration of the Initial Term or a
subsequent Renewal Term unless either party provides written notice to the other
at least ninety (90) days before the end of the Initial Term or Renewal Term
that such party does not intend to renew this Agreement upon the expiration
thereof.
1.4 Termination. This Agreement may be terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this Agreement.
2. Scope of Employment.
2.1 Position and Duties. During the term of this Agreement, Employer shall
employ Executive to serve as the President of Employer. In such capacity,
Executive shall perform such executive, administrative and operational duties as
may be assigned to Executive from time to time by the Board of Directors of
Employer.
2.2 Exclusive Efforts. Executive agrees to serve Employer faithfully and to the
best of Executive's ability and to devote Executive's entire business time,
attention and efforts to the interests and business of Employer, its
subsidiaries and their affiliates.
2.3 Compliance with Laws. Executive agrees at all times to strictly adhere to
and perform all his duties in accordance with applicable laws, rules and
regulations and the written policies and procedures of Employer in effect from
time to time.
3. Compensation, Benefits and Expenses.
3.1 Base Salary. Except as otherwise provided in this Agreement, during the
period from the Effective Date through December 31, 1999 (the "First Year")
Employer shall pay to Executive a base salary at a rate of $109,000 per year
(the "Base Salary"). The Base Salary may be increased, in the sole discretion of
Employer,
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during the second and third years of the terms of this Agreement, but may not be
decreased. Employer shall pay the Base Salary to Executive in equal installments
pursuant to Employer's standard payroll policies and Executive's salary shall be
subject to such withholding or deductions as may be mutually agreed between
Employer and Executive or required by law.
3.2 Bonus. In addition to the salary set forth in Section 3.1, Executive may
receive bonuses as follows:
3.2.1 If the Employer meets or exceeds its budget for revenue and profit,
the Executive is eligible for a bonus which shall be determined by the
Compensation Committee of the Board of Directors of Employer.
3.2.3 The bonus earned by Executive during the term of this Agreement, if
any, shall be paid to Executive in a lump sum promptly after the
Employer's audited annual financial results are publicly disclosed.
3.2.4 Employer does not guarantee that any bonus will be awarded or paid
to Executive. Payment of any bonus shall be subject to such withholding or
deductions as may be mutually agreed between Employer and Executive or
required by law.
3.3 Incentive Stock Plan Benefits. During the period of his employment,
Executive shall be entitled to receive grants of options under any incentive
stock plan operated by Financial Institutions, Inc. ("FII") for its employees
and those of its subsidiaries, in such amounts as may be determined by the
appropriate Committee of the Board of Directors or the Board of Directors of
Employer, or by the FII Compensation Committee.
3.4 Fringe Benefits. During the period of his employment, Executive shall be
entitled to participate in FII's plans for the welfare and benefit of its
employees to the extent Executive satisfies the requirements provided in such
plans, health and other qualifications for participation. In the event Executive
becomes a "Retired Early Employee" as defined in subparagraph 4.4.1 and 4.4.2,
or is terminated for reasons other than those set forth in subparagraphs 4.1.3,
4.1.4, 4.1.6 or 4.1.7 health insurance and dental benefits will be continued as
if Executive continued to remain an employee for the remaining term of this
Agreement or until Executive obtains a position offering comparable benefits,
whichever occurs first.
3.5 Vacation and Holidays. During the term of this Agreement, Executive shall
accrue paid vacation in accordance with Employer's policies of four (4) weeks
per year. Executive shall be entitled to take accrued vacation days and paid
holidays in accordance with Employer's policies applicable to its employees
generally. Executive may not carry forward vacation days from year to year.
3.6 Expenses. During the term of this Agreement, Employer authorizes Executive
to incur reasonable and necessary out-of-pocket business expenses in the course
of performing his duties and rendering services hereunder in accordance with
Employer's policies with respect thereto, and Employer shall reimburse Executive
for all such expenses, provided (i) such expenses and the purpose for which they
were incurred, are in accordance with Employer's policies, and (ii) Executive
timely submits to Employer expense reports and substantiation of the expenses in
accordance with Employer's policies.
3.7 Country Club Dues and Automobile Expenses. During the term of this
Agreement, in the discretion of the Board of Directors, Employer shall reimburse
Executive for monthly membership dues at a country club of Executive's choosing,
and shall provide Executive with use of a suitable automobile.
4. Termination.
4.1 Termination. Executive's Employment by Employer shall terminate at the
expiration of the Initial Term or any Renewal Term provided timely notice is
given
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as provided in Section 1.3 and shall terminate prior to the expiration of the
then current term on the earlier of:
4.1.1 the death of Executive;
4.1.2 the date on which Executive is (i) determined to be "permanently
disabled" as defined under the disability insurance policy covering
Executive, or (ii) if Executive is not covered by any such disability
policy, Executive is determined to be "totally disabled" by the Board of
Directors of Employer based upon the advice of a board certified physician
reasonably acceptable to Employer and Executive or his legal
representative, which may include a determination that Executive is
unable, because of physical or mental illness or incapacity or otherwise,
to fulfill his duties under this Agreement for six consecutive months or
appears unable to perform such duties for an indefinite period of time;
4.1.3 the commission by Executive of (i) a felony conviction which is
final and non-appealable, (ii) a breach of fiduciary duty, (iii) a
material act of dishonesty, fraud or misrepresentation, or (iv) any act of
moral turpitude which the Board of Directors determines has or may be
reasonably expected to have a material detrimental impact on Employer's
business or operations or prevent, because of its demonstrated or
demonstrable effect on employees, regulatory agencies or customers,
Executive from effectively performing his executive and other duties under
this Agreement;
4.1.4 Executive neglects to satisfactorily perform the duties which
Executive is required to perform under this Agreement or performs such
duties other than in good faith, as determined by the Board of Directors.
The Board will provide a written notice to the Executive, specifying the
unsatisfactory performance and suggest what must be done to improve and
maintain such performance. The written notice will also specify the time
period (considered probationary period) given the Executive to correct
such conduct.
4.1.5 the termination of Executive's employment by Employer during the
term of this Agreement for any reason without cause other than pursuant to
Sections 4.1.1, 4.1.2, 4.1.3 or 4.1.4;
4.1.6 Executive's resignation or retirement; or
4.1.7 the mutual consent to such termination in writing by Executive and
Employer.
4.2 Time of Termination. Executive's employment with Employer shall terminate
immediately upon Executive's death, upon written notice of termination from
Employer or Executive upon the occurrence of an event specified in Sections
4.1.2, 4.1.3, 4.1.5 or 4.1.6, upon the expiration of the cure period specified
in Section 4.1.4, upon the execution of a writing terminating Executive's
employment pursuant to Section 4.1.7, or upon expiration of the Initial Term or
a Renewal Term if timely notice is given pursuant to Section 1.3 (as applicable,
the "Termination Date"). Employer's obligations under this Agreement shall
terminate upon such termination of employment without any further action by the
parties except to the extent specifically provided herein.
4.3 Effect of Termination of Employment. Following the Termination Date:
4.3.1 Executive shall return all property of Employer as provided in
Section 6 of this Agreement;
4.3.2 Executive's salary shall cease to accrue;
4.3.3 subject to Section 4.4, the Board of Directors shall determine an
appropriate bonus to pay to Executive as his bonus or other incentive
compensation for the period through the Termination Date computed
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consistently with the manner in which Executive's bonus or incentive
compensation would have been determined for such period if Executive's
employment had not terminated;
4.3.4 Executive's participation in FII's benefit plans shall cease except
as required by law, the terms of the plan(s) or as provided in
subparagraph 3.4 of this Agreement;
4.3.5 Executive shall cease to accrue vacation days and shall be paid for
unused vacation time accrued since the beginning of the then current
Initial or Renewal Term in accordance with Employer's policies applicable
to employees generally; and
4.3.6 Executive shall submit any claims for reimbursement of business
expenses incurred in accordance with Section 3.5 within the time period
required under Employer's policies generally or Employer will not be
obligated to reimburse such expenses.
4.3.7 If this Agreement is terminated prior to the expiration of the
Initial Term or any Renewal Term as provided in Section 4 of this
Agreement, the Employer shall have no further liability to Executive
hereunder, except as explicitly stated in this Agreement, other than for
earned but unpaid compensation and those benefits (accrued but unpaid) to
which Executive is entitled under this Agreement through the date of
termination, provided, however, that in the event Executive becomes a
"Retired Early Employee" as defined in subparagraph 4.4.1 or is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, health insurance and dental benefits to
Executive will be continued as if Executive continued to remain an
employee for the remaining term of this Agreement or until Executive
obtains another position offering comparable benefits, whichever occurs
first.
4.3.8 If, during the term of this Agreement, the Executive is terminated
for reasons other than those set forth in subparagraphs 4.1.1, 4.1.2,
4.1.3, 4.1.4, 4.1.6 or 4.1.7, Employer shall, during the one year period
after the Termination Date, make equal monthly payments or a single lump
sum payment to the Executive (which shall not be deemed base annual salary
payments) in an amount such that the present value of all such payments,
determined as of the Termination Date, equals the sum of (a) the Base
Salary Amount, and (b) the annual incentive compensation paid by Employer
to Executive for the most recent tax year ending before the date on which
the termination occurred. It shall be at the discretion of the
Compensation Committee, as to whether the payment is made as a single lump
sum payment or equal monthly payments.
4.4. Change of Control and Change of Authority
4.4.1 Retired Early Employee. If a Change of Control and Change of
Authority, as such terms are defined in subparagraph 4.4.7 below, occurs
during the term of the Executive's employment under this Employment
Agreement, either the Executive, on the one hand, or Employer, on the
other, may elect by written notice, given to the other party or parties,
at any time within twelve (12) months after such Change of Control and
Change of Authority, to terminate the employment of the Executive by
Employer, whereupon the Executive will become a "Retired Early Employee,"
and will be entitled to receive such payments as are provided hereafter in
this Section 4.4. Such election and the termination of the Executive's
employment shall become effective on the first day of the second calendar
month commencing after delivery of the notice or on such earlier date as
the Executive in his sole discretion may specify (the "Effective Date").
4.4.2 Cash Payments. If the Executive should become a Retired Early
Employee hereunder, Employer shall, during the period commencing on the
Effective Date and ending two years thereafter (the "Pay-Out Period"),
make equal monthly payments or a single lump sum payment to the Executive
(which shall not be deemed base annual salary payments) in an amount such
that the
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present value of all such payments, determined as of the Effective Date,
equals the sum of two times the Base Salary Amount, as such term is
defined in subparagraph 4.4.7 below, plus the average of the annual
incentive compensation paid by Employer to Executive, as determined over
the most recent two (2) tax years ending before the date on which the
Change of Control and Change of Authority occurred. It shall be at the
discretion of the Compensation Committee, as to whether the payment is
made as a single lump sum payment or equal monthly payments. The
payment(s) provided for in subparagraph 4.3.8 do not apply to Retired
Early Employees who receive cash payment(s) pursuant to this subparagraph.
If at any time during the Pay-Out Period the Compensation Committee of the
Board in its sole discretion shall determine, upon application of the
Retired Early Employee supported by substantial evidence, that the Retired
Early Employee is then under a severe financial hardship resulting from
(i) a sudden and unexpected illness or accident of the Retired Early
Employee or any of his dependents (as defined in section 152(a) of the
Internal Revenue Code), (ii) loss of the Retired Early Employee's property
due to casualty, or (iii) other similar extraordinary and unforeseeable
circumstance arising as a result of events beyond the control of the
Retired Early Employee, Employer shall make available to the Retired Early
Employee, in one (1) lump sum, an amount up to but not greater than the
present value of all monthly payments remaining to be paid to him in the
Pay-Out Period, calculated as of the date of such determination by the
Compensation Committee of the Board, for the purpose of relieving such
severe financial hardship to the extent the same has not been or may not
be relieved by (xi) reimbursement or compensation by insurance or
otherwise, (xii) liquidation of the Retired Early Employee's assets (to
the extent such liquidation would not itself cause severe financial
hardship), or (xiii) distributions from other benefit plans. If (a) the
lump sum amount thus made available is less than (b) the present value of
all such remaining monthly payments, Employer shall continue to pay to the
Retired Early Employee monthly payments for the duration of the Pay-Out
Period, but from such date forward such monthly payments will be in a
reduced amount such that the present value of all such reduced payments
will equal the difference between (b) and (a), above. The Retired Early
Employee may elect to waive any or all payments due him under this
subparagraph.
4.4.3 Acceleration of Stock Options. All options and other rights that
Executive may hold to purchase or otherwise acquire Common Stock of FII
shall immediately become exercisable in full for the total number of
shares that are or might become purchasable thereunder, in each case
without further condition or limitation except the giving of notice of
exercise and the payment of the purchase price thereunder (but without
amendment of the plan under which they were issued). At his discretion,
Executive may elect to surrender to Employer his rights in any such
options and rights held by him and, upon that surrender, Employer shall
pay him an amount in cash equal to the aggregate spread between the
exercise prices of all those options and rights and the value of the
Common Stock purchasable thereunder (or of any other security into which
the Common Stock has been exchanged or converted) as of the date of the
termination of employment, the value to be determined by the reported last
sale price of the Common Stock or that other security (or the mean between
the reported last bid and asked prices) on that date on NASDAQ (or, if it
is not NASDAQ, on whatever may then be the principal exchange or quotation
system on which the Employer's Common Stock or that other security is
traded at that time).
4.4.4 Life Insurance Policies. Employer shall repay any policy loans
previously taken on the Employer's insurance policies on Executive's life
(provided that the directors of Employer were given written notice
promptly after the making of any such loans which were made while
Executive was the president and chief executive officer of Employer), and
then shall transfer to Executive any and all of its right, title, and
interest in and to all Employer life insurance policies on Executive's
life (and upon that transfer, Executive shall be deemed to have released
Employer from any and all obligations it then owes to him to maintain and
pay premiums on those
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policies, all other provisions of any agreements under which those
policies were agreed to be maintained, however, to remain in effect).
4.4.5 Death of Retired Early Employee. If the Retired Early Employee dies
before receiving all monthly payments payable to him under subparagraph
4.4(b), above, Employer shall pay to the Retired Early Employee's estate,
one (1) lump sum payment in an amount equal to the present value of all
such remaining unpaid monthly payments, determined as of the date of death
of the Retired Early Employee.
4.4.6 Indemnification of Executive. In the event a Change of Control and
Change of Authority occurs, Employer shall indemnify Executive for all
reasonable legal fees and expenses subsequently incurred by Executive
through legal counsel approved in advance by Employer in seeking to obtain
or enforce any right or benefit provided under this Employment Agreement,
including but not limited to the rights and benefits provided under this
Section 4.4 and whether or not Executive has become a Retired Early
Employee hereunder, provided, however, that such right to indemnification
will not apply if and to the extent that a court of competent jurisdiction
shall determine that any such fees and expenses have been incurred as a
result of Executive's bad faith or willful misconduct. Indemnification
payments payable hereunder by Employer shall be made not later than thirty
(30) days after a request for payment has been received from Executive
with such evidence of indemnifiable fees and expenses as Employer may
reasonably request.
4.4.7 Definitions.
(i) The "Base Salary Amount" for purpose of this Paragraph 4.4 shall
equal the annual compensation payable by Employer to Executive and
includable by Executive in gross income for the most recent year ending
before the date on which the Change of Control and Change of Authority
occurred.
(ii) A "Change of Control" shall be deemed to have occurred if
(A) any individual corporation (other than FII),
partnership, trust, association, pool, syndicate, or any other
entity or any group of persons acting in concert becomes the
beneficial owner, as that concept is defined in Rule 13d-3
promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as the result of any one
or more securities transactions (including gifts and stock
repurchases but excluding transactions described in
subdivision (B), following), of securities of FII possessing
twenty percent (20%) or more of the voting power for the
election of directors of suchentity,
(B) there shall be consummated any consolidation, merger
or stock-for-stock exchange involving FII or the securities of
FII in which the holders of voting securities of FII
immediately prior to such consummation own, as a group,
immediately after such consummation, voting securities of FII
(or, if FII does not survive such transaction voting
securities of the corporation surviving such transaction)
having less than fifty percent (50%) of the total voting power
in an election of directors of FII (or such other surviving
corporation), excluding securities received by any members of
such group which represent disproportionate percentage
increases in their shareholdings vis-a-vis the other members
of such group,
(C) "approved directors" shall constitute less than a
majority of the entire Board of Directors, with "approved
directors" defined to mean the members of the Board of
Directors of Employer as of the date of this Agreement and any
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subsequently elected members who shall be nominated or
approved by a majority of the approved directors on the Board
prior to such election, or
(D) there shall be consummated any sale, lease, exchange
or other transfer (in one transaction or a series of related
transactions, excluding any transaction described in
subdivision (B), above), of all, or substantially all, of the
assets of FII to a party which is not controlled by or under
common control with FII.
(iii) A "Change of Authority" shall be deemed to have occurred if
upon the occurrence of a Change in Control, Executive elects to
voluntarily terminate his employment following any demotion, loss of
title, or office, reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 25 miles from
its location immediately prior to the Change in Control; provided,
however, that Executive may consent in writing to any such demotion, loss,
reduction or relocation.
5. Confidentiality; Inventions.
5.1 Confidential Information. Executive has and will have access to and
participate in the development of or be acquainted with confidential or
proprietary information and trade secrets related to the business of Employer,
its subsidiaries and any affiliates (collectively, the "Companies"), including
but not limited to (i) business plans, software programs, operating plans,
marketing plans, financial reports, operating data, budgets, wage and salary
rates, pricing strategies and information, terms of agreements with suppliers or
customers and others, customer lists, reports, correspondence, tapes, disks,
tangible property and specifications owned by or used in the Companies'
businesses; (ii) operating strengths and weaknesses of the Companies' officers,
directors, employees, agents, suppliers and customers, and/or (iii) information
pertaining to future developments such as, but not limited to, research and
development, software development or enhancement, future marketing plans or
ideas, and plans or ideas for new services or products, (iv) all information
which is learned or developed by Executive in the course and performance of his
duties under this Employment Agreement, including without limitation, reports,
information and data relating to the Employer's acquisition strategies, and (v)
other tangible and intangible property which is used in the business and
operations of the Companies but not made publicly available ((i) through (v)
are, collectively, (the "Confidential Information").
5.2 Treatment of Confidential Information; Confidentiality Agreements. Executive
shall not, directly or indirectly, disclose, use or make known for his or
another's benefit any Confidential Information of the Companies or use such
Confidential Information in any way except in the best interests of the
Companies in the performance of Executive's duties under this Agreement. In
addition, to the extent that Employer has entered into a confidentiality
agreement with any other person or entity Executive agrees to comply with the
terms of such confidentiality agreement and to be subject to the restrictions
and limitations imposed by such confidentiality agreements as if he was a party
thereto.
5.3 Inventions. Executive shall promptly disclose both orally and in
writing to Employer all discoveries, ideas, software, developments, discoveries,
designs, improvements, innovations and inventions (collectively referred to
herein as "Inventions"), whether patentable or not, either relating to the
existing or contemplated business, products, services, plans, processes, or
procedures of Employer, or suggested by or resulting from Executive's work at
Employer, or resulting wholly or in part from the use of Employer's time,
material, facilities or ideas, which Executive made or conceived or may make or
conceive, whether or not during working hours, alone or with others, at any time
during the term of this Agreement or within one year thereafter, and Executive
agrees that all such inventions shall be the exclusive property of the Employer.
5.4 Assignment of Inventions. Executive hereby assigns to Employer all his
rights and interests in and to all such inventions and all patents, copyrights,
- --------------------------------------------------------------------------------
Page 92
<PAGE>
trademarks or other types of intellectual property protection which may be
obtained on them, in this and all foreign countries. At Employer's expense, but
without charge to it, Executive agrees to execute, acknowledge and deliver to
Employer any specific assignments to any such inventions or other relevant
documents and to take any such further action as may be considered necessary by
Employer at any time to obtain or defend letters patent in any and all
countries, to obtain documents relating to registration, ownership or transfer
of copyrights, to vest title in such inventions in Employer or its assigns, or
to obtain for Employer any other legal protection for such inventions.
5.5 Survival of Obligations. The obligations of Executive under this Section 5
shall survive the termination of Executive's employment and the expiration or
termination of this Agreement.
6. Return of Employer's Property. Immediately upon termination of
Executive's employment with Employer, Executive shall deliver to Employer all
copies of data, information and knowledge, including, without limitation, all
notes, reference materials, sketches, diagrams, reproductions, memoranda,
documentation and records incorporating or reflecting any Confidential
Information, documents, correspondence, notebooks, reports, computer programs,
names of full-time and part-time employees and consultants, and all other
materials and copies thereof (including computer disks and other electronic
media) relating in any way to the business of Employer in any way obtained by
Executive during the period of his employment with Employer, along with any
automobile provided by Employer for Executive's use (the "Employer's Property").
The Employer's Property shall belong exclusively to the Employer and shall be
delivered to the Employer immediately upon termination of Executive's employment
with the Employer, for whatever reason said termination occurs. The obligations
of Executive under this Section 6 shall survive the termination of Executive's
employment and the expiration or termination of this Agreement.
7. Non-competition and Non-solicitation.
7.1 Non-competition. During the term of this Agreement, and for the
greater period of eighteen (18) months, or during the period for which Executive
is entitled to receive compensation after the termination of this Agreement
pursuant to subparagraphs 4.3.8 or 4.4.2, regardless of whether such
compensation is paid in a lump sum rather than monthly payments, employee shall
not engage, anywhere within New York State, whether directly or indirectly, as
principal, owner, officer, director, agent, employee, consultant or partner, in
the management of a bank holding company, commercial bank, savings bank, credit
union or any other financial services provider that competes with FII, its
subsidiaries or its products or programs ("Restricted Activities"), provided
that the foregoing shall not restrict Executive from engaging in any Restricted
Activities which Employer directs Executive to undertake or which Employer
otherwise expressly authorizes. The foregoing shall not restrict Executive from
owning less than 1% of the outstanding capital stock of any company which
engages in Restricted Activities, provided that Executive is not otherwise
involved with such company as an officer, director, agent, employee or
consultant.
7.2 Scope and Breach of Non-Competition. Subject to Executive's continuing
compliance with the provisions of Section 7.1, Executive may be a principal,
owner, officer, director, agent, consultant or partner, of any corporation,
partnership or other entity. The foregoing provisions of Section 7.1 shall not
be held invalid because of the scope of the territory covered, the actions
restricted thereby, or the period of time such covenant is operative. In the
event of a breach or threatened breach by the Executive of Section 7.1, Employer
shall be entitled to a temporary restraining order and an injunction restraining
Executive from the commission of such breach. Nothing herein shall be construed
as prohibiting Employer from pursuing any other remedies available to it for
such breach or threatened breach, including the recovery of money damages.
7.3 Non-solicitation. During the term of this Agreement and for a two (2) year
period following the Termination Date, Executive shall not, directly or
indirectly, without the written consent of Employer: (i) recruit or solicit for
employment any
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<PAGE>
employee of Employer or FII or encourage any such employee to leave their
employment with Employer or FII, or (ii) solicit, induce or influence any
customer, supplier, lessor or any other person or entity which has a business
relationship with Employer or FII to discontinue or reduce the extent of such
relationship with Employer or FII.
7.4 In the event that the Executive breaches any of the provisions of paragraphs
7.1,7.2, or 7.3, the cash payments provided for by subparagraphs 4.3.8 or 4.4.2
shall cease immediately. Executive shall have no further entitlement to receive
cash payments pursuant to subparagraphs 4.3.8 or 4.4.2 and Employer shall have
no further liability for such payments after the date of Executive's breach.
7.5 The Executive and the Employer believe that the restrictions and covenants
in this section are reasonable and enforceable under the circumstances. However,
if any one or more of the provisions in this section shall, for any, reason be
held to be excessively broad as to time, duration, geographic scope, activity,
or subject, it shall be construed by limiting and reducing it so as to be
enforceable to the extent compatible with law and with the Executive's and the
Employer's intentions as stated herein.
7.6 Survival of Obligations. The obligations of Executive and Employer under
this Section 7 shall survive the termination of Executive's employment and the
expiration or termination of this Agreement.
8. Miscellaneous.
8.1 Remedies. Each of the parties hereto shall have all rights and remedies set
forth in this Agreement. All remedies hereunder are cumulative and are not
exclusive of any other remedies provided by law or any other agreement or
contract to which such person is a party. Each party shall be entitled to
enforce such rights specifically (without the requirement of posting a bond or
other security), to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights granted by law. Without limiting
the generality of the foregoing, Executive specifically agrees that any breach
or threatened breach of Sections 5, 6 or 7 would cause irreparable injury to
Employer, that money damages would not provide an adequate remedy to Employer,
and that Employer shall accordingly have the right and remedy (i) to obtain an
injunction prohibiting Executive from violating or threatening to violate such
provisions, (ii) to have such provisions specifically enforced by any court of
competent jurisdiction, and (iii) to require Executive to account for and pay
over to Employer all compensation, profits, monies, accruals, increments or
other benefits derived or received by Executive as the result of any
transactions constituting a breach of such provisions.
8.2 Entire Agreement; Amendments and Waivers. This Agreement (including
the schedule hereto) represents the entire understanding and agreement between
the parties hereto with respect to the subject matter hereof and can be amended,
supplemented or changed, and any provision hereof can be waived, only by a
written instrument making specific reference to this Agreement signed by the
party against whom enforcement of any such amendment, supplement, modification
or waiver is sought. The waiver by any party hereto of a breach of any provision
of this Agreement shall not operate or be construed as a further or continuing
waiver of such breach or as a waiver of any other or subsequent breach. No
failure on the part of any party to exercise, and no delay in exercising, any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of such right, power or remedy by such party
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy.
8.3 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York without reference to its
principles of conflicts of law.
8.4 Notices. All notices, demands, solicitations of consent or approval,
and other communications hereunder shall be in writing and shall be delivered
personally, mailed, sent by telefax or sent by recognized commercial courier
(e.g.,
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<PAGE>
Federal Express). If delivered personally, such notice shall be deemed to be
given when delivered to the intended recipient. If delivered by mail, such
notice shall be deemed to be given five (5) days after having been deposited in
the United States mail so addressed, with postage thereon prepaid. If delivered
by telefax, such notice shall be deemed given when transmission of the notice is
complete to the telefax number of the other party. If delivered by recognized
commercial carrier, such notice shall be deemed given one (1) day after having
been delivered to a recognized commercial carrier for overnight delivery. All
such notices shall be addressed to the address set forth in the preamble to this
Agreement or to such other address which such party shall have given to the
other party for such purpose by notice hereunder.
8.5 Captions. The headings used in this Agreement are intended for
reference purposes only and shall not control or affect in any manner the
meaning or interpretation of any of the provisions of is Agreement.
8.6 Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of the remaining
provisions of this Agreement, and this Agreement shall be construed in all
respects as if such invalid or unenforceable provision were omitted. All
provisions of this Agreement shall be enforced to the full extent permitted by
law.
8.7 Interpretation. The parties acknowledge and agree that: (i) each party
and its counsel reviewed and negotiated the terms and provisions of this
Agreement and have contributed to its revision; (ii) the rule of construction to
the effect that any ambiguities are resolved against the drafting party shall
not be employed in the interpretation of this Agreement; and (iii) the terms and
provisions of this Agreement shall be construed fairly as to all parties hereto,
regardless of which party was generally responsible for the preparation of this
Agreement.
8.8 Counterparts. This Agreement may be executed in any number of copies,
each of which shall be deemed an original, and all of which together will be
deemed one and the same instrument.
8.9 Successors and Assigns. All covenants and agreements contained in this
Agreement by or on behalf of any of the parties hereto shall bind, and inure to
the benefit of the respective successors and permitted assigns of the parties
hereto whether so expressed or not. Neither party shall transfer or assign this
Agreement or any of their rights or obligations hereunder, whether by operation
of law or otherwise, without the prior written consent of the other party
hereto. Any attempted transfer or assignment of this Agreement or any rights or
obligations hereunder in violation of this provision shall be void ab initio.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date
first above written.
First Tier Bank & Trust
By:
Name: Peter G. Humphrey
Title: President & CEO
Financial Institutions, Inc.
_________________________________________
Randolph C. Brown
President & CEO
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Page 95
EX-11
(Exhibit 11) Calculation of Basic Earnings Per Share and Diluted Earnings
Per Share
Earnings per share is based on the weighted average number of shares
outstanding. The Company's basic and diluted earnings per share calculations are
identical as there is, currently no dilutive effect. The computation of basic
and diluted earnings per share for the twelve months ended December 31, 1999 are
as follows:
Income Shares Per Share Amount
------ ------ ----------------
Net income $15,957,000
Less: Preferred stock
dividends 1,503,000
-----------
Net income available to
common shareholders $14,454,000 10,474,465 $1.38
=========== ========== =====
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Page 96
EX-13
(Exhibit 13) Annual Report to Shareholders for the year ended December 31,
1999
F I N A N C I A L I N S T I T U T I O N S, I N C .
ANNUAL REPORT
1999
Front Cover
1999 Annual Report
Partnership in Growth
Financial Institutions, Inc.
Inside Cover
Financial Institutions, Inc. and Subsidiaries
Office Locations
Wyoming County Bank
The National Bank of Geneva
The Pavilion State Bank
First Tier Bank & Trust
Corporate Profile
Financial Institutions, Inc. ("FII") is the parent company of Wyoming County
Bank, The National Bank of Geneva, The Pavilion State Bank and First Tier Bank &
Trust. FII operates as a super-community bank holding company - a bank holding
company that owns multiple community banks that are separately managed.
The four FII banks provide a wide range of consumer and commercial banking
services to individuals and businesses through a network of 29 offices and 37
ATM's. These facilities are located in Western and Central New York in nine
contiguous counties: Allegany, Cattaraugus, Genesee, Livingston, Monroe,
Ontario, Seneca, Wyoming and Yates.
[map]
Mission Statement
Financial Institutions, Inc. is a multi-bank holding company that creates and
builds a value-driven relationship with its customers, communities, employees
and stockholders. We will continue to pursue the super-community banking
strategy.
<PAGE>
Financial Institutions, Inc.
Selected Financial Highlights
<TABLE>
<CAPTION>
Dollars in thousands, except per share amounts 1999 1998 1997 1996 1995
========================================================================================================================
<S> <C> <C> <C> <C> <C>
For the Year
Net interest income
Fully taxable-equivalent basis $ 49,165 $ 43,758 $ 40,817 $ 38,143 $ 35,736
Provision for loan losses 3,062 2,732 2,829 1,740 1,405
Noninterest income 7,848 6,381 5,733 5,165 4,405
Noninterest expense 27,032 24,602 22,084 19,796 20,062
Net income 15,957 13,605 12,842 13,075 11,103
Preferred dividends 1,503 1,506 1,513 1,522 1,523
Net income available to common shareholders 14,454 12,099 11,329 11,553 9,580
========================================================================================================================
Per Common Share
Net income $ 1.38 $ 1.22 $ 1.14 $ 1.16 $ 0.96
Cash dividends declared 0.31 0.26 0.22 0.20 0.18
Book value 9.05 7.94 6.94 5.96 5.02
Tangible book value 8.77 7.54 6.46 5.40 4.37
Market value 12.12 -- -- -- --
========================================================================================================================
At Year End
Assets $1,136,460 $ 976,185 $ 880,512 $ 802,266 $ 721,994
Earning assets 1,057,202 919,943 812,084 744,551 671,500
Loans 763,745 655,427 602,477 552,189 481,005
Allowance for loan losses 11,421 9,570 8,145 7,129 6,183
Deposits 949,531 850,455 767,726 707,703 640,237
Shareholders' equity 117,539 96,578 86,843 77,254 68,001
Common shareholders' equity 99,727 78,720 68,916 59,202 49,926
Common shares outstanding 11,018 9,916 9,928 9,928 9,940
========================================================================================================================
Average Balances
Assets $1,036,461 $ 918,408 $ 834,786 $ 763,789 $ 702,671
Earning assets 982,881 864,176 784,073 718,767 661,309
Loans 700,062 621,418 571,877 511,033 448,509
Deposits 888,670 798,954 730,098 677,244 628,796
Common equity 89,460 74,323 64,286 55,375 44,892
========================================================================================================================
Asset quality
Allowance for loan losses to loans 1.50% 1.46% 1.35% 1.29% 1.29%
Nonperforming assets to loans and other real estate 0.88 1.24 1.62 1.38 1.21
Allowance for loan losses to nonperforming loans 198.83 156.86 108.95 121.51 143.76
Net loan charge-offs to average loans 0.17 0.21 0.32 0.16 0.12
========================================================================================================================
Key Ratios
Return on average common equity 16.16% 16.28% 17.62% 20.86% 21.34%
Return on average assets 1.54 1.48 1.54 1.71 1.58
Common dividend payout ratio 22.54 21.43 19.28 16.77 18.16
Net interest margin 5.00 5.06 5.21 5.31 5.40
Efficiency ratio 47.03 48.31 47.02 45.47 49.69
========================================================================================================================
Capital Ratios
Average common equity to average assets 8.63% 8.09% 7.70% 7.25% 6.39%
Leverage ratio 10.80 9.58 9.53 9.05 8.57
Tier 1 risk-based capital ratio 14.94 13.71 13.58 13.25 12.76
Risk-based capital ratio 16.19 14.96 14.81 14.50 14.01
========================================================================================================================
</TABLE>
1
<PAGE>
A Message from the President
[photo of president]
Callout at top of page
While achieving record earnings, we also set the framework for future growth by
completing a successful initial public offering (IPO), entering new markets,
launching new products, establishing a new investment services subsidiary and
enhancing our technological resources.
I am pleased to report that 1999 was truly an extraordinary year for Financial
Institutions, Inc. (FII). While achieving record earnings at the company as well
as at each of our subsidiary banks, we also set the framework for future growth
by completing a successful initial public offering (IPO), entering new markets,
launching new products, establishing a new investment services subsidiary and
enhancing our technological resources.
A Strong Financial Performance
Net income increased to an all-time high of $15.96 million in 1999, up 17.3%
from the previous year. Earnings per share of $1.38 in 1999 were 13.1% higher
than in 1998. Return on average common equity was 16.16% in 1999 compared to
16.28% in 1998.
Fueled by strong deposit and loan growth, net interest income grew 12.2% in 1999
to $47 million. Noninterest income was up 23% to $7.8 million influenced by
improved collection of deposit service charges and higher sales of mutual funds
and annuities.
Noninterest expense increased 9.9% to $27 million for the year, due largely to
increased staffing and technology resources necessary to support expanded
lending activities, product lines and delivery channels. However, effective
allocation of resources has been a major focus of the organization and the
company's efficiency ratio improved to 47.03% in 1999 from 48.31% in 1998.
At December 31, 1999, FII had total assets of $1,136.5 million, an increase of
16.4% from year-end 1998. Loans increased 16.5% during the year to $763.7
million at December 31, 1999 primarily as the result of commercial and
agricultural loan growth. Total deposits were $949.5 million at year-end, up 12%
from a year earlier.
The strong growth in the loan portfolio in 1999 was achieved without sacrificing
credit quality as nonperforming assets decreased 18% to $6.7 million. The ratio
of nonperforming assets, net of government guarantees, to total loans and other
real estate was .78% at December 31, 1999 as compared to 1.03% a year earlier.
The ratio of the allowance for loan losses to total loans was 1.50% at December
31, 1999, up slightly from the 1.46% level of the year before.
Based on our earnings, asset growth and strong capital position, the Board of
Directors declared total dividends of $0.311 per common share in 1999, up 19%
from 1998.
A Successful IPO
In June 1999, we successfully completed our IPO, selling 1.1 million shares and
raising $13.6 million in net proceeds. Our publicly traded stock gives us
greater flexibility to structure and finance the ongoing growth and
diversification of our company. One of our long range plans is to grow through
acquisitions and we now have another form of currency to offer a seller.
2
<PAGE>
By having a publicly traded stock, we will also be better able to access the
capital markets in the future. Additionally, we are now able to offer stock
options to retain and attract talented employees, and to better align the
interests of management and shareholders.
Entering the Rochester and Buffalo Markets
We opened our first office in the Rochester area in September 1999, in the
suburb of Honeoye Falls. This market, we believe, will be very receptive to a
community bank that offers high quality personal service and a broad array of
products, and is responsive to the needs of small businesses. With a population
of nearly one million people and a stable economy supported by the headquarters
of companies such as Eastman Kodak, Bausch & Lomb and Paychex, the Rochester
market offers the size and economic vitality to help fuel our future growth.
In January 2000, we announced our plans for a second office in Rochester.
Pending regulatory approval, this office will be located in the suburb of North
Chili and will open in the Spring of 2000.
We have taken a different strategy was taken to begin penetrating the Buffalo
market. Like the Rochester market, the Buffalo area offers a large population
base - more than 1.2 million people - and a significant concentration of
businesses. In 1999, two full-time commercial lenders were hired to develop
relationships with small and medium size businesses in the Buffalo area and by
year-end we had generated a total of $15 million in closed or committed loans.
We were ranked among the top ten lenders in the Buffalo District in 1999 by the
Small Business Administration.
New Products and a New Subsidiary
A key corporate objective is to provide our customers with a comprehensive line
of products that meets all their financial services needs. In support of this
objective, we enhanced our delivery channels and expanded our trust and
investment services in 1999.
During the year, we introduced NetExpress Teller for personal customers and
NetExpress Business for commercial and municipal customers. Providing users with
24 hour-a-day, seven-day-a-week access to their accounts over the Internet,
these new products recognize the profound impact the Internet is having on the
financial services industry, and our commitment to utilize new technologies to
provide our customers with greater banking convenience. (See box on page 5 for
information on Internet banking.)
To further enhance our customer relationships and increase noninterest income,
we revitalized our trust services and established a new investment subsidiary,
The FI Group. By adding experienced trust personnel and establishing alliances
with providers of custody and investment advisory services, we were able to
efficiently upgrade our trust services and begin developing new trust business.
By March 2000,
Callout on right of page
Partnership in Growth
At FII, we have developed a partnership with our four subsidiary banks which
enables them to be uniquely positioned to compete effectively against both
community banks and larger regional banks as well as other financial service
providers. With the resources of FII to provide them with the financial
strength, operational support and technological expertise usually available only
to much larger institutions, our subsidiary banks are able to offer a product
line second to none, grant larger loans than other banks their size and
implement the most up-to-date technology. They, in turn, remain independently
managed banks who know their community intimately, can be responsive to the
needs of their customers and deliver superior quality service to them. We
believe it is this partnership which has fueled our growth in 1999 and will
continue to fuel our growth in the upcoming years.
3
<PAGE>
[photo of board]
[4 graphs]
we had accumulated more than $30 million in trust assets under management. We
will continue to aggressively cross-sell trust services to our existing personal
and commercial customers. We will also develop new business from referrals from
attorneys, accountants and our own advisory boards and boards of directors.
Replacing a third party arrangement, The FI Group will enable us to offer a
broader array of investment products to our customers including "wrap accounts"
in which we will manage our customers' investment portfolios for an annual fee.
Over time, we anticipate transitioning customers from accounts which produce
revenue only from transactions to accounts which provide FII an ongoing revenue
stream based on the assets in these accounts. With The FI Group, we will also
retain a higher proportion of the commissions we receive from the sale of mutual
funds and annuities to our customers. This business has grown steadily since we
introduced it in 1993. In 1999, our seven full-time and ten part-time investment
representatives collectively sold more than $30 million in investment products.
Enhancing Technology for Customer Convenience and Operational Efficiency
In 1999, we enhanced our check imaging capabilities to enable customer service
representatives at any branch to view an image of a check, and to print an image
of that check in the branch.
We also added document imaging capabilities which allow us to create an image of
any document and store that document in an electronic format. With document
imaging, a customer service representative can now view and print a copy of a
customer's statement in a branch, enabling us to respond to customer service
requests more quickly and efficiently. Document imaging is also being used to
store and retrieve signature cards, loan agreements and deposit account forms.
In support of our Internet banking products, we installed Internet access at all
branches so that branch staff can demonstrate the capabilities of our NetExpress
Teller service to customers. To make it easier to bank with us, we installed two
new ATM's in 1999, raising our total installed ATM base to 37.
Callout on bottom of page
A key objective is to provide our customers with a comprehensive line of
products that meets all their financial services needs.
4
<PAGE>
Internet Banking at FII
Like other businesses, banking is undergoing dramatic changes as the result of
the Internet. To capitalize on the impact these changes will have on our
industry, FII introduced NetExpress Teller in January 1999.
A fully functional Internet banking service, NetExpress Teller enables customers
to check account balances, transfer funds between accounts, view images of
checks, pay bills and perform other functions. As one of the first banks in
Western and Central New York to offer Internet banking, we have been gratified
by the strong demand for this service. By year-end, more than 5,000 customers
were using NetExpress Teller. In focus groups conducted with NetExpress users in
the Fall of 1999, we received uniformly positive reviews of this new service.
Building upon the success of NetExpress Teller, in September 1999 we launched
NetExpress Business, an Internet banking and cash management service designed
for small and medium size businesses and municipalities. NetExpress Business
provides a convenient way for organizations to offer their employees direct
deposit payroll, collect payments from customers, initiate Automated Clearing
House transactions and manage their accounts more efficiently. In the first
three months, we have signed up nearly 100 businesses.
While we will utilize technology to provide our customers with the most advanced
products and services, we also understand that the Internet is not for everyone,
and that many customers will always want personal service. As we go forward into
the new millennium, we are committed to offering our customers choices, so that
they can bank with us in the manner they prefer - whether it be at a full
service branch, at an ATM, over the telephone or on the Internet.
Increasing Shareholder Value
As we look ahead, we recognize that effective capital management and earnings
growth are the keys to increasing shareholder value. With shareholders' equity
at 10.4% of total assets at year-end, we have an extremely strong capital
position which positions FII well for the future. However, our capital position
also creates a significant challenge in maintaining a high return on equity. We
are focused on all of the options with which to manage our capital most
effectively.
In 2000, we will continue to execute a three-pronged plan for growth. This plan
includes: increasing market share in our existing markets; expanding our
relationship with existing customers by cross-selling additional investment,
trust and traditional banking services; and by entering new geographic markets
through "de novo" branches or by acquisition.
We will also continue to implement our super community banking strategy in which
our holding company provides our subsidiaries with operational support and
technological expertise. Our subsidiaries, in turn, remain independently managed
banks that can be responsive to the needs of their communities (see box on
Partnership in Growth). This strategy has fueled our growth in 1999 and will
continue to do so in 2000 and beyond.
Thank You [graph]
In closing, I would like to extend my sincere appreciation to the boards of
directors and advisory boards at FII and our four banks for their dedication and
support. I would also like to recognize the hard work of all my talented
colleagues throughout the company. Their efforts made possible the extraordinary
achievements of 1999. Finally, I would like to thank all FII shareholders for
their continued support and reaffirm our commitment to maximize the benefits of
your investment.
Sincerely,
Peter G. Humphrey
President & CEO
Callout on right of page
Effective capital management and earnings grwoth are the keys to increasing
shareholder value.
5
<PAGE>
Left Page:
Wyoming County Bank Five=Year Performance History
[photo of bank president and Mendon town board member]
[photo of new office]
[5 graphs]
Growth through New Markets
In September, Wyoming County Bank opened a new full-service banking office in
the Rochester suburb of Honeoye Falls. Following a successful grand opening, the
Honeoye Falls Office grew to more than $3 million in deposits in its first three
months. Pictured here, from left to right, are Paul S. Tichenor, a member of the
Mendon Town Board which oversees the Village of Honeoye Falls, and Jon J.
Cooper, President and CEO of Wyoming County Bank.
6
<PAGE>
Right Page:
Wyoming County Bank
[photo of bank board of directors]
Wyoming County Bank's highlights in 1999 included achieving record earnings,
surpassing $400 million in total assets, expanding into the Rochester and
Buffalo markets, launching a new retail checking account and revitalizing the
bank's trust services.
Net income increased 14% in 1999 to a record $6.8 million. Total assets were
$452.4 million at year end, up 21% during the year. Total loans grew to $303.4
million by the end of 1999, up 16% for the year. This loan growth was the result
of successful new business development activities, both in existing and new
markets. Two full-time commercial lenders were hired to develop relationships
with businesses in the Buffalo area, and by year-end we had a total of $15
million in closed or committed loans in this new market. In the Rochester
market, we targeted small businesses in a calling program which generated a
total of $2 million in closed or committed loans during the year.
Total deposits at the end of 1999 were $381.4 million, up 16% from the prior
year. This growth was in part due to the opening in September of a new office in
Honeoye Falls, a suburb of Rochester. By year-end, deposits in this office
exceeded $3 million. A new high-yielding passbook savings account also
contributed to our growth in deposits. Introduced in the Spring, the account
exceeded $15 million in total balances by the end of the year.
Noninterest income totaled $2.8 million in 1999, up 23%. This growth was fueled
in part by increased deposit service charges and higher sales of mutual funds
and annuities. Noninterest income growth was also due to the successful launch
of our Community Checking Account. By the end of 1999, more than 3,000 accounts
were opened. For a monthly fee, Community Checking Account customers receive a
variety of benefits including free check orders, preferred rates on certificates
of deposits and loans, and other services. Laying the groundwork for future
growth in noninterest income, a trust officer was hired to revitalize the bank's
Trust Department.
To provide customers with additional convenience and ease-of-access to their
accounts, we introduced NetExpress Teller, an interactive Internet banking
service, in January. By year-end, nearly 1500 customers were using this new
service to check account balances and transfer funds between accounts. In
September, we started offering NetExpress Business, an Internet banking and cash
management service for small businesses.
Recognizing the importance of staff development, we held extensive sales
training programs in 1999 for all customer-contact staff.
In a partnership with the Keshequa Central School, we opened a branch banking
office in the school to serve school employees and teach students about banking
and the importance of saving. To encourage saving, we matched students' initial
deposits up to a designated amount. In recognition of Wyoming County Bank's
contributions to enriching educational opportunities, the Livingston County
Business/Education Alliance presented the bank with its 1999 Schoolhouse Award.
Wyoming County Bank's community activities were also recognized in 1999 by the
F.D.I.C. which awarded the bank an "Outstanding Rating" for its Community
Reinvestment Act Performance. Further recognition was achieved through a report
published in 1999 by the Office of Advocacy of the SBA which ranked Wyoming
County Bank fourth among all banks in New York State for small business
friendliness.
Call out on right page:
Wyoming County Bank's highlights included achieving record earnings, surpassing
$400 million in total assets, expanding into the Rochester and Buffalo markets,
launching a new retail checking account and revitalizing the bank's trust
services.
7
<PAGE>
Left Page:
The National Bank of Geneva
Callout on left of page
NBG was ranked the number one bank for both small business lending and
agricultural lending in all of New York State by the Office of Advocacy of the
U. S. Small Business Administration.
[photo of bank board of directors]
In an exceptional year, The National Bank of Geneva (NBG) achieved record
earnings, surpassed $400 million in total assets, launched a new Trust and
Investment Department, and was ranked the number one bank for both small
business lending and agricultural lending in all of New York State by the Office
of Advocacy of the U. S. Small Business Administration.
In 1999, net income totaled $6.1 million, up 15.6% from the prior year. Total
assets were $417.1 million at year end, up 12% during the year. Total loans at
year end were $290.7 million, up 20% during the year. This strong loan growth
resulted from aggressive new business development efforts in which our
experienced lenders relied on their intimate knowledge of local markets and
their ability to respond quickly to loan requests to successfully compete
against larger regional banks.
Realizing that the growth of the local economy is critical to the growth of the
bank, NBG officials partnered with Seneca County representatives and four area
business owners to submit loan applications to the U. S. Department of Housing
and Urban Development which resulted in $1.4 million in new financing.
Also supporting the growth in total loans was an increase in the residential
mortgage portfolio as a full-time dedicated mortgage lender supplemented the
activities of branch staff. Data reported by the Home Mortgage Disclosure Act
ranked NBG as the number one bank residential mortgage lender in the markets we
serve.
Total deposits at the end of 1999 were $356.2 million, up 9% from the prior
year. Much of the increase came from our new Seneca County Office which gathered
nearly $30 million in deposits in its first year of operation.
Noninterest income grew 21% in 1999 to $2.891 million influenced by a full year
of ATM fees, and increased deposit service charges resulting from more deposit
accounts and improved collection of fees. Setting the stage for future growth in
noninterest income, NBG launched a new Trust and Investment Department by hiring
a trust officer with more than 25 years experience and a trust administrative
assistant with 20 years experience. They were joined in the new department by
our two existing investment specialists. A grand opening for NBG's new
department was held in December with attorneys, accountants and others invited
to view the suite of offices where staff will meet with customers. By March
2000, NBG's Trust and Investment Department had over $21 million in assets under
management.
In January we introduced NetExpress Teller, an interactive Internet banking
service. In a highly successful new product launch, we signed-up over 2,300
customers during the year and by year-end had nearly 5% of all our customers
using NetExpress Teller. In September, we started offering NetExpress Business,
an Internet banking and cash management service for businesses and
municipalities.
In reports released by the Office of Advocacy of the U. S. Small Business
Administration in 1999, NBG was ranked the number one bank for both small
business lending and agricultural lending among 152 banks in New York State.
This ranking clearly recognizes NBG's success in providing extraordinary service
to small businesses and farms.
8
<PAGE>
Right Page:
The National Bank of Geneva Five-Year Performance History
[photos with customer and customer's facility]
[5 graphs]
Growth through Community Development
A complex financing package offered by The National Bank of Geneva (NBG) in
partnership with the U.S. Department of Agriculture Rural Economic and Community
Development Agency enabled BonaDent Dental Laboratories to expand into a new
hi-tech 35,000 square foot facility in Seneca Falls, retaining 70 existing jobs
and creating 45 new jobs in this community. Pictured here, from left to right,
are: Stephen V. DeRaddo, Executive Vice President, NBG; Bruce H. Bonafiglia,
President, BonaDent Dental Laboratories, and; Thomas L Kime, President & CEO,
NBG.
9
<PAGE>
Left Page:
The Pavilion State Bank Five-Year Performance History
[photo with customer]
[5 graphs]
[photo - NetExpress business]
Growth through New Products
In 1999, The Pavilion State Bank introduced NetExpress Business, an Internet
banking and cash management service for businesses. Pictured above are Maureen
Torrey Marshall, Vice President, Torrey Farms, and W.J. Humphrey, III, President
& CEO, The Pavilion State Bank. A bank customer since 1995, Torrey Farms is the
largest cabbage grower in the eastern United States. On the right, Lauri Dunn
uses NetExpress Business to review Torrey Farms' account activity.
10
<PAGE>
Right Page:
The Pavilion State Bank
[photo of bank board of directors]
The Pavilion State Bank (PSB) effectively competes against much larger regional
and national banks by offering customers excellent personal service combined
with a wide array of sophisticated banking products. This strategy proved
successful in 1999, as evidenced by record net income of $2.0 million, up 24.5%
from the prior year.
Contributing to the strong growth in net income was an increase in total loans
to $100.3 million at the end of 1999, up 15.8% for the year. This was the result
of expanded indirect consumer lending, as PSB worked with auto dealers in
Genesee County and suburban Rochester to further develop relationships.
Commercial loans also increased, fueled by a successful sales calling program in
which bank directors actively participated. An alliance with property auctioneer
Harris Wilcox, Inc. contributed to healthy growth in the residential mortgage
portfolio.
Total deposits at year end were $122.5 million, up 12.4% from the prior year.
All categories of deposits grew, influenced by the success of our two Batavia
offices. In Genesee County, our deposit market share increased to 17.1% in 1999,
up from 15.7% in 1998, as measured by F.D.I.C. reports. In Livingston County,
our deposit market share increased to 4.1% from 3.6%.
Noninterest income totaled $1.313 million in 1999, up 28.5% over 1998. Our
success in selling mutual funds and annuities to our customers, led by the
efforts of Don Bouchard, Sr. Investment Representative, was a major contributor
to this increase. Improved collection of deposit service charges also helped
boost our noninterest income.
At the beginning of 1999, we introduced NetExpress Teller, our Internet banking
service which enables customers to check their account balances, transfer funds
and pay bills online. By year end, more than 600 customers were signed-up.
Building upon the success of NetExpress Teller, we introduced NetExpress
Business in September. This Internet cash management service provides businesses
a convenient way to offer their employees direct deposit payroll, collect
payments from customers and manage their accounts more efficiently. PSB's web
site www.pavilionbank.com received a top rating from Bankrate.com, an online
publication which reviews and rates financial institution web sites.
In January 2000, we announced our plans to open a new office in North Chili, a
suburb of Rochester, pending approval by the F.D.I.C. and the New York State
Banking Department. Dominated by larger regional and national competitors, this
market offers tremendous opportunity for a community bank focused on small
business lending and quality personal service. We also announced the election of
Dr. William C. Crothers, President of Roberts Wesleyan College, to the PSB Board
of Directors.
Consistent with the bank's commitment to supporting the communities in which we
do business, W.J. Humphrey, III, President and CEO of PSB, served as Chairman of
the Genesee County Comprehensive Master Plan Committee. PSB Board of Director
James Vincent served as Chairman of the Genesee County Water Resources Agency
and was instrumental in gaining county and state support for infrastructure
improvements.
Call out on right page:
In January 2000, PSB announced plans to open a new office in North Chili, a
suburb of Rochester, pending approval by the F.D.I.C. and the New York State
Banking Department.
11
<PAGE>
Left Page:
First Tier Bank & Trust
Call out on left of page:
In 1999, First Tier combined aggressive new business development, superior
quality service and effective expense control to achieve record earnings while
increasing market share in every market we serve.
[photo of bank board of directors]
Sometimes it is not the uniqueness of the strategy but the success of its
execution which propels a bank to new levels of performance. In 1999, First Tier
combined aggressive new business development, superior quality service and
effective expense control to achieve record earnings while increasing market
share in every market we serve.
First Tier reported full-year net income of $1.367 million in 1999, up 24% from
the prior year. Total loans grew 8% to $69.3 million at year-end. A key factor
contributing to this loan growth was an ongoing program in which bank officers
and directors utilized their knowledge of the small business community to
identify and call on qualified prospects.
Total deposits grew to $105.9 million at year-end 1999, up 19% during the year.
In Cattaraugus County, our deposit market share increased to 14.4% in 1999, up
from 11.8% in 1998, as measured by F.D.I.C. reports. As the result, our market
share rank improved to second in 1999 from third in 1998. In Allegany County,
our deposit market share increased to 2.1% from 1.6%.
Noninterest income totaled $865,000 in 1999, up 14% from the previous year. This
growth resulted from improved collection of service charges, increased sales of
mutual funds and annuities, and higher ATM revenue from new machines. In
addition, trust income grew from increased investment management and estate
settlement activities.
In order to expand our trust services, a full-time trust officer with extensive
experience was hired. Looking forward, we anticipate accelerating the growth of
our Trust Department by conducting a disciplined new business development
program in 2000, focusing calling efforts on accountants and attorneys.
To enhance convenience for our customers, we introduced NetExpress Teller in
January. This interactive Internet banking service enables customers to check
account balances, transfer funds between accounts and pay bills online. By
year-end, almost 500 customers were using this service. In order to better serve
the small business market, we introduced NetExpress Business in September. An
enhanced version of NetExpress Teller, NetExpress Business is an Internet cash
management service for small businesses.
In 1999, Thomas M. O'Rourke retired from First Tier's Board of Directors after
11 years of dedicated service. We acknowledge and thank him for his valuable
contributions to the success of our organization.
12
<PAGE>
Right Page:
[photo with customer and customer's facility]
First Tier Bank & Trust Five-Year Performance History
[5 graphs]
Growth through Expanded Relationships
Throughout a more than ten year relationship, First Tier Bank & Trust has
provided Holiday Valley Resort with an increasing array of banking services
including an operating line of credit and depository accounts. During this
period, the popular resort has enhanced its ski slopes and lodging properties to
become one of the premier ski areas in the northeast. In 1999, Holiday Valley
was rated the number one ski and snowboard area in New York State by SKI
Magazine. Picture here, from left to right, are: Randolph C. Brown, President &
CEO, First Tier; David Trathen, Controller, Holiday Valley, and; Allen J. Yahn,
Chairman of the Board, Holiday Valley.
13
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The following discussion should be read in conjunction with the consolidated
financial statements and related notes. The Company's results of operations are
dependent primarily on net interest income, which is the difference between the
income earned on loans and securities and the Company's cost of funds,
consisting of the interest paid on deposits and borrowings. Results of
operations are also affected by the provision for loan losses, investment
activities, loan origination, sale and servicing activities, plus service
charges and fees collected on deposit accounts. Non-interest expense primarily
consists of salaries and employee benefits, occupancy and equipment expense,
marketing expenses, amortization of intangibles, and other expenses. Results of
operations are also significantly affected by general economic and competitive
conditions, particularly changes in interest rates, government policies and
actions of regulatory authorities.
Overview
Net income in 1999 was $16.0 million, or 17% more than the $13.6 million earned
in 1998. In 1997, net income was $12.8 million. Earnings per share for the year
ended December 31, 1999 was $1.38 compared to $1.22 in 1998 and $1.14 in 1997.
Earnings per share has been adjusted to reflect the 100-for-one stock split
effected on June 9, 1999, in connection with the initial public offering.
Net income represented a return on average assets in 1999 of 1.54% compared to
1.48% in 1998 and 1.54% in 1997. The return on average common equity in 1999 was
16.16% compared to 16.28% in 1998 and 17.62% in 1997. The initial public
offering of common stock, which raised over $13.6 million in additional capital,
was the primary reason for the decrease in the return on average equity in 1999.
Net interest income increased 12% in 1999 to $47.0 million from $41.9 million in
1998. This increase is primarily attributable to an increase of 13% in average
loans to $700.1 million in 1999 from $621.4 million in 1998 and a 20% increase
in average investment securities to $274.3 million in 1999 from $228.9 million
in 1998. Similarly, average loans increased 9% in 1998 from $571.9 million and
investment securities increased 15% in 1998 from $198.0 million in 1997. These
were the primary factors for the 7% rise in that year's net interest income from
$39.3 million in 1997.
Net income in 1999 as compared to 1998 also reflected a 23% increase in
noninterest income primarily from higher deposit service charges and mutual fund
income. These were partially offset by increases in the provision for loan
losses of 12% and non-interest expenses of 10%. Similarly, net income in 1998 as
compared to 1997 benefited from an 11% increase in non-interest income primarily
from higher deposit service charges and mutual fund income while non-interest
expenses increased 11% and provision for loan losses decreased 3% from 1997.
14
<PAGE>
Lending Activities
Total loans increased to $764.1 million at December 31, 1999 from $655.8 million
at December 31, 1998, an increase of $108.3 million or 16.5%. Commercial loans
increased $22.6 million or 19.2%, while commercial real estate loans increased
by $30.7 million or 28.7%. At December 31, 1999, commercial loans totaled $140.4
million, representing 18.4% of total loans, and commercial real estate loans
totaled $137.7 million, representing 18.0% of total loans.
At December 31, 1999, agricultural loans, which include agricultural real estate
loans, represented 19.8% of the total loan portfolio. Between December 31, 1998
and December 31, 1999, agricultural loans increased by $27.8 million, or 22.4%,
to $151.5 million.
As of December 31, 1999, residential real estate loans had grown by $7.3 million
or 4.0% from December 31, 1998, and totaled $189.5 million or 24.8% of the total
loan portfolio. The Company was able to successfully compete for this business
during the heavy refinancing period of the last few years, through business
development efforts and by providing a broad line of variable and fixed-rate
mortgage products.
The Company also offers a broad range of consumer loan products. Consumer and
home equity loans grew by $19.8 million, or 15.8%, in 1999 and ended the year at
$145.0 million, representing 19.0% of the total loan portfolio.
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, commercial loans increased $11.9 million or 11.3%, while commercial real
estate loans increased by $7.7 million or 7.7%. 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.
At December 31, 1998, agricultural loans, which include agricultural real estate
loans, represent 18.9% of the 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, residential real estate loans 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.
Consumer and home equity loans grew by $5.7 million, or 4.8%, during 1998 and
ended 1998 at $125.2 million, representing 19.1% of the total loan portfolio.
Loan Portfolio Composition
Set forth below is selected information concerning the composition of the
Company's loan portfolio.
<TABLE>
<CAPTION>
At December 31
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial ................ $ 140,376 $ 117,750 $ 105,811 $ 100,854 $ 82,538
Commercial real estate .... 137,694 106,948 99,273 98,118 85,774
Agricultural .............. 151,534 123,754 107,546 86,674 69,223
Residential real estate ... 189,466 182,177 170,736 157,490 144,407
Consumer and home equity .. 145,038 125,198 119,506 109,456 99,515
--------- --------- --------- --------- ---------
Total loans, gross ...... 764,108 655,827 602,872 552,592 481,457
--------- --------- --------- --------- ---------
Net deferred fees ......... (363) (400) (395) (403) (452)
Allowance for credit losses (11,421) (9,570) (8,145) (7,129) (6,183)
--------- --------- --------- --------- ---------
Total loans, net ......... $ 752,324 $ 645,857 $ 594,332 $ 545,060 $ 474,822
========= ========= ========= ========= =========
</TABLE>
Loan Maturity and Repricing Schedule
The following table sets forth certain information as of December 31, 1999,
regarding the amount of loans maturing or repricing in the Company's portfolio.
Demand loans having no stated schedule of repayment and no stated maturity and
overdrafts are reported as due in one year or less. Adjustable and floating-rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than the period in which they contractually mature, and fixed-rate
loans are included in the period in which the final contractual repayment is
due.
ONE
WITHIN THROUGH AFTER
ONE FIVE FIVE
YEAR YEARS YEARS TOTAL
At December 31, 1999 ---- ----- ----- -----
(IN THOUSANDS)
Commercial ...................... $ 67,225 $ 40,206 $ 32,945 $140,376
Commercial real estate .......... 7,768 12,491 117,435 137,694
Agricultural .................... 39,518 27,085 84,931 151,534
Residential real estate ......... 4,816 10,932 173,718 189,466
Consumer and home equity ........ 10,430 80,976 53,632 145,038
-------- -------- -------- --------
Total loans ................... $129,757 $171,690 $462,661 $764,108
======== ======== ======== ========
Loans maturing after one year:
With a predetermined interest rate $117,107 $141,277
With a floating or adjustable rate 54,583 321,384
15
<PAGE>
Nonaccruing Loans and Nonperforming Assets
At December 31, 1999 the Company had $6.7 million in nonperforming assets
compared to $8.2 million at December 31, 1998. In addition to intensified
collection efforts the decrease is attributable to the sale of property held in
other real estate owned as well as successful efforts to liquidate collateral
securing several nonperforming loans.
The following table sets forth information regarding nonaccruing loans and other
nonperforming assets.
<TABLE>
<CAPTION>
At December 31
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans (1):
Commercial ................................ $1,159 $1,250 $ 970 $1,048 $1,025
Commercial real estate .................... 1,373 995 1,648 1,877 1,550
Agricultural .............................. 1,455 2,340 2,669 1,218 579
Residential real estate ................... 413 733 1,325 679 357
Consumer and home equity .................. 375 423 431 517 402
------ ------ ------ ------ ------
Total Nonaccruing loans ................. 4,775 5,741 7,043 5,339 3,913
Accruing loans 90 days or more delinquent .... 969 360 433 528 388
------ ------ ------ ------ ------
Total nonperforming loans .................... 5,744 6,101 7,476 5,867 4,301
Other real estate owned (2) .................. 969 2,084 2,309 1,801 1,541
------ ------ ------ ------ ------
Total non-performing assets .................. 6,713 8,185 9,785 7,668 5,842
Less: government guaranteed portion
of non-performing loans .................. 734 1,421 1,428 1,478 661
------ ------ ------ ------ ------
Total non-performing assets, net of
government guaranteed portion (3) ........ $5,979 $6,764 $8,357 $6,190 $5,181
====== ====== ====== ====== ======
Total non-performing loans to total
loans ...................................... 0.75% 0.93% 1.24% 1.06% 0.89%
====== ====== ====== ====== ======
Total non-performing loans, net of government
guaranteed portion, to total loans ......... 0.66% 0.71% 1.00% 0.79% 0.76%
====== ====== ====== ====== ======
Total non-performing assets to total loans
and other real estate ...................... 0.88% 1.24% 1.62% 1.38% 1.21%
====== ====== ====== ====== ======
Total non-performing assets, net of government
guaranteed portion, to total loans and
other real estate .......................... 0.78% 1.03% 1.38% 1.12% 1.07%
====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Loans are placed on non-accrual status when they become 90 days or more
past due or if they have been identified by the Company 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 non-
performing loans less the portion of the principal amount of all
nonperforming loans that is guaranteed by the SBA or FSA.
16
<PAGE>
Analysis of the Allowance for Loan Losses
At December 31, 1999, the Company's allowance for loan losses was $11.4 million,
an increase of $1.8 million over the previous year end. At December 31, 1999,
the Company's allowance for loan losses as a percentage of total loans was 1.50%
compared to 1.46% at December 31, 1998 and, as a percentage of total
non-performing loans increased to 198.83%, compared to 156.86% at December 31,
1998. Non-performing loans decreased slightly from $6.1 million at December 31,
1998 to $5.7 million at December 31, 1999. Net loan charge-offs were $1.2
million in 1999 compared to $1.3 million in 1998.
The following table sets forth the analysis of the allowance for loan losses for
the periods indicated.
<TABLE>
<CAPTION>
At December 31
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year ....... $ 9,570 $ 8,145 $ 7,129 $ 6,183 $ 5,303
Charge-offs:
Commercial ...................... 312 263 500 154 119
Commercial real estate .......... 139 687 746 237 165
Agricultural .................... 12 19 -- 74 --
Residential real estate ......... 461 215 131 146 38
Consumer and home equity ........ 663 488 620 321 310
------- ------- ------- ------- -------
Total 1,587 1,672 1,997 932 632
------- ------- ------- ------- -------
Recoveries:
Commercial ...................... 88 106 12 3 7
Commercial real estate .......... 23 84 18 35 10
Agricultural .................... -- -- 1 -- --
Residential real estate ......... 163 42 26 2 1
Consumer and home equity ........ 102 133 127 98 89
------- ------- ------- ------- -------
Total 376 365 184 138 107
------- ------- ------- ------- -------
Net charge-offs .................... 1,211 1,307 1,813 794 525
Provision for credit losses ........ 3,062 2,732 2,829 1,740 1,405
------- ------- ------- ------- -------
Balance at end of year ............. $11,421 $ 9,570 $ 8,145 $ 7,129 $ 6,183
======= ======= ======= ======= =======
Ratio of net charge-offs during
the year to average loans
outstanding during the year ..... 0.17% 0.21% 0.32% 0.16% 0.12%
======= ======= ======= ======= =======
Ratio of allowance for loan losses
to total loans .................. 1.50% 1.46% 1.35% 1.29% 1.29%
======= ======= ======= ======= =======
Ratio of allowance for loan losses
to nonperforming loans .......... 198.83% 156.86% 108.95% 121.51% 143.76%
======= ======= ======= ======= =======
Ratio of allowance for loan losses
to nonperforming loans, net of
government guaranteed portion (1) 227.97% 204.49% 134.67% 162.43% 169.86%
======= ======= ======= ======= =======
</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.
17
<PAGE>
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan losses
by loan category for the periods 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
------------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ------------------------
Percent Percent Percent
Of Loans Of Loans Of Loans
Amount In Each Amount In Each Amount In Each
Of Allowance Category Of Allowance Category Of Allowance Category
For To Total For To Total For To Total
Loan Losses Loans Loan Losses Loans Loan Losses Loans
------------- -------- -------------- ----- -------------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial.................................. $ 2,314 18.4% $ 3,227 17.9% $ 2,406 17.6%
Commercial real estate...................... 2,181 18.0 1,734 16.3 1,237 16.5
Agricultural................................ 1,591 19.8 1,288 18.9 1,377 17.8
Residential real estate..................... 952 24.8 1,489 27.8 1,328 28.3
Consumer and home equity.................... 1,792 19.0 1,643 19.1 1,490 19.8
Unallocated ................................ 2,591 -- 189 -- 307 --
------- ----- ------- ----- -------- -----
Total............................. $11,421 100.0% $ 9,570 100.0% $ 8,145 100.0%
======= ===== ======= ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------
1996 1995
---------------------- ----------------------
Percent Percent
Of Loans Of Loans
Amount In Each Amount In Each
Of Allowance Category Of Allowance Category
For To Total For To Total
Loan Losses Loans Loan Losses Loans
------------- ----- ------------- -----
<S> <C> <C> <C> <C>
Commercial...................................... $ 1,573 18.2% $ 1,283 17.1%
Commercial real estate.......................... 1,081 17.8 767 17.8
Agricultural.................................... 928 15.7 357 14.4
Residential real estate......................... 965 28.5 427 30.0
Consumer and home equity........................ 1,555 19.8 726 20.7
Unallocated .................................... 1,027 -- 2,623 --
-------- ------- ------- -------
Total.................................. $ 7,129 100.0% $ 6,183 100.0%
======== ======= ======= =======
</TABLE>
- ----------
INVESTING ACTIVITIES
U.S. Treasury and Agency Securities. At December 31, 1999, the U.S. Treasury and
Agency securities portfolio totaled $154.2 million, of which $150.2 million was
classified as available for sale. At that date the portfolio consisted of $17.1
million in U. S. Treasury securities and $137.1 million in U. S. federal agency
securities. The U. S. federal agency security portfolio consists almost
exclusively of callable securities. These callable securities provide additional
yield and are maintained at a level consistent with the Company's interest rate
risk profile. At December 31, 1998, the U. S. Treasury and Agency securities
portfolio totaled $130.1 million of which $117.6 million was classified as
available for sale.
State and Municipal Obligations. At December 31, 1999, the portfolio of state
and municipal obligations totaled $93.6 million, of which $16.2 million was
classified as available for sale. At that date $77.4 million was classified as
held to maturity, with a fair value of $77.0 million. At December 31, 1998, the
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. 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, 1999 the Company had $21.0 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 the Company's interest rate
risk profile. At December 31, 1998 the Company had $23.5 million in
mortgage-backed securities, all classified as available for sale.
Corporate Bonds. The corporate bond portfolio at December 31, 1999 totaled $8.7
million, all of which was classified as available for sale. The portfolio was
purchased to further diversify the investment portfolio and increase investment
yield. The Company's investment 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. The corporate bond portfolio at December 31, 1998 totaled $2.8
million, all of which was classified as available for sale.
Equity Securities. At December 31, 1999, equity securities totaled $4.3 million,
all of which was classified as available for sale. The portfolio consisted of a
total of $0.6 million of common stock issued by seven different companies and
$0.5 million of trust preferred. The portfolio also includes $3.0 million of
FHLB stock and $94,000 of common stock of the Federal Reserve Bank. At December
31, 1998, equity securities 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, $2.8 million of FHLB stock, and
$94,000 of Federal Reserve Bank stock.
18
<PAGE>
Security Yields, Maturities and Repricing Schedule. The following table sets
forth certain information regarding the carrying value, weighted average yields
and contractual maturities of the Company's securities portfolio as of December
31, 1999. Adjustable-rate securities are included in the period in which
interest rates are next scheduled to adjust. No tax equivalent adjustments were
made to the weighted average yields.
<TABLE>
<CAPTION>
For the year ended December 31, 1999
-------------------------------------------------------------------------------------------------
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>
Available for sale:
U.S. Treasury and agency.... $ 11,155 6.04% $ 96,078 5.96% $ 47,120 6.22% $ -- --% $154,353 6.05%
Mortgage-backed securities.. 1,012 6.33 9,345 6.41 6,461 6.56 4,555 6.57 21,373 6.49
States and municipal
obligations................. 559 4.45 8,593 4.44 6,653 4.73 525 6.15 16,330 4.61
Corporate bonds............. -- -- 6,303 6.25 1,969 6.26 750 6.20 9,022 6.25
-------- -------- -------- -------- --------
Total debt securities......... 12,726 5.99 120,319 5.90 62,203 6.10 5,830 6.48 201,078 5.98
-------- -------- -------- -------- --------
Equity securities............. -- -- -- -- -- -- -- -- 3,713 12.40
-------- -------- -------- -------- --------
Total securities available
for sale.............. $ 12,726 5.99% $120,319 5.90% $ 62,203 6.10% $ 5,830 6.48% $204,791 6.10%
======== ======== ======== ======== ========
Held to maturity:
U.S. Treasury and agency.... $ 1,995 6.17% $ 1,951 6.14% $ -- --% $ -- --% $ 3,946 6.16%
States and municipal
obligations................. 19,642 4.51 49,525 4.56 7,790 4.88 453 5.95 77,410 4.59
-------- -------- -------- -------- --------
Total securities held to
maturity.............. $ 21,637 4.66% $ 51,476 4.62% $ 7,790 4.88% $ 453 5.95% $ 81,356 4.66%
======== ======== ======== ======== ========
</TABLE>
FUNDING ACTIVITIES
Borrowings
The following table sets forth certain information as to the Company's
short-term borrowings for the periods indicated. Short-term borrowings generally
mature within 90 days.
<TABLE>
<CAPTION>
As of and for the year ended December 31
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances............................... $ 41,500 $ -- $ 5,000
Securities sold under agreements
to repurchase.............................. 4,596 5,362 3,849
----------- ----------- -----------
Total short-term borrowings............. $ 46,096 $ 5,362 $ 8,849
=========== =========== ===========
Average rate at period-end.................. 5.77% 4.33% 5.27%
Average rate during period.................. 5.02% 5.02% 5.46%
</TABLE>
The increase in short-term borrowings is attributed to a planned build up in
liquidity assets in connection with "Y2K" preparation as well as additional
funding for expansion of the loan portfolio. Securities sold under repurchase
agreements of $4,596,000, $5,362,000, and $3,849,000 at December 31, 1999, 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
$11,537,000, $6,547,000, and $3,849,000 for the years ended December 31, 1999,
1998, and 1997, respectively. The average amount of outstanding repurchase
agreements was $7,835,000, $4,248,000, and $1,627,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
The Company has $10,950,000 and $43,300,000 of remaining credit available under
lines of credit with the FHLB at December 31, 1999 and 1998 which are
collateralized by FHLB stock and real estate mortgage loans.
Long-term borrowings are summarized as follows:
<TABLE>
<CAPTION>
At December 31
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances............................... $ 8,421 $ 6,617 $ 1,314
10% notes................................... $ 1,698 $ 1,739 $ 1,739
Other....................................... 121 144 164
----------- ----------- -----------
Total long-term borrowings............. $ 10,240 $ 8,500 $ 3,217
=========== =========== ===========
</TABLE>
Advances payable to the FHLB are collateralized by FHLB stock and real estate
mortgage loans. The advances mature from 2000 through 2008 and have a fixed
interest rate with a weighted average rate of 5.76% as of December 31, 1999. The
Company issued $1,739,000 of 10% unsecured notes to former shareholders of First
Tier Bank & Trust due March 31, 2000 with interest payable quarterly. Other debt
at December 31, 1999, 1998, and 1997 includes mortgage notes which mature from
2000 through 2005 and bear interest at a fixed average rate of 3.76% Long term
borrowings have aggregate maturities for the five years 2000 through 2004 of
$2,835,000 in 2000, $1,146,000 in 2001, $155,000 in 2002, $165,000 in 2003 and
$174,000 in 2004.
19
<PAGE>
Deposits
The Banks offer 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. These core deposit products
were $726.6 million or 76.5% of total deposits of $949.5 million at December 31,
1999. The core deposit base consists almost exclusively of in-market deposits
and there are no brokered deposits. Core deposits are supplemented with
certificates of deposit over $100,000 which were $222.9 million at December 31,
1999. Certificates of deposit over $100,000 are largely from in-market
municipal, business and individual customers.
Total 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. Core deposit products were $678.8 million or 79.8% of total deposits at
December 31, 1998. Certificates of deposit over $100,000 totaled $171.6 million
at December 31, 1998.
The daily average balances, percentage composition and weighted average rates
paid on deposits for each of the years ended December 31, 1999, 1998 and 1997
are presented below:
<TABLE>
<CAPTION>
For the year ended December 31
1999 1998 1997
------------------------------ ------------------------------ ---------------------------
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........ $ 105,076 11.8% 1.34% $ 91,627 11.5% 1.46% $ 83,271 11.4% 1.45%
Savings and money market......... 183,800 20.7 2.43 163,966 20.5 2.62 166,646 22.8 2.67
Certificates of deposit
under $100,000................. 280,953 31.6 5.22 274,750 34.4 5.68 248,871 34.1 5.62
Certificates of deposit
over $100,000................. 190,942 21.5 5.18 158,317 19.8 5.64 133,799 18.3 5.64
Non-interest-bearing accounts.... 127,899 14.4 -- 110,294 13.8 -- 97,510 13.4 --
--------- ----- --------- ----- --------- -----
Total average deposits......... $ 888,670 100.0% 3.78% $ 798,954 100.0% 3.78% $ 730,097 100.0% 3.72%
========= ====== ========= ===== ========= =====
</TABLE>
The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 1999:
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------------------
3 Months Over 3 To 6 Over 6 To 12 Over 12
Or Less Months Months Months Total
------- ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000.. $ 59,325 $ 53,171 $ 99,560 $ 65,961 $ 278,017
Certificates of deposit of $100,000 or more. 159,115 26,505 24,717 12,564 222,901
---------- --------- ---------- ---------- ----------
Total certificates of deposit............ $ 218,440 $ 79,676 $ 124,277 $ 78,525 $ 500,918
========== ========= ========== ========== ==========
</TABLE>
NET INCOME ANALYSIS
Net Interest Income
Net interest income, the principal source of the Company's earnings, was $47.0
million in 1999 compared with $41.9 million in 1998, an increase of $5.1 million
or 12.2%. Net interest income increased in 1999 as a result of a 13.7% increase
in average earning assets, derived primarily from growth of $78.6 million in
average loans and $45.4 million in average securities. The growth in earning
assets was partially offset by a 6 basis point decline in the net interest
margin. 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%. Average earning assets
grew by $80.6 million in 1998, or 10.2% over 1997, with average loans growing by
$49.5 million, or 8.7%, and average investment securities growing by $29.4
million, or 14.8% which were partially offset by a 15 basis point decline in the
net interest margin. Net interest margin, on a tax-equivalent basis, was 5.00%
for 1999, 5.06% for 1998, and 5.21% for 1997.
Net interest margin declined slightly by 6 basis points to 5.00% in 1999 as
intense competition for loan assets continued. Net interest margin declined 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 8.24% in 1999 from 8.65% in 1998. The interest-earning asset
yield was 8.76% in 1997. The cost of interest-bearing liabilities decreased to
4.05% in 1999 from 4.41% in 1998 and was 4.33% in 1997. Growth in
interest-bearing liabilities in 1999 occurred in all categories. The Company
closely managed interest rate pricing on its deposits which caused the interest
bearing liability rate to decline in 1999. In 1998 much of the growth in
interest bearing liabilities was in higher yielding certificates of deposit
which caused the yield on this portfolio to increase that year.
20
<PAGE>
Average Balance Sheet. The following table sets forth certain information
relating to the Company's consolidated statements of financial condition and
reflects the average yields earned on interest-earning assets, as well as the
average rates paid on interest-bearing liabilities for the years indicated. Such
yields and rates were derived by dividing interest income or expense by the
average balances of interest-earning assets or interest-bearing liabilities,
respectively, for the years shown. Tax equivalent adjustments have been made.
All average balances are average daily balances. Nonaccruing loans have been
included in the yield calculations in this table.
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------------------
1999 1998
------------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and interest
bearing deposits.......................... $ 8,529 $ 428 5.02% $ 15,406 $ 842 5.47%
Investment securities (1) ................ 274,290 17,203 6.27 227,352 14,784 6.50
Loans (2) ................................. 700,062 63,417 9.06 621,418 59,090 9.51
----------- ----------- --------- ---------
Total interest-earning assets ........... 982,881 81,048 8.24 864,176 74,716 8.65
----------- ----------- --------- ---------
Allowance for loan losses ................ (10,261) (8,910)
Other non-interest-earning assets 63,841 63,142
----------- ----------
Total assets ............................ $ 1,036,461 $ 918,408
=========== ==========
Interest-bearing liabilities:
Savings and money market................... $ 183,800 $ 4,461 2.43% $ 163,966 $ 4,301 2.62%
Interest-bearing checking ................. 105,076 1,408 1.34 91,627 1,335 1.46
Certificates of deposit ................... 471,895 24,551 5.20 433,067 24,523 5.66
Borrowed funds ............................ 26,398 1,463 5.54 13,635 799 5.86
----------- ----------- --------- ---------
Total interest-bearing liabilities ...... 787,169 31,883 4.05 702,295 30,958 4.41
----------- ----------- --------- ---------
Non-interest-bearing demand deposits ....... 127,899 110,294
Other non-interest-bearing liabilities ..... 14,091 13,613
----------- ---------
Total liabilities ....................... 929,159 826,202
Stockholders' equity (3) ................... 107,302 92,206
----------- ---------
Total liabilities and stockholders'
equity ............................. $ 1,036,461 $ 918,408
=========== ==========
Net interest income ........................ $ 49,165 $ 43,758
=========== ===========
Net interest rate spread ................... 4.19% 4.24%
====== ======
Net earning assets ......................... $ 195,712 $ 161,881
=========== ===========
Net interest income as a percentage of
average interest-earning assets ........... 5.00% 5.06%
====== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities ... 124.86% 123.05%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------
1997
---------------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold and interest
bearing deposits.......................... $ 14,204 $ 788 5.55%
Investment securities (1) ................. 197,992 13,149 6.64
Loans (2) .................................. 571,877 54,730 9.57
----------- -----------
Total interest-earning assets ............ 784,073 68,667 8.76
----------- -----------
Allowance for loan losses ................. (7,370)
Other noninterest-earning assets 58,083
-----------
Total assets ............................. $ 834,786
===========
Interest-bearing liabilities:
Savings and money market................... $ 166,646 $ 4,447 2.67%
Interest-bearing checking .................. 83,271 1,211 1.45
Certificates of deposit .................... 382,670 21,534 5.63
Borrowed funds ............................. 10,585 658 6.22
------------- -----------
Total interest-bearing liabilities ....... 643,172 27,850 4.33
------------- -----------
Non-interest-bearing demand deposits ........ 97,510
Other non-interest-bearing liabilities ...... 11,838
------------
Total liabilities ........................ 752,520
Stockholders' equity (3) .................... 82,266
------------
Total liabilities and stockholders'
equity .............................. $ 834,786
===========
Net interest income ......................... $ 40,817
===========
Net interest rate spread .................... 4.43%
======
Net earning assets .......................... $ 140,901
=============
Net interest income as a percentage of
average interest-earning assets ............ 5.21%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities .... 121.91%
======
</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 tax rate of 35%.
(2) Net of deferred loan fees and expenses, and loan discounts.
(3) Includes unrealized gains/(losses) on securities available for sale.
21
<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 the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by current year rate); (ii) changes attributable to changes
in rate (changes in rate multiplied by prior volume); and (iii) 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
---------------------------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
------------------------------------ --------------------------------
Increase/(Decrease) Total Increase/(Decrease) Total
Due To Increase Due To 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.......................... $ (346) $ (69) $ (415) $ 64 $ (10) $ 54
Investment securities...................... 2,847 (442) 2,405 1,984 (349) 1,635
Loans...................................... 7,135 (2,809) 4,326 4,720 (360) 4,360
-------- ------- -------- ------- ------- --------
Total interest-earning assets......... 9,636 (3,320) 6,316 6,768 (719) 6,049
======== ======= ======== ======= ======= ========
Interest-bearing liabilities:
Savings and money market................... 180 (107) 73 (72) (74) (146)
Interest-bearing checking.................. 482 (321) 161 134 (10) 124
Certificates of deposit .................. 2,020 (1,993) 27 2,855 134 2,989
Borrowed funds............................. 707 (43) 664 164 (23) 141
-------- ------- -------- ------- ------- --------
Total interest-bearing liabilities.... 3,389 (2,464) 925 3,081 27 3,108
======== ======= ======== ======= ======= ========
Net interest income.......................... $ 6,247 $ (856) $ 5,391 $3,687 $ (746) $ 2,941
======== ======= ======== ======= ======= ========
</TABLE>
PROVISION FOR LOAN LOSSES
The Company establishes provisions for losses, which are charged to operations,
in order to maintain the allowance for loan losses at an adequate level. The
provision for loan losses was $3.1 million in 1999, compared to $2.7 million in
1998 and $2.8 million in 1997. The amount of the provision in excess of the net
charge-offs for each of the three years increased the balance of the Company's
Allowance for Loan Losses. The growth in the Allowance for Loan Losses is
consistent with the growth in the Company's loan portfolio.
NONINTEREST INCOME
The following table presents the major categories of noninterest income during
the years indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts.................... $4,289 $3,234 $2,706
Loan servicing fees.................................... 1,192 1,190 1,137
Mutual fund fees....................................... 882 672 471
Insurance fees......................................... 327 238 175
Gain on sale of assets................................. 292 181 353
Other.................................................. 866 866 891
------ ------ ------
Total noninterest income............................. $7,848 $6,381 $5,733
====== ====== ======
</TABLE>
Service charges on deposit accounts increased in 1999 as a result of an increase
in demand deposit customers and selected increases in deposit service pricing.
Mutual fund fees increased $210,000, or 31.3%, due to a greater emphasis on the
sale of such investment products. An increase of $111,000 in gains on the sale
of assets from $181,000 in 1998 to $292,000 in 1999 was derived from $71,000 in
gains on sales of securities available for sale versus no security gains in 1998
and $40,000 of additional gains from sales of loans and other assets. Service
charges on deposit accounts increased $528,000, or 19.5%, in 1998 from $2.7
million in 1997. Loan servicing fees increased $53,000, or 4.7% in 1998
consistent with the increase in the portfolio of loans serviced for others.
Mutual fund fees increased $201,000, or 42.7% in 1998 also due to greater
emphasis on the sale of such investment products.
NONINTEREST EXPENSES
The following table presents the major categories of noninterest expense for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Salaries and employee benefits........................ $14,801 $13,092 $11,713
Occupancy and equipment............................... 4,491 3,855 3,809
Supplies and postage.................................. 1,295 1,363 1,211
Amortization of intangibles........................... 839 839 839
Professional fees..................................... 618 809 328
Advertising........................................... 574 487 476
Other real estate..................................... 259 378 198
Other expense......................................... 4,155 3,779 3,510
------- ------- -------
Total non-interest expense.......................... $27,032 $24,602 $22,084
======= ======= =======
</TABLE>
The increases in noninterest expenses in 1999 are largely the result of
increases in staffing levels from expanding lending activities, technological
expenditures associated with expanding the Company's product line and
distribution channels and the opening of new branch offices in contiguous
markets. Noninterest expenses increased 11.4% in 1998 primarily from an
investment in staff additions and upgrades to facilities and technology. Key
members were added to the management team and several branch facilities were
expanded and one new branch was opened in 1998. The Company also added features
to technological
22
<PAGE>
capabilities including an internet banking product, check imaging and upgrades
to overall data processing capabilities in preparation for the year 2000. Even
with these expenditures, the Company's efficiency ratio, which measures the
amount of overhead required to produce a dollar of revenue, remained at a
relatively low level. For the years ended December 31, 1999, 1998, and 1997 the
efficiency ratio was 47.0%, 48.3%, and 47.0%, respectively.
The Company's largest component of noninterest expense, salaries and employee
benefits increased 13.1% in 1999. Salaries and employee benefits increased 11.8%
in 1998. Upgrades to salary and incentive compensation programs, additions to
the management team and additional staff hired at the new branch offices account
for the increases. Occupancy and equipment costs increased 16.5% in 1999 due to
new branch openings and additional technological expenditures. Occupancy and
equipment costs increased only $46,000, or 1.2% in 1998, as additional
non-recurring costs associated with the opening of the 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 contributed to improved efficiencies and fee income
in 1999.
INCOME TAXES
The effective income tax rate was 35.6% in 1999, 35.1% in 1998, and 36.2% in
1997. The fluctuation in the 1998 effective tax rate from 1997 is attributable
to changes in the percentage of pre-tax income being derived from interest
income on tax-exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash, due from banks, interest-bearing
deposits and federal funds sold. The levels of these assets are dependent on
operating, financing, lending and investing activities during any given period.
At December 31, 1999, cash, due from banks, interest-bearing deposits and
federal funds sold totaled $61.2 million, or 5.4% of total assets, as compared
to $42.8 million, or 4.4% of total assets, at December 31, 1998. Cash on hand
accounted for $11.4 million of the increase which was included in the Company's
Year 2000 liquidity and cash flow contingency plan.
The Company's primary sources of funds are deposits, proceeds from the principal
and interest payments on loans, 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. The Company monitors its liquidity position on a daily basis.
Excess short-term liquidity is usually invested in overnight federal funds sold.
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.
Total deposits increased $99.1 million from December 31, 1998 to December 31,
1999. Deposit flows are affected by the level of interest rates, the interest
rates and products offered by local competitors and other factors.
At December 31, 1999, the Company had total borrowings of $56.3 million, which
primarily consisted of advances from the FHLB and repurchase agreements entered
into with business customers. FHLB advances are available pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. At December 31, 1999, the Company had $49.9 million of FHLB advances
outstanding, an increase of $43.3 million from $6.6 million at December 31,
1998. Short term FHLB advances increased $34.5 million during the 4th quarter as
part of the Company's overall liquidity and cash flow contingency planning for
"Y2K" (see below).
Outstanding loan commitments totaled $152.4 million at December 31, 1999. The
Company anticipates it will have sufficient funds available to meet current loan
commitments. Certificates of deposit which are scheduled to mature in one year
or less from December 31, 1999 total $422.4 million. Based upon experience and
current pricing strategy, management believes that a significant portion of such
deposits will remain with the Banks.
At December 31, 1999, the Company significantly exceeded all regulatory capital
requirements with:
o a consolidated leverage capital level of $117.6 million, or 10.8% of
adjusted assets, which is above the required level of $43.5 million, or
4.00% of adjusted assets;
o a Tier 1 risk-based capital of $117.6 million, or 14.94% of adjusted
assets, which is above the required level of $31.5 million, or 4.00% of
adjusted assets; and
o a consolidated risk-based capital of $127.4 million, or 16.19% of adjusted
assets, which is above the required level of $63.0 million, or 8.00% of
adjusted assets.
23
<PAGE>
MARKET RISK
The principal objective of the Company's interest rate risk management is to
evaluate the interest rate risk inherent in certain assets and liabilities,
determine the appropriate level of risk given its business strategy, operating
environment, capital and liquidity requirements and performance objectives, and
manage the risk consistent with the guidelines approved by the Company's Board
of Directors to reduce the vulnerability of operations to changes in interest
rates. The Company's 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
strategic objectives and regularly reviews the activities of the 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.
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 the Company's 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 re-price 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 December 31, 1999, the one-year gap position,
the difference between the amount of interest-earning assets maturing or
re-pricing within one year and interest-bearing liabilities maturing or
repricing within one year, was $74.1 million, or 7.6% of total assets.
Accordingly, over the one year period following December 31, 1999, the Company
will have $74.1 million more in liabilities re-pricing than assets. Generally if
rate-sensitive assets re-price sooner than rate-sensitive liabilities, earnings
will be positively impacted in a rising rate environment. Conversely, in a
declining rate environment, earnings will generally be negatively impacted. If
rate-sensitive liabilities re-price sooner than rate-sensitive assets then
generally earnings will be negatively impacted in a rising rate environment.
Conversely, in a declining rate environment earnings will generally be
positively impacted. Management believes that the negative gap position will not
have a material adverse effect on the Company's operating results.
Gap Analysis. The following table (the "Gap Table") sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at December
31, 1999 which management anticipates, 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 December 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%, 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 more than 3 years, respectively. Prepayment
and repricing rates can have a significant impact on the estimated gap. While
management believes such assumptions are reasonable, there can be no assurance
that assumed repricing rates will approximate actual future deposit activity.
24
<PAGE>
<TABLE>
<CAPTION>
Gap Table Volumes Subject to Repricing Within
-----------------------------------------------------------------------------------------------
0-30 31-180 181-365
December 31, 1999 days days days 1-3 years 3-5 years 5-10 years >10 years Total
-----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold ........... $ 11,554 $ -- $ -- $ -- $ -- $ -- $ -- $ 11,554
Securities (1) ............... 1,273 21,181 15,522 65,092 108,857 66,546 3,157 281,628
Loans (2) .................... 309,942 60,530 69,263 124,567 88,988 48,102 62,354 763,746
-------- --------- -------- --------- --------- --------- --------- ----------
Total interest-earning
assets ................... 322,769 81,711 84,785 189,659 197,845 114,648 65,511 1,056,928
-------- --------- -------- --------- --------- --------- --------- ----------
Interest-bearing liabilities:
Interest-bearing checking,
savings and money
market deposits ............ 7,671 38,350 46,022 92,044 118,323 4,403 -- 306,813
Certificates of deposit ...... 122,230 175,887 124,280 71,885 6,479 157 -- 500,918
Borrowed funds ............... 4,610 43,257 1,076 1,326 351 5,625 91 56,336
-------- --------- -------- --------- --------- --------- --------- ----------
Total interest-bearing
liabilities .............. 134,511 257,494 171,378 165,255 125,153 10,185 91 864,067
-------- --------- -------- --------- --------- --------- --------- ----------
Period gap ..................... $188,258 $(175,783) $(86,593) $ 24,404 $ 72,692 $ 104,463 $ 65,420 $ 192,861
======== ========= ======== ========= ========= ========= ========= ==========
Cumulative gap ................. $188,258 $ 12,475 $(74,118) $ (49,714) $ 22,978 $ 127,441 $ 192,861
======== ========= ======== ========= ========= ========= =========
Period gap to total assets ..... 16.62% (15.52%) (7.64%) 2.15% 6.42% 9.22% 5.77% 17.02%
======== ========= ======== ========= ========= ========= ========= ==========
Cumulative gap to
total assets ................ 16.62% 1.10% (6.54%) (4.39%) 2.03% 11.25% 17.02%
======== ========= ======== ========= ========= ========= =========
Cumulative interest-earning
assets to cumulative interest-
bearing liabilities .......... 239.96% 103.18% 86.84% 93.18% 102.69% 114.75% 122.32%
======== ========= ======== ========= ========= ========= =========
</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, the Company directs 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.
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
December 31, 1999:
<TABLE>
<CAPTION>
Change in Interest Net Interest Income Economic Value of Equity
Rates in Basis Points ----------------------------------- ----------------------------------
(Rate Shock) $Amount $ Change % Change $ Amount $ Change % Change
- --------------------------- ------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
200........................ $54,844 $ 1,314 2.45% $121,090 $(11,988) (9.01%)
100........................ 54,254 724 1.35% 126,676 (6,402) (4.81%)
Static..................... 53,530 -- -- 133,078 -- --
(100)...................... 52,919 (611) (1.14%) 139,520 6,442 4.84%
(200)...................... 51,324 (2,206) (4.12%) 142,826 9,748 7.33%
</TABLE>
The Company measures 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 December 31, 1999, a 200 basis point increase in rates would increase net
interest income by $1.3 million, or 2.45%, over the next twelve month period.
Conversely, a 200 basis point decrease in rates would decrease net interest
income by $2.2 million, or 4.12%, 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 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.
25
<PAGE>
YEAR 2000 "Y2K"
General
The Year 2000 risk involved computer programs and computer software that would
not be able to perform into the Year 2000 without interruption. If computer
systems did not correctly recognize the date change from December 31, 1999 to
January 1, 2000, computer applications that rely on the date field could have
failed or created erroneous results. Such erroneous results could have affected
interest, payment, or due dates or have caused a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Company Preparations
The Company formally initiated its Year 2000 project plan in September 1997 to
ensure that operational and financial systems would not be adversely affected by
Year 2000 problems. The Company formed a Year 2000 project team to allocate the
necessary resources to ensure completion of the project under board of directors
oversight.
The software for the Company's systems is provided through software vendors. All
third party vendors and software providers were contacted and required to
demonstrate and represent that their products would be Year 2000 compliant. The
Company implemented an ongoing program of testing compliance with these
representations and warranties. In addition, compliance with Year 2000
directives and guidelines issued by the Federal Financial Institutions
Examination Council ("FFIEC") and other bank regulatory agencies was 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.
Costs of Compliance
The Company expended approximately $262,000 through December 31, 1999 to address
Year 2000 issues. No additional costs are expected.
Risks Related to Third Parties
The Company cannot accurately gauge the impact of Year 2000 noncompliance by
third parties with which it transacts business. The largest dollar deposit
customers were identified (aggregate deposits over $250,000) as were the largest
commercial/agricultural loan customers (which have loans over $100,000).
Customers deemed at risk were surveyed 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.
Responses were reviewed and the Company worked individually with customers to
resolve any identified problems. In the event that Year 2000 noncompliance
adversely affects a borrower, the Company may be required to charge-off the loan
to that borrower. Management believes these potential charge-offs are not
material.
Contingency Plans and Current Status
Contingency planning with respect to the Year 2000 date change was completed and
none of the Company's systems failed. Processing by the Federal Reserve of
electronic funds transfers and check clearing was not interrupted.
As the Company's data processing systems functioned properly at the time of the
date change and the Company has not experienced any internal or external "Y2K"
problems, there has been no impact on the Company's financial condition or
results of operations.
26
<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, 1999 and
1998 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, 1999. 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, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Buffalo, New York
January 24, 2000
27
<PAGE>
Financial Institutions, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
1999 1998
---- ----
(Dollars in thousands, except share amounts)
Assets
Cash, due from banks and interest-bearing deposits $ 49,672 $ 26,365
Federal funds sold 11,554 16,478
Securities available for sale, at fair value 200,272 157,022
Securities held to maturity 81,356 91,016
Loans 763,745 655,427
Allowance for loan losses (11,421) (9,570)
----------- -----------
Loans, net 752,324 645,857
Premises and equipment, net 17,009 18,081
Other assets 24,273 21,366
----------- -----------
Total assets $ 1,136,460 $ 976,185
=========== ===========
Liabilities And Shareholders' Equity
Deposits:
Demand $ 141,800 $ 128,216
Savings, money market and interest-bearing
checking 306,813 273,630
Certificates of Deposit 500,918 448,609
----------- -----------
Total deposits 949,531 850,455
Accrued expenses and other liabilities 13,054 15,290
Short-term borrowings 46,096 5,362
Long-term borrowings 10,240 8,500
----------- -----------
Total liabilities 1,018,921 879,607
----------- -----------
Shareholders' equity:
3% cumulative preferred stock, $100 par value,
authorized 10,000 shares, issued and
outstanding 1,759 shares in 1999 and
1,842 shares in 1998 176 184
8.48% cumulative preferred stock, $100 par
value, authorized 200,000 shares, issued
and outstanding 176,356 shares in 1999
and 176,734 shares in 1998 17,636 17,673
Common stock, $ 0.01 par value, authorized
50,000,000 shares, issued 11,303,533 shares
in 1999 and 10,200,400 shares in 1998 113 102
Additional paid-in capital 16,448 2,837
Retained earnings 86,361 75,167
Accumulated other comprehensive income (loss) (2,661) 1,141
Treasury stock - common, at cost -
285,800 shares in 1999 and 284,800
shares in 1998 (534) (526)
----------- -----------
Total shareholders' equity 117,539 96,578
----------- -----------
Total liabilities and shareholders' equity $ 1,136,460 $ 976,185
=========== ===========
See accompanying notes to consolidated financial statements.
28
<PAGE>
Financial Institutions, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
(Dollars in thousands, except
per share amounts)
Interest income:
Loans $63,417 $59,090 $54,730
Securities 15,054 12,938 11,650
Other 428 842 788
------- ------- -------
Total interest income 78,899 72,870 67,168
------- ------- -------
Interest expense:
Deposits 30,420 30,159 27,193
Borrowings 1,463 799 658
------- ------- -------
Total interest expense 31,883 30,958 27,851
------- ------- -------
Net interest income 47,016 41,912 39,317
Provision for loan losses 3,062 2,732 2,829
------- ------- -------
Net interest income after
provision for loan losses 43,954 39,180 36,488
------- ------- -------
Noninterest income:
Service charges on deposits 4,289 3,234 2,706
Loan servicing fees 1,192 1,190 1,137
Mutual fund fees 882 672 471
Other 1,485 1,285 1,419
------- ------- -------
Total noninterest income 7,848 6,381 5,733
------- ------- -------
Noninterest expense:
Salaries and employee benefits 14,801 13,092 11,713
Occupancy and equipment 4,491 3,855 3,809
Supplies and postage 1,295 1,363 1,211
Amortization of intangibles 839 839 839
Professional fees 618 809 328
Other 4,988 4,644 4,184
------- ------- -------
Total noninterest expense 27,032 24,602 22,084
------- ------- -------
Income before income taxes 24,770 20,959 20,137
Income taxes 8,813 7,354 7,295
------- ------- -------
Net income 15,957 13,605 12,842
Preferred stock dividends 1,503 1,506 1,513
------- ------- -------
Net income available to
common shareholders $14,454 $12,099 $11,329
======= ======= =======
Net income per common share:
Basic $ 1.38 $ 1.22 $ 1.14
======= ======= =======
Diluted $ 1.38 $ 1.22 $ 1.14
======= ======= =======
See accompanying notes to consolidated financial statements.
29
<PAGE>
Financial Institutions, Inc. and Subsidiaries
Consolidated Statements of Changes in
Shareholders' Equity and Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Additional Compre-
3% 8.48% Paid hensive
Preferred Preferred Common In Retained Income
Stock Stock Stock Capital Earnings (Loss)
----- ----- ----- ------- -------- ------
(Dollars in thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 $ 192 $ 17,860 $ 102 $ 2,761 $ 56,516 $ 192
Purchase of 72 shares of 3% preferred stock (7) -- -- 4 -- --
Purchase of 1,176 shares of 8.48% preferred stock -- (117) -- (5) -- --
Purchase of 5,200 shares of common stock -- -- -- -- -- --
Sale of 6,000 shares of treasury stock -- -- -- 27 -- --
Comprehensive income:
Net income -- -- -- -- 12,842 --
Unrealized gain on securities
available for sale, net -- -- -- -- -- 557
Total comprehensive income
Cash dividends declared:
3% Preferred - $3.00 per share -- -- -- -- (6) --
8.48% Preferred - $8.48 per share -- -- -- -- (1,507) --
Common - $0.22 per share -- -- -- -- (2,184) --
--------- --------- --------- --------- --------- ---------
Balance - December 31, 1997 185 17,743 102 2,787 65,661 749
Purchase of 5 shares of 3% preferred stock (1) -- -- -- -- --
Purchase of 693 shares of 8.48% preferred stock -- (70) -- (7) -- --
Purchase of 23,500 shares of common stock -- -- -- -- -- --
Sale of 10,600 shares of treasury stock -- -- -- 57 -- --
Comprehensive income:
Net income -- -- -- -- 13,605 --
Unrealized gain on securities
available for sale, net -- -- -- -- -- 392
Total comprehensive income
Cash dividends declared:
3% Preferred - $3.00 per share -- -- -- -- (6) --
8.48% Preferred - $8.48 per share -- -- -- -- (1,500) --
Common - $0.26 per share -- -- -- -- (2,593) --
--------- --------- --------- --------- --------- ---------
Balance - December 31, 1998 184 17,673 102 2,837 75,167 1,141
Purchase of 83 shares of 3% preferred stock (8) -- -- 4 -- --
Purchase of 378 shares of 8.48% preferred stock -- (37) -- (5) -- --
Purchase of 1,000 shares of common stock -- -- -- -- -- --
Comprehensive income:
Net income -- -- -- -- 15,957 --
Unrealized loss on securities
available for sale, net -- -- -- -- -- (3,802)
Total comprehensive income
Cash dividends declared:
3% Preferred - $3.00 per share -- -- -- -- (5) --
8.48% Preferred - $8.48 per share -- -- -- -- (1,498) --
Common - $0.311 per share -- -- -- -- (3,260) --
Issuance of 1,103,133 shares of common stock -- -- 11 13,612 -- --
Through Initial Public Offering, net
--------- --------- --------- --------- --------- ---------
Balance - December 31, 1999 $ 176 $ 17,636 $ 113 $ 16,448 $ 86,361 ($ 2,661)
========= ========= ========= ========= ========= =========
<CAPTION>
Total
Share-
Treasury holders'
Stock Equity
----- ------
(Dollars in thousands, except share amounts)
<S> <C> <C>
Balance - December 31, 1996 ($ 369) $ 77,254
Purchase of 72 shares of 3% preferred stock -- (3)
Purchase of 1,176 shares of 8.48% preferred stock -- (122)
Purchase of 5,200 shares of common stock (23) (23)
Sale of 6,000 shares of treasury stock 8 35
Comprehensive income:
Net income -- 12,842
Unrealized gain on securities
available for sale, net -- 557
---------
Total comprehensive income 13,399
---------
Cash dividends declared:
3% Preferred - $3.00 per share -- (6)
8.48% Preferred - $8.48 per share -- (1,507)
Common - $0.22 per share -- (2,184)
--------- ---------
Balance - December 31, 1997 (384) 86,843
Purchase of 5 shares of 3% preferred stock -- (1)
Purchase of 693 shares of 8.48% preferred stock -- (77)
Purchase of 23,500 shares of common stock (162) (162)
Sale of 10,600 shares of treasury stock 20 77
Comprehensive income:
Net income -- 13,605
Unrealized gain on securities
available for sale, net -- 392
---------
Total comprehensive income 13,397
---------
Cash dividends declared:
3% Preferred - $3.00 per share -- (6)
8.48% Preferred - $8.48 per share -- (1,500)
Common - $0.26 per share -- (2,593)
--------- ---------
Balance - December 31, 1998 (526) 96,578
Purchase of 83 shares of 3% preferred stock -- (4)
Purchase of 378 shares of 8.48% preferred stock -- (42)
Purchase of 1,000 shares of common stock (8) (8)
Comprehensive income:
Net income -- 15,957
Unrealized loss on securities
available for sale, net -- (3,802)
---------
Total comprehensive income 12,155
---------
Cash dividends declared:
3% Preferred - $3.00 per share -- (5)
8.48% Preferred - $8.48 per share -- (1,498)
Common - $0.311 per share -- (3,260)
Issuance of 1,103,133 shares of common stock --
13,623
Through Initial Public Offering, net
--------- ---------
Balance - December 31, 1999 ($ 534) $ 117,539
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
Financial Institutions, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,957 $ 13,605 $ 12,842
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,585 3,117 2,798
Provision for loan losses 3,062 2,732 2.829
Deferred income tax benefit (692) (670) (533)
Gain on sale of securities available for sale, net (71) -- --
Gain on sale of loans and premises and equipment (221) (181) (353)
Minority interest in net income of subsidiary banks 78 68 68
Increase in other assets (422) (1,210) (1,536)
Increase in accrued expenses and other liabilities (2,071) 1,231 2,367
--------- --------- ---------
Net cash provided by operating activities 19,205 18,692 18,482
--------- --------- ---------
Cash flows from investing activities:
Purchase of securities:
Available for sale (110,571) (141,300) (61,916)
Held to maturity (20,247) (46,008) (33,693)
Proceeds from maturities of securities:
Available for sale 55,990 94,841 36,467
Held to maturity 29,563 53,766 40,505
Proceeds from sales of securities available for sale 4,585 -- --
Net increase in loans (109,377) (54,025) (51,743)
Purchase of premises and equipment, net (896) (3,673) (4,172)
--------- --------- ---------
Net cash used in investing activities (150,953) (96,399) (74,552)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 99,076 82,729 60,023
Increase (decrease) in short-term borrowings, net 40,734 (3,487) 4,959
Proceeds from long-term borrowings 1,906 5,344 1,314
Repayment of long-term borrowings (166) (61) (21)
Proceeds from Initial Public Offering 13,623 -- --
Repurchase of preferred and common shares, net (54) (163) (113)
Dividends paid (4,988) (3,987) (3,750)
--------- --------- ---------
Net cash provided by financing activities 150,131 80,375 62,412
--------- --------- ---------
Net increase in cash and cash equivalents 18,383 2,668 6,342
Cash and cash equivalents at the beginning of the year 42,843 40,175 33,833
--------- --------- ---------
Cash and cash equivalents at the end of the year $ 61,226 $ 42,843 $ 40,175
========= ========= =========
Supplemental disclosure of cash flow information: Cash paid during year for:
Interest $ 32,051 $ 29,920 $ 25,782
Income taxes $ 9,012 $ 8,431 $ 7,462
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
Financial Institutions, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
Principles of Consolidation
The consolidated financial statements include the accounts of FII, its four
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"). All significant
intercompany transactions and balances have been eliminated in consolidation.
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 and loss 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. Realized gains or losses from
the sale of available for sale securities are recognized on the trade date using
the specific identification method.
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.
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.
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 such
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.
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.
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.
32
<PAGE>
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.
Income Tax
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and the respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period which includes the
enactment date.
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.
Diluted net income per share reflects the effects of common stock issuable upon
exercise of dilutive stock options.
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.
Cash Equivalents
For purposes of the statement of cash flows, interest-bearing deposits and
federal funds sold are considered cash equivalents.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires recognition of
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. SFAS No. 133's effective date was deferred in
June 1999 by FASB's issuance of SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" and is now effective for fiscal years beginning after June
15, 2000, 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 a
reclassification of securities to the available for sale category from the held
to maturity category, at the time the standard is adopted.
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. In
May, 1999, the Board of Directors and shareholders 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 which
became effective on June 7, 1999. In June, 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.
On June 25, 1999, the Company priced its initial public offering of 903,133
common shares at an offering price of $14.00 per share. In addition, on June 29,
1999, the underwriters exercised the entire over-allotment option and purchased
an additional 200,000 shares of the Company's common stock, $.01 par value per
share, at a price of $14.00 per share, less underwriting discounts and
commissions. These transactions closed on June 30, 1999 and the Company realized
proceeds of $13.6 million net of underwriting and other offering costs of
approximately $1.8 million.
33
<PAGE>
(3) Securities
The aggregate amortized cost and fair value of securities available for sale and
securities held to maturity follow:
December 31, 1999
(Dollars in thousands) Gross Unrealized
Amortized ------------------- Fair
Cost Gains Losses Value
-------- -------- -------- --------
Securities Available for Sale:
U.S. Treasury and agency $154,353 $ 14 $ 4,158 $150,209
Mortgage-backed securities 21,372 9 406 20,975
State and municipal obligations 16,331 18 208 16,141
Corporate bonds 9,022 7 363 8,666
Equity securities 3,713 568 -- 4,281
-------- -------- -------- --------
Total securities available
for sale 204,791 616 5,135 200,272
======== ======== ======== ========
Securities Held to Maturity:
U.S. Treasury and agency 3,946 -- 29 3,917
State and municipal obligations 77,410 296 721 76,985
-------- -------- -------- --------
Total securities held
to maturity $ 81,356 $ 296 $ 750 $ 80,902
======== ======== ======== ========
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
======== ======== ======== ========
The amortized cost and fair value of debt securities by contractual maturity
follow:
Available for Sale Held to Maturity
-------------------- ---------------------
December 31, 1999. Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value
-------- -------- -------- --------
Due in one year or less $ 12,726 $ 12,728 $ 21,637 $ 21,643
Due in one to five years 120,319 117,601 51,476 51,125
Due in five to ten years 62,204 59,978 7,790 7,668
Due after ten years 5,829 5,684 453 466
-------- -------- -------- --------
$201,078 $195,991 $ 81,356 $ 80,902
======== ======== ======== ========
Maturities of mortgage-backed securities are classified in accordance with the
contractual repayment schedules. Expected maturities will differ from contracted
maturities since issuers may have the right to prepay obligations.
Proceeds from the sale of securities available for sale during 1999 were
$4,585,000 with gross gains of $126,000 and gross losses of $55,000 realized on
those sales. The Company did not sell any securities in 1998 or 1997.
Securities Held to Maturity and Available for Sale with carrying values of
$240,628,000 and $204,586,000 were pledged as collateral against municipal
deposits at December 31, 1999 and 1998, respectively.
34
<PAGE>
(4) Loans
Loans outstanding at December 31, 1999 and 1998 are summarized as follows:
1999 1998
---- ----
(Dollars in thousands)
Commercial ................................... $ 140,376 $ 117,750
Commercial real estate ....................... 137,694 106,948
Agricultural ................................. 151,534 123,754
Residential real estate . .................... 189,466 182,177
Consumer and home equity ..................... 145,038 125,198
--------- ---------
Loans, gross ............................... 764,108 655,827
--------- ---------
Net deferred fees ............................ (363) (400)
Allowance for loan losses .................... (11,421) (9,570)
--------- ---------
Loans, net .................................. $ 752,324 $ 645,857
========= =========
The following table sets forth the changes in the allowance for loan losses for
the years indicated.
Year ended December 31
---------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Balance at beginning of year ................ $ 9,570 $ 8,145 $ 7,129
Charge-offs:
Commercial ............................... 312 263 500
Commercial real estate ................... 139 687 746
Agricultural ............................. 12 19 --
Residential real estate .................. 461 215 131
Consumer and home equity ................. 663 488 620
------- ------- -------
Total charge-offs ...................... 1,587 1,672 1,997
------- ------- -------
Recoveries:
Commercial ............................... 88 106 12
Commercial real estate ................... 23 84 18
Agricultural ............................. -- -- 1
Residential real estate .................. 163 42 26
Consumer and home equity ................. 102 133 127
------- ------- -------
Total recoveries ....................... 376 365 184
------- ------- -------
Net charge-offs ............................. 1,211 1,307 1,813
Provision for loan losses ................... 3,062 2,732 2,829
------- ------- -------
Balance at end of year ...................... $11,421 $ 9,570 $ 8,145
======= ======= =======
Loans serviced for others amounting to $200,217,000, $177,797,000, and
153,218,000 at December 31, 1999, 1998, and 1997, respectively are not included
in the consolidated statements of financial condition. Loans held for sale
totaled $2,131,000 and $2,475,000 at December 31, 1999 and 1998, respectively.
Proceeds from the sale of loans were $53,552,000, $55,725,000, and $45,525,000
in 1999, 1998, and 1997, respectively. Net gain on the sale of loans was
$221,000, $232,000, and $341,000 in 1999, 1998, and 1997, respectively.
Commitments to sell loans were $1,458,000 and $6,109,000 at December 31, 1999
and 1998, 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 mortgage loans 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 government-sponsored
agencies (FHLMC and FHA).
The recorded investment in loans that are considered to be impaired totaled
$3,682,000 and $5,066,000 at December 31, 1999 and 1998, respectively. Allowance
for loan losses on impaired loans amounted to $865,000, at December 31, 1999 and
$941,000 at December 31, 1998. The average recorded investment in impaired loans
during 1999, 1998, and 1997 was $3,838,000, $8,111,000, and $7,184,000,
respectively. Interest income recognized on impaired loans during 1999, 1998,
and 1997 was approximately $82,000, $246,000, and $369,000, respectively.
In the normal course of business there are various outstanding commitments to
extend credit which are not reflected in the accompanying consolidated financial
statements. Loan commitments have off-balance-sheet credit risk because only
origination fees are recognized in the balance sheet until commitments are
fulfilled or expire. The credit risk amounts are equal to the contractual
amounts, assuming that the amounts are fully advanced and collateral or other
security is of no value. The Company's policy generally requires customers to
provide collateral, usually in the form of customers' operating assets or
property, prior to the disbursement of approved loans. The contract amounts of
these commitments at December 31, 1999 were: letters of credit $4,601,000 and
unused commitments $152,416,000. The contract amounts of these commitments at
December 31, 1998 were: letters of credit $3,640,000 and unused commitments
$107,995,000. 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.
Loans outstanding to certain officers, directors, or companies in which they
have 10% or more beneficial ownership approximated $14,912,000, $11,562,000, and
$11,351,000 at December 31, 1999, 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.
As of December 31, 1999, the Company had no significant concentration of credit
risk in the loan portfolio outside of normal 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.
35
<PAGE>
(5) Premises and Equipment
A summary of premises and equipment at December 31, 1999 and 1998 follows:
(Dollars in thousands) 1999 1998
---- ----
Land and land improvements $ 1,980 $ 1,621
Buildings and leasehold improvements 15,294 15,693
Furniture, fixtures, equipment and vehicles 11,982 11,056
-------- --------
29,256 28,370
Accumulated depreciation and amortization (12,247) (10,289)
-------- --------
Premises and equipment, net $ 17,009 $ 18,081
======== ========
Depreciation expense amounted to $2,036,000, $1,745,000, and $1,744,000 for the
years ended December 31, 1999, 1998, and 1997, respectively.
(6) Deposits
Scheduled maturities for certificates of deposit at December 31, 1999 are as
follows:
Mature in year ending December 31:
(Dollars in thousands)
2000...................... $422,396
2001...................... 60,334
2002...................... 11,551
2003...................... 4,430
2004...................... 2,049
After 2004................ 158
--------
$500,918
========
Certificates of deposit greater than $100,000 total $222,901,000 and
$171,615,000 at December 31, 1999 and 1998 respectively. Interest expense on
these certificates of deposit amounted to $9,895,000, $8,928,000, and $7,551,000
for the years ended December 31, 1999, 1998, and 1997, respectively.
(7) Borrowings
Short-term borrowings at December 31, 1999 and 1998 are summarized as follows:
(Dollars in thousands) 1999 1998
---- ----
Repurchase agreements $ 4,596 $ 5,362
FHLB advances 41,500 --
------- ---------
Total $46,096 $ 5,362
======= =========
Average rate at year-end 5.77% 4.33%
======= =========
Average rate during period 5.02% 5.02%
======= =========
The FHLB advances mature within six months and carry rates of interest from
5.69% to 6.03%. Advances payable to the FHLB are collateralized by FHLB stock
and residential mortgage loans. At December 31, 1999 and 1998, the Company had
remaining credit available of $11.0 million and $43.3 million, respectively
under the Company's lines of credit with the FHLB.
Repurchase agreements as of and for the years ended December 31, 1999 and 1998
are summarized as follows:
(Dollars in thousands) 1999 1998
---- ----
Weighted average interest rate of
repurchase agreements (at year-end) 4.73% 4.51%
Maximum outstanding at any
month end $11,537 $ 6,547
Average amount outstanding
during the year $ 7,835 $ 4,248
The average amounts outstanding are computed using daily average balances.
Related interest expense for 1999, 1998 and 1997 was $350,000, $193,000 and
$89,000, respectively.
Long-term borrowings include $8,421,000 of FHLB advances with maturities of more
than 1 year, $1,698,000 of 10% unsecured notes to former shareholders of First
Tier Bank & Trust due March 31, 2000, and $121,000 of mortgage notes. Long-term
borrowings at December 31, 1998 totaled $8,500,000. The aggregate maturities of
long-term borrowings at December 31, 1999 are as follows:
Mature in year ending December 31
(Dollars in thousands)
2000 $ 2,835
2001 1,146
2002 155
2003 165
2004 174
Thereafter 5,765
- -------------------------------------------------------------------------------
Total $ 10,240
===============================================================================
The average rate of long-term borrowings at December 31, 1999 and 1998 was 6.44%
and 6.60%, respectively.
36
<PAGE>
(8) Income Taxes
Total income taxes for the years ended December 31, 1999, 1998 and 1997 were
allocated as follows:
(Dollars in thousands) 1999 1998 1997
---- ---- ----
Income from operations $ 8,813 $ 7,354 $ 7,295
Shareholders' equity, for
change in unrealized gain (loss)
on securities available for sale (2,635) 273 385
------- ------- -------
$ 6,178 $ 7,627 $ 7,680
======= ======= =======
Income tax expense/(benefit) from operations for the years ended December 31,
1999, 1998 and 1997 are as follows:
(Dollars in thousands)
1999 1998 1997
---- ---- ----
Current:
Federal $ 7,449 $ 6,339 $ 6,187
State 2,056 1,685 1,641
- --------------------------------------------------------------------------------
Total current 9,505 8,024 7,828
- --------------------------------------------------------------------------------
Deferred:
Federal (657) (524) (420)
State (35) (146) (113)
- --------------------------------------------------------------------------------
Total deferred (692) (670) (533)
- --------------------------------------------------------------------------------
Total income
taxes $ 8,813 $ 7,354 $ 7,295
================================================================================
The actual and statutory tax rates on operations for the years ended December
31, 1999, 1998, and 1997 differ as follows:
1999 1998 1997
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
Tax exempt interest income (5.6) (5.6) (4.8)
State taxes, net of federal
income tax benefit 5.3 4.8 4.9
Other 0.9 0.9 1.1
- -------------------------------------------------------------------------------
Total 35.6% 35.1% 36.2%
===============================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1999 and
1998 are presented as follows:
(Dollars in thousands) 1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses $4,456 $3,808
Unrealized loss on securities
available for sale 1,846 --
Core deposit intangible 511 431
Interest on nonaccrual loans 455 372
Other 235 297
- --------------------------------------------------------------------------------
Total gross deferred tax assets 7,503 4,908
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization of
premises and equipment 535 592
Prepaid pension costs 1,406 1,331
Unrealized gain on securities
available for sale -- 791
Other 200 162
- --------------------------------------------------------------------------------
Total gross deferred
tax liabilities 2,141 2,876
- --------------------------------------------------------------------------------
Net deferred tax asset, included
in other assets $5,362 $2,032
================================================================================
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
December 31, 1999.
37
<PAGE>
(9) 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 change in the defined benefit pension plan's
change in benefit obligation and change in plan assets for 1999, 1998 and 1997
using the most recent actuarial data measured at September 30, 1999, 1998 and
1997:
(Dollars in thousands) 1999 1998 1997
---- ---- ----
Change in benefit obligation:
Benefit obligation at
beginning of year $(10,947) $ (8,913) $ (7,858)
Service cost (673) (543) (463)
Interest cost (698) (653) (613)
Actuarial gain (loss) 17 (1,389) (609)
Benefits paid 459 439 530
Plan expenses 102 112 100
-------- -------- --------
Benefit obligation at
end of year (11,740) (10,947) (8,913)
-------- -------- --------
Change in plans assets:
Fair value of plan assets at
beginning of year 13,509 13,395 10,956
Actual return on plan assets 2,110 594 2,424
Employer contribution 647 70 646
Plan expenses (101) (111) (101)
Benefits paid (459) (439) (530)
Fair value of plan assets at -- -- --
-------- -------- --------
end of year 15,706 13,509 13,395
-------- -------- --------
Funded status 3,966 2,562 4,482
Unamortized net asset
at transition (255) (293) (331)
Unrecognized net (gain) loss
subsequent to transition (552) 455 (1,460)
Unamortized prior service cost (59) (62) (64)
-------- -------- --------
Prepaid benefit cost $ 3,100 $ 2,662 $ 2,627
======== ======== ========
Pension costs consist of the following components for the years ended December
31, 1999, 1998 and 1997:
(Dollars in thousands) 1999 1998 1997
---- ---- ----
Service cost $ 673 $ 543 $ 463
Interest cost on projected
benefit obligation 698 653 613
Expected return on plan assets (1,121) (1,113) (909)
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 $ 209 $ 35 $ 126
======= ======= =======
Weighted average discount rate 7.00% 6.50% 7.50%
======= ======= =======
Expected long-term rate of return 8.50% 8.50% 8.50%
======= ======= =======
Rate of compensation increase 5.0% 4.5% 5.0%
======= ======= =======
The Company also 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 $480,000, $398,000, and $389,000, in 1999, 1998, and 1997, respectively.
38
<PAGE>
(10) Stock Compensation Plans
On May 27, 1999, the Company's shareholders approved the 1999 Management Stock
Incentive Plan and the 1999 Directors' Stock Incentive Plan. Under the plans,
the Company may grant stock options to its directors, directors of its
subsidiaries, and key employees to purchase shares of common stock, shares of
restricted stock and stock appreciation rights. Grants under the plans may be
made to up to 10% of the number of shares of common stock issued, including
treasury shares. The exercise price of each option equals the market price of
the Company's stock on the date of the grant and an option's maximum term is ten
years.
The Company applies APB Opinion 25 and related Interpretations in accounting for
the stock option plans. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Company's stock incentive plans been determined
based on the fair value at the grant dates for awards under the plans consistent
with the method prescribed by FASB Statement No. 123, the Company's net income
and earnings per share would have been adjusted to the following pro forma
amounts for the year ended December 31, 1999:
As reported Pro forma
----------- ----------
Net income (dollars in thousands) $ 15,957 $ 15,846
Earnings per common share $ 1.38 $ 1.37
The fair value of each option granted during 1999 of $4.29 is estimated using
the Black-Scholes option-pricing model with the following weighted-average
assumptions in 1999:
Dividend yield 2.16%
Expected life 10.0 years
Expected volatility 30.0%
Risk-free interest rate 6.0%
Stock options granted under the stock incentive plans in 1999 were 319,042
options at a weighted average exercise price of $14.00. At December 31, 1999
there were 319,042 options outstanding, none of which were exercisable, with a
weighted average remaining contractual life of 9.5 years.
(11) Regulatory Capital
The Company is subject to various regulatory capital requirements administered
by the Federal banking agencies. 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 impact on the
Company's financial statements.
For evaluating regulatory capital adequacy, companies are required 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 December 31, 1999
and 1998, that the Company and each subsidiary bank met all capital adequacy
requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company and its subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that management believes
have changed the Company's category.
Payments of dividends by the subsidiary banks to FII are limited or restricted
in certain circumstances under banking regulations. At December 31, 1999 an
aggregate of $16,442,000 was available for payment of dividends by the
subsidiary banks to FII without the approval from the appropriate regulatory
authorities.
<TABLE>
<CAPTION>
Actual Regulatory
December 31, 1999 Capital Minimum Requirements Well-Capitalized
------------------ ------------------------ ------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Leverage capital (Tier 1) as percent
of three-month average assets:
Company $117,557 10.80% $43,528 4.00% $54,411 5.00%
FTB 8,913 7.66 4,657 4.00 5,822 5.00
NBG 36,541 9.05 16,159 4.00 20,199 5.00
PSB 12,159 8.89 5,469 4.00 6,836 5.00
WCB 41,405 9.66 17,148 4.00 21,435 5.00
As percent of risk-weighted,
period-end assets:
Core capital (Tier 1):
Company 117,557 14.94 31,479 4.00 47,218 6.00
FTB 8,913 12.45 2,865 4.00 4,297 6.00
NBG 36,541 11.48 12,733 4.00 19,099 6.00
PSB 12,159 12.44 3,909 4.00 5,864 6.00
WCB 41,405 14.04 11,798 4.00 17,698 6.00
Total capital (Tiers 1 and 2):
Company 127,413 16.19 62,957 8.00 78,696 10.00
FTB 9,811 13.70 5,729 8.00 7,162 10.00
NBG 40,521 12.73 25,465 8.00 31,832 10.00
PSB 13,383 13.69 7,819 8.00 9,773 10.00
WCB 45,106 15.29 23,597 8.00 29,496 10.00
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Actual Regulatory
December 31, 1998 Capital Minimum Requirements Well-Capitalized
------------------ ------------------------ ------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<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
</TABLE>
(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, 1999 and 1998:
1999 1998
--------------------- --------------------
Carrying Fair Carrying Fair
(Dollars in thousands) Amount Value Amount Value
--------------------- --------------------
Financial Assets
Securities $281,628 $281,173 $248,038 $249,450
Loans, net 752,324 749,934 645,857 660,109
======== ======== ======== ========
Financial Liabilities
Deposits:
Interest Bearing:
Savings and NOW 306,813 306,813 273,630 273,630
Time deposits 500,918 499,160 448,609 451,204
Non-interest bearing 141,800 141,800 128,216 128,216
-------- -------- -------- --------
Total deposits 949,531 947,773 850,455 853,050
-------- -------- -------- --------
Short-term borrowings 46,096 46,096 5,362 5,362
Long-term borrowings $ 10,240 $ 10,065 $ 8,500 $ 8,920
======== ======== ======== ========
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 non-interest 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.
Short-Term Borrowings Carrying value approximates fair value.
Long-Term Borrowings
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.
40
<PAGE>
(13) Segment Information
Segments are determined based upon the individual subsidiary banks. Reportable
segments are comprised of WCB, NBG, PSB and FTB as the Company evaluates
performance on an individual bank basis. The reportable segment information as
of and for the years ended December 31, 1999, 1998, and 1997 follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Net interest income:
WCB ........................................ $ 19,415 $ 17,504 $ 16,193
NBG ........................................ 16,231 14,600 14,116
PSB ........................................ 6,409 5,608 5,215
FTB ........................................ 4,743 4,266 3,873
----------- ----------- -----------
Total segment net interest income ........ 46,798 41,978 39,397
Parent Company and eliminations, net ......... 218 (66) (80)
----------- ----------- -----------
Total net interest income ................ $ 47,016 $ 41,912 $ 39,317
=========== =========== ===========
Net interest income plus non-interest income:
WCB ........................................ $ 22,222 $ 19,795 $ 18,201
NBG ........................................ 19,121 16,986 16,472
PSB ........................................ 7,722 6,630 6,060
FTB ........................................ 5,605 5,027 4,474
----------- ----------- -----------
Total segment net interest
income plus non-interest income ....... 54,670 48,438 45,207
Parent Company and eliminations, net ......... 194 (145) (157)
----------- ----------- -----------
Total net interest income plus
non-interest income ................... $ 54,864 $ 48,293 $ 45,050
=========== =========== ===========
Net income:
WCB ........................................ $ 6,774 $ 5,943 $ 5,486
NBG ........................................ 6,093 5,272 5,408
PSB ........................................ 2,039 1,638 1,595
FTB ........................................ 1,367 1,102 834
----------- ----------- -----------
Total segment net income ................. 16,273 13,955 13,323
Parent Company and eliminations, net ......... (316) (350) (481)
----------- ----------- -----------
Total net income ......................... $ 15,957 $ 13,605 $ 12,842
=========== =========== ===========
Assets:
WCB ........................................ $ 452,353 $ 372,931 $ 353,613
NBG ........................................ 417,120 372,130 326,485
PSB ........................................ 141,363 125,508 108,714
FTB ........................................ 122,052 100,253 91,075
----------- ----------- -----------
Total segment net assets ................. 1,132,888 970,822 879,887
Parent Company and eliminations, net ......... 3,572 5,363 625
----------- ----------- -----------
Total assets ............................. $ 1,136,460 $ 976,185 $ 880,512
=========== =========== ===========
</TABLE>
41
<PAGE>
(14) Condensed Parent Company Only Financial Statements
The following condensed statements of condition of FII as of December 31, 1999
and 1998, and the condensed statements of income and cash flows for the years
ended December 31, 1999, 1998, and 1997 should be read in conjunction with the
consolidated financial statements and related notes:
Condensed Statements of Condition 1999 1998
---- ----
(Dollars in thousands)
Assets:
Cash and due from banks $ 17,786 $ 3,708
Securities available for sale, at fair value 1,144 877
Investment in subsidiary banks 99,248 92,161
Other assets 3,593 4,598
-------- --------
Total assets $121,771 $101,344
======== ========
Liabilities and equity:
Long-term borrowings $ 1,698 $ 1,739
Other liabilities 2,534 3,027
Shareholders' equity 117,539 96,578
-------- --------
Total liabilities and equity $121,771 $101,344
======== ========
<TABLE>
<CAPTION>
Condensed Statements of Income
(Dollars in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividends from subsidiaries $ 6,088 $ 5,723 $ 4,928
Other income 5,212 4,328 3,778
-------- -------- --------
Total income 11,300 10,051 8,706
Expenses 5,542 4,715 4,302
-------- -------- --------
Income before income taxes and equity in
earnings of subsidiaries 5,758 5,336 4,404
Income tax benefit (93) (105) (112)
-------- -------- --------
Income before equity in earnings
of subsidiaries 5,851 5,441 4,516
Equity in undistributed earnings of
subsidiaries 10,106 8,164 8,326
-------- -------- --------
Net income $ 15,957 $ 13,605 $ 12,842
======== ======== ========
<CAPTION>
Condensed Statements of Cash Flows
(Dollars in thousands) 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,957 $ 13,605 $ 12,842
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 842 748 704
Equity in undistributed earnings
of subsidiaries (10,106) (8,164) (8,326)
Deferred income tax expense 58 102 127
Increase in other assets (141) (161) (189)
Increase (decrease) in accrued
expense and other liabilities (78) 454 (68)
-------- -------- --------
Net cash provided by operating
activities 6,532 6,584 5,090
-------- -------- --------
Cash flows from investing activities:
Equity investment in subsidiaries, net (154) -- (35)
Purchase of securities available for sale (520) -- --
Purchase of premises and equipment, net (319) (739) (2,394)
-------- -------- --------
Net cash provided by
investing activities (993) (739) (2,429)
-------- -------- --------
Cash flows from financing activities:
Repayment of long-term borrowings (41) -- --
Repurchase of preferred and common shares,
net (54) (163) (113)
Preferred dividends paid (1,503) (1,506) (1,515)
Common dividends paid (3,486) (2,480) (2,235)
Proceeds from Initial Public Offering, net 13,623 -- --
-------- -------- --------
Net cash provided by (used
in) financing activities 8,539 (4,149) (3,863)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents 14,078 1,696 (1,202)
Cash and cash equivalents at the
beginning of the year 3,708 2,012 3,214
-------- -------- --------
Cash and cash equivalents at
the end of the year $ 17,786 $ 3,708 $ 2,012
======== ======== ========
</TABLE>
42
<PAGE>
Supplementary Data (Unaudited)
Quarterly Financial Information
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Diluted
Net Provision Income Earnings Per
Interest Interest for Loan Before Net Common
Income Income Losses Income Taxes Income Share
------- ------- ------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
1999
First quarter $18,452 $10,816 $ 525 $ 5,795 $ 3,746 $ 0.34
Second quarter 19,194 11,412 531 6,020 3,885 0.35
Third quarter 20,186 12,229 933 6,616 4,161 0.34
Fourth quarter 21,067 12,559 1,073 6,339 4,165 0.34
1998
First quarter $17,670 $10,217 $ 573 $ 5,316 $ 3,386 $ 0.30
Second quarter 18,131 10,346 573 5,417 3,483 0.31
Third quarter 18,365 10,528 603 5,509 3,546 0.32
Fourth quarter 18,704 10,821 983 4,717 3,190 0.28
</TABLE>
Stock Data for 1999
Set forth below are the high, low and closing prices for the Company's common
shares by quarter in 1999. Data was supplied by NASDAQ.
High Low Close
---- --- -----
Second 15.625 14.000 15.000
Third 15.500 12.250 12.938
Fourth 14.625 12.000 12.125
43
<PAGE>
Financial Institutions, Inc. and Subsidiaries
Advisory Board Members
Wyoming County Bank
Livingston County
Theresa Alianell, MD
Thomas Bell
Sally Brooks
Philip Brooks
Patrick Burke
Gerald Coyne
Richard Essler
David Gaylord
Steven Kruk
Helen Lent
Anthony Morrow
Dennis Neenan
Sherman Sanford
Peter Scorsone
Larry Scoville
Geraldine Traphagen
Louise Wadsworth
Michael West
Wyoming County
Mark Amidon
Lawrence Appleby
Brent Birkland
Daniel Burling
Valerie Duell
Ann Humphrey
Christine Kennedy
Vincent Liberatore
Timothy Moran
James Schlick
Harry Spink
Frank Vitagliano Jr.
Pamela Yates
Yorkshire
Harold Crabb
Thomas Moran
Howard Payne
Richard Reisdorf
Robert Salzler
Gayle Wolfer Sprague
The National Bank of Geneva
Canandaigua
Deborah A. Clune
John E. Garvey
Richard D. Maltman
John E. Miller, Jr.
Dennis A. Morga
C. Marshall Seager
Duane Thompson
Penn Yan
Milton L. Harman
Linda J. Jackson
Paul W. Marble, Jr.
Daryl L. Middlebrook
Neil J. Simmons
William H. Sutherland
Seneca County
Bruce J. Austic
Francis C. Barrett
Dr. Kenneth W. Padgett
Robert L. Sessler
William H. Sigrist
Richard K. Wadhams
Stanley (Bill) Wagner
The Pavilion State Bank
Batavia
Bill Fritts
Scott Offhaus
Paul Tenney
Peter Terry
Maureen Torrey Marshall
Caledonia
Marjorie Carpenter
Brent Darch
Marjorie Jones
Tim Nothnagle
Casey Randall
LeRoy
Charlie Cook
Gary Dries
Robert F. Humphrey
David Meade
Robert P. Moore, Sr.
Pavilion
Dean Davis
John Gray
Bob Jeffres
Sharon Swede
Tim Walton
First Tier Bank & Trust
John Kwiatkowski
Thomas Palumbo
Nico Van Zwanenberg
Daniel Wintermantel
44
<PAGE>
Financial Institutions, Inc. and Subsidiaries
Senior Officers
[logo]
Financial Institutions, Inc.
Peter G. Humphrey, President & CEO
Randolph C. Brown, Sr. Vice President
Jon J. Cooper, Sr. Vice President
Wolcott J. Humphrey, III, Sr. Vice President
Thomas L. Kime, Sr. Vice President
Ronald A. Miller, Sr. Vice President
Peter M. Biggs, Vice President
Regina R. Colegrove, Vice President
Sonia M. Dumbleton, Vice President
R. Mitchell McLaughlin, Vice President
Steven S. Perl, Vice President
David L. MacIntyre, Assistant Vice President
[logo]
Wyoming County Bank
Jon J. Cooper President & CEO
Louis J. Burgio Sr. Vice President
Terry K. Lowell Sr. Vice President
Kevin D. Maroney Sr. Vice President
Dana C. Gavenda Vice President
Michael W. Williamson Vice President
[logo]
The National Bank of Geneva
Thomas L. Kime President & CEO
Stephen V. DeRaddo Executive Vice President
Robert W. Sollenne Sr. Vice President
Todd W. Andrews Vice President
Bruce F. Bossard Vice President
Jeffery E. Franklin Vice President
Jeffery A. Friend Vice President
Ronald A. Rubin Vice President
Gary F. Shultz Vice President
[logo]
The Pavilion State Bank
Wolcott J. Humphrey, III President & CEO
Ted J. Habgood Sr. Vice President
Priscilla Rider Sr. Vice President
John Titus Sr. Vice President
Diane Torcello Vice President
Howard E. Hotze, Jr. Vice President
[logo]
First Tier Bank & Trust
Randolph C. Brown President & CEO
Gary M. Rougeau Sr. Vice President
Stephen L. Foster Vice President
G. Gary Gluck Vice President
Brian Snyder Vice President
[logo]
FI Group Incorporated
Member NASD, SIPC
David L. MacIntyre, President
Robert T. Koczent, Secretary
1999 FII Annual Report Copy
Inside Back Cover
Investor Information
Transfer Agent
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
Customer Service: (800) 288-9541
Website: www.chasemellon.com
Stock Listing
Financial Institutions, Inc.'s common stock is listed on the Nasdaq National
Market under the symbol FISI.
Independent Auditors
KPMG LLP
Buffalo, New York
Annual Meeting
The Annual Meeting of Shareholders of Financial Institutions, Inc. will be held
at FII Corporate Headquarters, 220 Liberty Street, Warsaw, New York 14569, at
10:00 a.m on May 10, 2000.
Website Addresses
www.fiiwarsaw.com
www.wycobank.com
www.nbgeneva.com
www.pavilionbank.com
www.firsttierbank.com
Financial Institutions, Inc.
220 Liberty Street
P.O. Box 227
Warsaw, New York 14569
(716) 786-1100
[logo]
EX-21
(Exhibit 21) Subsidiaries of Financial Institutions, Inc.
FINANCIAL INSTITUTIONS, INC.
Name of Subsidiary State of Incorporation
-------------------- ------------------------
Wyoming County Bank New York
The National Bank of Geneva New York
The Pavilion State Bank New York
First Tier Bank & Trust New York
The FI Group, Inc. New York
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 49,397
<INT-BEARING-DEPOSITS> 275
<FED-FUNDS-SOLD> 11,554
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 200,272
<INVESTMENTS-CARRYING> 81,356
<INVESTMENTS-MARKET> 80,902
<LOANS> 763,745
<ALLOWANCE> 11,421
<TOTAL-ASSETS> 1,136,460
<DEPOSITS> 949,531
<SHORT-TERM> 46,096
<LIABILITIES-OTHER> 13,054
<LONG-TERM> 10,240
17,812
0
<COMMON> 113
<OTHER-SE> 99,614
<TOTAL-LIABILITIES-AND-EQUITY> 1,136,460
<INTEREST-LOAN> 63,417
<INTEREST-INVEST> 15,054
<INTEREST-OTHER> 428
<INTEREST-TOTAL> 78,899
<INTEREST-DEPOSIT> 30,420
<INTEREST-EXPENSE> 1,463
<INTEREST-INCOME-NET> 47,016
<LOAN-LOSSES> 3,062
<SECURITIES-GAINS> 71
<EXPENSE-OTHER> 27,032
<INCOME-PRETAX> 24,770
<INCOME-PRE-EXTRAORDINARY> 24,770
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,957
<EPS-BASIC> 1.38
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 5.00
<LOANS-NON> 4,775
<LOANS-PAST> 969
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,570
<CHARGE-OFFS> 1,587
<RECOVERIES> 376
<ALLOWANCE-CLOSE> 11,421
<ALLOWANCE-DOMESTIC> 11,421
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,591
</TABLE>
