FORM 10-Q ---------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 Commission file number 0-26481 FINANCIAL INSTITUTIONS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) New York 16-0816610 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 220 Liberty Street, Warsaw, New York 14569 - ---------------------------------------- --------- (Address of principal executive offices) (Zip code) 716-786-1100 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. TITLE OUTSTANDING ----- ----------- Common Stock, $0.01 par value Outstanding at May 1, 2001 Per share 10,986,721 shares ================================================================================
INDEX FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES PART I. -- FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Consolidated Statements of Financial Condition Consolidated Statements of Income Consolidated Statements of Cash Flows Consolidated Statements of Shareholders' Equity and Comprehensive Income Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES EXHIBITS
ITEM 1. FINANCIAL STATEMENTS FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except share amounts) <TABLE> <CAPTION> March 31, December 31, 2001 2000 ASSETS ----------- ------------ (unaudited) <S> <C> <C> Cash, due from banks and interest-bearing deposits $ 30,537 $ 29,226 Federal funds sold 31,225 926 Securities available for sale, at fair value 263,889 261,869 Securities held to maturity (fair value of $78,314 at March 31, 2001 and $76,884 at December 31, 2000) 77,687 76,947 Loans 897,196 887,145 Allowance for loan losses (14,466) (13,883) ----------- ----------- Loans, net 882,730 873,262 Premises and equipment, net 18,953 18,423 Other assets 32,560 28,674 ----------- ----------- Total assets $ 1,337,581 $ 1,289,327 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $ 145,493 $ 162,840 Savings, money market and interest-bearing checking 339,571 309,732 Certificates of deposit 644,906 605,539 ----------- ----------- Total deposits 1,129,970 1,078,111 Short-term borrowings 19,776 46,903 Long-term borrowings 15,484 15,481 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures 16,200 -- Accrued expenses and other liabilities 18,879 17,214 ----------- ----------- Total liabilities 1,200,309 1,157,709 ----------- ----------- Shareholders' equity: 3% cumulative preferred stock, $100 par value, authorized 10,000 shares, issued and outstanding 1,686 shares at March 31, 2001 and 1,711 shares at December 31, 2000 168 171 8.48% cumulative preferred stock, $100 par value, authorized 200,000 shares, issued and outstanding 175,866 shares at March 31, 2001 and December 31, 2000 17,587 17,587 Common stock, $0.01 par value, authorized 50,000,000 shares, issued 11,303,533 shares at March 31, 2001 and December 31, 2000 113 113 Additional paid-in capital 16,473 16,472 Retained earnings 101,570 98,348 Accumulated other comprehensive income(loss) 2,290 (144) Treasury stock-common, at cost-316,812 shares at March 31, 2001 and December 31, 2000 (929) (929) ----------- ----------- Total shareholders' equity 137,272 131,618 ----------- ----------- Total liabilities and shareholders' equity $ 1,337,581 $ 1,289,327 =========== =========== </TABLE> See accompanying notes to consolidated financial statements. 1
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (unaudited) <TABLE> <CAPTION> Three Months Ended March 31, ------------------- 2001 2000 ------- ------- <S> <C> <C> Interest income: Loans $20,848 $17,719 Securities 4,821 4,091 Other 85 47 ------- ------- Total interest income 25,754 21,857 ------- ------- Interest expense: Deposits 11,196 8,380 Borrowings 788 792 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures 181 -- ------- ------- Total interest expense 12,165 9,172 ------- ------- Net interest income 13,589 12,685 Provision for loan losses 811 835 ------- ------- Net interest income after provision for loan losses 12,778 11,850 ------- ------- Noninterest income: Service charges on deposits 1,319 1,094 Gain on sale\call of securities 185 -- Gain on sale of loans and other assets 272 117 Loan servicing fees 259 302 Investment brokerage fees 386 267 Other 364 289 ------- ------- Total noninterest income 2,785 2,069 ------- ------- Noninterest expense: Salaries and employee benefits 4,757 4,036 Occupancy and equipment 1,288 1,125 Supplies and postage 383 380 Amortization of intangibles 176 210 Professional fees 218 195 Other 1,422 1,261 ------- ------- Total noninterest expense 8,244 7,207 ------- ------- Income before income taxes 7,319 6,712 Income taxes 2,514 2,418 ------- ------- Net income $ 4,805 $ 4,294 ======= ======= Earnings per common share: Basic $ 0.40 $ 0.36 ======= ======= Diluted $ 0.40 $ 0.36 ======= ======= </TABLE> See accompanying notes to consolidated financial statements. 2
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited) <TABLE> <CAPTION> Three Months Ended March 31, 2001 2000 -------- -------- <S> <C> <C> Cash flows from operating activities: Net income $ 4,805 $ 4,294 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 832 812 Provision for loan losses 811 835 Deferred income tax benefit (273) (238) Gain on sale/call of securities (185) -- Gain on sale of loans and other assets (272) (117) Minority interest in net income of subsidiary banks 23 21 Increase in other assets (863) (969) Increase in accrued expenses and other liabilities 3,213 2,591 -------- -------- Net cash provided by operating activities 8,091 7,229 -------- -------- Cash flows from investing activities: Purchase of securities: Available for sale (72,699) (20,997) Held to maturity (4,577) (1,898) Proceeds from maturity/call of securities: Available for sale 66,806 6,160 Held to maturity 3,774 2,561 Proceeds from sales of securities available for sale 3,965 -- Net increase in loans (10,019) (24,687) Proceeds from sales of premises and equipment 24 8 Purchase of premises and equipment (1,038) (360) -------- -------- Net cash used in investing activities (13,764) (39,213) -------- -------- Cash flows from financing activities: Net increase (decrease) in deposits 51,859 (120) Net (decrease) increase in short-term borrowings (27,126) 1,916 Proceeds from long-term borrowings 42 10,000 Repayment of long-term borrowings (39) (7,734) Proceeds from guaranteed preferred beneficial interests in corporation's junior subordinated debentures, net of costs 15,713 -- Repurchase of preferred and common shares, net of director plan issuance (2) (166) Dividends paid (3,164) (1,257) -------- -------- Net cash provided by financing activities 37,283 2,639 -------- -------- Net increase (decrease) in cash and cash equivalents 31,610 (29,345) Cash and cash equivalents at beginning of the period 30,152 61,226 -------- -------- Cash and cash equivalents at end of the period $ 61,762 $ 31,881 ======== ======== Supplemental disclosure of cash flow information: Cash paid during period for: Interest $ 11,157 $ 8,795 ======== ======== Income taxes $ 625 $ 582 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 3
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Dollars in thousands, except per share amounts) (unaudited) <TABLE> <CAPTION> Accumulated Other Comprehen- Total Preferred Stock sive Share- --------------- Common Additional Retained Income Treasury holders 3% 8.48% Stock Paid-In Capital Earnings (Loss) Stock Equity -- ----- ----- ------- ---------- -------- ----------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance-December 31, 2000 $ 171 $ 17,587 $ 113 $ 16,472 $ 98,348 $ (144) $ (929) $131,618 Purchase of 25 shares of 3% preferred stock (3) 1 (2) Comprehensive income: Net income 4,805 4,805 Unrealized gain on securities available for sale (net of tax of $1,583) 2,324 2,324 Reclassification adjustment for gains included in net income (net of tax of $75) 110 110 -------- Net unrealized gain on securities available for sale (net of tax of $1,658) 2,434 -------- Total comprehensive income 7,239 -------- Cash dividends declared: 3% preferred-$0.75 per share (1) (1) 8.48% preferred-$2.12 per share (373) (373) Common-$0.11 per share (1,209) (1,209) -------- -------- -------- -------- -------- -------- -------- -------- Balance-March 31, 2001 $ 168 $ 17,587 $ 113 $ 16,473 $101,570 $ 2,290 $ (929) $137,272 ======== ======== ======== ======== ======== ======== ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 4
FINANCIAL INSTITUTIONS. INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 and 2000 (Unaudited) 1. BASIS OF PRESENTATION Financial Institutions. Inc. (the "Company") is a bank holding company with four commercial banks subsidiaries that operate in Western and Central New York State: Wyoming County Bank ("WCB"); The National Bank of Geneva ("NBG"); The Pavilion State Bank ("PSB"); and, First Tier Bank & Trust ("FTB") (collectively the "Banks"). The Company is also the parent of The FI Group, Inc. ("FIGI") and FISI Statutory Trust I ("FISI"). FIGI is a brokerage subsidiary that commenced operations in March 2000. FISI is a trust formed in February 2001 to accommodate the private placement of $16.2 million in capital securities with several institutional investors, with the proceeds utilized to aid funding the acquisition of Bath National Bank ("BNB") (see Note 6). The capital securities are identified on the balance sheet as guaranteed preferred beneficial interests in corporation's junior subordinated debentures. In addition, the capital securities are an alternative funding vehicle with certain favorable features, namely, the capital securities qualify as regulatory capital and the related interest expense is tax-deductible. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included in the results for the three month periods ended March 31, 2001 and 2000. The results of operations for the three month period ended March 31, 2001 are not necessarily indicative of the results which may be expected for the year ending December 31, 2001 or any other interim period. The consolidated financial statements include the accounts of the Company, the Banks, FIGI and FISI. All significant intercompany balances and transactions have been eliminated in consolidation. 2. EARNINGS PER SHARE Basic earnings per share, after giving effect to preferred stock dividends, has been computed using weighted average common shares outstanding. Diluted earnings per share reflects the effects, if any, of incremental common shares issuable upon exercise of dilutive stock options. Earnings per common share have been computed based on the following: (Dollars in thousands, except share amounts) <TABLE> <CAPTION> Three Months Ended March 31, 2001 2000 ---- ---- <S> <C> <C> Net Income $ 4,805 $ 4,294 Less: Preferred Stock Dividends 374 374 ----------- ----------- Net Income Available to Common Shareholders $ 4,431 $ 3,920 =========== =========== Average Number of Common Shares Outstanding 10,986,721 11,016,052 Add: Effect of Dilutive Options 21,101 -- ----------- ----------- Average Number of Common Shares Outstanding Used to Calculate Diluted Earnings per Common Share 11,007,822 11,016,052 =========== =========== </TABLE> 5
3. LOANS AND ALLOWANCE FOR LOAN LOSSES The following table summarizes, at the dates indicated, the Company's loan portfolio by type: (Dollars in thousands) As of As of March 31, December 31, 2001 2000 --------- ------------ Commercial $ 171,126 $ 169,832 Commercial real estate 175,390 166,041 Agricultural 167,700 165,367 Residential real estate 194,752 201,160 Consumer & home equity 188,228 184,745 --------- --------- Loans, gross 897,196 887,145 Allowance for loan losses (14,466) (13,883) --------- --------- Total loans, net $ 882,730 $ 873,262 ========= ========= The following table presents an analysis of the allowance for loan losses and other related data for the periods indicated. (Dollars in thousands) Three Months Ended ----------------------- March 31, 2001 2000 ------- ------- Balance at the beginning of the period $13,883 $11,421 Charge-Offs: Commercial 53 154 Commercial real estate 60 4 Agricultural -- -- Residential real estate 42 -- Consumer and home equity 151 252 ------- ------- Total charge-offs 306 410 ------- ------- Recoveries: Commercial 7 3 Commercial real estate 10 -- Agricultural -- 1 Residential real estate -- -- Consumer and home equity 61 57 ------- ------- Total recoveries 78 61 ------- ------- Net charge-offs 228 349 Provision for loan losses 811 835 ------- ------- Balance at the end of the period $14,466 $11,907 ======= ======= Ratio of net charge-offs to average loans (annualized) 0.10% 0.18% Allowance for loan losses to total loans 1.61% 1.51% Allowance for loan losses to nonperforming loans 188.34% 171.97% At March 31, 2001 and 2000, the recorded investment in loans that are considered to be impaired totaled $5,988,000 and $3,490,000, respectively. The average recorded investments in impaired loans during the three months ended March 31, 2001 and 2000 were approximately $4,493,000 and $3,586,000, respectively. At March 31, 2001 and 2000, the Company had specific allocations for impaired loans included in the allowance for loan losses of $1,096,000 and $747,000, respectively. 6
The following table presents information regarding nonperforming assets at the dates indicated: (Dollars in thousands) <TABLE> <CAPTION> As of As of March 31, December 31, 2001 2000 --------- ------------ <S> <C> <C> Nonaccruing loans (1): Commercial $ 915 $1,044 Commercial real estate 1,810 1,619 Agricultural 2,889 2,881 Residential real estate 869 835 Consumer and home equity 481 217 ------ ------ Total loans 6,964 6,596 Accruing loans 90 days or more delinquent 717 521 ------ ------ Total nonperforming loans 7,681 7,117 Other real estate owned (2) 950 932 ------ ------ Total nonperforming assets $8,631 $8,049 ====== ====== Nonperforming loans to total loans 0.86% 0.80% ====== ====== Nonperforming assets to total loans and other real estate 0.96% 0.91% ====== ====== </TABLE> (1) Loans are placed on nonaccrual status when they become 90 days past due if there is uncertainty with respect to the collectibility of interest or principal. (2) Other real estate owned balances are shown net of related allowances. 4. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement, as amended by SFAS No. 138, 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. The Company adopted SFAS No. 133 on January 1, 2001. The adoption of this statement did not have a material effect on the Company's financial position or results of operations. 5. SUBSEQUENT EVENT On May 1, 2001, the Company acquired all of the outstanding common stock of Bath National Corporation ("BNC"), and its wholly-owned subsidiary bank, Bath National Bank ("BNB"). Consolidated assets of BNB were approximately $300 million as of March 31, 2001. BNB is a full service community bank headquartered in Bath, New York, which has 11 branch locations in Steuben, Yates, Ontario and Schuyler Counties. The Company paid $48.00 per share in cash for each of the outstanding shares of BNC common stock with an aggregate purchase price of approximately $62.6 million. The acquisition will be accounted for using the purchase method of accounting. 7
6. SEGMENT INFORMATION Segments are determined based upon the individual subsidiary banks. Reportable segments are comprised of WCB, NBG, PSB and FTB as the Company manages and evaluates performance on an individual bank basis. The reportable segment information as of and for the three month periods ended March 31, 2001 and 2000 follows: <TABLE> <CAPTION> (Dollars in thousands) 2001 2000 ---- ---- <S> <C> <C> Net interest income: WCB ........................................... $ 5,624 $ 5,229 NBG ........................................... 4,675 4,365 PSB ........................................... 1,920 1,677 FTB ........................................... 1,384 1,254 ----------- ----------- Total segment net interest income ........... 13,603 12,525 Parent Company, FIGI, FISI, and eliminations, net (14) 160 ----------- ----------- Total net interest income ................... $ 13,589 $ 12,685 =========== =========== Net interest income plus non-interest income: WCB ........................................... $ 6,478 $ 5,971 NBG ........................................... 5,586 5,210 PSB ........................................... 2,487 1,925 FTB ........................................... 1,669 1,490 ----------- ----------- Total segment net interest income plus non-interest income .......... 16,220 14,596 Parent Company, FIGI, FISI, and eliminations, net 154 158 ----------- ----------- Total net interest income plus non-interest income ...................... $ 16,374 $ 14,754 =========== =========== Net income: WCB ........................................... $ 1,986 $ 1,857 NBG ........................................... 1,784 1,669 PSB ........................................... 622 435 FTB ........................................... 397 390 ----------- ----------- Total segment net income .................... 4,789 4,351 Parent Company, FIGI, FISI, and eliminations, net 16 (57) ----------- ----------- Total net income ............................ $ 4,805 $ 4,294 =========== =========== Assets: WCB ........................................... $ 528,614 $ 457,823 NBG ........................................... 493,163 420,041 PSB ........................................... 174,460 144,684 FTB ........................................... 135,092 122,823 ----------- ----------- Total segment net assets .................... 1,331,329 1,145,371 Parent Company, FIGI, FISI, and eliminations, net 6,252 (508) ----------- ----------- Total assets ................................ $ 1,337,581 $ 1,144,863 =========== =========== </TABLE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS This quarterly report contains certain "forward-looking statements" covered by the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. When used or incorporated by reference in the Company's disclosure documents, the words "anticipate," "estimate," "expect," "project," "target," "goal" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including, but not limited to changes in (1) general economic conditions, (2) the real estate markets, and (3) interest rates. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected or projected. These forward-looking statements speak only as of the date of the document. The Company expressly disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectation with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The purpose of this discussion is to present material changes in the Company's financial condition and results of operations during the three months ended March 31, 2001 to supplement the information in the consolidated financial statements included in this report. The following table presents certain information and ratios that management of the Company considers important in evaluating performance: <TABLE> <CAPTION> At or For the Three Months Ended March 31, 2001 2000 $ Change % Change ---- ---- -------- -------- <S> <C> <C> <C> <C> Per common share data: Net income - basic $0.40 $0.36 $0.04 11.1% Net income - diluted $0.40 $0.36 $0.04 11.1% Cash dividends declared $0.11 $0.10 $0.01 10.0% Book value $10.88 $9.20 $1.68 18.3% Common shares outstanding: Weighted average shares - basic 10,986,721 11,016,052 Weighted average shares - diluted 11,007,882 11,016,052 Period end 10,986,721 11,006,733 Performance ratios, annualized: Return on average assets 1.50% 1.55% Return on average common equity 15.38% 15.69% Net interest margin (tax-equivalent) 4.65% 5.00% Efficiency ratio 47.18% 45.32% Asset quality ratios: Nonperforming loans to total loans 0.86% 0.88% Nonperforming assets to total loans and other real estate 0.96% 0.99% Net loan charge-offs to average loans 0.10% 0.18% Allowance for loan losses to total loans 1.61% 1.51% Allowance for loan losses to nonperforming loans 188.34% 171.97% Capital ratios: Average common equity to average total assets 8.97% 8.99% Leverage ratio 11.49% 10.81% Tier 1 risk based capital ratio 15.82% 14.72% Risk-based capital ratio 17.07% 15.97% </TABLE> 9
The Company's net income for the first quarter of 2001 increased 11.9% to $4,805,000 compared to $4,294,000 for the first three months of 2000. Earnings per common share increased 11.1% to $0.40 for the 2001 quarter from $0.36 in 2000. Return on average common equity was 15.38% for the three months ended March 31, 2001 compared to 15.69% for the same period last year. Net interest income increased 7.1% in the first quarter of 2001 to $13,589,000 compared to $12,685,000 for the first three months of 2000. Growth in average earning assets of 17.3%, in comparison to the same period a year earlier, drove the increase, as net interest margin decreased to 4.65% from 5.00% for the same quarter last year. The decrease in net interest margin is reflective of incremental asset growth at lower margins together with increasing price competitiveness in a period of declining market interest rates. The growth in average earning assets is the result of continued expansion of our commercial loan portfolio as well as our indirect consumer loan portfolio. Noninterest income increased 34.6% in the first quarter of 2001 to $2,785,000 from $2,069,000 for the same period in 2000. This increase primarily reflects the benefit of the continuing growth in core deposits and the related service fees, as well as realized gains on the sale/call of securities of $185,000 and the sale of residential mortgage loans. In addition, our investment brokerage fees were $386,000 for the first three months of 2001 an increase of $119,000 from the same period last year. Noninterest expense for the first quarter of 2001 was up 14.4% to $8,244,000 from $7,207,000 for the prior year period. The increase is primarily due to additional staffing and technology resources necessary to support continued expansion of lending activities, product lines and delivery channels. Nonetheless the efficiency ratio for the first quarter of 2001 remained strong at 47.2% compared to 45.3% for the same period a year ago. The provision for loan losses for the first quarter of 2001 was $811,000, compared to $835,000 for the same period in 2000. The allowance for loan losses was $14,466,000 at March 31, 2000, an increase of $583,000 from December 31 ,2000. Although nonperforming loans increased to $7,681,000 at March 31, 2001 compared to $6,924,000 at March 31, 2000, the ratio of nonperforming loans to total loans of 0.86% at March 31, 2001 is comparable to 0.88% a year ago, and the ratio of the allowance for loan losses to nonperforming loans was 188.34% at March 31, 2001, up from 171.97% a year ago. The ratio of the allowance for loan losses to total loans also improved to 1.61% at March 31, 2001, compared to 1.51% from a year ago. At March 31, 2001 the Company had total assets of $1,337.6 million, an increase of 3.7% from $1,289.3 million at December 31, 2000. Loans increased 1.1% to $897.2 million at the recent quarter end from $887.1 million at December 31, 2000. Federal funds sold increased to $31.2 million at March 31, 2001 from $0.9 million at December 31, 2000 as a result of overnight investing of funds appropriated for the acquisition of BNB on May 1, 2001. Funds appropriated for the BNB acquisition include the private placement of $16.2 million in capital securities with institutional investors in February 2001. Total deposits were $1,130.0 million at the recent quarter-end, compared with $1,078.1 million a quarter earlier. Total shareholders' equity increased 4.3% to $137.3 million at March 31, 2001 from $131.6 million at December 31 ,2000. Book value per common share at March 31, 2001 was $10.88, an increase of 5.0% from $10.36 at December 31, 2000. 10
SUPPLEMENTAL SCHEDULES The following table presents, for the periods indicated, the total dollar amount of average balances, interest income from average interest-earning assets, the resulting yields and interest expense on average interest-bearing liabilities expressed both in dollars and rates. Except as indicated in the footnotes to this table, no tax-equivalent adjustments have been made and all average balances are daily average balances. Nonaccruing loans have been included in the yield calculation in this table. <TABLE> <CAPTION> For The Three Months Ended March 31, ---------------------------------------- 2001 2000 ------- ------- Average Interest Annualized Average Interest Annualized Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ (Dollars in thousands) Balance Paid Rate Balance Paid Rate --------- -------- -------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Interest-earning assets Federal funds sold and interest- bearing deposits $ 6,696 $ 86 5.21% $ 3,479 $ 47 5.43% Investment securities (1) 343,629 5,605 6.53% 287,881 4,654 6.46% Loans (2) Commercial and agricultural 505,828 11,797 9.46% 434,544 10,147 9.39% Residential real estate 198,803 4,517 9.09% 188,882 4,103 8.69% Consumer and home equity 186,440 4,533 9.86% 147,600 3,469 9.45% ---------- ---------- ------ ---------- ---------- ------ Total loans 891,071 20,847 9.46% 771,026 17,719 9.23% ---------- ---------- ------ ---------- ---------- ------ Total interest-earning assets 1,241,396 26,538 8.62% 1,062,386 22,420 8.47% ---------- ---------- ------ ---------- ---------- ------ Interest-bearing liabilities Interest-bearing checking 124,525 393 1.28% 109,585 366 1.34% Savings and money market 196,388 1,275 2.63% 190,771 1,195 2.52% Certificates of deposit 625,236 9,527 6.18% 502,450 6,819 5.46% Borrowed funds 53,949 788 5.92% 53,675 792 5.93% Guaranteed preferred beneficial interests in corporation's junior subordinated debentures 6,840 181 10.73% -- -- -- ---------- ---------- ------ ---------- ---------- ------ Total interest-bearing liabilities 1,006,938 12,164 4.90% 856,481 9,172 4.31% ---------- ---------- ------ ---------- ---------- ------ Net interest income $ 14,374 $ 13,248 ========== ========== Net interest rate spread 3.72% 4.16% ====== ====== Net earning assets $ 234,458 $ 205,905 ========== ========== Net interest margin on earning assets (3) 4.65% 5.00% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 123.28% 124.04% ====== ====== </TABLE> (1) Amounts shown are amortized cost for held to maturity securities and fair value for available for sale securities. In order for pre-tax income and resultant yields on tax-exempt securities to be comparable to those on taxable securities and loans, a tax-equivalent adjustment to interest earned from tax-exempt securities has been computed using a federal income tax rate of 35%. (2) Net of deferred loan fees and costs. (3) The net interest margin is equal to net interest income divided by average interest-earning assets and is presented on an annualized basis. 11
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: (1) changes attributable to changes in volume (changes in volume multiplied by the current year rate); (2) changes attributable to changes in rate (changes in rate multiplied by the prior year volume); and (3) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and changes due to rate. <TABLE> <CAPTION> 1st Quarter 2001 Compared to 1st Quarter 2000 (Dollars in thousands) --------------------------------------------- Increase (Decrease) Due to -------------------------- Total Increase Volume Rate (Decrease) ------ --------- ---------- <S> <C> <C> <C> Interest-earning assets: Federal funds sold and interest-bearing deposits $ 41 $ (2) $ 39 Investment securities 901 50 951 Loans: Commercial and agricultural 1,586 64 1,650 Residential real estate 231 183 414 Consumer and home equity 920 144 1,064 ------- ------- ------- Total loans 2,737 391 3,128 ------- ------- ------- Total interest-earning assets 3,679 439 4,118 ------- ------- ------- Interest-bearing liabilities: Interest-bearing checking 41 (14) 27 Savings and money market 35 45 80 Certificates of deposit 1,840 868 2,708 Borrowed funds 20 (24) (4) Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures 181 -- 181 ------- ------- ------- Total interest-bearing liabilities 2,117 875 2,992 ------- ------- ------- Net interest income $ 1,562 $ (436) $ 1,126 ======= ======= ======= </TABLE> 12
Item 3: Quantitative and Qualitative Disclosures about Market Risk The Company realizes income principally from the differential or spread between the interest earned on loans, investments and other interest-earning assets and the interest paid on deposits and borrowings. Loan volumes and yields, as well as the volume of and rates on investments, deposits and borrowings, are affected by market interest rates. Additionally, because of the terms and conditions of many of the Company's loan documents and deposit accounts, a change in interest rates could also affect the projected maturities of the loan portfolio and/or the deposit base, which could alter the Company's sensitivity to future changes in interest rates. Accordingly, management considers interest rate risk to be the Company's most significant market risk. Interest rate risk management focuses on maintaining consistent growth in net interest income within Board approved policy limits while taking into consideration, among other factors, the Company's overall credit, operating income, operating cost, and capital profile. The Company's Asset/Liability Committee (ALCO), which includes senior management and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Management of the Company's interest rate risk requires the selection of appropriate techniques and instruments to be utilized after considering the benefits, costs and risks associated with available alternatives. Since the Company does not utilize derivative instruments, management's techniques usually consider one or more of the following: (1) interest rates offered on products, (2) maturity terms offered on products, (3) types of products offered, and (4) products available to the Company in the wholesale market such as advances from the FHLB. The Company uses a net interest income and economic value of equity model as one method to identify and manage its interest rate risk profile. The model is based on expected cash flows and repricing characteristics for all financial instruments and incorporates market-based assumptions regarding the impact of changing interest rates on these financial instruments. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. The Company has experienced no significant changes in market risk due to changes in interest rates since the Company's Annual Report on Form 10-K as of December 31, 2000 dated March 29, 2001 as filed with the Securities and Exchange Commission. Management also uses the static gap analysis to identify and manage the Company's interest rate risk profile. Interest sensitivity gap ("gap") analysis measures the difference between the assets and liabilities repricing or maturing within specific time periods. 13
PART II -- OTHER INFORMATION FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES Item 6. Exhibits and reports on Form 8-K (a) Exhibits 3.1 Certificate of Incorporation of the Registrant, as amended * 3.2 By-laws of the Registrant, as amended * 4.1 Form of Certificate for the Registrant's Common Stock * 10.1 1999 Management Stock Incentive Plan of the Registrant ** 10.2 1999 Directors' Stock Incentive Plan of the Registrant ** o * Incorporated by reference to the corresponding exhibit filed with the Registrant's Registration Statement on Form S-1 (File No. 333-76865). o ** Incorporated by reference to the corresponding exhibit filed with the Registrant's 1999 Annual Report on Form 10-K. (b) Reports on Form 8-K None. 14
SIGNATURES Pursuant to the requirements 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. (Registrant) May 15, 2001 /s/ Peter G. Humphrey ------------ --------------------- Date Peter G. Humphrey, President & CEO May 15, 2001 /s/ Ronald A. Miller ------------ -------------------- Date Ronald A. Miller, SVP & CFO 15