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 June 30, 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 August 1, 2001 Per share 10,987,862 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> June 30, December 31, 2001 2000 ASSETS ------------ ------------ (unaudited) <S> <C> <C> Cash, due from banks and interest-bearing deposits $ 40,234 $ 29,226 Federal funds sold 3,318 926 Securities available for sale, at fair value 389,469 261,869 Securities held to maturity (fair value of $68,616 at June 30, 2001 and $76,884 at December 31, 2000) 67,959 76,947 Loans 1,130,415 887,145 Allowance for loan losses (17,815) (13,883) ------------ ------------ Loans, net 1,112,600 873,262 Premises and equipment, net 23,483 18,423 Goodwill and other intangibles 38,804 2,732 Other assets 39,329 25,942 ------------ ------------ Total assets $ 1,715,196 $ 1,289,327 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Demand $ 197,987 $ 162,840 Savings, money market and interest-bearing checking 445,774 309,732 Certificates of deposit 737,844 605,539 ------------ ------------ Total deposits 1,381,605 1,078,111 Short-term borrowings 99,436 46,903 Long-term borrowings 53,630 15,481 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures 16,200 -- Accrued expenses and other liabilities 23,479 17,214 ------------ ------------ Total liabilities 1,574,350 1,157,709 ------------ ------------ Shareholders' equity: 3% cumulative preferred stock, $100 par value, authorized 10,000 shares, issued and outstanding 1,686 shares at June 30, 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 June 30, 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 June 30, 2001 and December 31, 2000 113 113 Additional paid-in capital 16,496 16,472 Retained earnings 105,062 98,348 Accumulated other comprehensive income(loss) 2,345 (144) Treasury stock--common, at cost--315,671 shares at June 30, 2001 and 316,812 shares at December 31, 2000 (925) (929) ------------ ------------ Total shareholders' equity 140,846 131,618 ------------ ------------ Total liabilities and shareholders' equity $ 1,715,196 $ 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> Six Months Ended Three Months Ended June 30, June 30, --------------------------- --------------------- 2001 2000 2001 2000 Interest income: -------- -------- -------- -------- <S> <C> <C> <C> <C> Loans $ 23,416 $ 19,095 $ 44,264 $ 36,814 Securities 5,534 4,377 10,355 8,468 Other 202 42 287 89 -------- -------- -------- -------- Total interest income 29,152 23,514 54,906 45,371 -------- -------- -------- -------- Interest expense: Deposits 11,659 9,289 22,855 17,669 Borrowings 1,089 1,021 1,877 1,813 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures 419 -- 600 -- -------- -------- -------- -------- Total interest expense 13,167 10,310 25,332 19,482 -------- -------- -------- -------- Net interest income 15,985 13,204 29,574 25,889 Provision for loan losses 1,026 1,172 1,837 2,007 -------- -------- -------- -------- Net interest income after provision for loan losses 14,959 12,032 27,737 23,882 -------- -------- -------- -------- Noninterest income: Service charges on deposits 1,724 1,259 3,043 2,353 Gain on sale\call of securities 173 -- 358 -- Gain on sale of loans and other assets 255 65 527 182 Loan servicing fees 161 303 420 605 Investment services 440 350 826 523 Other 699 326 1,063 709 -------- -------- -------- -------- Total noninterest income 3,452 2,303 6,237 4,372 -------- -------- -------- -------- Noninterest expense: Salaries and employee benefits 5,509 4,103 10,266 8,139 Occupancy and equipment 1,459 1,117 2,747 2,242 Supplies and postage 526 351 909 731 Amortization of intangibles 589 176 765 386 Professional fees 470 204 688 399 Other 1,856 1,424 3,278 2,685 -------- -------- -------- -------- Total noninterest expense 10,409 7,375 18,653 14,582 -------- -------- -------- -------- Income before income taxes 8,002 6,960 15,321 13,672 Income taxes 2,817 2,511 5,331 4,929 -------- -------- -------- -------- Net income $ 5,185 $ 4,449 $ 9,990 $ 8,743 ======== ======== ======== ======== Earnings per common share: Basic $ 0.44 $ 0.37 $ 0.84 $ 0.73 ======== ======== ======== ======== Diluted $ 0.43 $ 0.37 $ 0.83 $ 0.73 ======== ======== ======== ======== </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> Six Months Ended June 30, 2001 2000 ---------- ---------- <S> <C> <C> Cash flows from operating activities: Net income $ 9,990 $ 8,743 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,257 1,529 Provision for loan losses 1,837 2,007 Deferred income tax benefit (730) (506) Gain on sale/call of securities (358) -- Gain on sale of loans and other assets (527) (182) Minority interest in net income of subsidiary banks 48 43 Increase in other assets (125) (1,784) Increase in accrued expenses and other liabilities 3,537 1,506 ---------- ---------- Net cash provided by operating activities 15,929 11,356 ---------- ---------- Cash flows from investing activities: Purchase of securities: Available for sale (193,840) (49,453) Held to maturity (10,153) (13,056) Proceeds from maturity/call of securities: Available for sale 140,642 21,413 Held to maturity 19,021 14,059 Proceeds from sales of securities available for sale 7,508 -- Net increase in loans (53,859) (73,819) Proceeds from sales of premises and equipment 39 24 Purchase of premises and equipment (2,341) (1,139) Purchase of Bath National Corporation, net of cash acquired (48,955) -- ---------- ---------- Net cash used in investing activities (141,938) (101,971) ---------- ---------- Cash flows from financing activities: Net increase in deposits 72,027 39,224 Net increase in short-term borrowings 42,349 19,761 Proceeds from long-term borrowings 12,579 4,088 Repayment of long-term borrowings (120) (1,772) Proceeds from guaranteed preferred beneficial interests in corporation's junior subordinated debentures, net of costs 15,713 -- Net issuance (repurchase) of preferred and common shares 25 (422) Dividends paid (3,165) (2,732) ---------- ---------- Net cash provided by financing activities 139,408 58,147 ---------- ---------- Net increase (decrease) in cash and cash equivalents 13,400 (32,468) Cash and cash equivalents at beginning of the period 30,152 61,226 ---------- ---------- Cash and cash equivalents at end of the period $ 43,552 $ 28,758 ========== ========== Supplemental disclosure of cash flow information: Cash paid during period for: Interest $ 21,945 $ 17,873 Income taxes $ 5,594 $ 5,444 Noncash investing activities: Fair value of noncash assets acquired in purchase acquisition $ 281,664 $ -- Fair value of liabilities assumed in purchase acquisition $ 269,897 $ -- </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 Additional sive Share- --------------- Common Paid-In Retained Income Treasury holders 3% 8.48% Stock 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 30 shares of 3% preferred stock (3) 1 (2) Issue 1,141 shares of common stock - directors plan 23 4 27 Comprehensive income: Net income 9,990 9,990 Unrealized gain on securities available for sale (net of tax of $1,551) 2,276 2,276 Reclassification adjustment for gains included in net income (net of tax of $145) 213 213 -------- Net unrealized gain on securities available for sale (net of tax of $1,696) 2,489 -------- Total comprehensive income 12,479 -------- Cash dividends declared: 3% preferred-$1.50 per share (3) (3) 8.48% preferred-$4.24 per share (746) (746) Common-$0.23 per share (2,527) (2,527) ---- ------- ------- --------- -------- ------- ----- -------- Balance-June 30, 2001 $168 $17,587 $ 113 $ 16,496 $105,062 $ 2,345 $(925) $140,846 ==== ======= ======= ========= ======== ======= ===== ======== </TABLE> See accompanying notes to consolidated financial statements. 4
FINANCIAL INSTITUTIONS. INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 and 2000 (Unaudited) 1. BASIS OF PRESENTATION Financial Institutions. Inc. ("FII") is a financial holding company with five commercial bank 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"); First Tier Bank & Trust ("FTB"); and Bath National Bank ("BNB"), (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, the proceeds of which were utilized to partially fund the acquisition of Bath National Corporation ("BNC") (see Note 3). The capital securities are identified on the balance sheet as guaranteed preferred beneficial interests in corporation's junior subordinated debentures 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 and six month periods ended June 30, 2001 and 2000. The results of operations for the three and six month period ended June 30, 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 FII, the Banks, FIGI and FISI (collectively, "the Company"). 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 June 30, 2001 2000 ----------- ----------- <S> <C> <C> Net Income $ 5,185 $ 4,449 Less: Preferred Stock Dividends 374 374 ----------- ----------- Net Income Available to Common Shareholders $ 4,811 $ 4,075 =========== =========== Average Number of Common Shares Outstanding 10,987,210 10,991,867 Add: Effect of Dilutive Options 147,995 954 ----------- ----------- Average Number of Common Shares Outstanding Used to Calculate Diluted Earnings per Common Share 11,135,205 10,992,821 =========== =========== <CAPTION> Six Months Ended June 30, 2001 2000 ----------- ----------- <S> <C> <C> Net Income $ 9,990 $ 8,743 Less: Preferred Stock Dividends 748 748 ----------- ----------- Net Income Available to Common Shareholders $ 9,242 $ 7,995 =========== =========== Average Number of Common Shares Outstanding 10,986,967 11,003,959 Add: Effect of Dilutive Options 95,825 3 ----------- ----------- Average Number of Common Shares Outstanding Used to Calculate Diluted Earnings per Common Share 11,082,792 11,003,962 =========== =========== </TABLE> 5
3. ACQUISITION On May 1, 2001, FII acquired all of the common stock of BNC, and its wholly-owned subsidiary bank, Bath National Bank ("BNB"). 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 was accounted for under the purchase method of accounting, and accordingly, the excess of the purchase price over the fair value of identifiable assets acquired, less liabilities assumed, has been recorded as goodwill. Goodwill recognized with respect to the merger was approximately $37.2 million. Goodwill is being amortized using the straight-line method over 15-years. In accordance with SFAS No. 142 (See Note 5), the Company will cease goodwill amortization on January 1, 2001 and will evaluate goodwill for impairment annually thereafter. The results of operations for BNB are included in the income statement from the date of acquisition (May 1, 2001) to the end of the period. The table below presents certain unaudited pro forma information as if the BNC acquisition, which ocurred in 2001, had been consummated on January 1, 2000. This proforma information gives effect to certain adjustments, including accounting adjustments related to fair value adjustments, amortization of goodwill and related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company acquired BNC on January 1, 2000. (Dollars in thousands, except per share) <TABLE> <CAPTION> Pro Forma Pro Forma (Unaudited) (Unaudited) Six months ended Year ended June 30, 2001 December 30,2000 ---------------- ---------------- <S> <C> <C> Net interest income $32,718 $62,097 Noninterest income $6,971 $11,203 Net income $8,367 $13,967 ======= ======= Earnings per share: Basic $0.69 $1.13 Diluted $0.69 $1.13 </TABLE> 4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES The following table summarizes, at the dates indicated, the Company's loan portfolio by type: (Dollars in thousands) <TABLE> <CAPTION> As of As of June 30, December 31, 2001 2000 ------------ ------------ <S> <C> <C> Commercial $224,650 $169,832 Commercial real estate 248,577 166,041 Agricultural 179,467 165,367 Residential real estate 247,300 201,160 Consumer & home equity 230,421 184,745 ----------- --------- Loans, gross 1,130,415 887,145 Allowance for loan losses (17,815) (13,883) ----------- --------- Total loans, net $1,112,600 $873,262 =========== ========= </TABLE> 6
The following table presents an analysis of the allowance for loan losses and other related data for the periods indicated. (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended -------------------- -------------------- June 30, June 30, 2001 2000 2001 2000 ------- ------- ------- ------- <S> <C> <C> <C> <C> Balance at the beginning of the period $14,466 $11,907 $13,883 $11,421 Addition as a result of acquisition 2,686 -- 2,686 -- Charge-Offs: Commercial 60 24 114 178 Commercial real estate 7 360 66 364 Agricultural -- 29 -- 29 Residential real estate 103 63 145 63 Consumer and home equity 348 154 499 407 ------- ------- ------- ------- Total charge-offs 518 630 824 1,041 ------- ------- ------- ------- Recoveries: Commercial 7 66 14 69 Commercial real estate -- 1 10 1 Agricultural -- -- -- 1 Residential real estate -- -- -- -- Consumer and home equity 148 65 209 123 ------- ------- ------- ------- Total recoveries 155 132 233 194 ------- ------- ------- ------- Net charge-offs 363 498 591 847 Provision for loan losses 1,026 1,172 1,837 2,007 ------- ------- ------- ------- Balance at the end of the period $17,815 $12,581 $17,815 $12,581 ======= ======= ======= ======= Ratio of net charge-offs to average loans (annualized) 0.12% 0.21% Allowance for loan losses to total loans 1.58% 1.50% Allowance for loan losses to nonperforming loans 166.41% 158.72% </TABLE> At June 30, 2001 and 2000, the recorded investment in loans that are considered to be impaired totaled $8,126,000 and $5,270,000, respectively. The average recorded investments in impaired loans during the six months ended June 30, 2001 and 2000 were approximately $7,160,000 and $4,147,000, respectively. At June 30, 2001 and 2000, the Company had specific allocations for impaired loans included in the allowance for loan losses of $2,100,000 and $860,000, respectively. 7
The following table presents information regarding nonperforming assets at the dates indicated: (Dollars in thousands) <TABLE> <CAPTION> As of As of June 30, December 31, 2001 2000 ----------- ------------ <S> <C> <C> Nonaccruing loans (1): Commercial $3,075 $1,044 Commercial real estate 2,406 1,619 Agricultural 2,787 2,881 Residential real estate 1,111 835 Consumer and home equity 676 217 ----------- ----------- Total loans 10,055 6,596 Accruing loans 90 days or more delinquent 650 521 ----------- ----------- Total nonperforming loans 10,705 7,117 Other real estate owned (2) 1,212 932 ----------- ----------- Total nonperforming assets $11,917 $8,049 =========== =========== Nonperforming loans to total loans 0.95% 0.80% ===== ===== Nonperforming assets to total loans and other real estate 1.05% 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. 5. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") 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. In June, 2001 the FASB issued SFAS Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations be accounted for under the purchase method, use of the pooling-of-interests method is no longer permitted for business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill (including goodwill reported in prior acquisitions) no longer be amortized to earnings, but instead be reviewed for impairment annually, with impairment losses charged to earnings when they occur. The Company is required to adopt SFAS No. 142 effective January 1, 2002. The results of operations for the six months ended June 30, 2001 include goodwill amortization from the BNC acquisition of approximately $413,000. The amortization of goodwill will cease effective January 1, 2002. 8
6. SEGMENT INFORMATION Segments are determined based upon the individual subsidiary banks. Reportable segments are comprised of WCB, NBG, BNB (from the date of acquisition ,May 1, 2001, to the end of the period), PSB and FTB as the Company manages and evaluates performance on an individual bank basis. The reportable segment information as of and for the six months ended June 30, 2001 and 2000 follows: (Dollars in thousands) 2001 2000 ----------- ----------- Net interest income: WCB ....................................... $ 11,305 $ 10,562 NBG ....................................... 9,653 8,961 BNB ....................................... 2,165 -- PSB ....................................... 3,974 3,483 FTB ....................................... 2,776 2,527 ----------- ----------- Total segment net interest income ....... 29,873 25,533 FII, FIGI, FISI, and eliminations, net ...... (299) 356 ----------- ----------- Total net interest income ............... $ 29,574 $ 25,889 =========== =========== Net interest income plus non-interest income: WCB ....................................... $ 13,193 $ 12,188 NBG ....................................... 11,597 10,610 BNB ....................................... 2,630 -- PSB ....................................... 5,034 4,032 FTB ....................................... 3,359 2,991 ----------- ----------- Total segment net interest income plus non-interest income ...... 35,813 29,821 FII, FIGI, FISI, and eliminations, net ...... (2) 440 ----------- ----------- Total net interest income plus non-interest income .................. $ 35,811 $ 30,261 =========== =========== Net income: WCB ....................................... $ 4,011 $ 3,646 NBG ....................................... 3,822 3,425 BNB ....................................... 404 -- PSB ....................................... 1,317 952 FTB ....................................... 823 738 ----------- ----------- Total segment net income ................ 10,377 8,761 FII, FIGI, FISI, and eliminations, net ...... (387) (18) ----------- ----------- Total net income ........................ $ 9,990 $ 8,743 =========== =========== Assets: WCB ....................................... $ 535,945 $ 486,630 NBG ....................................... 521,597 437,614 BNB ....................................... 346,904 -- PSB ....................................... 181,007 160,012 FTB ....................................... 132,946 129,196 ----------- ----------- Total segment net assets ................ 1,718,399 1,213,452 FII, FIGI, FISI, and eliminations, net ...... (3,203) (9,562) ----------- ----------- Total assets ............................ $ 1,715,196 $ 1,203,890 =========== =========== 9
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 and six months ended June 30, 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 June 30, 2001 2000 $ Change % Change ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Per common share data: Net income - basic $0.44 $0.37 $0.07 18.9% Net income - diluted $0.43 $0.37 $0.06 16.2% Cash dividends declared $0.12 $0.10 $0.02 20.0% Book value $11.20 $9.48 $1.72 18.1% Common shares outstanding: Weighted average shares - basic 10,987,210 10,991,867 Weighted average shares - diluted 11,135,205 10,992,821 Period end 10,987,862 10,986,721 Performance ratios, annualized: Return on average assets 1.33% 1.53% Return on average common equity 15.92% 15.94% Net interest margin (tax-equivalent) 4.62% 4.95% Efficiency ratio 48.47% 44.65% Asset quality ratios: Nonperforming loans to total loans 0.95% 0.95% Nonperforming assets to total loans and other real estate 1.05% 1.08% Net loan charge-offs to average loans 0.14% 0.24% Allowance for loan losses to total loans 1.58% 1.50% Allowance for loan losses to nonperforming loans 166.41% 158.72% Capital ratios: Average common equity to average total assets 7.72% 8.77% Leverage ratio 7.60% 10.54% Tier 1 risk based capital ratio 9.85% 14.19% Risk-based capital ratio 11.11% 15.44% </TABLE> 10
The Company's net income for the second quarter of 2001 increased 17% to $5,185,000 compared to $4,449,000 for the second quarter of 2000. Net income for the first six months of 2001 increased 14% to $9,990,000 compared to $8,743,000 for the same period in 2000. Diluted earnings per common share increased to $0.43 for the second quarter of 2001 and to $0.83 for the first six months of the year compared to $0.37 and $0.73, respectively, for the same periods in 2000. Return on average common equity was 15.66% for the six months ended June 30, 2001 compared to 15.82% for the same period last year. For the second quarter of 2001 net interest income increased $2,781,000 to $15,985,000 compared to $13,204,000 for the second quarter of 2000. Net interest income for the first six months of 2001 was $29,574,000, an increase of $3,685,000 from $25,889,000 for the first six months of 2000. Total loans at quarter end were $1,130 million, an increase of $294 million over the same period last year. BNB accounted for $189 million of the increase with the additional $105 million reflecting the continuing expansion of both the commercial and consumer loan portfolios in the Company's existing and contiguous markets. Net interest margin was 4.62% for the second quarter of 2001 and 4.63% for the first six months of 2001. That compares to 4.95% and 4.97% for the same periods last year. The decrease in net interest margin is consistent with management's expectations in the falling interest rate environment and is reflective of incremental asset growth at lower margins. However, the Company has achieved strong growth in net interest income given a marketplace environment of increasing price competitiveness and rapidly declining market interest rates. Noninterest income increased 50% in the second quarter of 2001 to $3,452,000 from $2,303,000 for the same period in 2000. While the addition of BNB contributed to the increase, the significant growth reflects the benefit of the continuing growth in deposits and the related service fees, as well as the expansion of our investment brokerage and trust businesses. In addition, gains realized principally from the call of securities totaled $173,000 in the second quarter of 2001 and $358,000 for the first six months of 2001. Noninterest expense for the second quarter of 2001 was $10,409,000 compared to $7,375,000 for the second quarter of 2000. For the six months ended June 30, 2001, noninterest expense was $18,653,000, an increase from $14,582,000 for the same period in 2000. The increases reflect the impact of BNB together with increased staffing and technology resources necessary to support continued expansion of our existing product lines and delivery channels. Nonetheless the efficiency ratio for the second quarter of 2001 remained strong at 48.5% compared to 47.2% for the first quarter of 2001 and 44.7% for the second quarter of 2000. The provision for loan losses for the second quarter of 2001 was $1,026,000, compared to $1,172,000 for the same period in 2000. For the first six months of 2001 the provision was $1,837,000 compared to $2,007,000 for the same period in 2000. The increase in nonperforming loans to $10,705,000 at June 30, 2001 compared to $7,927,000 at June 30, 2000 directly results from the addition of $2,993,000 in nonperforming loans at BNB. The Company's ratio of nonperforming loans to total loans was .95% at both June 30, 2001 and June 30, 2000. However, the ratio of the allowance for loan losses to nonperforming loans increased to 166.41% at June 30, 2001, up from 158.72% a year ago. The ratio of the allowance for loan losses to total loans also improved to 1.58% at June 30, 2001, compared to 1.50% a year ago. At June 30, 2001 the Company had total assets of $1,715 million, an increase of $511 million ($296 million from the BNB acquisition) from $1,204 million at June 30, 2000. Total deposits were $1,382 million at the recent quarter-end, compared with $989 million a year earlier with the BNB acquisition accounting for $231 million of the increase. Total shareholders' equity increased 16% to $141 million at June 30, 2001 from $122 million a year earlier. 11
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 June 30, ---------------------------------------------------- 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 $17,594 $200 4.56% $2,781 $42 6.07% Investment securities (1) 406,217 6,494 6.40% 300,563 4,978 6.63% Loans (2) Commercial and agricultural 603,021 13,152 8.75% 460,246 11,034 9.64% Residential real estate 227,888 5,170 9.07% 191,982 4,247 8.85% Consumer and home equity 215,438 5,095 9.49% 162,248 3,814 9.45% ---------- --------- --------- ---------- --------- --------- Total loans 1,046,347 23,417 8.97% 814,476 19,095 9.42% ---------- --------- --------- ---------- --------- --------- Total interest-earning assets 1,470,158 30,111 8.21% 1,117,820 24,115 8.66% ---------- --------- --------- ---------- --------- --------- Interest-bearing liabilities Interest-bearing checking 157,471 463 1.18% 111,289 374 1.35% Savings and money market 245,749 1,332 2.17% 192,055 1,248 2.61% Certificates of deposit 724,241 9,864 5.46% 537,260 7,667 5.74% Borrowed funds 89,634 1,089 4.87% 63,765 1,022 6.45% Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures 16,200 419 10.37% -- -- -- ---------- --------- --------- ---------- --------- --------- Total interest-bearing liabilities 1,233,295 13,167 4.28% 904,369 10,311 4.59% ---------- --------- --------- ---------- --------- --------- Net interest income $16,944 $13,804 ========= ========= Net interest rate spread 3.93% 4.07% ========= ========= Net earning assets $236,863 $213,451 ========== ========== Net interest margin on earning assets (3) 4.62% 4.95% ========= ========= Ratio of average interest-earning assets to average interest- bearing liabilities 119.21% 123.60% ========= ========= </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. 12
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> 2nd Quarter 2001 Compared to 2nd Quarter 2000 (Dollars in thousands) ----------------------------------------------------- Increase (Decrease) Due to --------------------------------- Total Volume Rate Increase ------ -------- ---------- <S> <C> <C> <C> Interest-earning assets: Federal funds sold and interest-bearing deposits $168 $(10) $158 Investment securities 1,687 (171) 1,516 Loans: Commercial and agricultural 3,138 (1,020) 2,118 Residential real estate 819 104 923 Consumer and home equity 1,265 16 1,281 ------ ------ ------ Total loans 5,222 (900) 4,322 ------ ------ ------ Total interest-earning assets 7,077 (1,081) 5,996 ------ ------ ------ Interest-bearing liabilities: Interest-bearing checking 135 (46) 89 Savings and money market 300 (216) 84 Certificates of deposit 2,573 (376) 2,197 Borrowed funds 325 (258) 67 Guaranteed preferred beneficial interests in Corporation's junior subordinated debentures 419 -- 419 ------ ------ ------ Total interest-bearing liabilities 3,752 (896) 2,856 ------ ------ ------ Net interest income $3,325 $ (185) $3,140 ====== ====== ====== </TABLE> 13
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. 14
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 (1) The Company filed a Current Report on Form 8-K dated May 11, 2001, which disclosed the acquisition of Bath National Corporation and its banking subsidiary, Bath National Bank on May 1, 2001. 15
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) August 1, 2001 /s/ Peter G. Humphrey --------------- --------------------- Date Peter G. Humphrey, President & CEO August 1, 2001 /s/ Ronald A. Miller --------------- -------------------- Date Ronald A. Miller, SVP & CFO 16