Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-26481
(Exact name of registrant as specified in its charter)
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NEW YORK
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16-0816610 |
(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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220 LIBERTY STREET, WARSAW, NEW YORK
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14569 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (585) 786-1100
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 period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).
Yes o No o
Indicate by check mark whether the regsitrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The registrant had 10,938,738 shares of Common Stock, $0.01 par value, outstanding as of July 30,
2010.
FINANCIAL INSTITUTIONS, INC.
Form 10-Q
For the Quarterly Period Ended June 30, 2010
TABLE OF CONTENTS
- 2 -
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
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June 30, |
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December 31, |
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(Dollars in thousands, except share and per share data) |
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2010 |
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2009 |
|
ASSETS |
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Cash and cash equivalents: |
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Cash and due from banks |
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$ |
43,326 |
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$ |
42,874 |
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Federal funds sold and interest-bearing deposits in other banks |
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93 |
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85 |
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Total cash and cash equivalents |
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43,419 |
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42,959 |
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Securities available for sale, at fair value |
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651,533 |
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580,501 |
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Securities held to maturity, at amortized cost (fair value of $28,247 and $40,629, respectively) |
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27,404 |
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39,573 |
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Loans |
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1,291,583 |
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1,264,427 |
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Less: Allowance for loan losses |
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21,825 |
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20,741 |
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Loans, net |
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1,269,758 |
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1,243,686 |
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Company owned life insurance |
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25,451 |
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24,867 |
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Premises and equipment, net |
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34,127 |
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34,783 |
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Goodwill |
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37,369 |
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37,369 |
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Other assets |
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53,870 |
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58,651 |
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Total assets |
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$ |
2,142,931 |
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$ |
2,062,389 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Deposits: |
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Noninterest-bearing demand |
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$ |
328,937 |
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$ |
324,303 |
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Interest-bearing demand |
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370,584 |
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363,698 |
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Savings and money market |
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399,972 |
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368,603 |
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Certificates of deposit |
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722,452 |
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686,351 |
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Total deposits |
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1,821,945 |
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1,742,955 |
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Short-term borrowings |
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46,886 |
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59,543 |
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Long-term borrowings |
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46,768 |
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46,847 |
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Other liabilities |
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15,633 |
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14,750 |
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Total liabilities |
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1,931,232 |
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1,864,095 |
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Shareholders equity: |
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Series A 3% Preferred Stock, $100 par value, 1,533 shares authorized and issued |
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153 |
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153 |
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Series A Preferred Stock, $100 par value, 7,503 shares authorized and issued, aggregate
liquidation preference of $37,515; net of $1,491 and $1,672 discount, respectively |
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36,024 |
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35,843 |
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Series B-1 8.48% Preferred Stock, $100 par value, 200,000 shares authorized,
174,223 shares issued |
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17,422 |
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17,422 |
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Total preferred equity |
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53,599 |
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53,418 |
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Common stock, $0.01 par value, 50,000,000 shares authorized, 11,348,122 shares issued |
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113 |
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113 |
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Additional paid-in capital |
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25,433 |
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26,940 |
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Retained earnings |
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137,871 |
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131,371 |
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Accumulated other comprehensive income (loss) |
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2,254 |
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(3,702 |
) |
Treasury stock, at cost 405,886 and 527,854 shares, respectively |
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(7,571 |
) |
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(9,846 |
) |
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Total shareholders equity |
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211,699 |
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198,294 |
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Total liabilities and shareholders equity |
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$ |
2,142,931 |
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$ |
2,062,389 |
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See accompanying notes to the consolidated financial statements.
- 3 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
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Three months ended |
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Six months ended |
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June 30, |
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June 30, |
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(Dollars in thousands, except per share amounts) |
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2010 |
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2009 |
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2010 |
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2009 |
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Interest income: |
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Interest and fees on loans |
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$ |
18,714 |
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$ |
17,847 |
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$ |
37,332 |
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$ |
34,906 |
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Interest and dividends on investment securities |
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5,485 |
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5,429 |
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10,684 |
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11,436 |
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Other interest income |
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3 |
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26 |
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10 |
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53 |
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Total interest income |
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24,202 |
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23,302 |
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48,026 |
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46,395 |
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Interest expense: |
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Deposits |
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3,730 |
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4,888 |
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7,514 |
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9,903 |
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Short-term borrowings |
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85 |
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56 |
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|
163 |
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94 |
|
Long-term borrowings |
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|
711 |
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|
713 |
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1,421 |
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1,426 |
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Total interest expense |
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4,526 |
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|
5,657 |
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|
9,098 |
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11,423 |
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|
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Net interest income |
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|
19,676 |
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|
17,645 |
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|
38,928 |
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|
34,972 |
|
Provision for loan losses |
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2,105 |
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|
2,088 |
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2,523 |
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|
3,994 |
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Net interest income after provision for loan losses |
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|
17,571 |
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|
15,557 |
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|
36,405 |
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|
30,978 |
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Noninterest income: |
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|
|
|
|
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|
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Service charges on deposits |
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2,502 |
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2,517 |
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4,732 |
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4,837 |
|
ATM and debit card |
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|
1,054 |
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|
908 |
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|
1,988 |
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|
1,719 |
|
Broker-dealer fees and commissions |
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|
359 |
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|
234 |
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|
739 |
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|
|
503 |
|
Company owned life insurance |
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|
282 |
|
|
|
275 |
|
|
|
551 |
|
|
|
535 |
|
Loan servicing |
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|
140 |
|
|
|
470 |
|
|
|
420 |
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|
727 |
|
Net gain on sale of loans held for sale |
|
|
115 |
|
|
|
246 |
|
|
|
177 |
|
|
|
416 |
|
Net gain on investment securities |
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|
63 |
|
|
|
1,153 |
|
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|
69 |
|
|
|
1,207 |
|
Impairment charges on investment securities |
|
|
|
|
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|
(1,733 |
) |
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|
(526 |
) |
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(1,783 |
) |
Net gain on sale and disposal of other assets |
|
|
|
|
|
|
|
|
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|
2 |
|
|
|
158 |
|
Other |
|
|
451 |
|
|
|
445 |
|
|
|
897 |
|
|
|
887 |
|
|
|
|
|
|
|
|
|
|
|
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|
Total noninterest income |
|
|
4,966 |
|
|
|
4,515 |
|
|
|
9,049 |
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|
|
9,206 |
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|
|
|
|
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|
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|
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Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
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Salaries and employee benefits |
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8,044 |
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|
8,437 |
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16,291 |
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|
|
17,168 |
|
Occupancy and equipment |
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|
2,670 |
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|
|
2,683 |
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|
|
5,441 |
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|
|
5,559 |
|
FDIC assessments |
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|
634 |
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|
1,593 |
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|
1,236 |
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|
|
2,273 |
|
Computer and data processing |
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|
615 |
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|
|
562 |
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|
1,186 |
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|
1,179 |
|
Professional services |
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|
478 |
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|
591 |
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|
1,084 |
|
|
|
1,440 |
|
Supplies and postage |
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|
431 |
|
|
|
476 |
|
|
|
876 |
|
|
|
941 |
|
Advertising and promotions |
|
|
352 |
|
|
|
249 |
|
|
|
539 |
|
|
|
423 |
|
Other |
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|
1,646 |
|
|
|
1,849 |
|
|
|
2,955 |
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|
3,535 |
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|
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|
|
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|
|
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Total noninterest expense |
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|
14,870 |
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|
|
16,440 |
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|
|
29,608 |
|
|
|
32,518 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
7,667 |
|
|
|
3,632 |
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|
|
15,846 |
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|
|
7,666 |
|
Income tax expense |
|
|
2,469 |
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|
|
1,004 |
|
|
|
5,320 |
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|
|
2,071 |
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|
|
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|
|
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|
|
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Net income |
|
$ |
5,198 |
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|
$ |
2,628 |
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|
$ |
10,526 |
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|
$ |
5,595 |
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|
|
|
|
|
|
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|
|
|
|
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|
Preferred stock dividends, net of amortization |
|
|
931 |
|
|
|
925 |
|
|
|
1,860 |
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|
|
1,843 |
|
|
|
|
|
|
|
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|
|
|
|
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|
Net income applicable to common shareholders |
|
$ |
4,267 |
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|
$ |
1,703 |
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|
$ |
8,666 |
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$ |
3,752 |
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|
|
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Earnings per common share (Note 2): |
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|
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Basic |
|
$ |
0.39 |
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|
$ |
0.16 |
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|
$ |
0.80 |
|
|
$ |
0.35 |
|
Diluted |
|
$ |
0.39 |
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|
$ |
0.16 |
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|
$ |
0.80 |
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|
$ |
0.35 |
|
See accompanying notes to the consolidated financial statements.
- 4 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity (Unaudited)
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Accumulated |
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Additional |
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Other |
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Total |
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(Dollars in thousands, |
|
Preferred |
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Common |
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Paid-in |
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|
Retained |
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Comprehensive |
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|
Treasury |
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|
Shareholders |
|
except per share data) |
|
Equity |
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|
Stock |
|
|
Capital |
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|
Earnings |
|
|
Income (Loss) |
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|
Stock |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
Balance at January 1, 2010 |
|
$ |
53,418 |
|
|
$ |
113 |
|
|
$ |
26,940 |
|
|
$ |
131,371 |
|
|
$ |
(3,702 |
) |
|
$ |
(9,846 |
) |
|
$ |
198,294 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,526 |
|
|
|
|
|
|
|
|
|
|
|
10,526 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,956 |
|
|
|
|
|
|
|
5,956 |
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,482 |
|
Share-based compensation plans: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
542 |
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
179 |
|
|
|
129 |
|
Restricted stock awards issued, net |
|
|
|
|
|
|
|
|
|
|
(1,984 |
) |
|
|
|
|
|
|
|
|
|
|
1,984 |
|
|
|
|
|
Directors retainer |
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
112 |
|
|
|
97 |
|
Accrued undeclared cumulative dividend on
Series A Preferred Stock, net of
amortization |
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Series A 3% Preferred$1.50 per share |
|
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|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
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|
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|
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(2 |
) |
Series A Preferred$125.00 per share |
|
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|
|
|
|
|
|
|
|
|
|
|
|
(938 |
) |
|
|
|
|
|
|
|
|
|
|
(938 |
) |
Series B-1 8.48% Preferred$4.24 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(739 |
) |
|
|
|
|
|
|
|
|
|
|
(739 |
) |
Common$0.20 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,166 |
) |
|
|
|
|
|
|
|
|
|
|
(2,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
$ |
53,599 |
|
|
$ |
113 |
|
|
$ |
25,433 |
|
|
$ |
137,871 |
|
|
$ |
2,254 |
|
|
$ |
(7,571 |
) |
|
$ |
211,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
- 5 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,526 |
|
|
$ |
5,595 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,776 |
|
|
|
2,034 |
|
Net amortization of premiums and discounts on investment securities |
|
|
1,002 |
|
|
|
949 |
|
Provision for loan losses |
|
|
2,523 |
|
|
|
3,994 |
|
Amortization of unvested stock-based compensation |
|
|
542 |
|
|
|
515 |
|
Deferred income tax expense |
|
|
828 |
|
|
|
5,211 |
|
Proceeds from sale of loans held for sale |
|
|
14,284 |
|
|
|
58,416 |
|
Originations of loans held for sale |
|
|
(14,594 |
) |
|
|
(59,992 |
) |
Increase in company owned life insurance |
|
|
(551 |
) |
|
|
(535 |
) |
Net gain on investment securities |
|
|
(69 |
) |
|
|
(1,207 |
) |
Impairment charge on investment securities |
|
|
526 |
|
|
|
1,783 |
|
Net gain on sale of loans held for sale |
|
|
(177 |
) |
|
|
(416 |
) |
Net gain on sale and disposal of other assets |
|
|
(2 |
) |
|
|
(158 |
) |
Decrease (increase) in other assets |
|
|
294 |
|
|
|
(4,629 |
) |
Increase in other liabilities |
|
|
1,322 |
|
|
|
3,090 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
18,230 |
|
|
|
14,650 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of investment securities: |
|
|
|
|
|
|
|
|
Available for sale |
|
|
(196,238 |
) |
|
|
(214,940 |
) |
Held to maturity |
|
|
(8,251 |
) |
|
|
(17,223 |
) |
Proceeds from principal payments, maturities and calls on investment securities: |
|
|
|
|
|
|
|
|
Available for sale |
|
|
100,160 |
|
|
|
178,974 |
|
Held to maturity |
|
|
19,979 |
|
|
|
26,501 |
|
Proceeds from sale of securities available for sale |
|
|
33,090 |
|
|
|
82,198 |
|
Net loan originations |
|
|
(28,178 |
) |
|
|
(116,409 |
) |
Purchase of company owned life insurance |
|
|
(33 |
) |
|
|
(33 |
) |
Proceeds from sales of other assets |
|
|
411 |
|
|
|
1,042 |
|
Purchase of premises and equipment |
|
|
(1,250 |
) |
|
|
(1,198 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(80,310 |
) |
|
|
(61,088 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
78,990 |
|
|
|
66,997 |
|
Net (decrease) increase in short-term borrowings |
|
|
(12,657 |
) |
|
|
9,663 |
|
Repayment of long-term borrowings |
|
|
(79 |
) |
|
|
(506 |
) |
Issuance of preferred and common shares |
|
|
|
|
|
|
53 |
|
Stock options exercised |
|
|
129 |
|
|
|
|
|
Cash dividends paid to preferred shareholders |
|
|
(1,679 |
) |
|
|
(1,481 |
) |
Cash dividends paid to common shareholders |
|
|
(2,164 |
) |
|
|
(2,160 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
62,540 |
|
|
|
72,566 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
460 |
|
|
|
26,128 |
|
Cash and cash equivalents, beginning of period |
|
|
42,959 |
|
|
|
55,187 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
43,419 |
|
|
$ |
81,315 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
- 6 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Financial Institutions, Inc., a financial holding company organized under the laws of New York
State (New York or NYS), and its subsidiaries provide deposit, lending and other financial
services to individuals and businesses in Central and Western New York. The Company owns all of
the capital stock of Five Star Bank, a New York State chartered bank, and Five Star Investment
Services, Inc., a broker-dealer subsidiary offering noninsured investment products. The Company
also owns 100% of FISI Statutory Trust I (the Trust), which was formed in February 2001 for the
purpose of issuing trust preferred securities. References to the Company mean the consolidated
reporting entities and references to the Bank mean Five Star Bank.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated in consolidation. The
accounting and reporting policies conform to U.S. generally accepted accounting principles
(GAAP). Certain information and footnote disclosures normally included in financial statements
prepared in conformity with GAAP have been condensed or omitted pursuant to such rules and
regulations. However, in the opinion of management, the accompanying consolidated financial
statements reflect all adjustments of a normal and recurring nature necessary to present fairly the
consolidated balance sheet, statements of income, shareholders equity and cash flows for the
periods indicated, and contain adequate disclosure to make the information presented not
misleading. Prior years consolidated financial statements are re-classified whenever necessary to
conform to the current years presentation. These consolidated financial statements should be read
in conjunction with the Companys 2009 Annual Report on Form 10-K. The results of operations for
any interim periods are not necessarily indicative of the results which may be expected for the
entire year.
Use of Estimates
The preparation of these financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. Material estimates relate
to the determination of the allowance for loan losses, assumptions used in the defined benefit
pension plan accounting, the carrying value of goodwill and deferred tax assets, and the valuation
and other than temporary impairment considerations related to the securities portfolio.
Cash Flow Information
Supplemental cash flow information addressing certain cash payments and noncash investing and
financing activities was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Cash payments: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
9,115 |
|
|
$ |
9,735 |
|
Income taxes |
|
|
4,539 |
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Real estate and other assets acquired in settlement of loans |
|
$ |
70 |
|
|
$ |
804 |
|
Accrued and declared unpaid dividends |
|
|
1,694 |
|
|
|
1,692 |
|
Increase (decrease) in net unsettled security transactions |
|
|
(441 |
) |
|
|
18,336 |
|
Loans securitized |
|
|
|
|
|
|
15,983 |
|
- 7 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
FASB ASC 810 Consolidation (ASC 810) was amended to change how a company determines when an
entity that is insufficiently capitalized or is not controlled through voting (or similar rights)
should be consolidated. The determination of whether a company is required to consolidate an entity
is based on, among other things, an entitys purpose and design and a companys ability to direct
the activities of the entity that most significantly impact the entitys economic performance. The
new authoritative accounting guidance requires additional disclosures about the reporting entitys
involvement with variable-interest entities and any significant changes in risk exposure due to
that involvement as well as its affect on the entitys financial statements. The new authoritative
accounting guidance under ASC 810 was adopted effective January 1, 2010 and did not have a
significant impact on the Companys consolidated financial statements.
FASB ASC 860 Transfers and Servicing (ASC 860) was amended to enhance reporting about transfers
of financial assets, including securitizations, and where companies have continuing exposure to the
risks related to transferred financial assets. The new authoritative accounting guidance eliminates
the concept of a qualifying special-purpose entity and changes the requirements for derecognizing
financial assets. The new authoritative accounting guidance also requires additional disclosures
about all continuing involvements with transferred financial assets including information about
gains and losses resulting from transfers during the period. The new authoritative accounting
guidance under ASC 860 was adopted effective January 1, 2010 and did not have a significant impact
on the Companys consolidated financial statements.
FASB ASC 820 Fair Value Measurements and Disclosures (ASC 820) was amended to require some new
disclosures and clarify some existing disclosure requirements about fair value measurement. It
requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair
value hierarchy and disclosure of the reasons for such transfers. It will also require the
presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather
than a net basis. The amendments also clarify that disclosures should be disaggregated by class of
asset or liability and that disclosures about inputs and valuation techniques should be provided
for both recurring and non-recurring fair value measurements. These new disclosure requirements
were adopted by the Company during the current period, with the exception of the requirement
concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning
after December 15, 2010. With respect to the portions of this amendment that were adopted during
the current period, the adoption of this standard did not have a significant impact on the
Companys consolidated financial statements. The Company believes that the adoption of the
remaining portion of this amendment will not have a significant impact on the Companys
consolidated financial statements.
FASB ASC 310 Receivables (ASC 310) was amended to require an entity to provide a greater level of
disaggregated information about the credit quality of its financing receivables and its allowance
for credit losses. The requirements are intended to enhance transparency regarding credit losses
and the credit quality of loan and lease receivables. Under this statement, allowance for credit
losses and fair value are to be disclosed by portfolio segment, while credit quality information,
impaired financing receivables and nonaccrual status are to be presented by class of financing
receivable. Disclosure of the nature and extent, the financial impact and segment information of
troubled debt restructurings will also be required. These new disclosure requirements are
effective for interim and annual reporting periods after December 15, 2010. The Company believes
that the adoption of the standard will not have a significant impact on the Companys consolidated
financial statements.
- 8 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(2.) EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the earnings and shares used in calculating basic
and diluted EPS for the three and six months ended June 30, 2010 and 2009 (in thousands, except per
share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income applicable to common shareholders |
|
$ |
4,267 |
|
|
$ |
1,703 |
|
|
$ |
8,666 |
|
|
$ |
3,752 |
|
Less: Earnings allocated to participating securities |
|
|
29 |
|
|
|
5 |
|
|
|
59 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings allocated to common shares outstanding |
|
$ |
4,238 |
|
|
$ |
1,698 |
|
|
$ |
8,607 |
|
|
$ |
3,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to calculate basic EPS |
|
|
10,761 |
|
|
|
10,724 |
|
|
|
10,754 |
|
|
|
10,720 |
|
Add: Effect of common stock equivalents |
|
|
85 |
|
|
|
42 |
|
|
|
46 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to calculate diluted EPS |
|
|
10,846 |
|
|
|
10,766 |
|
|
|
10,800 |
|
|
|
10,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.39 |
|
|
$ |
0.16 |
|
|
$ |
0.80 |
|
|
$ |
0.35 |
|
Diluted |
|
$ |
0.39 |
|
|
$ |
0.16 |
|
|
$ |
0.80 |
|
|
$ |
0.35 |
|
Shares subject to the following securities, outstanding as of June 30 of the respective year, were
excluded from the computation of diluted EPS because the effect would be antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
395 |
|
|
|
554 |
|
|
|
423 |
|
|
|
566 |
|
Restricted stock awards |
|
|
2 |
|
|
|
|
|
|
|
1 |
|
|
|
20 |
|
Warrant |
|
|
|
|
|
|
378 |
|
|
|
188 |
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
397 |
|
|
|
932 |
|
|
|
612 |
|
|
|
964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accounting guidance under ASC Topic 260, Earnings Per Share, provides that unvested
share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The Company has both participating and
non-participating non-vested stock awards outstanding. Only those non-vested stock awards issued
with rights to dividends or dividend equivalents are considered participating securities and are
included in the computation of earnings per share pursuant to the two-class method. The dilutive
effect of non-participating non-vested stock is calculated using the treasury stock method and is
reflected in the weighted average common shares used to calculate diluted EPS.
- 9 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(3.) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government
sponsored enterprises |
|
$ |
230,311 |
|
|
$ |
1,719 |
|
|
$ |
120 |
|
|
$ |
231,910 |
|
State and political subdivisions |
|
|
59,335 |
|
|
|
2,264 |
|
|
|
1 |
|
|
|
61,598 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
66,994 |
|
|
|
1,409 |
|
|
|
9 |
|
|
|
68,394 |
|
Federal Home Loan Mortgage Corporation |
|
|
34,344 |
|
|
|
713 |
|
|
|
|
|
|
|
35,057 |
|
Government National Mortgage Association |
|
|
104,880 |
|
|
|
2,716 |
|
|
|
|
|
|
|
107,596 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
11,157 |
|
|
|
291 |
|
|
|
25 |
|
|
|
11,423 |
|
Federal Home Loan Mortgage Corporation |
|
|
20,686 |
|
|
|
461 |
|
|
|
4 |
|
|
|
21,143 |
|
Government National Mortgage Association |
|
|
109,487 |
|
|
|
2,060 |
|
|
|
6 |
|
|
|
111,541 |
|
Privately issued |
|
|
1,429 |
|
|
|
687 |
|
|
|
|
|
|
|
2,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
142,759 |
|
|
|
3,499 |
|
|
|
35 |
|
|
|
146,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
348,977 |
|
|
|
8,337 |
|
|
|
44 |
|
|
|
357,270 |
|
Asset-backed securities |
|
|
708 |
|
|
|
108 |
|
|
|
61 |
|
|
|
755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
639,331 |
|
|
$ |
12,428 |
|
|
$ |
226 |
|
|
$ |
651,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
27,404 |
|
|
$ |
843 |
|
|
$ |
|
|
|
$ |
28,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government
sponsored enterprises |
|
$ |
134,564 |
|
|
$ |
86 |
|
|
$ |
545 |
|
|
$ |
134,105 |
|
State and political subdivisions |
|
|
80,812 |
|
|
|
2,850 |
|
|
|
3 |
|
|
|
83,659 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
75,108 |
|
|
|
629 |
|
|
|
259 |
|
|
|
75,478 |
|
Federal Home Loan Mortgage Corporation |
|
|
37,321 |
|
|
|
413 |
|
|
|
56 |
|
|
|
37,678 |
|
Government National Mortgage Association |
|
|
110,576 |
|
|
|
97 |
|
|
|
342 |
|
|
|
110,331 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
16,274 |
|
|
|
250 |
|
|
|
94 |
|
|
|
16,430 |
|
Federal Home Loan Mortgage Corporation |
|
|
20,879 |
|
|
|
504 |
|
|
|
14 |
|
|
|
21,369 |
|
Government National Mortgage Association |
|
|
95,886 |
|
|
|
56 |
|
|
|
873 |
|
|
|
95,069 |
|
Privately issued |
|
|
5,087 |
|
|
|
403 |
|
|
|
330 |
|
|
|
5,160 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
138,126 |
|
|
|
1,213 |
|
|
|
1,311 |
|
|
|
138,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
361,131 |
|
|
|
2,352 |
|
|
|
1,968 |
|
|
|
361,515 |
|
Asset-backed securities |
|
|
1,295 |
|
|
|
171 |
|
|
|
244 |
|
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
577,802 |
|
|
$ |
5,459 |
|
|
$ |
2,760 |
|
|
$ |
580,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
39,573 |
|
|
$ |
1,056 |
|
|
$ |
|
|
|
$ |
40,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 10 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(3.) INVESTMENT SECURITIES (Continued)
Sales of securities available for sale were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Proceeds from sales |
|
$ |
20,140 |
|
|
$ |
88,370 |
|
|
$ |
33,090 |
|
|
$ |
98,745 |
|
Gross realized gains |
|
|
67 |
|
|
|
2,558 |
|
|
|
73 |
|
|
|
2,973 |
|
Gross realized losses |
|
|
4 |
|
|
|
1,405 |
|
|
|
4 |
|
|
|
1,766 |
|
The scheduled maturities of securities available for sale and securities held to maturity at June
30, 2010 are shown below (in thousands). Actual expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
Debt securities available for sale: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
40,243 |
|
|
$ |
40,774 |
|
Due from one to five years |
|
|
115,155 |
|
|
|
118,458 |
|
Due after five years through ten years |
|
|
130,859 |
|
|
|
131,968 |
|
Due after ten years |
|
|
353,074 |
|
|
|
360,333 |
|
|
|
|
|
|
|
|
|
|
$ |
639,331 |
|
|
$ |
651,533 |
|
|
|
|
|
|
|
|
Debt securities held to maturity: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
19,768 |
|
|
$ |
19,950 |
|
Due from one to five years |
|
|
5,922 |
|
|
|
6,340 |
|
Due after five years through ten years |
|
|
1,441 |
|
|
|
1,634 |
|
Due after ten years |
|
|
273 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
$ |
27,404 |
|
|
$ |
28,247 |
|
|
|
|
|
|
|
|
The following tables show the investments gross unrealized losses and fair value, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position at June 30, 2010 and December 31, 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government
sponsored enterprises |
|
$ |
|
|
|
$ |
|
|
|
$ |
9,117 |
|
|
$ |
120 |
|
|
$ |
9,117 |
|
|
$ |
120 |
|
State and political subdivisions |
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
1 |
|
|
|
101 |
|
|
|
1 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
5,109 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
5,109 |
|
|
|
9 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
|
|
|
|
|
|
|
|
2,831 |
|
|
|
25 |
|
|
|
2,831 |
|
|
|
25 |
|
Federal Home Loan Mortgage Corporation |
|
|
309 |
|
|
|
1 |
|
|
|
678 |
|
|
|
3 |
|
|
|
987 |
|
|
|
4 |
|
Government National Mortgage Association |
|
|
2,593 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
2,593 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
2,902 |
|
|
|
7 |
|
|
|
3,509 |
|
|
|
28 |
|
|
|
6,411 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
8,011 |
|
|
|
16 |
|
|
|
3,509 |
|
|
|
28 |
|
|
|
11,520 |
|
|
|
44 |
|
Asset-backed securities |
|
|
129 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
8,140 |
|
|
$ |
77 |
|
|
$ |
12,727 |
|
|
$ |
149 |
|
|
$ |
20,867 |
|
|
$ |
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 11 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(3.) INVESTMENT SECURITIES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Less than 12 months |
|
|
12 months or longer |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government
sponsored enterprises |
|
$ |
83,480 |
|
|
$ |
360 |
|
|
$ |
10,003 |
|
|
$ |
185 |
|
|
$ |
93,483 |
|
|
$ |
545 |
|
State and political subdivisions |
|
|
|
|
|
|
|
|
|
|
150 |
|
|
|
3 |
|
|
|
150 |
|
|
|
3 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
24,964 |
|
|
|
258 |
|
|
|
643 |
|
|
|
1 |
|
|
|
25,607 |
|
|
|
259 |
|
Federal Home Loan Mortgage Corporation |
|
|
5,627 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
5,627 |
|
|
|
56 |
|
Government National Mortgage Association |
|
|
55,304 |
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
55,304 |
|
|
|
342 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
353 |
|
|
|
2 |
|
|
|
5,384 |
|
|
|
92 |
|
|
|
5,737 |
|
|
|
94 |
|
Federal Home Loan Mortgage Corporation |
|
|
490 |
|
|
|
1 |
|
|
|
814 |
|
|
|
13 |
|
|
|
1,304 |
|
|
|
14 |
|
Government National Mortgage Association |
|
|
79,645 |
|
|
|
873 |
|
|
|
|
|
|
|
|
|
|
|
79,645 |
|
|
|
873 |
|
Privately issued |
|
|
|
|
|
|
|
|
|
|
2,985 |
|
|
|
330 |
|
|
|
2,985 |
|
|
|
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
80,488 |
|
|
|
876 |
|
|
|
9,183 |
|
|
|
435 |
|
|
|
89,671 |
|
|
|
1,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
166,383 |
|
|
|
1,532 |
|
|
|
9,826 |
|
|
|
436 |
|
|
|
176,209 |
|
|
|
1,968 |
|
Asset-backed securities |
|
|
278 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
278 |
|
|
|
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
250,141 |
|
|
$ |
2,136 |
|
|
$ |
19,979 |
|
|
$ |
624 |
|
|
$ |
270,120 |
|
|
$ |
2,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company reviews investment securities on an ongoing basis for the presence of
other-than-temporary impairment (OTTI) with formal reviews performed quarterly. Declines in the
fair value of held-to-maturity and available-for-sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit issues or concerns, or the security is intended to be sold. The
amount of the impairment related to non-credit related factors is recognized in other comprehensive
income. Evaluating whether the impairment of a debt security is other than temporary involves
assessing i.) the intent to sell the debt security or ii.) the likelihood of being required to sell
the security before the recovery of its amortized cost basis. In determining whether the
other-than-temporary impairment includes a credit loss, the Company uses its best estimate of the
present value of cash flows expected to be collected from the debt security considering factors
such as: a.) the length of time and the extent to which the fair value has been less than the
amortized cost basis, b.) adverse conditions specifically related to the security, an industry, or
a geographic area, c.) the historical and implied volatility of the fair value of the security, d.)
the payment structure of the debt security and the likelihood of the issuer being able to make
payments that increase in the future, e.) failure of the issuer of the security to make scheduled
interest or principal payments, f.) any changes to the rating of the security by a rating agency,
and g.) recoveries or additional declines in fair value subsequent to the balance sheet date.
The following summarizes the amounts of OTTI recognized during the periods presented by investment
category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Mortgage-backed securities Privately issued whole loan CMOs |
|
$ |
|
|
|
$ |
1,733 |
|
|
$ |
|
|
|
$ |
1,783 |
|
Other asset-backed securities Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
1,733 |
|
|
$ |
526 |
|
|
$ |
1,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010, the number of investment securities in an unrealized loss position totaled 24.
As of June 30, 2010, management does not have the intent to sell any of the securities in a loss
position and believes that it is likely that it will not be required to sell any such securities
before the anticipated recovery of amortized cost. The unrealized losses are largely due to
increases in market interest rates over the yields available at the time the underlying securities
were purchased. The fair value is expected to recover as the bonds approach their maturity date or
repricing date or if market yields for such investments decline. Management does not believe any
of the securities in a loss position are impaired due to reasons of credit quality. Accordingly, as
of June 30, 2010, management has concluded that unrealized losses on its investment securities are
temporary and no further impairment loss has been realized in the Companys consolidated statements
of income.
- 12 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(4.) LOANS
Loans outstanding, including net unearned income and net deferred fees and costs of $18.2 million
and $16.5 million as of June 30, 2010 and December 31, 2009, respectively, are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Commercial |
|
$ |
208,618 |
|
|
$ |
206,383 |
|
Commercial mortgage |
|
|
334,043 |
|
|
|
330,748 |
|
Residential mortgage |
|
|
139,112 |
|
|
|
144,636 |
|
Home equity |
|
|
200,929 |
|
|
|
200,684 |
|
Consumer indirect |
|
|
381,464 |
|
|
|
352,611 |
|
Other consumer |
|
|
27,417 |
|
|
|
29,365 |
|
|
|
|
|
|
|
|
Total loans |
|
|
1,291,583 |
|
|
|
1,264,427 |
|
Less: Allowance for loan losses |
|
|
21,825 |
|
|
|
20,741 |
|
|
|
|
|
|
|
|
Total loans, net |
|
$ |
1,269,758 |
|
|
$ |
1,243,686 |
|
|
|
|
|
|
|
|
Loans held for sale (included in residential mortgage), totaled $908 thousand and $421 thousand as
of June 30, 2010 and December 31, 2009, respectively.
(5.) SHAREHOLDERS EQUITY & COMPREHENSIVE INCOME
The changes in shares of common stock outstanding were as follows for the six months ended June 30,
2010:
|
|
|
|
|
Shares outstanding at beginning of period |
|
|
10,820,268 |
|
Restricted stock awards issued, net of forfeitures |
|
|
106,346 |
|
Stock options exercised |
|
|
9,613 |
|
Directors retainer |
|
|
6,009 |
|
|
|
|
|
Shares outstanding at end of period |
|
|
10,942,236 |
|
|
|
|
|
Presented below is a reconciliation of net income to comprehensive income including the components
of other comprehensive income (loss) for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Pre-tax |
|
|
Expense |
|
|
Net-of-tax |
|
|
Pre-tax |
|
|
Expense |
|
|
Net-of-tax |
|
|
|
Amount |
|
|
(Benefit) |
|
|
Amount |
|
|
Amount |
|
|
(Benefit) |
|
|
Amount |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the period |
|
$ |
9,046 |
|
|
$ |
3,499 |
|
|
$ |
5,547 |
|
|
$ |
(1,200 |
) |
|
$ |
(465 |
) |
|
$ |
(735 |
) |
Reclassification adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized net gains included in income |
|
|
(69 |
) |
|
|
(27 |
) |
|
|
(42 |
) |
|
|
(1,207 |
) |
|
|
(467 |
) |
|
|
(740 |
) |
Impairment charges included in income |
|
|
526 |
|
|
|
204 |
|
|
|
322 |
|
|
|
1,783 |
|
|
|
690 |
|
|
|
1,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,503 |
|
|
|
3,676 |
|
|
|
5,827 |
|
|
|
(624 |
) |
|
|
(242 |
) |
|
|
(382 |
) |
Pension and post-retirement benefit liabilities |
|
|
211 |
|
|
|
82 |
|
|
|
129 |
|
|
|
345 |
|
|
|
134 |
|
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
$ |
9,714 |
|
|
$ |
3,758 |
|
|
|
5,956 |
|
|
$ |
(279 |
) |
|
$ |
(108 |
) |
|
|
(171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
10,526 |
|
|
|
|
|
|
|
|
|
|
|
5,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
$ |
16,482 |
|
|
|
|
|
|
|
|
|
|
$ |
5,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (loss), net of tax, for the periods
indicated were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Net actuarial loss and prior service cost on defined benefit pension and post-retirement plans |
|
$ |
(5,228 |
) |
|
$ |
(5,357 |
) |
Net unrealized gain on securities available for sale |
|
|
7,482 |
|
|
|
1,655 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
$ |
2,254 |
|
|
$ |
(3,702 |
) |
|
|
|
|
|
|
|
- 13 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.) SHARE-BASED COMPENSATION PLANS
The Company maintains certain stock-based compensation plans, approved by the Companys
shareholders that are administered by the Board, or the Management Development and Compensation
Committee of the Board. The share-based compensation plans were established to allow for the
granting of compensation awards to attract, motivate and retain employees, executive officers and
non-employee directors who contribute to the success and profitability of the Company and to give
such persons a proprietary interest in the Company, thereby enhancing their personal interest in
the Companys success.
The following is a summary of stock option activity for the six months ended June 30, 2010 (dollars
in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Term |
|
|
Value |
|
Outstanding at beginning of year |
|
|
458,734 |
|
|
$ |
20.30 |
|
|
5.25 years |
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(9,613 |
) |
|
|
13.37 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,867 |
) |
|
|
18.16 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(5,245 |
) |
|
|
12.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
442,009 |
|
|
|
20.55 |
|
|
4.87 years |
|
$ |
113 |
|
Exercisable at end of period |
|
|
369,665 |
|
|
|
21.01 |
|
|
4.40 years |
|
$ |
65 |
|
During the six months ended June 30, 2010, proceeds from stock option exercises totaled $129
thousand. During the six months ended June 30, 2010, all of the shares issued in connection with
stock option exercises were issued from available treasury stock.
The Company awarded grants of 99,340 restricted shares to certain members of management during the
six months ended June 30, 2010. The weighted average market price of the restricted shares on the
date of grant was $12.20. Either a service requirement or both service and performance
requirements must be satisfied before the participant becomes vested in the shares. Where
applicable, the performance period for the awards is the Companys fiscal year ending December 31,
2010. The share-based payment awards granted to management in 2010 do not have rights to dividends
or dividend equivalents. During the six months ended June 30, 2010 the Company granted 7,200
restricted shares to directors, of which 3,600 shares vested immediately and 3,600 shares will vest
after completion of a one-year service requirement. The market price of the restricted shares on
the date of grant was $16.20. The director awards were granted with nonforfeitable rights to
dividends.
The following is a summary of restricted stock award activity for the six months ended June 30,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Market |
|
|
|
Number of |
|
|
Price at |
|
|
|
Shares |
|
|
Grant Date |
|
Outstanding at beginning of year |
|
|
77,772 |
|
|
$ |
15.05 |
|
Granted |
|
|
106,540 |
|
|
|
12.47 |
|
Released |
|
|
(12,200 |
) |
|
|
16.90 |
|
Forfeited |
|
|
(194 |
) |
|
|
13.21 |
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
171,918 |
|
|
$ |
13.32 |
|
|
|
|
|
|
|
|
|
- 14 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.) SHARE-BASED COMPENSATION PLANS (Continued)
The Company amortizes the expense related to restricted stock awards over the requisite service
period. Share-based compensation expense is included in the consolidated statements of income
under salaries and employee benefits for awards granted to management and in other noninterest
expense for awards granted to directors. The share-based compensation expense included in the
consolidated statements of income is as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Stock Incentive Plan |
|
$ |
24 |
|
|
$ |
48 |
|
|
$ |
50 |
|
|
$ |
122 |
|
Director Stock Incentive Plan |
|
|
11 |
|
|
|
12 |
|
|
|
22 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
60 |
|
|
|
72 |
|
|
|
145 |
|
Restricted stock awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Stock Incentive Plan |
|
|
212 |
|
|
|
140 |
|
|
|
382 |
|
|
|
302 |
|
Director Stock Incentive Plan |
|
|
74 |
|
|
|
68 |
|
|
|
88 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286 |
|
|
|
208 |
|
|
|
470 |
|
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation |
|
$ |
321 |
|
|
$ |
268 |
|
|
$ |
542 |
|
|
$ |
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.) EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company participates in The New York State Bankers Retirement System (the System), a defined
benefit pension plan covering substantially all employees, subject to the limitations related to
the plan closure effective December 31, 2006. The benefits are based on years of service and the
employees highest average compensation during five consecutive years of employment. The defined
benefit plan was closed to new participants effective December 31, 2006. Only employees hired on
or before December 31, 2006 and who met participation requirements on or before January 1, 2008 are
eligible to receive benefits.
The components of the Companys net periodic benefit expense for its pension plan were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Service cost |
|
$ |
408 |
|
|
$ |
422 |
|
|
$ |
816 |
|
|
$ |
844 |
|
Interest cost on projected benefit obligation |
|
|
484 |
|
|
|
456 |
|
|
|
967 |
|
|
|
913 |
|
Expected return on plan assets |
|
|
(611 |
) |
|
|
(462 |
) |
|
|
(1,222 |
) |
|
|
(924 |
) |
Amortization of unrecognized prior service cost |
|
|
3 |
|
|
|
3 |
|
|
|
6 |
|
|
|
6 |
|
Amortization of unrecognized loss |
|
|
114 |
|
|
|
182 |
|
|
|
229 |
|
|
|
364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
398 |
|
|
$ |
601 |
|
|
$ |
796 |
|
|
$ |
1,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys funding policy is to contribute, at a minimum, an actuarially determined amount that
will satisfy the minimum funding requirements determined under the appropriate sections of Internal
Revenue Code. In December 2009, the Company contributed $3.5 million to the pension plan for
fiscal year 2010, which exceeds the minimum required contribution of $1.5 million.
- 15 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(8.) FAIR VALUE MEASUREMENTS
Valuation Hierarchy
The fair value of an asset or liability is the price that would be received to sell that asset or
paid to transfer that liability in an orderly transaction occurring in the principal market (or
most advantageous market in the absence of a principal market) for such asset or liability. ASC
Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active markets for identical
assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is
as follows:
|
|
|
Level 1 Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date. |
|
|
|
|
Level 2 Inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly or indirectly. These might include
quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability (such as interest rates,
volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally
from or corroborated by market data by correlation or other means. |
|
|
|
|
Level 3 Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities. |
In general, fair value is based upon quoted market prices, where available. If such quoted
market prices are not available, fair value is based upon internally developed models that
primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made
to ensure that financial instruments are recorded at fair value. These adjustments may include
amounts to reflect counterparty credit quality and the companys creditworthiness, among other
things, as well as unobservable parameters. Any such valuation adjustments are applied
consistently over time. The Companys valuation methodologies may produce a fair value
calculation that may not be indicative of net realizable value or reflective of future fair
values. While management believes the Companys valuation methodologies are appropriate and
consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a different estimate
of fair value at the reporting date. Furthermore, the reported fair value amounts have not been
comprehensively revalued since the presentation dates, and therefore, estimates of fair value
after the balance sheet date may differ significantly from the amounts presented herein. A more
detailed description of the valuation methodologies used for assets and liabilities measured at
fair value, as well as the general classification of such instruments pursuant to the valuation
hierarchy, is set forth below.
Investment Securities. Pooled trust preferred securities are reported at fair value utilizing
Level 3 inputs. Fair values for these securities are determined through the use of internal
valuation methodologies appropriate for the specific asset, which may include the use of a
discounted expected cash flow analysis or the use of broker quotes. Other securities classified
as available for sale are reported at fair value utilizing Level 2 inputs. For these securities,
the Company obtains fair value measurements from an independent pricing service. The fair value
measurements consider observable data that may include dealer quotes, market spreads, cash
flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market
consensus prepayment speeds, credit information and the bonds terms and conditions, among other
things.
- 16 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(8.) FAIR VALUE MEASUREMENTS (Continued)
Assets Measured at Fair Value on a Recurring Basis
Assets measured and recorded at fair value on a recurring basis as of June 30, 2010 and December
31, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
|
|
Inputs |
|
|
Inputs |
|
|
Inputs |
|
|
Fair Value |
|
June 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government
sponsored enterprises |
|
$ |
|
|
|
$ |
231,910 |
|
|
$ |
|
|
|
$ |
231,910 |
|
State and political subdivisions |
|
|
|
|
|
|
61,598 |
|
|
|
|
|
|
|
61,598 |
|
Mortgage-backed securities |
|
|
|
|
|
|
357,270 |
|
|
|
|
|
|
|
357,270 |
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
646 |
|
|
|
646 |
|
Other |
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
650,887 |
|
|
$ |
646 |
|
|
$ |
651,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government
sponsored enterprises |
|
$ |
|
|
|
$ |
134,105 |
|
|
$ |
|
|
|
$ |
134,105 |
|
State and political subdivisions |
|
|
|
|
|
|
83,659 |
|
|
|
|
|
|
|
83,659 |
|
Mortgage-backed securities |
|
|
|
|
|
|
361,515 |
|
|
|
|
|
|
|
361,515 |
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
1,015 |
|
|
|
1,015 |
|
Other |
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
579,486 |
|
|
$ |
1,015 |
|
|
$ |
580,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers in or out of Level 1 or Level 2 during the six months ended June 30, 2010.
Changes in Level 3 Fair Value Measurements
The reconciliation for all assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the six months ended June 30, 2010, is as follows (in thousands):
|
|
|
|
|
Securities available for sale (Level 3), beginning of year |
|
$ |
1,015 |
|
Transfers into Level 3 |
|
|
|
|
Capitalized interest |
|
|
200 |
|
Principal paydowns and amortization of premiums |
|
|
|
|
Coupon payments applied to principal |
|
|
(61 |
) |
Total gains (losses) (realized/unrealized): |
|
|
|
|
Included in earnings |
|
|
(526 |
) |
Included in other comprehensive income |
|
|
18 |
|
|
|
|
|
Securities available for sale (Level 3), end of period |
|
$ |
646 |
|
|
|
|
|
- 17 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(8.) FAIR VALUE MEASUREMENTS (Continued)
Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring
basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject
to fair value adjustments in certain circumstances (for example, when there is evidence of
impairment). Examples of these nonrecurring uses of fair value include: loans held for sale,
mortgage servicing assets and collateral dependent impaired loans. As of June 30, 2010, the
Company had no liabilities measured at fair value on a nonrecurring basis.
Loans held for sale are carried at the lower of cost or fair value. As of June 30, 2010, a
valuation allowance against loans held for sale was not necessary as fair value exceeded cost.
Fair value is based on observable market rates for comparable loan products which is considered a
level 2 fair value measurement.
Mortgage servicing rights (MSR) are carried at the lower of cost or fair value. Recent declines
in mortgage interest rates have led to an increase in the estimated prepayment speed of the
Companys sold loan portfolio with servicing retained, causing a decrease in the fair value of the
Companys MSR during the first six months of 2010. As a result of this decrease, the Company
increased its corresponding valuation allowance by $94 thousand during the six months ended June
30, 2010. A valuation allowance of $279 thousand existed as of June 30, 2010. The mortgage
servicing rights are a Level 3 fair value measurement, as fair value is determined by calculating
the present value of the future servicing cash flows from the underlying mortgage loans.
Certain impaired loans were remeasured and reported at fair value through a specific valuation
allowance allocation of the allowance for loan losses based upon the fair value of the underlying
collateral. Impaired loans with a carrying value of $6.8 million were reduced by specific
valuation allowance allocations totaling $3.2 million to a total reported fair value of $3.6
million. The collateral dependent impaired loans are a Level 2 fair measurement, as fair value is
determined based upon estimates of the fair value of the collateral underlying the impaired loans
typically using appraisals of comparable property or valuation guides.
Nonfinancial Assets and Nonfinancial Liabilities
Certain nonfinancial assets measured at fair value on a non-recurring basis include nonfinancial
assets and nonfinancial liabilities measured at fair value in the second step of a goodwill
impairment test, and intangible assets and other nonfinancial long-lived assets measured at fair
value for impairment assessment. There were no nonfinancial assets or nonfinancial liabilities
measured at fair value during the six month period ended June 30, 2010.
Fair Value of Financial Instruments
The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value
of financial assets and financial liabilities, including those financial assets and financial
liabilities that are not measured and reported at fair value on a recurring basis or non-recurring
basis.
The following discussion describes the valuation methodologies used for assets and liabilities
measured or disclosed at fair value. The techniques utilized in estimating the fair values of
financial instruments are reliant on the assumptions used, including discount rates and estimates
of the amount and timing of future cash flows. Care should be exercised in deriving conclusions
about our business, its value or financial position based on the fair value information of
financial instruments presented below.
Fair value estimates are made at a specific point in time, based on available market information
and judgments about the financial instrument, including estimates of timing, amount of expected
future cash flows and the credit standing of the issuer. Such estimates do not consider the tax
impact of the realization of unrealized gains or losses. In some cases, the fair value estimates
cannot be substantiated by comparison to independent markets. In addition, the disclosed fair
value may not be realized in the immediate settlement of the financial instrument.
- 18 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(8.) FAIR VALUE MEASUREMENTS (Continued)
The estimated fair value approximates carrying value for cash and cash equivalents, FHLB and FRB
stock, company owned life insurance, accrued interest receivable, short-term borrowings and accrued
interest payable. Fair value estimates for other financial instruments are discussed below.
Loans (including loans held for sale). For variable rate loans that re-price 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 on loans with similar
terms and credit quality. For criticized and classified loans, fair value is estimated by
discounting expected cash flows at a rate commensurate with the risk associated with the
estimated cash flows, or estimates of fair value discounts based on observable market
information. The fair value for loans held for sale is based on estimates, quoted market prices
and investor commitments.
Deposits. The fair values for demand accounts, money market and savings deposits are equal to
their carrying amounts. The fair values of certificates of deposit are estimated using a
discounted cash flow approach that applies prevailing market interest rates for similar maturity
instruments.
Long-term borrowings (excluding junior subordinated debentures). The fair value for long-term
borrowings is estimated using a discounted cash flow approach that applies prevailing market
interest rates for similar maturity instruments.
Junior subordinated debentures. The fair value for the junior subordinated debentures is
estimated using a discounted cash flow approach that applies prevailing market interest rates for
similar maturity instruments.
The fair value of a financial instrument is the current amount that would be exchanged between
willing parties, other than in a forced liquidation. Fair value is best determined based upon
quoted market prices. However, in many instances, there are no quoted market prices for the
Companys various financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. The accounting guidelines exclude certain financial
instruments and all non-financial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented at June 30, 2010 and December 31, 2009 may not necessarily
represent the underlying fair value of the Company.
The estimated fair values of financial instruments were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
43,419 |
|
|
$ |
43,419 |
|
|
$ |
42,959 |
|
|
$ |
42,959 |
|
Securities available for sale |
|
|
651,533 |
|
|
|
651,533 |
|
|
|
580,501 |
|
|
|
580,501 |
|
Securities held to maturity |
|
|
27,404 |
|
|
|
28,247 |
|
|
|
39,573 |
|
|
|
40,629 |
|
Loans (including loans held for sale) |
|
|
1,269,758 |
|
|
|
1,336,090 |
|
|
|
1,243,686 |
|
|
|
1,290,557 |
|
Company owned life insurance |
|
|
25,451 |
|
|
|
25,451 |
|
|
|
24,867 |
|
|
|
24,867 |
|
Accrued interest receivable |
|
|
8,018 |
|
|
|
8,018 |
|
|
|
7,386 |
|
|
|
7,386 |
|
FHLB and FRB stock |
|
|
7,253 |
|
|
|
7,253 |
|
|
|
7,185 |
|
|
|
7,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market deposits |
|
|
1,099,493 |
|
|
|
1,099,493 |
|
|
|
1,056,604 |
|
|
|
1,056,604 |
|
Time deposits |
|
|
722,452 |
|
|
|
729,010 |
|
|
|
686,351 |
|
|
|
692,429 |
|
Short-term borrowings |
|
|
46,886 |
|
|
|
46,886 |
|
|
|
59,543 |
|
|
|
59,543 |
|
Long-term borrowings (excluding junior subordinated debentures) |
|
|
30,066 |
|
|
|
30,432 |
|
|
|
30,145 |
|
|
|
30,886 |
|
Junior subordinated debentures |
|
|
16,702 |
|
|
|
10,885 |
|
|
|
16,702 |
|
|
|
10,741 |
|
Accrued interest payable |
|
|
7,560 |
|
|
|
7,560 |
|
|
|
7,576 |
|
|
|
7,576 |
|
- 19 -
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING INFORMATION
Statements in this Quarterly Report on Form 10-Q that are based on other than historical data are
forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements provide current expectations or forecasts of future events and include,
among others:
|
|
|
statements with respect to the beliefs, plans, objectives, goals, guidelines,
expectations, anticipations, and future financial condition, results of operations and
performance of Financial Institutions, Inc. (the parent or FII) and its subsidiaries
(collectively the Company, we, our, us); |
|
|
|
statements preceded by, followed by or that include the words may, could, should,
would, believe, anticipate, estimate, expect, intend, plan, projects, or
similar expressions. |
These forward-looking statements are not guarantees of future performance, nor should they be
relied upon as representing managements views as of any subsequent date. Forward-looking
statements involve significant risks and uncertainties and actual results may differ materially
from those presented, either expressed or implied, in this Quarterly Report on Form 10-Q,
including, but not limited to, those presented in the Managements Discussion and Analysis.
Factors that might cause such differences include, but are not limited to:
|
|
|
changes in financial market conditions, either internationally, nationally or locally in
areas in which the Company conducts its operations, including without limitation, reduced
rates of business formation and growth, commercial and residential real estate development
and real estate prices; |
|
|
|
fluctuations in markets for equity, fixed-income, commercial paper and other securities,
including availability, market liquidity levels, and pricing; |
|
|
|
changes in interest rates, the quality and composition of the loan and securities
portfolios, demand for loan products, deposit flows and competition; |
|
|
|
changes in fiscal, monetary, regulatory, trade and tax policies and laws, including
policies of the U.S. Department of Treasury and the Federal Reserve Board; |
|
|
|
the Companys participation or lack of participation in governmental programs
implemented under the Emergency Economic Stabilization Act (EESA) and the American
Recovery and Reinvestment Act (ARRA), including without limitation the Troubled Asset
Relief Program (TARP), the Capital Purchase Program (CPP), and the Temporary Liquidity
Guarantee Program (TLGP) and the impact of such programs and related regulations on the
Company and on international, national, and local economic and financial markets and
conditions; |
|
|
|
changes in consumer spending and savings habits; |
|
|
|
increased competitive challenges and expanding product and pricing pressures among
financial institutions; |
|
|
|
demand for financial services in the Companys market areas; |
|
|
|
legislation or regulatory changes which adversely affect the Companys operations or
business, including the recently enacted Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act); |
|
|
|
the Companys ability to comply with applicable laws and regulations, including
restrictions on dividend payments; |
|
|
|
changes in accounting policies or procedures as may be required by the Financial
Accounting Standards Board or regulatory agencies; |
|
|
|
increased costs of deposit insurance and changes with respect to Federal Deposit
Insurance Corporation (FDIC) insurance coverage levels; and |
|
|
|
declines in the market value of the Companys publicly traded stock price or declines in
the Companys ability to generate future cash flows may increase the potential that
goodwill recorded on the Companys consolidated statement of financial condition be
designated as impaired and that the Company may incur a goodwill write-down in the future. |
The Company cautions readers not to place undue reliance on any forward-looking statements, which
speak only as of the date made, and advises readers that various factors, including those described
above, could affect the Companys financial performance and could cause the Companys actual
results or circumstances for future periods to differ materially from those anticipated or
projected.
Except as required by law, the Company does not undertake, and specifically disclaims any
obligation to publicly release any revisions to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the date of such
statements.
- 20 -
MANAGEMENTS DISCUSSION AND ANALYSIS
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES
The Companys consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles and are consistent with predominant practices in the banking
industry. Application of critical accounting policies, which are those policies that management
believes are the most important to the Companys financial condition and results, requires
management to make estimates, assumptions, and judgments that affect the amounts reported in the
consolidated financial statements and accompanying notes and are based on information available as
of the date of the financial statements. Future changes in information may affect these estimates,
assumptions and judgments, which, in turn, may affect amounts reported in the financial statements.
The Company has numerous accounting policies, of which the most significant are presented in Note
1, Summary of Significant Accounting Policies, of the notes to consolidated financial statements
included in the Companys 2009 Annual Report on Form 10-K. These policies, along with the
disclosures presented in the other financial statement notes and in this discussion, provide
information on how significant assets, liabilities, revenues and expenses are reported in the
consolidated financial statements and how those reported amounts are determined. Based on the
sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying
those amounts, management has determined that the accounting policies with respect to the adequacy
of the allowance for loan losses, valuation of goodwill and deferred tax assets, the valuation of
securities and determination of other-than-temporary impairment (OTTI), and accounting for
defined benefit plans require particularly subjective or complex judgments important to the
Companys financial condition and results of operations, and, as such, are considered to be
critical accounting policies. These estimates and assumptions are based on managements best
estimates and judgment and are evaluated on an ongoing basis using historical experience and other
factors, including the current economic environment. The Company adjusts these estimates and
assumptions when facts and circumstances dictate. As future events cannot be determined with
precision, actual results could differ significantly from the Companys estimates.
For additional information regarding critical accounting policies, refer to Note 1, Summary of
Significant Accounting Policies, of the notes to consolidated financial statements and the section
captioned Critical Accounting Estimates in Managements Discussion and Analysis of Financial
Condition and Results of Operations included in the 2009 Annual Report on Form 10-K. There have
been no material changes in the Companys application of critical accounting policies related to
the allowance for loan losses, valuation of goodwill and deferred tax assets, the valuation of
securities and determination of OTTI, and accounting for defined benefit plans since December 31,
2009.
OVERVIEW
The principal objective of this discussion is to provide an overview of the financial condition and
results of operations of the Company for the periods covered in this quarterly report. Certain
reclassifications have been made to make prior periods comparable. This discussion and tabular
presentations should be read in conjunction with the accompanying consolidated financial statements
and accompanying notes.
IMPACT OF RECENT LEGISLATION
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act), which significantly changes the regulation of financial
institutions and the financial services industry. The Dodd-Frank Act includes provisions affecting
large and small financial institutions alike, including several provisions that will affect how
community banks, thrifts, and small bank and thrift holding companies will be regulated in the
future. Among other things, these provisions abolish the Office of Thrift Supervision and transfer
its functions to the other federal banking agencies, relax rules regarding interstate branching,
allow financial institutions to pay interest on business checking accounts, permanently raises the
current standard maximum deposit insurance amount to $250,000, and impose new capital requirements
on bank and thrift holding companies. The Dodd-Frank Act also establishes the Bureau of Consumer
Financial Protection as an independent entity within the Federal Reserve, which will be given the
authority to promulgate consumer protection regulations applicable to all entities offering
consumer financial services or products, including banks. The Companys management is reviewing the
provisions of the Dodd-Frank Act, many of which are phased-in over the next several months and
years, and assessing its probable impact on the operations of the Company. However, the ultimate
effect of the Dodd-Frank Act on the financial services industry in general, and the Company in
particular, is uncertain at this time.
- 21 -
MANAGEMENTS DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
Summary of Performance
Net income was $5.2 million for the second quarter of 2010 compared to $2.6 million for the second
quarter of 2009. Net income available to common shareholders for the second quarter of 2010 was
$4.3 million, or $0.39 per diluted share, compared with $1.7 million, or $0.16 per diluted share,
for the second quarter of last year. Return on average equity was 10.04% and return on average
assets was 0.97% for the second quarter of 2010 compared to 5.48% and 0.52%, respectively, for the
second quarter of 2009. Net income for the six months ended June 30, 2010 totaled $10.5 million
compared to $5.6 million for the same period in 2009. For the first six months of 2010 net income
available to common shareholders was $8.7 million, or $0.80 per diluted share, compared with $3.8
million, or $0.35 per diluted share, for the first six months of 2009. Return on average equity
was 10.35% and return on average assets was 0.99% for the six months ended June 30, 2010 compared
to 5.88% and 0.57%, respectively, for the same period in 2009.
Net income increased $2.6 million, or 98%, for the second quarter of 2010, compared to the same
period in 2009, and increased $4.9 million, or 88%, for the six months ended June 30, 2010 compared
to the same period in 2009. The $2.6 million increase for the second quarter of 2010 was primarily
the result of an increase of $2.0 million in net interest income, a $451 thousand increase in
noninterest income and a $1.6 million decrease in noninterest expense, offset by a $1.5 million
increase in income tax expense. There were no other-than-temporary impairment charges during the
second quarter of 2010. Noninterest income for the second quarter of 2009 included $1.7 million of
other-than-temporary impairment charges on privately issued whole loan collateralized mortgage
obligations. The increase in net income during the six months ended June 30, 2010 was driven by a
$4.0 million increase in net interest income, a $1.5 million decrease in the provision for loan
losses and a $2.9 million decrease in noninterest expense, offset by a $3.2 million increase in
income tax expense.
Details of the changes in the various components of net income are further discussed in the
sections that follow.
Net Interest Income and Net Interest Margin
Net interest income is the primary source of the Companys revenue. Net interest income is the
difference between interest income on interest-earning assets, such as loans and investment
securities, and the interest expense on interest-bearing deposits and other borrowings used to fund
interest-earning and other assets or activities. Net interest income is affected by changes in
interest rates and by the amount and composition of earning assets and interest-bearing
liabilities, as well as the sensitivity of the balance sheet to changes in interest rates,
including characteristics such as the fixed or variable nature of the financial instruments,
contractual maturities and repricing frequencies.
Interest rate spread and net interest margin are utilized to measure and explain changes in net
interest income. Interest rate spread is the difference between the yield on earning assets and the
rate paid for interest-bearing liabilities that fund those assets. The net interest margin is
expressed as the percentage of net interest income to average earning assets. The net interest
margin exceeds the interest rate spread because noninterest-bearing sources of funds (net free
funds), principally noninterest-bearing demand deposits and shareholders equity, also support
earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt
investment securities is computed on a taxable equivalent basis. Net interest income, interest
rate spread, and net interest margin are discussed on a taxable equivalent basis.
The following table reconciles interest income per the consolidated statements of income to
interest income adjusted to a fully taxable equivalent basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Interest income per consolidated statements of income |
|
$ |
24,202 |
|
|
$ |
23,302 |
|
|
$ |
48,026 |
|
|
$ |
46,395 |
|
Adjustment to fully taxable equivalent basis |
|
|
465 |
|
|
|
751 |
|
|
|
972 |
|
|
|
1,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income adjusted to a fully taxable equivalent basis |
|
|
24,667 |
|
|
|
24,053 |
|
|
|
48,998 |
|
|
|
47,956 |
|
Interest expense |
|
|
4,526 |
|
|
|
5,657 |
|
|
|
9,098 |
|
|
|
11,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income on a taxable equivalent basis |
|
$ |
20,141 |
|
|
$ |
18,396 |
|
|
$ |
39,900 |
|
|
$ |
36,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 22 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Net interest income on a taxable equivalent basis for the second quarter of 2010 was $20.1 million,
an increase of $1.7 million or 9% versus the same quarter last year. The increase in taxable
equivalent net interest income was attributable to both a favorable volume variance (as changes in
the balances and mix of earning assets and interest-bearing liabilities added $1.5 million to
taxable equivalent net interest income) and a favorable rate variance (as the impact of changes in
the interest rate environment and product pricing increased taxable equivalent net interest income
by $288 thousand).
The net interest margin for the second quarter of 2010 was 4.09%, 8 basis points higher than 4.01%
for the same quarter in 2009. This comparable period increase was a function of a 14 basis point
increase in interest rate spread, partially offset by a 6 basis point lower contribution from net
free funds (due principally to lower rates on interest-bearing liabilities reducing the value of
noninterest-bearing deposits and other net free funds). The improvement in interest rate spread
was a net result of a 37 basis point decrease in the cost of interest-bearing liabilities and a 23
basis point decrease in the yield on earning assets.
The yield on earning assets was 5.01% for the second quarter of 2010, 23 basis points lower than
the comparable quarter last year, attributable principally to the yield on investment securities
(down 72 basis points, to 3.44%). The yield on loans decreased 11 basis points to 5.88%, also
impacted by the lower rate environment.
The rate on interest-bearing liabilities of 1.13% for the second quarter of 2010 was 37 basis
points lower than the same quarter in 2009. Rates on interest-bearing deposits were down 39 basis
points to 0.98%, reflecting the lower rate environment, yet moderated by product-focused pricing to
retain balances. The cost of short-term borrowings increased 8 basis points to 0.79%, while the
cost of long-term funding increased modestly by 1 basis point.
Average interest-earning assets were $1.972 billion for the second quarter of 2010, an increase of
$133.6 million or 7% from the comparable quarter last year, with average loans up $79.8 million and
average securities up $98.4 million. The growth in average loans was comprised of increases in
retail loans (up $68.5 million, primarily indirect loans) and commercial loans (up $41.2 million),
while residential mortgages decreased (down $29.9 million).
Average interest-bearing liabilities of $1.612 billion in the second quarter of 2010 were $98.1
million or 6% higher than the second quarter of 2009. On average, interest-bearing deposits grew
$87.1 million (primarily attributable to $85.6 million higher retail deposits), while
noninterest-bearing demand deposits (a principal component of net free funds) were up $38.6
million. Average wholesale funding balances increased $11.0 million between the second quarter
periods, primarily due to higher short-term borrowings.
Net interest income on a taxable equivalent basis for the first six months of 2010 was $39.9
million, an increase of $3.4 million or 9% versus the same period last year. The increase in
taxable equivalent net interest income was primarily attributable to a favorable volume variance
(as changes in the balances and mix of earning assets and interest-bearing liabilities added $3.3
million to taxable equivalent net interest income) and to a lesser degree, a favorable rate
variance (as the impact of changes in the interest rate environment and product pricing increased
taxable equivalent net interest income by $56 thousand).
The net interest margin for the first six months of 2010 was 4.11%, 6 basis points higher than
4.05% for the same period last year. This comparable period increase was a function of an 11 basis
point increase in interest rate spread, partially offset by a 5 basis point lower contribution from
net free funds. The improvement in interest rate spread was a net result of a 39 basis point
decrease in the cost of interest-bearing liabilities and a 28 basis point decrease in the yield on
earning assets.
The yield on earning assets was 5.04% for the first six months of 2010, 28 basis points lower than
the same period last year, attributable principally to the yield on investment securities (down 90
basis points, to 3.45%). The yield on loans decreased 8 basis points to 5.93%.
The rate on interest-bearing liabilities of 1.15% for the first six months of 2010 was 39 basis
points lower than the same period in 2009. Rates on interest-bearing deposits were down 40 basis
points to 1.01%. The cost of short-term borrowings increased 4 basis points to 0.72%, while the
cost of long-term funding increased modestly by 2 basis points.
Average interest-earning assets were $1.954 billion for the first six months of 2010, an increase
of $140.8 million or 8% from the comparable period last year, with average loans up $100.0 million
and average securities up $77.8 million. The growth in average loans was comprised of increases in
retail loans (up $80.4 million, primarily indirect loans) and commercial loans (up $51.2 million),
while residential mortgages decreased (down $31.6 million).
Average interest-bearing liabilities of $1.595 billion in the first six months of 2010 were $102.4
million or 7% higher than the first six months of 2009. On average, interest-bearing deposits grew
$85.2 million (primarily attributable to $78.1 million higher retail deposits), while
noninterest-bearing demand deposits were up $35.1 million. Average wholesale funding balances
increased $17.2 million between the first six months of 2010 and the same period in 2009, primarily
due to higher short-term borrowings.
- 23 -
MANAGEMENTS DISCUSSION AND ANALYSIS
The following tables sets forth certain information relating to the consolidated balance sheets and
reflects the average yields earned on interest-earning assets, as well as the average rates paid on
interest-bearing liabilities for the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest-earning deposits |
|
$ |
4,479 |
|
|
$ |
3 |
|
|
|
0.20 |
% |
|
$ |
49,105 |
|
|
$ |
26 |
|
|
|
0.21 |
% |
Investment securities (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
585,300 |
|
|
|
4,584 |
|
|
|
3.13 |
|
|
|
420,952 |
|
|
|
3,970 |
|
|
|
3.77 |
|
Tax-exempt (2) |
|
|
106,862 |
|
|
|
1,366 |
|
|
|
5.11 |
|
|
|
172,788 |
|
|
|
2,210 |
|
|
|
5.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
692,162 |
|
|
|
5,950 |
|
|
|
3.44 |
|
|
|
593,740 |
|
|
|
6,180 |
|
|
|
4.16 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
208,327 |
|
|
|
2,500 |
|
|
|
4.81 |
|
|
|
203,286 |
|
|
|
2,343 |
|
|
|
4.62 |
|
Commercial mortgage |
|
|
334,253 |
|
|
|
5,137 |
|
|
|
6.16 |
|
|
|
298,090 |
|
|
|
4,747 |
|
|
|
6.39 |
|
Residential mortgage |
|
|
140,946 |
|
|
|
2,032 |
|
|
|
5.77 |
|
|
|
170,865 |
|
|
|
2,548 |
|
|
|
5.97 |
|
Home equity |
|
|
199,865 |
|
|
|
2,277 |
|
|
|
4.57 |
|
|
|
191,291 |
|
|
|
2,191 |
|
|
|
4.59 |
|
Consumer indirect |
|
|
364,801 |
|
|
|
6,069 |
|
|
|
6.67 |
|
|
|
301,112 |
|
|
|
5,240 |
|
|
|
6.98 |
|
Other consumer |
|
|
27,060 |
|
|
|
699 |
|
|
|
10.37 |
|
|
|
30,831 |
|
|
|
778 |
|
|
|
10.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,275,252 |
|
|
|
18,714 |
|
|
|
5.88 |
|
|
|
1,195,475 |
|
|
|
17,847 |
|
|
|
5.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,971,893 |
|
|
|
24,667 |
|
|
|
5.01 |
|
|
|
1,838,320 |
|
|
|
24,053 |
|
|
|
5.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(21,052 |
) |
|
|
|
|
|
|
|
|
|
|
(20,272 |
) |
|
|
|
|
|
|
|
|
Other noninterest-earning assets |
|
|
208,071 |
|
|
|
|
|
|
|
|
|
|
|
194,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,158,912 |
|
|
|
|
|
|
|
|
|
|
$ |
2,012,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
$ |
386,703 |
|
|
$ |
179 |
|
|
|
0.19 |
% |
|
$ |
366,985 |
|
|
$ |
186 |
|
|
|
0.20 |
% |
Savings and money market |
|
|
420,774 |
|
|
|
294 |
|
|
|
0.28 |
|
|
|
392,355 |
|
|
|
263 |
|
|
|
0.27 |
|
Certificates of deposit |
|
|
715,168 |
|
|
|
3,257 |
|
|
|
1.83 |
|
|
|
676,221 |
|
|
|
4,439 |
|
|
|
2.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,522,645 |
|
|
|
3,730 |
|
|
|
0.98 |
|
|
|
1,435,561 |
|
|
|
4,888 |
|
|
|
1.37 |
|
Short-term borrowings |
|
|
42,946 |
|
|
|
85 |
|
|
|
0.79 |
|
|
|
31,903 |
|
|
|
56 |
|
|
|
0.71 |
|
Long-term borrowings |
|
|
46,807 |
|
|
|
711 |
|
|
|
6.09 |
|
|
|
46,860 |
|
|
|
713 |
|
|
|
6.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
89,753 |
|
|
|
796 |
|
|
|
3.55 |
|
|
|
78,763 |
|
|
|
769 |
|
|
|
3.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,612,398 |
|
|
|
4,526 |
|
|
|
1.13 |
|
|
|
1,514,324 |
|
|
|
5,657 |
|
|
|
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
324,790 |
|
|
|
|
|
|
|
|
|
|
|
286,155 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
14,053 |
|
|
|
|
|
|
|
|
|
|
|
19,412 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
207,671 |
|
|
|
|
|
|
|
|
|
|
|
192,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,158,912 |
|
|
|
|
|
|
|
|
|
|
$ |
2,012,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax-equivalent) |
|
|
|
|
|
$ |
20,141 |
|
|
|
|
|
|
|
|
|
|
$ |
18,396 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.88 |
% |
|
|
|
|
|
|
|
|
|
|
3.74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earning assets |
|
$ |
359,495 |
|
|
|
|
|
|
|
|
|
|
$ |
323,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (tax-equivalent) |
|
|
|
|
|
|
|
|
|
|
4.09 |
% |
|
|
|
|
|
|
|
|
|
|
4.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
122.30 |
% |
|
|
|
|
|
|
|
|
|
|
121.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investment securities are shown at amortized cost and include non-performing
securities. |
|
(2) |
|
The interest on tax-exempt securities is calculated on a tax equivalent basis
assuming a Federal tax rate of 34%. |
- 24 -
MANAGEMENTS DISCUSSION AND ANALYSIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest-earning deposits |
|
$ |
9,395 |
|
|
$ |
10 |
|
|
|
0.20 |
% |
|
$ |
46,376 |
|
|
$ |
53 |
|
|
|
0.23 |
% |
Investment securities (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
563,723 |
|
|
|
8,797 |
|
|
|
3.12 |
|
|
|
417,267 |
|
|
|
8,403 |
|
|
|
4.03 |
|
Tax-exempt (2) |
|
|
111,542 |
|
|
|
2,859 |
|
|
|
5.13 |
|
|
|
180,182 |
|
|
|
4,594 |
|
|
|
5.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
675,265 |
|
|
|
11,656 |
|
|
|
3.45 |
|
|
|
597,449 |
|
|
|
12,997 |
|
|
|
4.35 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
206,626 |
|
|
|
4,964 |
|
|
|
4.84 |
|
|
|
194,379 |
|
|
|
4,506 |
|
|
|
4.67 |
|
Commercial mortgage |
|
|
333,918 |
|
|
|
10,113 |
|
|
|
6.11 |
|
|
|
294,940 |
|
|
|
9,304 |
|
|
|
6.36 |
|
Residential mortgage |
|
|
142,355 |
|
|
|
4,254 |
|
|
|
5.98 |
|
|
|
173,986 |
|
|
|
5,237 |
|
|
|
6.02 |
|
Home equity |
|
|
199,884 |
|
|
|
4,554 |
|
|
|
4.59 |
|
|
|
190,315 |
|
|
|
4,498 |
|
|
|
4.77 |
|
Consumer indirect |
|
|
358,823 |
|
|
|
12,035 |
|
|
|
6.76 |
|
|
|
284,329 |
|
|
|
9,799 |
|
|
|
6.95 |
|
Other consumer |
|
|
27,599 |
|
|
|
1,412 |
|
|
|
10.32 |
|
|
|
31,261 |
|
|
|
1,562 |
|
|
|
10.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,269,205 |
|
|
|
37,332 |
|
|
|
5.93 |
|
|
|
1,169,210 |
|
|
|
34,906 |
|
|
|
6.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,953,865 |
|
|
|
48,998 |
|
|
|
5.04 |
|
|
|
1,813,035 |
|
|
|
47,956 |
|
|
|
5.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(21,036 |
) |
|
|
|
|
|
|
|
|
|
|
(19,738 |
) |
|
|
|
|
|
|
|
|
Other noninterest-earning assets |
|
|
202,852 |
|
|
|
|
|
|
|
|
|
|
|
194,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,135,681 |
|
|
|
|
|
|
|
|
|
|
$ |
1,988,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
$ |
389,783 |
|
|
$ |
368 |
|
|
|
0.19 |
% |
|
$ |
363,745 |
|
|
$ |
410 |
|
|
|
0.23 |
% |
Savings and money market |
|
|
411,088 |
|
|
|
570 |
|
|
|
0.28 |
|
|
|
382,104 |
|
|
|
514 |
|
|
|
0.27 |
|
Certificates of deposit |
|
|
702,297 |
|
|
|
6,576 |
|
|
|
1.89 |
|
|
|
672,153 |
|
|
|
8,979 |
|
|
|
2.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,503,168 |
|
|
|
7,514 |
|
|
|
1.01 |
|
|
|
1,418,002 |
|
|
|
9,903 |
|
|
|
1.41 |
|
Short-term borrowings |
|
|
45,441 |
|
|
|
163 |
|
|
|
0.72 |
|
|
|
28,105 |
|
|
|
94 |
|
|
|
0.68 |
|
Long-term borrowings |
|
|
46,827 |
|
|
|
1,421 |
|
|
|
6.09 |
|
|
|
46,979 |
|
|
|
1,426 |
|
|
|
6.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
92,268 |
|
|
|
1,584 |
|
|
|
3.45 |
|
|
|
75,084 |
|
|
|
1,520 |
|
|
|
4.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,595,436 |
|
|
|
9,098 |
|
|
|
1.15 |
|
|
|
1,493,086 |
|
|
|
11,423 |
|
|
|
1.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
319,040 |
|
|
|
|
|
|
|
|
|
|
|
283,935 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
16,090 |
|
|
|
|
|
|
|
|
|
|
|
19,245 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
205,115 |
|
|
|
|
|
|
|
|
|
|
|
191,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,135,681 |
|
|
|
|
|
|
|
|
|
|
$ |
1,988,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax-equivalent) |
|
|
|
|
|
$ |
39,900 |
|
|
|
|
|
|
|
|
|
|
$ |
36,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.89 |
% |
|
|
|
|
|
|
|
|
|
|
3.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earning assets |
|
$ |
358,429 |
|
|
|
|
|
|
|
|
|
|
$ |
319,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (tax-equivalent) |
|
|
|
|
|
|
|
|
|
|
4.11 |
% |
|
|
|
|
|
|
|
|
|
|
4.05 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
122.47 |
% |
|
|
|
|
|
|
|
|
|
|
121.43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investment securities are shown at amortized cost and include non-performing
securities. |
|
(2) |
|
The interest on tax-exempt securities is calculated on a tax equivalent basis
assuming a Federal tax rate of 34%. |
- 25 -
MANAGEMENTS DISCUSSION AND ANALYSIS
|
|
|
(3) |
|
The following table presents, on a tax equivalent basis, the relative contribution
of changes in volumes and changes in rates to changes in net interest income for the periods
indicated. The change in interest not solely due to changes in volume or rate has been
allocated in proportion to the absolute dollar amounts of the change in each (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, 2010 vs. 2009 |
|
|
June 30, 2010 vs. 2009 |
|
|
|
Increase/ (Decrease) |
|
|
|
|
|
|
Increase/ (Decrease) |
|
|
|
|
|
|
Due to Change in |
|
|
Total Net |
|
|
Due to Change in |
|
|
Total Net |
|
|
|
Average |
|
|
Average |
|
|
Increase |
|
|
Average |
|
|
Average |
|
|
Increase |
|
|
|
Volume |
|
|
Rate |
|
|
(Decrease) |
|
|
Volume |
|
|
Rate |
|
|
(Decrease) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest-earning deposits |
|
$ |
(29 |
) |
|
$ |
6 |
|
|
$ |
(23 |
) |
|
$ |
(39 |
) |
|
$ |
(4 |
) |
|
$ |
(43 |
) |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,367 |
|
|
|
(753 |
) |
|
|
614 |
|
|
|
2,544 |
|
|
|
(2,150 |
) |
|
|
394 |
|
Tax-exempt |
|
|
(843 |
) |
|
|
(1 |
) |
|
|
(844 |
) |
|
|
(1,759 |
) |
|
|
24 |
|
|
|
(1,735 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
524 |
|
|
|
(754 |
) |
|
|
(230 |
) |
|
|
785 |
|
|
|
(2,126 |
) |
|
|
(1,341 |
) |
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
59 |
|
|
|
98 |
|
|
|
157 |
|
|
|
290 |
|
|
|
168 |
|
|
|
458 |
|
Commercial mortgage |
|
|
560 |
|
|
|
(170 |
) |
|
|
390 |
|
|
|
1,192 |
|
|
|
(383 |
) |
|
|
809 |
|
Residential mortgage |
|
|
(433 |
) |
|
|
(83 |
) |
|
|
(516 |
) |
|
|
(945 |
) |
|
|
(38 |
) |
|
|
(983 |
) |
Home equity |
|
|
98 |
|
|
|
(12 |
) |
|
|
86 |
|
|
|
221 |
|
|
|
(165 |
) |
|
|
56 |
|
Consumer indirect |
|
|
1,068 |
|
|
|
(239 |
) |
|
|
829 |
|
|
|
2,505 |
|
|
|
(269 |
) |
|
|
2,236 |
|
Other consumer |
|
|
(97 |
) |
|
|
18 |
|
|
|
(79 |
) |
|
|
(186 |
) |
|
|
36 |
|
|
|
(150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,255 |
|
|
|
(388 |
) |
|
|
867 |
|
|
|
3,077 |
|
|
|
(651 |
) |
|
|
2,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,750 |
|
|
|
(1,136 |
) |
|
|
614 |
|
|
|
3,823 |
|
|
|
(2,781 |
) |
|
|
1,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
|
10 |
|
|
|
(17 |
) |
|
|
(7 |
) |
|
|
28 |
|
|
|
(70 |
) |
|
|
(42 |
) |
Savings and money market |
|
|
20 |
|
|
|
11 |
|
|
|
31 |
|
|
|
40 |
|
|
|
16 |
|
|
|
56 |
|
Certificates of deposit |
|
|
243 |
|
|
|
(1,425 |
) |
|
|
(1,182 |
) |
|
|
387 |
|
|
|
(2,790 |
) |
|
|
(2,403 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
273 |
|
|
|
(1,431 |
) |
|
|
(1,158 |
) |
|
|
455 |
|
|
|
(2,844 |
) |
|
|
(2,389 |
) |
Short-term borrowings |
|
|
21 |
|
|
|
8 |
|
|
|
29 |
|
|
|
62 |
|
|
|
7 |
|
|
|
69 |
|
Long-term borrowings |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
20 |
|
|
|
7 |
|
|
|
27 |
|
|
|
57 |
|
|
|
7 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
293 |
|
|
|
(1,424 |
) |
|
|
(1,131 |
) |
|
|
512 |
|
|
|
(2,837 |
) |
|
|
(2,325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
1,457 |
|
|
$ |
288 |
|
|
$ |
1,745 |
|
|
$ |
3,311 |
|
|
$ |
56 |
|
|
$ |
3,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Loan Losses
The provision for loan losses is based upon credit loss experience, growth or contraction of
specific segments of the loan portfolio, and the estimate of losses inherent in the current loan
portfolio. There were provisions for loan losses of $2.1 million and $2.5 million for the three
and six month periods ended June 30, 2010, compared with provisions of $2.1 million and $4.0
million for the corresponding periods in 2009, respectively. See Allowance for Loan Losses
included herein for additional information.
- 26 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Noninterest Income
The following table details the major categories of noninterest income for the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposits |
|
$ |
2,502 |
|
|
$ |
2,517 |
|
|
$ |
4,732 |
|
|
$ |
4,837 |
|
ATM and debit card |
|
|
1,054 |
|
|
|
908 |
|
|
|
1,988 |
|
|
|
1,719 |
|
Broker-dealer fees and commissions |
|
|
359 |
|
|
|
234 |
|
|
|
739 |
|
|
|
503 |
|
Company owned life insurance |
|
|
282 |
|
|
|
275 |
|
|
|
551 |
|
|
|
535 |
|
Loan servicing |
|
|
140 |
|
|
|
470 |
|
|
|
420 |
|
|
|
727 |
|
Net gain on sale of loans held for sale |
|
|
115 |
|
|
|
246 |
|
|
|
177 |
|
|
|
416 |
|
Net gain on investment securities |
|
|
63 |
|
|
|
1,153 |
|
|
|
69 |
|
|
|
1,207 |
|
Impairment charges on investment securities |
|
|
|
|
|
|
(1,733 |
) |
|
|
(526 |
) |
|
|
(1,783 |
) |
Net gain on sale and disposal of other assets |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
158 |
|
Other |
|
|
451 |
|
|
|
445 |
|
|
|
897 |
|
|
|
887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
4,966 |
|
|
$ |
4,515 |
|
|
$ |
9,049 |
|
|
$ |
9,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income, excluding net gains and impairment charges on investment securities, decreased
$192 thousand or 4% for the three months ended June 30, 2010 as compared to 2009. Mortgage banking
income (defined as loan servicing and net gain on sale of loans held for sale) decreased $461
thousand as a result of lower secondary mortgage production experienced during the second quarter
of 2010 and a $110 thousand impairment charge on capitalized mortgage servicing assets that
resulted from an increase in prepayment assumptions used to value those assets. ATM and debit
card income was up $146 thousand or 16% from the second quarter of 2009 primarily due to an
increase in the number of cardholders and an increase in customer transactions. Broker-dealer fees
and commissions were up $125 thousand or 53% from the second quarter of 2009, mainly due to
increased sales volume.
The Company recognized $63 thousand in net gains on investment securities in the three months ended
June 30, 2010 as compared to $580 thousand of net losses in the same period of 2009. The
investment security net gains for the second quarter of 2010 are the result of gains on the
disposal of securities, as there were no other-than-temporary impairment charges during the second
quarter of 2010. The $580 thousand of investment security net losses in the same period of 2009
resulted from $1.7 million of other-than-temporary impairment charges on privately issued whole
loan collateralized mortgage obligations, partly offset by $1.2 million of net gains on the sale of
securities.
Noninterest income, excluding net gains and impairment charges on investment securities, decreased
$276 thousand or 3% in the six months ended June 30, 2010 as compared to the same 2009 period.
Service charges on deposits decreased $105 thousand due primarily to lower nonsufficient funds fees
due to changing customer behavior patterns. Mortgage banking income decreased $546 thousand as a
result of lower secondary mortgage production experienced during the first six months of 2010,
coupled with a $93 thousand write-down on capitalized mortgage servicing assets. ATM and debit
card income was up $269 thousand or 16% when comparing the fist six months of 2010 to the same
period in 2009, primarily due to an increase in the number of cardholders and customer
transactions. Broker-dealer fees and commissions were up $236 thousand or 47% in the six months
ended June 30, 2010 as compared to the same 2009 period, mainly due to increased sales volume.
The Company recognized $457 thousand in net losses on investment securities in the six months ended
June 30, 2010 as compared to $576 thousand of net losses in the same period of 2009. The
investment security net losses for the six months ended June 30, 2010 resulted from
other-than-temporary impairment charges of $526 thousand incurred during the first quarter of 2010,
partly offset by $69 thousand of gains on the disposal of securities. The $576 thousand of
investment security losses in the same period of 2009 are a result of $1.8 million of
other-than-temporary impairment charges, partly offset by $1.2 million of gains on the sale of
securities.
- 27 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Noninterest Expense
The following table details the major categories of noninterest expense for the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
$ |
8,044 |
|
|
$ |
8,437 |
|
|
$ |
16,291 |
|
|
$ |
17,168 |
|
Occupancy and equipment |
|
|
2,670 |
|
|
|
2,683 |
|
|
|
5,441 |
|
|
|
5,559 |
|
FDIC assessments |
|
|
634 |
|
|
|
1,593 |
|
|
|
1,236 |
|
|
|
2,273 |
|
Computer and data processing |
|
|
615 |
|
|
|
562 |
|
|
|
1,186 |
|
|
|
1,179 |
|
Professional services |
|
|
478 |
|
|
|
591 |
|
|
|
1,084 |
|
|
|
1,440 |
|
Supplies and postage |
|
|
431 |
|
|
|
476 |
|
|
|
876 |
|
|
|
941 |
|
Advertising and promotions |
|
|
352 |
|
|
|
249 |
|
|
|
539 |
|
|
|
423 |
|
Other |
|
|
1,646 |
|
|
|
1,849 |
|
|
|
2,955 |
|
|
|
3,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
14,870 |
|
|
$ |
16,440 |
|
|
$ |
29,608 |
|
|
$ |
32,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense decreased by $1.6 million or 10% during the three months ended June 30, 2010
compared to the three months ended June 30, 2009. Salaries and employee benefits expense decreased
$393 thousand or 5% primarily attributable to lower incentive compensation and pension benefit
costs, coupled with lower full-time equivalent staff levels. FDIC assessments were down $959
thousand or 60% from the second quarter of 2009, due primarily to a one-time special assessment of
$923 thousand incurred in the second quarter of 2009, a result of changes in FDIC deposit insurance
coverage and changes in premiums mandated by the FDIC to replenish deposit insurance reserves.
Professional services decreased $113 thousand or 19% from 2009, as the Company incurred lower
expenses associated with loan workouts and consulting services during the second quarter of 2010.
Other noninterest expense was $1.6 million for 2010, a decrease of $203 thousand or 11% from the
second quarter of 2009. The second quarter of 2009 included $73 thousand in amortization expense
on core deposit intangibles versus none in the second quarter of 2010, as well as declines in
miscellaneous other expense categories given the efforts to control discretionary expense.
Noninterest expense decreased by $2.9 million or 9% during the six months ended June 30, 2010
compared to the six months ended June 30, 2009. Salaries and employee benefits expense decreased
$877 thousand or 5% primarily attributable to lower incentive compensation and pension benefit
costs and decreased full-time equivalent staff levels. FDIC assessments were down $1.0 million or
46% from the first six months of 2010, due primarily to a one-time special assessment of $923
thousand incurred in the second quarter of 2009. Professional services decreased $356 thousand or
25% from 2009. The Company incurred lower expenses associated with loan workouts and consulting
services during the first half of 2010. Other noninterest expense was $3.0 million for the first
six months of 2010, a decrease of $580 thousand or 16% from comparable period of 2009. The 2009
amount included $150 thousand in amortization expense on core deposit intangibles versus none
during 2010, as well as declines in miscellaneous other expense categories.
The efficiency ratio for the second quarter of 2010 was 59.16% compared with 69.49% for the second
quarter of 2009, and 59.73% for the six months ended June 30, 2010, compared to 69.60% for the same
period a year ago. The 2010 efficiency ratios, compared to 2009, reflect lower levels of
noninterest expense. The efficiency ratio equals noninterest expense less other real estate
expense and amortization of intangible assets as a percentage of net revenue, defined as the sum of
tax-equivalent net interest income and noninterest income before net gains and impairment charges
on investment securities.
Income Taxes
The Company recorded income tax expense of $2.5 million in the second quarter of 2010, compared to
income tax expense of $1.0 million in the second quarter of 2009. For the six month period ended
June 30, 2010, income tax expense totaled $5.3 million compared to $2.1 million in the same period
of 2009. These changes were due in part to increases of $4.0 million and $8.2 million in pre-tax
income for the three and six month periods of 2010, respectively, compared to the prior year. The
effective tax rates recorded for 2010 on a quarter-to-date and year-to-date basis were 32.2% and
33.6%, respectively, in comparison to the June 30, 2009 quarter-to-date and year-to-date effective
tax rates of 27.6% and 27.0%, respectively. Effective tax rates are impacted by items of income
and expense that are not subject to federal or state taxation. The Companys effective tax rates
reflect the impact of these items, which include, but are not limited to, interest income from
tax-exempt securities and earnings on company owned life insurance.
- 28 -
MANAGEMENTS DISCUSSION AND ANALYSIS
ANALYSIS OF FINANCIAL CONDITION
INVESTING ACTIVITIES
The following table sets forth selected information regarding the composition of the Companys
investment securities portfolio as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities Portfolio Composition |
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agency and
government-sponsored enterprise securities |
|
$ |
230,311 |
|
|
$ |
231,910 |
|
|
$ |
134,564 |
|
|
$ |
134,105 |
|
State and political subdivisions |
|
|
59,335 |
|
|
|
61,598 |
|
|
|
80,812 |
|
|
|
83,659 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
347,548 |
|
|
|
355,154 |
|
|
|
356,044 |
|
|
|
356,355 |
|
Non-Agency mortgage-backed securities |
|
|
1,429 |
|
|
|
2,116 |
|
|
|
5,087 |
|
|
|
5,160 |
|
Asset-backed securities |
|
|
708 |
|
|
|
755 |
|
|
|
1,295 |
|
|
|
1,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
|
639,331 |
|
|
|
651,533 |
|
|
|
577,802 |
|
|
|
580,501 |
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
|
27,404 |
|
|
|
28,247 |
|
|
|
39,573 |
|
|
|
40,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
666,735 |
|
|
$ |
679,780 |
|
|
$ |
617,375 |
|
|
$ |
621,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment Assessment
The Company reviews investment securities on an ongoing basis for the presence of
other-than-temporary impairment (OTTI) with formal reviews performed quarterly. Declines in the
fair value of held-to-maturity and available-for-sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as realized losses to the extent the
impairment is related to credit losses or the security is intended to be sold. The amount of the
impairment related to non-credit related factors is recognized in other comprehensive income.
Evaluating whether the impairment of a debt security is other than temporary involves assessing i.)
the intent to sell the debt security or ii.) the likelihood of being required to sell the security
before the recovery of its amortized cost basis. In determining whether the other-than-temporary
impairment includes a credit loss, the Company uses its best estimate of the present value of cash
flows expected to be collected from the debt security considering factors such as: a.) the length
of time and the extent to which the fair value has been less than the amortized cost basis, b.)
adverse conditions specifically related to the security, an industry, or a geographic area, c.) the
historical and implied volatility of the fair value of the security, d.) the payment structure of
the debt security and the likelihood of the issuer being able to make payments that increase in the
future, e.) failure of the issuer of the security to make scheduled interest or principal payments,
f.) any changes to the rating of the security by a rating agency, and g.) recoveries or additional
declines in fair value subsequent to the balance sheet date.
The table below summarizes unrealized losses in each category of the securities portfolio at the
end of the periods indicated (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses on Investment Securities |
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Unrealized |
|
|
Percent |
|
|
Unrealized |
|
|
Percent |
|
|
|
Loss |
|
|
of Total |
|
|
Loss |
|
|
of Total |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government sponsored enterprises |
|
$ |
120 |
|
|
|
53.1 |
% |
|
$ |
545 |
|
|
|
19.8 |
% |
State and political subdivisions |
|
|
1 |
|
|
|
0.4 |
|
|
|
3 |
|
|
|
0.1 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
44 |
|
|
|
19.5 |
|
|
|
1,638 |
|
|
|
59.3 |
|
Non-Agency mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
330 |
|
|
|
12.0 |
|
Asset-backed securities |
|
|
61 |
|
|
|
27.0 |
|
|
|
244 |
|
|
|
8.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
226 |
|
|
|
100.0 |
% |
|
$ |
2,760 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no unrealized losses in held to maturity securities at June 30, 2010 or December 31,
2009.
- 29 -
MANAGEMENTS DISCUSSION AND ANALYSIS
U.S. Government Agencies and Government Sponsored Enterprises (GSE). As of June 30, 2010, there
were 7 securities in the U.S. Government agencies and GSE portfolio that were in an unrealized loss
position. These were in an unrealized loss position for 12 months or longer and had an aggregate
amortized cost of $9.2 million and unrealized losses of $120 thousand. Because the decline in
fair value is attributable to changes in interest rates, and not credit quality, and because the
Company does not have the intent to sell these securities and it is likely that it will not be
required to sell the securities before their anticipated recovery, the Company does not consider
these securities to be other-than-temporarily impaired at June 30, 2010.
State and Political Subdivisions. At June 30, 2010, the state and political subdivisions portfolio
(municipals) totaled $89.0 million, of which $61.6 million was classified as available for sale.
As of that date, $27.4 million was classified as held to maturity, with a fair value of $28.2
million. As of June 30, 2010, there were 2 municipals that were in an unrealized loss position.
These securities had an aggregate amortized cost of $102 thousand and unrealized losses of $1
thousand.
Agency Mortgage-backed Securities. At June 30, 2010, with the exception of the non-Agency
mortgage-backed securities (non-Agency MBS) discussed below, all of the mortgage-backed
securities held by the Company were issued by U.S. government sponsored entities and agencies
(Agency MBS), primarily FNMA and the FHLMC. The contractual cash flows of the Companys Agency
MBS are guaranteed by FNMA, FHLMC or GNMA. The GNMA mortgage-backed securities are backed by the
full faith and credit of the U.S. government.
Given the high credit quality inherent in Agency MBS, the Company does not consider any of the
unrealized losses as of June 30, 2010, on such MBS to be credit related. As a result of its
analyses, the Company determined at June 30, 2010 that the unrealized losses on its Agency MBS are
temporary. As of June 30, 2010, the Company did not intend to sell any of Agency MBS that were in
an unrealized loss position, all of which were performing in accordance with their terms.
Non-Agency Mortgage-backed Securities. The Companys non-Agency MBS portfolio consists of
positions in three privately issued whole loan collateralized mortgage obligations with a fair
value of $2.1 million and net unrealized gains of $687 thousand at June 30, 2010. As of that date,
each of the 3 non-Agency MBS were rated below investment grade. None of these securities were in
an unrealized loss position. To date, the Company has recognized aggregate OTTI charges due to
reasons of credit quality of $6.0 million against these securities, all of which was recorded prior
to 2010.
During the second quarter of 2010 the Company realized a net loss of $4 thousand on the sale of a
non-Agency MBS with an amortized cost of $3.3 million.
Asset-backed Securities (ABS). As of June 30, 2010, the carrying value of the ABS portfolio
totaled $755 thousand and consisted of positions in 15 securities, the majority of which are pooled
trust preferred securities (TPS) collateralized by preferred debt issued primarily by financial
institutions and, to a lesser extent, insurance companies located throughout the United States. As
a result of some issuers defaulting and others electing to defer interest payments on the preferred
debt which collateralize the securities, the Company considered the TPS to be non-performing and
stopped accruing interest on the investments during 2009.
During the first quarter of 2010, the Company recognized OTTI charges totaling $526 thousand
against four of these ABS. Since the second quarter of 2008, the Company has written down each of
the securities in the ABS portfolio, resulting in OTTI charges totaling $32.8 million through June
30, 2010. The Company expects to recover the remaining carrying value of $755 thousand on the
securities, which represents the Companys maximum exposure to future OTTI charges on the current
ABS portfolio. As of June 30, 2010, each of the securities in the ABS portfolio was rated below
investment grade. There were 7 ABS securities in a loss position with an aggregate amortized cost
of $190 thousand and unrealized losses totaling $61 thousand as of June 30, 2010. Each of these
securities has been in a loss position for less than 12 months.
Other Investments. As a member of the FHLB the Bank is required to hold FHLB stock. The amount of
required FHLB stock is based on the Banks asset size and the amount of borrowings from the FHLB.
The Company has assessed the ultimate recoverability of its FHLB stock and believes no impairment
currently exists. The Companys ownership of FHLB stock, which totaled $3.4 million at June 30,
2010, is included in other assets and recorded at cost.
As a member of the FRB system, the Company is required to maintain a specified investment in FRB
stock based on a ratio relative to the Companys capital. FRB stock totaled $3.9 million at June
30, 2010, is included in other assets and recorded at cost.
- 30 -
MANAGEMENTS DISCUSSION AND ANALYSIS
LENDING ACTIVITIES
The following table sets forth selected information regarding the composition of the Companys loan
portfolio as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Portfolio Composition |
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Commercial |
|
$ |
208,618 |
|
|
|
16.1 |
% |
|
$ |
206,383 |
|
|
|
16.3 |
% |
Commercial mortgage |
|
|
334,043 |
|
|
|
25.9 |
|
|
|
330,748 |
|
|
|
26.2 |
|
Residential mortgage |
|
|
139,112 |
|
|
|
10.8 |
|
|
|
144,636 |
|
|
|
11.4 |
|
Home equity |
|
|
200,929 |
|
|
|
15.6 |
|
|
|
200,684 |
|
|
|
15.9 |
|
Consumer indirect |
|
|
381,464 |
|
|
|
29.5 |
|
|
|
352,611 |
|
|
|
27.9 |
|
Other consumer |
|
|
27,417 |
|
|
|
2.1 |
|
|
|
29,365 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,291,583 |
|
|
|
100.0 |
% |
|
|
1,264,427 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses |
|
|
21,825 |
|
|
|
|
|
|
|
20,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net |
|
$ |
1,269,758 |
|
|
|
|
|
|
$ |
1,243,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans increased $27.2 million to $1.292 billion as of June 30, 2010 from $1.264 billion as of
December 31, 2009.
Commercial and commercial mortgages combined increased $5.6 million to $542.7 million as of June
30, 2010 from $537.1 million as of December 31, 2009, a result of the Companys continued focus on
commercial business development programs.
Residential mortgage loans decreased $5.5 million to $139.1 million as of June 30, 2010 in
comparison to $144.6 million as of December 31, 2009. This category of loans decreased as the
majority of newly originated and refinanced residential mortgages were sold to the secondary market
rather than being added to the portfolio. The Company does not engage in sub-prime or other
high-risk residential mortgage lending as a line-of-business.
The consumer indirect portfolio increased $28.9 million to $381.5 million as of June 30, 2010, from
$352.6 million as of December 31, 2009. During the first six months of 2010 the Company originated
$90.9 million in indirect auto loans with a mix of approximately 31% new auto and 69% used auto.
This compares with $109.2 million in indirect loan auto originations with a mix of approximately
32% new auto and 68% used auto for the same period in 2009.
Loans Held for Sale
Loans held for sale (included in residential mortgage), totaled $908 thousand and $421 thousand as
of June 30, 2010 and December 31, 2009, respectively.
The Company sells certain qualifying newly originated residential mortgages to the secondary
market. Residential mortgages serviced for others totaled $338.8 million and $349.8 million as of
June 30, 2010 and December 31, 2009, respectively, and are not included in the consolidated
statements of financial condition.
- 31 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Allowance for Loan Losses
The following table sets forth an analysis of the activity in the allowance for loan losses for the
periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Loss Analysis |
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Balance as of beginning of period |
|
$ |
20,586 |
|
|
$ |
19,657 |
|
|
$ |
20,741 |
|
|
$ |
18,749 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
121 |
|
|
|
573 |
|
|
|
190 |
|
|
|
675 |
|
Commercial mortgage |
|
|
164 |
|
|
|
63 |
|
|
|
209 |
|
|
|
155 |
|
Residential mortgage |
|
|
42 |
|
|
|
117 |
|
|
|
54 |
|
|
|
171 |
|
Home equity |
|
|
41 |
|
|
|
12 |
|
|
|
88 |
|
|
|
134 |
|
Consumer indirect |
|
|
932 |
|
|
|
714 |
|
|
|
2,160 |
|
|
|
1,582 |
|
Other consumer |
|
|
176 |
|
|
|
215 |
|
|
|
388 |
|
|
|
477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
1,476 |
|
|
|
1,694 |
|
|
|
3,089 |
|
|
|
3,194 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
92 |
|
|
|
114 |
|
|
|
184 |
|
|
|
233 |
|
Commercial mortgage |
|
|
18 |
|
|
|
36 |
|
|
|
450 |
|
|
|
79 |
|
Residential mortgage |
|
|
12 |
|
|
|
5 |
|
|
|
16 |
|
|
|
8 |
|
Home equity |
|
|
25 |
|
|
|
11 |
|
|
|
27 |
|
|
|
14 |
|
Consumer indirect |
|
|
359 |
|
|
|
289 |
|
|
|
699 |
|
|
|
465 |
|
Other consumer |
|
|
104 |
|
|
|
108 |
|
|
|
274 |
|
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
610 |
|
|
|
563 |
|
|
|
1,650 |
|
|
|
1,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
866 |
|
|
|
1,131 |
|
|
|
1,439 |
|
|
|
2,129 |
|
Provision for loan losses |
|
|
2,105 |
|
|
|
2,088 |
|
|
|
2,523 |
|
|
|
3,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
21,825 |
|
|
$ |
20,614 |
|
|
$ |
21,825 |
|
|
$ |
20,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs to average loans (annualized) |
|
|
0.27 |
% |
|
|
0.38 |
% |
|
|
0.23 |
% |
|
|
0.37 |
% |
Allowance for loan losses to total loans |
|
|
1.69 |
% |
|
|
1.69 |
% |
|
|
1.69 |
% |
|
|
1.69 |
% |
Allowance for loan losses to non-performing loans |
|
|
192 |
% |
|
|
217 |
% |
|
|
192 |
% |
|
|
217 |
% |
The following table sets forth additional information regarding net charge-offs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Rate(1) by Loan Type |
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
Net |
|
|
Loss |
|
|
Net |
|
|
Loss |
|
|
Net |
|
|
Loss |
|
|
Net |
|
|
Loss |
|
|
|
Charge-offs |
|
|
Rate |
|
|
Charge-offs |
|
|
Rate |
|
|
Charge-offs |
|
|
Rate |
|
|
Charge-offs |
|
|
Rate |
|
Commercial |
|
$ |
29 |
|
|
|
0.06 |
% |
|
$ |
459 |
|
|
|
0.91 |
% |
|
$ |
6 |
|
|
|
0.01 |
% |
|
$ |
442 |
|
|
|
0.46 |
% |
Commercial mortgage |
|
|
146 |
|
|
|
0.18 |
|
|
|
27 |
|
|
|
0.04 |
|
|
|
(241 |
) |
|
|
(0.15 |
) |
|
|
76 |
|
|
|
0.05 |
|
Residential mortgage |
|
|
30 |
|
|
|
0.09 |
|
|
|
112 |
|
|
|
0.26 |
|
|
|
38 |
|
|
|
0.05 |
|
|
|
163 |
|
|
|
0.19 |
|
Home equity |
|
|
16 |
|
|
|
0.03 |
|
|
|
1 |
|
|
|
0.00 |
|
|
|
61 |
|
|
|
0.06 |
|
|
|
120 |
|
|
|
0.13 |
|
Consumer indirect |
|
|
573 |
|
|
|
0.63 |
|
|
|
425 |
|
|
|
0.57 |
|
|
|
1,461 |
|
|
|
0.82 |
|
|
|
1,117 |
|
|
|
0.79 |
|
Other consumer |
|
|
72 |
|
|
|
1.07 |
|
|
|
107 |
|
|
|
1.39 |
|
|
|
114 |
|
|
|
0.83 |
|
|
|
211 |
|
|
|
1.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
866 |
|
|
|
0.27 |
% |
|
$ |
1,131 |
|
|
|
0.38 |
% |
|
$ |
1,439 |
|
|
|
0.23 |
% |
|
$ |
2,129 |
|
|
|
0.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the ratios of net charge-offs to average loans, annualized. |
The allowance for loan losses represents the estimated amount of probable credit losses inherent in
the Companys loan portfolio. The Company performs periodic, systematic reviews of the loan
portfolio to estimate probable losses in the respective loan portfolios. In addition, the Company
regularly evaluates prevailing economic and business conditions, industry concentrations, changes
in the size and characteristics of the portfolio and other pertinent factors. The process used by
the Company to determine the overall allowance for loan losses is based on this analysis. Based on
this analysis the Company believes the allowance for loan losses is adequate as of June 30, 2010.
- 32 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is
based upon managements evaluation of the amounts required to meet estimated charge-offs in the
loan portfolio after weighing a variety of factors, including the risk-profile of the Companys
loan products and customers. The adequacy of the allowance for loan losses is subject to ongoing
management review. While management evaluates currently available information in establishing the
allowance for loan losses, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluations. In addition, various
regulatory agencies, as an integral part of their examination process, periodically review a
financial institutions allowance for loan losses. Such agencies may require the financial
institution to recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
The Company does not engage in sub-prime or other high-risk residential mortgage lending as a
line-of-business. The Company primarily originates fixed and variable rate one-to-four family
residential mortgages collateralized by owner-occupied properties located within its central and
western New York marketplace, which has been relatively stable in recent years. Residential
mortgages collateralized by one-to-four family residential real estate generally have been
originated in amounts of no more than 85% of appraised value or have mortgage insurance.
The provision for loan losses represents managements estimate of the adjustment necessary to
maintain the allowance for loan losses at a level representative of probable credit losses inherent
in the portfolio. There were provisions for loan losses of $2.1 million and $2.5 million for the
three and six month periods ended June 30, 2010, compared with provisions of $2.1 million and $4.0
million for the corresponding periods in 2009, respectively. Net charge-offs decreased by $265
thousand and $690 thousand when comparing the three and six month periods of 2010 to the prior
year, respectively. The decrease in net charge-offs in 2010 related principally to commercial
loans.
Non-Performing Assets and Potential Problem Loans
The table below sets forth the amounts and categories of the Companys non-performing assets at the
dates indicated. At each date presented there were no troubled debt restructurings (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent and Non-Performing Assets |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
5,889 |
|
|
$ |
650 |
|
|
$ |
4,177 |
|
Commercial mortgage |
|
|
1,380 |
|
|
|
2,288 |
|
|
|
1,634 |
|
Residential mortgage |
|
|
2,480 |
|
|
|
2,376 |
|
|
|
2,658 |
|
Home equity |
|
|
1,072 |
|
|
|
880 |
|
|
|
628 |
|
Consumer indirect |
|
|
464 |
|
|
|
621 |
|
|
|
373 |
|
Other consumer |
|
|
19 |
|
|
|
7 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans |
|
|
11,304 |
|
|
|
6,822 |
|
|
|
9,496 |
|
Accruing loans 90 days or more delinquent |
|
|
61 |
|
|
|
1,859 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
|
11,365 |
|
|
|
8,681 |
|
|
|
9,498 |
|
Foreclosed assets |
|
|
500 |
|
|
|
746 |
|
|
|
1,046 |
|
Non-performing investment securities |
|
|
646 |
|
|
|
1,015 |
|
|
|
3,175 |
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
12,511 |
|
|
$ |
10,442 |
|
|
$ |
13,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans |
|
|
0.88 |
% |
|
|
0.69 |
% |
|
|
0.78 |
% |
Non-performing assets to total assets |
|
|
0.58 |
% |
|
|
0.51 |
% |
|
|
0.69 |
% |
Non-performing loans at June 30, 2010 were $11.4 million, an increase of $2.7 million from the $8.7
million balance at December 31, 2009. The increase in non-performing loans was largely
attributable to the addition of a $5.0 million participation interest in one commercial loan.
Despite being current with respect to principal and interest at June 30, 2010, the borrower is
experiencing significant financial difficulty and may not be able to repay its outstanding debt. A
$2.5 million specific reserve was allocated to this credit in the second quarter of 2010. During
the first quarter of 2010 the Company collected substantially all of a $1.9 million commercial
relationship included in accruing loans past due 90 days or more at December 31, 2009.
Non-performing assets include non-performing loans, foreclosed assets and non-performing investment
securities. Non-performing assets at June 30, 2010 were $12.5 million, an increase of $2.1 million
from the $10.4 million balance at December 31, 2009.
Foreclosed assets consist of real property properties formerly pledged as collateral to loans,
which have been acquired by the Company through foreclosure proceedings or acceptance of a deed in
lieu of foreclosure. Foreclosed assets are carried at the lower of cost or fair market value, less
selling costs. Foreclosed asset holdings represented 10 properties totaling $500 thousand at June
30, 2010 and 14 properties totaling $746 thousand at December 31, 2009.
- 33 -
MANAGEMENTS DISCUSSION AND ANALYSIS
Non-performing investment securities for which the Company has stopped accruing interest were $646
thousand at June 30, 2010, a decrease of $369 thousand from the $1.0 million balance at December
31, 2009. The decrease in non-performing investment securities reflects net losses, both realized
and unrealized, in the Companys asset backed securities portfolio.
The following table summarizes the Companys over 60-day delinquent loans by type, excluding
nonaccrual loans. The percentage of loans represents the balance of loans delinquent over 60 days
as a ratio of total loans outstanding for that loan type (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Over 60-day Delinquent |
|
|
|
June 30, |
|
|
December 31, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
Balance |
|
|
Loans |
|
|
Balance |
|
|
Loans |
|
|
Balance |
|
|
Loans |
|
Commercial |
|
$ |
314 |
|
|
|
0.15 |
% |
|
$ |
78 |
|
|
|
0.04 |
% |
|
$ |
|
|
|
|
|
% |
Commercial mortgage |
|
|
327 |
|
|
|
0.10 |
|
|
|
2,103 |
|
|
|
0.64 |
|
|
|
274 |
|
|
|
0.09 |
|
Residential mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
0.00 |
|
Home equity |
|
|
38 |
|
|
|
0.02 |
|
|
|
54 |
|
|
|
0.03 |
|
|
|
65 |
|
|
|
0.03 |
|
Consumer indirect |
|
|
45 |
|
|
|
0.01 |
|
|
|
110 |
|
|
|
0.03 |
|
|
|
103 |
|
|
|
0.03 |
|
Other consumer |
|
|
5 |
|
|
|
0.02 |
|
|
|
8 |
|
|
|
0.03 |
|
|
|
11 |
|
|
|
0.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
729 |
|
|
|
0.06 |
% |
|
$ |
2,353 |
|
|
|
0.19 |
% |
|
$ |
458 |
|
|
|
0.04 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential problem loans are loans that are currently performing, but information known about
possible credit problems of the borrowers causes management to have concern as to the ability of
such borrowers to comply with the present loan payment terms and may result in disclosure of such
loans as non-performing at some time in the future. These loans remain in a performing status due
to a variety of factors, including payment history, the value of collateral supporting the credits,
and/or personal or government guarantees. Management considers loans classified as substandard,
which continue to accrue interest, to be potential problem loans. The Company identified $12.8
million and $18.4 million in loans that continued to accrue interest which were classified as
substandard as of June 30, 2010 and December 31, 2009, respectively.
Generally, loans and investment securities are placed on nonaccrual status if principal or interest
payments become 90 days past due and/or management deem the collectibility of the principal and/or
interest to be in question, as well as when required by regulatory requirements. Once interest
accruals are discontinued, accrued but uncollected interest is charged to current year income.
Subsequent receipts on nonaccrual assets are recorded as a reduction of principal, and interest
income is recorded only after principal recovery is reasonably assured.
Information regarding the activity in nonaccrual loans for the three and six months ended June 30,
2010 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Six months |
|
|
|
ended |
|
|
ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2010 |
|
Nonaccrual loans, beginning of period |
|
$ |
6,685 |
|
|
$ |
6,822 |
|
Additions |
|
|
7,927 |
|
|
|
11,028 |
|
Payments |
|
|
(1,833 |
) |
|
|
(3,264 |
) |
Charge-offs |
|
|
(1,365 |
) |
|
|
(2,852 |
) |
Returned to accruing status |
|
|
(110 |
) |
|
|
(360 |
) |
Transferred to other real estate or repossessed assets |
|
|
|
|
|
|
(70 |
) |
|
|
|
|
|
|
|
Nonaccrual loans, end of period |
|
$ |
11,304 |
|
|
$ |
11,304 |
|
|
|
|
|
|
|
|
- 34 -
MANAGEMENTS DISCUSSION AND ANALYSIS
FUNDING ACTIVITIES
Deposits
The Company offers a broad array of deposit products including noninterest-bearing demand,
interest-bearing demand, savings and money market accounts and certificates of deposit. As of June
30, 2010, total deposits were $1.822 billion, an increase of $79.0 million in comparison to $1.743
billion as of December 31, 2009.
Nonpublic deposits represent the largest component of the Companys funding. Total nonpublic
deposits were $1.443 billion and $1.387 billion as of June 30, 2010 and December 31, 2009,
respectively. The Company continues to manage this segment of funding through a strategy of
competitive pricing and relationship-based sales and marketing that minimizes the number of
customer relationships that have only a single high-cost deposit account.
The Company offers a variety of public deposit products to the many towns, villages, counties and
school districts within our market. Public deposits generally range from 20 to 25% of the
Companys total deposits. As of June 30, 2010, total public deposits were $378.5 million in
comparison to $355.9 million as of December 31, 2009. There is a high degree of seasonality in
this component of funding, as the level of deposits varies with the seasonal cash flows for these
public customers. The Company maintains the necessary levels of short-term liquid assets and
overnight lines of credit to accommodate the seasonality associated with public deposits.
Borrowings
The Company has credit capacity with the FHLB and can borrow through facilities that include an
overnight line of credit, as well as amortizing and term advances. The Companys primary borrowing
source was FHLB advances and repurchase agreements, which amounted to $30.1 million as of June 30,
2010 and December 31, 2009. The FHLB borrowings mature on various dates through 2011 and are
classified as short-term or long-term in accordance with the original terms of the agreement. The
Company had approximately $61 million of immediate credit capacity with FHLB as of June 30, 2010.
The FHLB credit capacity is collateralized by securities from the Companys investment portfolio
and certain qualifying loans.
The Company had approximately $305 million in secured borrowing capacity at the Federal Reserve
Bank (FRB) Discount Window, of which none was outstanding at June 30, 2010. The FRB credit
capacity is collateralized by securities from the Companys investment portfolio and certain
qualifying loans. During the first quarter, the Company repaid $9.4 million of Federal funds
purchased and a $15.0 million advance from the Federal Reserves Term Auction Facility that were
outstanding at December 31, 2009.
The Company also has Federal funds lines available from various commercial banks. There were $7.3
million in advances outstanding on these lines of credit as of June 30, 2010. The Company had
approximately $87 million of unused credit capacity on these lines as of June 30, 2010. The
Company also utilizes short-term retail repurchase agreements with customers as a source of funds.
These short-term repurchase agreements amounted to $39.6 million and $35.1 million as of June 30,
2010 and December 31, 2009, respectively.
The following table summarizes the Companys borrowings as of June 30, 2010 (in thousands):
|
|
|
|
|
Federal funds purchased |
|
$ |
7,300 |
|
Customer repurchase agreements |
|
|
39,586 |
|
FHLB borrowings |
|
|
30,066 |
|
Trust preferred subordinated debentures |
|
|
16,702 |
|
|
|
|
|
Total borrowings |
|
$ |
93,654 |
|
|
|
|
|
Equity Activities
Total shareholders equity amounted to $211.7 million as of June 30, 2010, an increase of $13.4
million from $198.3 million as of December 31, 2009. The increase in shareholders equity through
the first six months ended June 30, 2010 resulted primarily from $16.5 million in comprehensive
income, partially offset by $3.8 million in accrued and declared dividends.
The Bank is subject to various regulatory capital requirements administered by the Federal Deposit
Insurance Corporation and the New York State Banking Department (NYSBD). At June 30, 2010, the
Banks regulatory capital ratios exceeded all regulatory requirements.
- 35 -
MANAGEMENTS DISCUSSION AND ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The objective of maintaining adequate liquidity is to assure the ability of the Company to meet its
financial obligations. These obligations include the withdrawal of deposits on demand or at their
contractual maturity, the servicing and repayment of debt and preferred equity obligations, the
ability to fund new and existing loan commitments, to take advantage of new business opportunities
and to satisfy other operating requirements. The Company achieves and manages liquidity by
maintaining a strong base of core customer funds, maturing short-term assets, its ability to sell
securities, lines of credit, and access to the financial and capital markets.
Liquidity for the Bank is managed through the monitoring of anticipated changes in loans, the
investment portfolio, core deposits and wholesale funds. The strength of the Banks liquidity
position is a result of its base of core customer deposits. These core deposits are supplemented
by wholesale funding sources that include credit lines with the other banking institutions, the
FHLB and the FRB.
The primary sources of liquidity for FII are dividends from the Bank and access to financial and
capital markets. Dividends from the Bank are limited by various regulatory requirements related to
capital adequacy and earnings trends. The Bank relies on cash flows from operations, core
deposits, borrowings and short-term liquid assets. Five Star Investment Services relies on cash
flows from operations and funds from FII when necessary.
The Companys cash and cash equivalents were $43.4 million as of June 30, 2010, relatively
unchanged from December 31, 2009. The Companys net cash provided by operating activities totaled
$18.2 million. Net cash used in investing activities totaled $80.3 million, which included cash
outflows of $28.2 million for net loan originations and $51.3 million from investment securities
transactions. Net cash provided by financing activities of $62.5 million was attributed to a $79.0
million increase in deposits, offset against a $12.7 million decrease in net borrowings and $3.8
million in dividend payments.
Capital Resources
Banks and financial holding companies are subject to various regulatory capital requirements
administered by state and federal banking agencies. Failure to meet minimum capital requirements
can result in certain mandatory and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material impact on the Companys consolidated financial
statements. Capital adequacy guidelines and, additionally for banks, prompt corrective action
regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk weighting and other
factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets
and of Tier 1 capital to average assets (all as defined in the regulations). These minimum amounts
and ratios are included in the table below.
The Companys and the Banks Tier 1 capital consists of shareholders equity excluding unrealized
gains and losses on securities available for sale (except for unrealized losses which have been
determined to be other than temporary and recognized as expense in the consolidated statements of
income), goodwill and other intangible assets and disallowed portions of deferred tax assets. Tier
1 capital for the Company includes, without limitation, $37.5 million of preferred stock issued to
the U.S. Department of Treasury (the Treasury) through the Treasurys Troubled Asset Relief
Program (TARP) and, subject to limitation, $16.7 million of trust preferred securities issued by
FISI Statutory Trust I and $17.5 million of preferred stock. The Company and the Banks total
capital are comprised of Tier 1 capital for each entity plus a permissible portion of the allowance
for loan losses.
The Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by
risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and
include total assets, excluding goodwill and other intangible assets and disallowed portions of
deferred tax assets, allocated by risk weight category and certain off-balance-sheet items
(primarily loan commitments and securities more than one level below investment grade that are
subject to the low level exposure rules). The leverage ratio is calculated by dividing Tier 1
capital by adjusted quarterly average total assets, which exclude goodwill and other intangible
assets and disallowed portions of deferred tax assets.
- 36 -
MANAGEMENTS DISCUSSION AND ANALYSIS
The Companys and the Banks actual and required regulatory capital ratios as of June 30, 2010 and
December 31, 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
|
|
|
|
|
|
Actual |
|
|
Adequacy Purposes |
|
|
Well Capitalized |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
June 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
177,649 |
|
|
|
8.45 |
% |
|
$ |
84,132 |
|
|
|
4.00 |
% |
|
$ |
105,164 |
|
|
|
5.00 |
% |
Bank (FSB) |
|
|
160,723 |
|
|
|
7.66 |
|
|
|
83,931 |
|
|
|
4.00 |
|
|
|
104,914 |
|
|
|
5.00 |
|
|
Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
177,649 |
|
|
|
12.73 |
|
|
|
55,805 |
|
|
|
4.00 |
|
|
|
83,707 |
|
|
|
6.00 |
|
Bank (FSB) |
|
|
160,723 |
|
|
|
11.58 |
|
|
|
55,531 |
|
|
|
4.00 |
|
|
|
83,296 |
|
|
|
6.00 |
|
|
Total risk-based capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
195,142 |
|
|
|
13.99 |
|
|
|
111,609 |
|
|
|
8.00 |
|
|
|
139,512 |
|
|
|
10.00 |
|
Bank (FSB) |
|
|
178,132 |
|
|
|
12.83 |
|
|
|
111,061 |
|
|
|
8.00 |
|
|
|
138,827 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
163,613 |
|
|
|
7.96 |
% |
|
$ |
82,188 |
|
|
|
4.00 |
% |
|
$ |
102,735 |
|
|
|
5.00 |
% |
Bank (FSB) |
|
|
154,316 |
|
|
|
7.53 |
|
|
|
82,018 |
|
|
|
4.00 |
|
|
|
102,522 |
|
|
|
5.00 |
|
|
Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
163,613 |
|
|
|
11.95 |
|
|
|
54,746 |
|
|
|
4.00 |
|
|
|
82,119 |
|
|
|
6.00 |
|
Bank (FSB) |
|
|
154,316 |
|
|
|
11.33 |
|
|
|
54,475 |
|
|
|
4.00 |
|
|
|
81,712 |
|
|
|
6.00 |
|
|
Total risk-based capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
180,766 |
|
|
|
13.21 |
|
|
|
109,492 |
|
|
|
8.00 |
|
|
|
136,865 |
|
|
|
10.00 |
|
Bank (FSB) |
|
|
171,385 |
|
|
|
12.58 |
|
|
|
108,949 |
|
|
|
8.00 |
|
|
|
136,186 |
|
|
|
10.00 |
|
Dividend Restrictions
In the ordinary course of business, the Company is dependent upon dividends from Five Star Bank to
provide funds for the payment of interest expense on the junior subordinated debentures, dividends
to shareholders and to provide for other cash requirements. Banking regulations may limit the
amount of dividends that may be paid. Approval by regulatory authorities is required if the effect
of dividends declared would cause the regulatory capital of the Bank to fall below specified
minimum levels. Approval is also required if dividends declared exceed the net profits for that
year combined with the retained net profits for the preceding two years. The Bank is currently
required to obtain approval from the NYS Banking Department for dividend payments.
In addition, pursuant to the terms of the Treasurys TARP Capital Purchase Program, the Company
may not declare or pay any cash dividends on its common stock other than regular quarterly
cash dividends of not more than $0.10 without the consent of the U.S. Treasury.
- 37 -
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The principal objective of the Companys interest rate risk management is to evaluate the interest
rate risk inherent in certain assets and liabilities, determine the appropriate level of risk to
the Company given its business strategy, operating environment, capital and liquidity requirements
and performance objectives, and manage the risk consistent with the guidelines approved by the
Companys Board of Directors. The Companys 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. Management develops an Asset-Liability Policy that meets strategic objectives and
regularly reviews the activities of the Bank.
The primary tool the Company uses to manage interest rate risk is a rate shock simulation to
measure the rate sensitivity of the balance sheet. Rate shock simulation is a modeling technique
used to estimate the impact of changes in rates on net interest income and economic value of
equity. 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 different
magnitudes over a period of twelve months. This simulation is based on managements 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.
In addition to the changes in interest rate scenarios listed above, the Company typically runs
other scenarios to measure interest rate risk, which vary depending on the economic and interest
rate environments.
The Company has experienced no significant changes in market risk due to changes in interest rates
since the Companys Annual Report on Form 10-K for the year ended December 31, 2009, dated March
12, 2010, as filed with the Securities and Exchange Commission.
ITEM 4. Controls and Procedures
Evaluation of disclosure controls and procedures
As of June 30, 2010, the Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the Securities and
Exchange Commission (SEC) under the Securities Exchange Act of 1934 (Exchange Act). Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of the end of the period covered by
this report.
Disclosure controls and procedures are the controls and other procedures that are designed to
ensure that information required to be disclosed in the reports that the Company files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed in
the reports that the Company files or submits under the Exchange Act is accumulated and
communicated to management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.
- 38 -
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company has experienced no significant changes in its legal proceedings from the disclosure
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2009, dated
March 12, 2010, as filed with the Securities and Exchange Commission.
ITEM 1A. Risk Factors
The Company has experienced no significant changes in its risk factors from the disclosure included
in the Companys Annual Report on Form 10-K for the year ended December 31, 2009, dated March 12,
2010 as filed with the Securities and Exchange Commission.
ITEM 6. Exhibits
|
(a) |
|
The following is a list of all exhibits filed or incorporated by reference as part of
this Report. |
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Location |
|
3.1 |
|
|
Amended and Restated Certificate of
Incorporation of the Company
|
|
Incorporated by
reference to
Exhibit 3.1 of the
Form 10-K for the
year ended December
31, 2008, dated
March 12, 2009 |
|
|
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated Bylaws of the Company
|
|
Incorporated by
reference to
Exhibit 3.4 of the
Form 10-K for the
year ended December
31, 2008, dated
March 12, 2009 |
|
|
|
|
|
|
|
|
4.1 |
|
|
Warrant to Purchase Common Stock, dated
December 23, 2008 issued by the Registrant to
the United States Department of the Treasury
|
|
Incorporated by
reference to
Exhibit 4.2 of the
Form 8-K, dated
December 19, 2008 |
|
|
|
|
|
|
|
|
10.1 |
|
|
1999 Management Stock Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.1 of the
S-1 Registration
Statement |
|
|
|
|
|
|
|
|
10.2 |
|
|
Amendment Number One to the FII 1999
Management Stock Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
July 28, 2006 |
|
|
|
|
|
|
|
|
10.3 |
|
|
Form of Non-Qualified Stock Option Agreement
Pursuant to the FII 1999 Management Stock
Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.2 of the
Form 8-K, dated
July 28, 2006 |
|
|
|
|
|
|
|
|
10.4 |
|
|
Form of Restricted Stock Award Agreement
Pursuant to the FII 1999 Management Stock
Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.3 of the
Form 8-K, dated
July 28, 2006 |
|
|
|
|
|
|
|
|
10.5 |
|
|
Form of Restricted Stock Award Agreement
Pursuant to the FII 1999 Management Stock
Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
January 23, 2008 |
|
|
|
|
|
|
|
|
10.6 |
|
|
1999 Directors Stock Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.2 of the
S-1 Registration
Statement |
|
|
|
|
|
|
|
|
10.7 |
|
|
Amendment to the 1999 Director Stock
Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.7 of the
Form 10-K for the
year ended December
31, 2008, dated
March 12, 2009 |
|
|
|
|
|
|
|
|
10.8 |
|
|
2009 Management Stock Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.8 of the
Form 10-Q for the
quarterly period
ended June 30,
2009, dated August
5, 2009 |
|
|
|
|
|
|
|
|
10.9 |
|
|
2009 Directors Stock Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.9 of the
Form 10-Q for the
quarterly period
ended June 30,
2009, dated August
5, 2009 |
|
|
|
|
|
|
|
|
10.10 |
|
|
Form of Restricted Stock Award Agreement
Pursuant to the FII 2009 Management Stock
Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
January 19, 2010 |
- 39 -
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Location |
|
10.11 |
|
|
Form of Restricted Stock Award Agreement
Pursuant to the FII 2009 Management Stock
Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
March 1, 2010 |
|
|
|
|
|
|
|
|
10.12 |
|
|
Form of Restricted Stock Award Agreement
Pursuant to the FII 2009 Management Stock
Incentive Plan
|
|
Incorporated by
reference to
Exhibit 10.2 of the
Form 8-K, dated
March 1, 2010 |
|
|
|
|
|
|
|
|
10.13 |
|
|
Amended Stock Ownership Requirements, dated
December 14, 2005
|
|
Incorporated by
reference to
Exhibit 10.19 of
the Form 10-K for
the year ended
December 31, 2005,
dated March 15,
2006 |
|
|
|
|
|
|
|
|
10.14 |
|
|
Executive Agreement with Peter G. Humphrey
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
June 30, 2005 |
|
|
|
|
|
|
|
|
10.15 |
|
|
Executive Agreement with James T. Rudgers
|
|
Incorporated by
reference to
Exhibit 10.2 of the
Form 8-K, dated
June 30, 2005 |
|
|
|
|
|
|
|
|
10.16 |
|
|
Executive Agreement with Ronald A. Miller
|
|
Incorporated by
reference to
Exhibit 10.3 of the
Form 8-K, dated
June 30, 2005 |
|
|
|
|
|
|
|
|
10.17 |
|
|
Executive Agreement with Martin K. Birmingham
|
|
Incorporated by
reference to
Exhibit 10.4 of the
Form 8-K, dated
June 30, 2005 |
|
|
|
|
|
|
|
|
10.18 |
|
|
Agreement with Peter G. Humphrey
|
|
Incorporated by
reference to
Exhibit 10.6 of the
Form 8-K, dated
June 30, 2005 |
|
|
|
|
|
|
|
|
10.19 |
|
|
Executive Agreement with John J. Witkowski
|
|
Incorporated by
reference to
Exhibit 10.7 of the
Form 8-K, dated
September 14, 2005 |
|
|
|
|
|
|
|
|
10.20 |
|
|
Executive Agreement with George D. Hagi
|
|
Incorporated by
reference to
Exhibit 10.7 of the
Form 8-K, dated
February 2, 2006 |
|
|
|
|
|
|
|
|
10.21 |
|
|
Voluntary Retirement Agreement with James T.
Rudgers
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
September 24, 2008 |
|
|
|
|
|
|
|
|
10.22 |
|
|
Amendment to Voluntary Retirement Agreement
with James T. Rudgers
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
July 1, 2009 |
|
|
|
|
|
|
|
|
10.23 |
|
|
Voluntary Retirement Agreement with Ronald A.
Miller
|
|
Incorporated by
reference to
Exhibit 10.2 of the
Form 8-K, dated
September 24, 2008 |
|
|
|
|
|
|
|
|
10.24 |
|
|
Amendment to Voluntary Retirement Agreement
with Ronald A. Miller
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
March 3, 2010 |
|
|
|
|
|
|
|
|
10.25 |
|
|
Letter Agreement, dated December 23, 2008,
including the Securities Purchase
Agreement-Standard Terms attached thereto, by
and between the Company and the United States
Department of the Treasury
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
December 19, 2008 |
|
|
|
|
|
|
|
|
11.1 |
|
|
Statement of Computation of Per Share Earnings
|
|
Incorporated by
reference to Note 2
of the Registrants
unaudited
consolidated
financial
statements under
Item 1 filed
herewith. |
|
|
|
|
|
|
|
|
12 |
|
|
Ratio of Earnings to Fixed Charges and
Preferred Dividends
|
|
Filed Herewith |
|
|
|
|
|
|
|
|
31.1 |
|
|
Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 Principal
Executive Officer
|
|
Filed Herewith |
|
|
|
|
|
|
|
|
31.2 |
|
|
Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 Principal
Financial Officer
|
|
Filed Herewith |
|
|
|
|
|
|
|
|
32 |
|
|
Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
Filed Herewith |
- 40 -
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.
|
|
|
|
|
|
|
/s/ Peter G. Humphrey
Peter G. Humphrey
President and Chief Executive Officer
(Principal Executive Officer)
|
, August 3, 2010 |
|
|
|
|
|
|
|
/s/ Karl F. Krebs
Karl F. Krebs
|
, August 3, 2010 |
|
|
Executive Vice President and Chief Financial Officer |
|
|
|
|
(Principal Financial and Principal Accounting Officer) |
|
|
- 41 -