Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
|
|
|
o |
|
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)
|
|
|
NEW YORK
|
|
16-0816610 |
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
|
|
|
220 LIBERTY STREET, WARSAW, NEW YORK
|
|
14569 |
(Address of principal executive offices)
|
|
(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 registrant 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.
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller company) |
|
|
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 10,820,268 shares of Common Stock, $0.01 par value, outstanding as of October 30, 2009.
FINANCIAL INSTITUTIONS, INC.
Form 10-Q
For the Quarterly Period Ended September 30, 2009
TABLE OF CONTENTS
- 2 -
PART I. FINANCIAL INFORMATION
|
|
|
ITEM 1. |
|
Financial Statements |
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
(Dollars in thousands, except share and per share data) |
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
48,721 |
|
|
$ |
34,528 |
|
Federal funds sold and interest-bearing deposits in other banks |
|
|
11,385 |
|
|
|
20,659 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
60,106 |
|
|
|
55,187 |
|
|
Securities available for sale, at fair value |
|
|
625,744 |
|
|
|
547,506 |
|
Securities held to maturity, at amortized cost (fair value of $46,122 and $59,147, respectively) |
|
|
45,056 |
|
|
|
58,532 |
|
Loans held for sale |
|
|
1,032 |
|
|
|
1,013 |
|
Loans |
|
|
1,259,362 |
|
|
|
1,121,079 |
|
Less: Allowance for loan losses |
|
|
20,782 |
|
|
|
18,749 |
|
|
|
|
|
|
|
|
Loans, net |
|
|
1,238,580 |
|
|
|
1,102,330 |
|
Company owned life insurance |
|
|
24,532 |
|
|
|
23,692 |
|
Premises and equipment, net |
|
|
35,210 |
|
|
|
36,712 |
|
Goodwill |
|
|
37,369 |
|
|
|
37,369 |
|
Other assets |
|
|
70,576 |
|
|
|
54,578 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,138,205 |
|
|
$ |
1,916,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing demand |
|
$ |
298,972 |
|
|
$ |
292,586 |
|
Interest-bearing demand |
|
|
383,982 |
|
|
|
344,616 |
|
Savings and money market |
|
|
402,042 |
|
|
|
348,594 |
|
Certificates of deposit |
|
|
712,182 |
|
|
|
647,467 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
1,797,178 |
|
|
|
1,633,263 |
|
|
|
|
|
|
|
|
|
|
Short-term borrowings |
|
|
73,265 |
|
|
|
23,465 |
|
Long-term borrowings |
|
|
46,848 |
|
|
|
47,355 |
|
Other liabilities |
|
|
24,979 |
|
|
|
22,536 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,942,270 |
|
|
|
1,726,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Series A 3% Preferred Stock, $100 par value, 1,533 shares authorized and issued |
|
|
153 |
|
|
|
153 |
|
Series A Preferred Stock, $100 par value, 7,503 shares authorized and issued, aggregate
liquidation preference of $37,515; net of $1,760 and $2,016 discount, respectively |
|
|
35,755 |
|
|
|
35,499 |
|
Series B-1 8.48% Preferred Stock, $100 par value, 200,000 shares authorized,
174,223 shares issued |
|
|
17,422 |
|
|
|
17,422 |
|
|
|
|
|
|
|
|
Total preferred equity |
|
|
53,330 |
|
|
|
53,074 |
|
Common stock, $0.01 par value, 50,000,000 shares authorized, 11,348,122 shares issued |
|
|
113 |
|
|
|
113 |
|
Additional paid-in capital |
|
|
26,815 |
|
|
|
26,397 |
|
Retained earnings |
|
|
127,941 |
|
|
|
124,952 |
|
Accumulated other comprehensive loss |
|
|
(2,381 |
) |
|
|
(4,013 |
) |
Treasury
stock, at cost 529,826 and 550,103 shares, respectively |
|
|
(9,883 |
) |
|
|
(10,223 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
195,935 |
|
|
|
190,300 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,138,205 |
|
|
$ |
1,916,919 |
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
- 3 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
(Dollars in thousands, except per share amounts) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
18,712 |
|
|
$ |
17,018 |
|
|
$ |
53,618 |
|
|
$ |
50,146 |
|
Interest and dividends on investment securities |
|
|
4,965 |
|
|
|
7,472 |
|
|
|
16,401 |
|
|
|
23,648 |
|
Other interest income |
|
|
20 |
|
|
|
68 |
|
|
|
73 |
|
|
|
572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
23,697 |
|
|
|
24,558 |
|
|
|
70,092 |
|
|
|
74,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
4,826 |
|
|
|
6,538 |
|
|
|
14,729 |
|
|
|
23,193 |
|
Short-term borrowings |
|
|
77 |
|
|
|
287 |
|
|
|
171 |
|
|
|
571 |
|
Long-term borrowings |
|
|
716 |
|
|
|
987 |
|
|
|
2,142 |
|
|
|
2,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
5,619 |
|
|
|
7,812 |
|
|
|
17,042 |
|
|
|
26,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
18,078 |
|
|
|
16,746 |
|
|
|
53,050 |
|
|
|
48,018 |
|
Provision for loan losses |
|
|
2,620 |
|
|
|
1,891 |
|
|
|
6,614 |
|
|
|
3,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
15,458 |
|
|
|
14,855 |
|
|
|
46,436 |
|
|
|
44,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposits |
|
|
2,643 |
|
|
|
2,794 |
|
|
|
7,480 |
|
|
|
7,812 |
|
ATM and debit card |
|
|
920 |
|
|
|
852 |
|
|
|
2,639 |
|
|
|
2,460 |
|
Loan servicing |
|
|
304 |
|
|
|
112 |
|
|
|
1,031 |
|
|
|
530 |
|
Company owned life insurance |
|
|
271 |
|
|
|
223 |
|
|
|
806 |
|
|
|
269 |
|
Broker-dealer fees and commissions |
|
|
238 |
|
|
|
363 |
|
|
|
741 |
|
|
|
1,223 |
|
Net gain on sale of loans held for sale |
|
|
129 |
|
|
|
48 |
|
|
|
545 |
|
|
|
304 |
|
Net gain on investment securities |
|
|
1,721 |
|
|
|
12 |
|
|
|
2,928 |
|
|
|
232 |
|
Impairment charges on investment securities |
|
|
(2,318 |
) |
|
|
(34,554 |
) |
|
|
(4,101 |
) |
|
|
(38,345 |
) |
Net gain on sale and disposal of other assets |
|
|
19 |
|
|
|
102 |
|
|
|
177 |
|
|
|
254 |
|
Other |
|
|
479 |
|
|
|
700 |
|
|
|
1,366 |
|
|
|
1,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income (loss) |
|
|
4,406 |
|
|
|
(29,348 |
) |
|
|
13,612 |
|
|
|
(23,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
8,253 |
|
|
|
7,021 |
|
|
|
25,421 |
|
|
|
23,626 |
|
Occupancy and equipment |
|
|
2,730 |
|
|
|
2,642 |
|
|
|
8,289 |
|
|
|
7,789 |
|
FDIC assessments |
|
|
753 |
|
|
|
236 |
|
|
|
3,026 |
|
|
|
369 |
|
Professional services |
|
|
532 |
|
|
|
467 |
|
|
|
1,972 |
|
|
|
1,504 |
|
Computer and data processing |
|
|
578 |
|
|
|
603 |
|
|
|
1,757 |
|
|
|
1,764 |
|
Supplies and postage |
|
|
473 |
|
|
|
475 |
|
|
|
1,414 |
|
|
|
1,353 |
|
Advertising and promotions |
|
|
227 |
|
|
|
472 |
|
|
|
650 |
|
|
|
905 |
|
Other |
|
|
1,596 |
|
|
|
1,493 |
|
|
|
5,131 |
|
|
|
4,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
15,142 |
|
|
|
13,409 |
|
|
|
47,660 |
|
|
|
42,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
4,722 |
|
|
|
(27,902 |
) |
|
|
12,388 |
|
|
|
(21,686 |
) |
Income tax expense |
|
|
1,313 |
|
|
|
524 |
|
|
|
3,384 |
|
|
|
1,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
3,409 |
|
|
$ |
(28,426 |
) |
|
$ |
9,004 |
|
|
$ |
(23,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends, net of amortization |
|
|
927 |
|
|
|
371 |
|
|
|
2,770 |
|
|
|
1,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shareholders |
|
$ |
2,482 |
|
|
$ |
(28,797 |
) |
|
$ |
6,234 |
|
|
$ |
(24,128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share (Note 2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.23 |
|
|
$ |
(2.66 |
) |
|
$ |
0.58 |
|
|
$ |
(2.21 |
) |
Diluted |
|
$ |
0.23 |
|
|
$ |
(2.66 |
) |
|
$ |
0.57 |
|
|
$ |
(2.21 |
) |
See accompanying notes to the consolidated financial statements.
- 4 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
(Dollars in thousands, |
|
Preferred |
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
Shareholders |
|
except per share data) |
|
Equity |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Loss |
|
|
Stock |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2009 |
|
$ |
53,074 |
|
|
$ |
113 |
|
|
$ |
26,397 |
|
|
$ |
124,952 |
|
|
$ |
(4,013 |
) |
|
$ |
(10,223 |
) |
|
$ |
190,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,004 |
|
|
|
|
|
|
|
|
|
|
|
9,004 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,632 |
|
|
|
|
|
|
|
1,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,636 |
|
Issuance costs of Series A Preferred Stock |
|
|
|
|
|
|
|
|
|
|
(68 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(68 |
) |
Share-based compensation plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation |
|
|
|
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
690 |
|
Stock options exercised |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
15 |
|
Restricted stock awards issued, net |
|
|
|
|
|
|
|
|
|
|
(170 |
) |
|
|
|
|
|
|
|
|
|
|
170 |
|
|
|
|
|
Directors retainer |
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
121 |
|
Accrued undeclared cumulative dividend on |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock, net of
amortization |
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
(194 |
) |
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A 3%
Preferred-$2.25 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Series A Preferred-$161.11 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,209 |
) |
|
|
|
|
|
|
|
|
|
|
(1,209 |
) |
Series B-1 8.48% Preferred-$6.36 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,108 |
) |
|
|
|
|
|
|
|
|
|
|
(1,108 |
) |
Common-$0.30 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,245 |
) |
|
|
|
|
|
|
|
|
|
|
(3,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009 |
|
$ |
53,330 |
|
|
$ |
113 |
|
|
$ |
26,815 |
|
|
$ |
127,941 |
|
|
$ |
(2,381 |
) |
|
$ |
(9,883 |
) |
|
$ |
195,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
- 5 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
9,004 |
|
|
$ |
(23,016 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,067 |
|
|
|
2,922 |
|
Net amortization of premiums and discounts on investment securities |
|
|
1,792 |
|
|
|
374 |
|
Provision for loan losses |
|
|
6,614 |
|
|
|
3,965 |
|
Amortization of unvested stock-based compensation |
|
|
690 |
|
|
|
529 |
|
Deferred income tax expense (benefit) |
|
|
5,562 |
|
|
|
(1,865 |
) |
Proceeds from sale of loans held for sale |
|
|
76,704 |
|
|
|
25,401 |
|
Originations of loans held for sale |
|
|
(76,178 |
) |
|
|
(25,199 |
) |
Increase in company owned life insurance |
|
|
(806 |
) |
|
|
(269 |
) |
Net gain on investment securities |
|
|
(2,928 |
) |
|
|
(232 |
) |
Impairment charge on investment securities |
|
|
4,101 |
|
|
|
38,345 |
|
Net gain on sale of loans held for sale |
|
|
(545 |
) |
|
|
(304 |
) |
Net gain on sale and disposal of other assets |
|
|
(177 |
) |
|
|
(254 |
) |
(Increase) decrease in other assets |
|
|
(5,095 |
) |
|
|
129 |
|
Increase (decrease) in other liabilities |
|
|
1,562 |
|
|
|
(2,727 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
23,367 |
|
|
|
17,799 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of investment securities: |
|
|
|
|
|
|
|
|
Available for sale |
|
|
(451,137 |
) |
|
|
(287,678 |
) |
Held to maturity |
|
|
(22,350 |
) |
|
|
(44,065 |
) |
Proceeds from principal payments, maturities and calls on investment securities: |
|
|
|
|
|
|
|
|
Available for sale |
|
|
243,439 |
|
|
|
270,367 |
|
Held to maturity |
|
|
36,512 |
|
|
|
40,924 |
|
Proceeds from sale of securities available for sale |
|
|
127,142 |
|
|
|
51,545 |
|
Net loan originations |
|
|
(159,750 |
) |
|
|
(116,772 |
) |
Purchase of company owned life insurance |
|
|
(34 |
) |
|
|
(20,066 |
) |
Proceeds from sales of other assets |
|
|
1,577 |
|
|
|
1,395 |
|
Purchase of premises and equipment |
|
|
(1,439 |
) |
|
|
(4,058 |
) |
|
|
|
|
|
|
|
Net cash used by investing activities |
|
|
(226,040 |
) |
|
|
(108,408 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
163,915 |
|
|
|
84,443 |
|
Net increase in short-term borrowings |
|
|
49,800 |
|
|
|
21,566 |
|
Proceeds from long-term borrowings |
|
|
|
|
|
|
30,000 |
|
Repayment of long-term borrowings |
|
|
(507 |
) |
|
|
(5,092 |
) |
Purchase of common stock |
|
|
|
|
|
|
(4,698 |
) |
Issuance of preferred and common shares |
|
|
(68 |
) |
|
|
112 |
|
Stock options exercised |
|
|
15 |
|
|
|
32 |
|
Cash dividends paid to preferred shareholders |
|
|
(2,320 |
) |
|
|
(1,112 |
) |
Cash dividends paid to common shareholders |
|
|
(3,243 |
) |
|
|
(4,611 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
207,592 |
|
|
|
120,640 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
4,919 |
|
|
|
30,031 |
|
Cash and cash equivalents, beginning of period |
|
|
55,187 |
|
|
|
46,673 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
60,106 |
|
|
$ |
76,704 |
|
|
|
|
|
|
|
|
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, and its subsidiaries provide deposit, lending and other financial services to individuals
and businesses in Central and Western New York. The Company owns 100% 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 in this Quarterly Report on Form 10-Q include the accounts of
the Company and its subsidiaries. The Trust is not included in the consolidated financial
statements of the Company under the requirements of the Variable Interest Entities Subsections of
the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). All
significant intercompany accounts and transactions have been eliminated in consolidation. The
accounting and reporting policies conform to general practices within the banking industry and to
U.S. generally accepted accounting principles. Prior years consolidated financial statements are
re-classified whenever necessary to conform to the current years presentation.
These financial statements have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in conformity with U.S.
generally accepted accounting principles (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 operations, shareholders equity and cash
flows for the periods indicated, and contain adequate disclosure to make the information presented
not misleading. These consolidated financial statements should be read in conjunction with the
Companys 2008 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 valuation 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 (receipts) and noncash
investing and financing activities was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash payments (receipts): |
|
|
|
|
|
|
|
|
Interest |
|
$ |
15,338 |
|
|
$ |
28,306 |
|
Income taxes |
|
|
(1,312 |
) |
|
|
2,349 |
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Real estate and other assets acquired in settlement of loans |
|
$ |
903 |
|
|
$ |
756 |
|
Accrued and declared unpaid dividends |
|
|
1,692 |
|
|
|
1,992 |
|
Increase in net unsettled security transactions |
|
|
16,795 |
|
|
|
1,814 |
|
Loans securitized |
|
|
15,983 |
|
|
|
|
|
- 7 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1.) |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) |
Recently Adopted Accounting Pronouncements
Accounting Standards Codification. The ASC became effective on July 1, 2009. At that date, the
ASC became FASBs officially recognized source of authoritative GAAP applicable to all public and
non-public non-governmental entities, superseding existing FASB, American Institute of Certified
Public Accountants, Emerging Issues Task Force and related literature. Rules and interpretive
releases of the SEC under the authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the way companies refer to GAAP in financial
statements and accounting policies. The ASC was not intended to change or alter existing GAAP, and
therefore did not have an impact on the Companys financial statements.
Earnings Per Share. On January 1, 2009, the Company adopted the requirements of the ASC
subsections regarding Participating Securities and the Two-Class Method as those requirements
relate to the calculation of earnings per common share. The ASC 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 common share pursuant to the two-class method. The Company has shares of restricted stock
outstanding that are participating securities under the provisions of the ASC. Accordingly, the
Company has computed earnings per common share using the two-class method described in the ASC
beginning January 1, 2009, and has retrospectively adjusted previously reported earnings per common
share data to conform to the two-class method.
Disclosures about Derivative Instruments and Hedging Activities. In March 2008, the FASB issued
new guidance regarding disclosures in the Derivatives and Hedging Topic of the ASC (Derivative
Disclosure Guidance). The Derivative Disclosure Guidance requires expanded disclosure to provide
greater transparency about (i) how and why an entity uses derivative instruments, (ii) how
derivative instruments and related hedge items are accounted for under the Derivatives and Hedging
Topic, and (iii) how derivative instruments and related hedged items affect an entitys financial
condition, results of operations and cash flows. To meet those objectives, the Derivative
Disclosure Guidance requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative
instruments and disclosures about credit risk-related contingent features in derivative agreements.
The Derivative Disclosure Guidance became effective for the Company on January 1, 2009 and its
adoption did not have an impact on the Companys financial statements.
Fair Value Determination. In April 2009, the FASB issued guidance (Fair Value Determination
Guidance) in the Fair Value Measurements and Disclosures Topic of the ASC regarding the
determination of fair value in instances where market conditions result in either inactive markets
for assets and liabilities or disorderly transactions within markets. The Fair Value Determination
Guidance affirms that the objective of fair value when the market for an asset is not active is the
price that would be received to sell the asset in an orderly transaction, and clarifies and
includes additional factors for determining whether there has been a significant decrease in market
activity for an asset when the market for that asset is not active. The Fair Value Determination
Guidance requires an entity to base its conclusion about whether a transaction was not orderly on
the weight of the evidence and expands certain disclosure requirements. The Fair Value
Determination Guidance became effective for the Company in the quarter ended June 30, 2009, and its
adoption did not have a significant impact on the Companys financial statements.
Other-Than-Temporary Impairments. In April 2009, the FASB issued guidance in the Investments-Debt
and Equity Securities Topic of the ASC regarding the recognition and presentation of
Other-Than-Temporary Impairments (OTTI Guidance). The OTTI Guidance (i) changes existing
guidance for determining whether an impairment is other than temporary to debt securities and (ii)
replaces the existing requirement that the entitys management assert it has both the intent and
ability to hold an impaired security until recovery with a requirement that management assert: (a)
it does not have the intent to sell the security; and (b) it is more likely than not it will not
have to sell the security before recovery of its cost basis. Under the OTTI Guidance, 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. The amount of the impairment related to other factors is
recognized in other comprehensive income. The OTTI Guidance became effective for the Company in
the quarter ended June 30, 2009, and its adoption did not have a significant impact on the
Companys financial statements.
Interim Disclosure about Fair Value of Financial Instruments. In April 2009, the FASB amended the
Fair Value of Financial Instruments Subsection of the ASC to require an entity to provide
disclosures about fair value of financial instruments in interim financial information (Fair Value
Disclosure Amendment). The Fair Value Disclosure Amendment requires a publicly traded company to
include disclosures about the fair value of its financial instruments whenever it issues summarized
financial information for interim reporting periods. In addition, entities must disclose, in the
body or in the accompanying notes of its summarized financial information for interim reporting
periods and in its financial statements for annual reporting periods, the fair value of all
financial instruments for which it is practicable to estimate that value, whether recognized or not
recognized in the statement of financial condition. The Fair Value Disclosure Amendment became
effective for the Company in the quarter ended June 30, 2009, and its adoption did not have a
significant effect on Companys financial statements. The Company has included the disclosures
required by the Fair Value Disclosure Amendment in Note 9, Fair Value Measurements.
- 8 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Subsequent Events. The Company has applied the provisions of the Subsequent Events Topic of the
ASC to its consolidated interim financial statements for periods ended after June 15, 2009. The
Subsequent Event Topic establishes general standards of accounting for, and disclosure of, events
that occur after the balance sheet date but before financial statements are issued or available to
be issued. In particular, the Subsequent Events Topic sets forth the period after the balance
sheet date during which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial statements. Accordingly,
the Company has evaluated events and transactions occurring through November 4, 2009, the date the
consolidated interim financial statements were issued, for potential recognition or disclosure in
the financial statements.
Recently Issued Accounting Pronouncements not Yet Adopted
In June 2009, the FASB issued two related accounting pronouncements changing the accounting
principles and disclosures requirements related to securitizations and special-purpose entities.
Specifically, these pronouncements eliminate the concept of a qualifying special-purpose entity,
change the requirements for derecognizing financial assets and change how a company determines when
an entity that is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. These pronouncements also expand existing disclosure requirements
to include more information about transfers of financial assets, including securitization
transactions, and where companies have continuing exposure to the risks related to transferred
financial assets. These pronouncements will be effective as of the beginning of each reporting
entitys first annual reporting period that begins after November 15, 2009, for interim periods
within that first annual reporting period and for interim and annual reporting periods thereafter.
Earlier application is prohibited. The recognition and measurement provisions regarding transfers
of financial assets shall be applied to transfers that occur on or after the effective date. These
new pronouncements will be effective January 1, 2010 and are not expected to have a significant
impact on the Companys financial statements.
Disclosures about Retirement Benefits. Effective for fiscal years ending after December 15, 2009,
the Compensation Retirement Benefits Topic, requires additional disclosures about employers plan
assets of a defined benefit pension or other postretirement plan. The requirements include
disclosing investing strategies, major categories of plan assets, concentrations of risk within
plan assets, information about fair value measurements of plan assets, and valuation techniques
used to measure the fair value of plan assets. Adoption of these additional requirements will not
have a significant impact on the Companys financial statements.
(2.) EARNINGS PER COMMON SHARE
The following table presents the computation of basic and diluted earnings per common share for the
three and nine months ended September 30, 2009 and 2008 (in thousands, except per share amounts).
The Company uses the two-class method prescribed by the Earnings Per Share Topic of the ASC to
compute earnings per common share. Participating securities include non-vested restricted stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) applicable to common shareholders |
|
$ |
2,482 |
|
|
|
(28,797 |
) |
|
|
6,234 |
|
|
|
(24,128 |
) |
Less: Earnings (loss) allocated to participating securities |
|
|
18 |
|
|
|
(224 |
) |
|
|
52 |
|
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings allocated to common shares outstanding |
|
$ |
2,464 |
|
|
$ |
(28,573 |
) |
|
$ |
6,182 |
|
|
$ |
(23,953 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to calculate basic EPS |
|
|
10,738 |
|
|
|
10,738 |
|
|
|
10,726 |
|
|
|
10,852 |
|
Add: Effect of common stock equivalents |
|
|
41 |
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares used to calculate diluted EPS |
|
|
10,779 |
|
|
|
10,738 |
|
|
|
10,764 |
|
|
|
10,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.23 |
|
|
$ |
(2.66 |
) |
|
$ |
0.58 |
|
|
$ |
(2.21 |
) |
Diluted |
|
$ |
0.23 |
|
|
$ |
(2.66 |
) |
|
$ |
0.57 |
|
|
$ |
(2.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares subject to the following securities were considered antidilutive and, therefore, excluded from the computation of
diluted EPS: |
Stock options |
|
|
553 |
|
|
|
452 |
|
|
|
528 |
|
|
|
423 |
|
Restricted stock awards |
|
|
|
|
|
|
31 |
|
|
|
14 |
|
|
|
24 |
|
Warrant |
|
|
378 |
|
|
|
|
|
|
|
378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
931 |
|
|
|
483 |
|
|
|
920 |
|
|
|
447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All shares of restricted stock are deducted from weighted average shares outstanding for the
computation of basic EPS. Shares of restricted stock, stock options, and warrant are included in
the calculation of diluted EPS using the treasury stock method.
- 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government
sponsored enterprises |
|
$ |
177,237 |
|
|
$ |
270 |
|
|
$ |
242 |
|
|
$ |
177,265 |
|
State and political subdivisions |
|
|
86,417 |
|
|
|
3,258 |
|
|
|
3 |
|
|
|
89,672 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
80,254 |
|
|
|
1,616 |
|
|
|
78 |
|
|
|
81,792 |
|
Federal Home Loan Mortgage Corporation |
|
|
51,722 |
|
|
|
1,078 |
|
|
|
17 |
|
|
|
52,783 |
|
Government National Mortgage Association |
|
|
118,154 |
|
|
|
917 |
|
|
|
35 |
|
|
|
119,036 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
18,121 |
|
|
|
244 |
|
|
|
122 |
|
|
|
18,243 |
|
Federal Home Loan Mortgage Corporation |
|
|
23,481 |
|
|
|
486 |
|
|
|
20 |
|
|
|
23,947 |
|
Government National Mortgage Association |
|
|
52,325 |
|
|
|
40 |
|
|
|
68 |
|
|
|
52,297 |
|
Privately issued |
|
|
8,825 |
|
|
|
464 |
|
|
|
361 |
|
|
|
8,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
102,752 |
|
|
|
1,234 |
|
|
|
571 |
|
|
|
103,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
352,882 |
|
|
|
4,845 |
|
|
|
701 |
|
|
|
357,026 |
|
Asset-backed securities |
|
|
1,415 |
|
|
|
366 |
|
|
|
|
|
|
|
1,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
617,951 |
|
|
$ |
8,739 |
|
|
$ |
946 |
|
|
$ |
625,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
45,056 |
|
|
$ |
1,066 |
|
|
$ |
|
|
|
$ |
46,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government
sponsored enterprises |
|
$ |
67,871 |
|
|
$ |
609 |
|
|
$ |
307 |
|
|
$ |
68,173 |
|
State and political subdivisions |
|
|
129,572 |
|
|
|
2,181 |
|
|
|
42 |
|
|
|
131,711 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
136,348 |
|
|
|
3,725 |
|
|
|
86 |
|
|
|
139,987 |
|
Federal Home Loan Mortgage Corporation |
|
|
94,960 |
|
|
|
2,649 |
|
|
|
14 |
|
|
|
97,595 |
|
Government National Mortgage Association |
|
|
1,926 |
|
|
|
17 |
|
|
|
25 |
|
|
|
1,918 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
17,856 |
|
|
|
74 |
|
|
|
642 |
|
|
|
17,288 |
|
Federal Home Loan Mortgage Corporation |
|
|
44,838 |
|
|
|
334 |
|
|
|
214 |
|
|
|
44,958 |
|
Government National Mortgage Association |
|
|
1,350 |
|
|
|
9 |
|
|
|
|
|
|
|
1,359 |
|
Privately issued |
|
|
42,296 |
|
|
|
5 |
|
|
|
2,854 |
|
|
|
39,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
106,340 |
|
|
|
422 |
|
|
|
3,710 |
|
|
|
103,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
339,574 |
|
|
|
6,813 |
|
|
|
3,835 |
|
|
|
342,552 |
|
Asset-backed securities |
|
|
3,918 |
|
|
|
|
|
|
|
|
|
|
|
3,918 |
|
Equity securities |
|
|
923 |
|
|
|
281 |
|
|
|
52 |
|
|
|
1,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
541,858 |
|
|
$ |
9,884 |
|
|
$ |
4,236 |
|
|
$ |
547,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
$ |
58,532 |
|
|
$ |
619 |
|
|
$ |
4 |
|
|
$ |
59,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Proceeds from sales |
|
$ |
45,878 |
|
|
$ |
4,000 |
|
|
$ |
144,623 |
|
|
$ |
51,545 |
|
Gross realized gains |
|
|
1,887 |
|
|
|
12 |
|
|
|
4,860 |
|
|
|
235 |
|
Gross realized losses |
|
|
166 |
|
|
|
|
|
|
|
1,932 |
|
|
|
3 |
|
The scheduled maturities of securities available for sale and securities held to maturity at
September 30, 2009 are shown below. 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 |
|
$ |
47,364 |
|
|
$ |
47,864 |
|
Due from one to five years |
|
|
196,173 |
|
|
|
200,082 |
|
Due after five years through ten years |
|
|
72,306 |
|
|
|
73,301 |
|
Due after ten years |
|
|
302,108 |
|
|
|
304,497 |
|
|
|
|
|
|
|
|
|
|
$ |
617,951 |
|
|
$ |
625,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities held to maturity: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
35,689 |
|
|
$ |
35,940 |
|
Due from one to five years |
|
|
7,087 |
|
|
|
7,572 |
|
Due after five years through ten years |
|
|
1,791 |
|
|
|
2,022 |
|
Due after ten years |
|
|
489 |
|
|
|
588 |
|
|
|
|
|
|
|
|
|
|
$ |
45,056 |
|
|
$ |
46,122 |
|
|
|
|
|
|
|
|
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 September 30, 2009 and December 31, 2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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 |
|
$ |
70,112 |
|
|
$ |
37 |
|
|
$ |
10,303 |
|
|
$ |
205 |
|
|
$ |
80,415 |
|
|
$ |
242 |
|
State and political subdivisions |
|
|
20 |
|
|
|
1 |
|
|
|
195 |
|
|
|
2 |
|
|
|
215 |
|
|
|
3 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
16,716 |
|
|
|
77 |
|
|
|
3 |
|
|
|
1 |
|
|
|
16,719 |
|
|
|
78 |
|
Federal Home Loan Mortgage Corporation |
|
|
5,346 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
5,346 |
|
|
|
17 |
|
Government National Mortgage Association |
|
|
13,984 |
|
|
|
34 |
|
|
|
61 |
|
|
|
1 |
|
|
|
14,045 |
|
|
|
35 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
374 |
|
|
|
1 |
|
|
|
5,581 |
|
|
|
121 |
|
|
|
5,955 |
|
|
|
122 |
|
Federal Home Loan Mortgage Corporation |
|
|
569 |
|
|
|
2 |
|
|
|
888 |
|
|
|
18 |
|
|
|
1,457 |
|
|
|
20 |
|
Government National Mortgage Association |
|
|
15,961 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
15,961 |
|
|
|
68 |
|
Privately issued |
|
|
|
|
|
|
|
|
|
|
3,427 |
|
|
|
361 |
|
|
|
3,427 |
|
|
|
361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
16,904 |
|
|
|
71 |
|
|
|
9,896 |
|
|
|
500 |
|
|
|
26,800 |
|
|
|
571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
52,950 |
|
|
|
199 |
|
|
|
9,960 |
|
|
|
502 |
|
|
|
62,910 |
|
|
|
701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
|
123,082 |
|
|
|
237 |
|
|
|
20,458 |
|
|
|
709 |
|
|
|
143,540 |
|
|
|
946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
123,082 |
|
|
$ |
237 |
|
|
$ |
20,458 |
|
|
$ |
709 |
|
|
$ |
143,540 |
|
|
$ |
946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 11 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(3.) INVESTMENT SECURITIES (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
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 |
|
$ |
50 |
|
|
$ |
1 |
|
|
$ |
11,704 |
|
|
$ |
306 |
|
|
$ |
11,754 |
|
|
$ |
307 |
|
State and political subdivisions |
|
|
6,191 |
|
|
|
41 |
|
|
|
84 |
|
|
|
1 |
|
|
|
6,275 |
|
|
|
42 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
10,432 |
|
|
|
65 |
|
|
|
484 |
|
|
|
21 |
|
|
|
10,916 |
|
|
|
86 |
|
Federal Home Loan Mortgage Corporation |
|
|
5,533 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
5,533 |
|
|
|
14 |
|
Government National Mortgage Association |
|
|
227 |
|
|
|
3 |
|
|
|
1,059 |
|
|
|
22 |
|
|
|
1,286 |
|
|
|
25 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage Association |
|
|
828 |
|
|
|
1 |
|
|
|
7,181 |
|
|
|
641 |
|
|
|
8,009 |
|
|
|
642 |
|
Federal Home Loan Mortgage Corporation |
|
|
|
|
|
|
|
|
|
|
7,224 |
|
|
|
214 |
|
|
|
7,224 |
|
|
|
214 |
|
Privately issued |
|
|
24,425 |
|
|
|
2,045 |
|
|
|
10,975 |
|
|
|
809 |
|
|
|
35,400 |
|
|
|
2,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total collateralized mortgage obligations |
|
|
25,253 |
|
|
|
2,046 |
|
|
|
25,380 |
|
|
|
1,664 |
|
|
|
50,633 |
|
|
|
3,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed securities |
|
|
41,445 |
|
|
|
2,128 |
|
|
|
26,923 |
|
|
|
1,707 |
|
|
|
68,368 |
|
|
|
3,835 |
|
Equity securities |
|
|
310 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
310 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
|
47,996 |
|
|
|
2,222 |
|
|
|
38,711 |
|
|
|
2,014 |
|
|
|
86,707 |
|
|
|
4,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and political subdivisions |
|
|
554 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
554 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
48,550 |
|
|
$ |
2,226 |
|
|
$ |
38,711 |
|
|
$ |
2,014 |
|
|
$ |
87,261 |
|
|
$ |
4,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 other 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.
During the third quarter of 2009, the Company recorded OTTI charges totaling $2.3 million on 12
pooled trust preferred securities, all of which were designated as impaired due to reasons of
credit quality, and one privately issued whole loan collateralized mortgage obligation (CMO)
which the Company has determined it intends to sell.
The following summarizes the amounts of OTTI recognized during the periods presented by investment
category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Mortgage-backed securities Privately issued whole loan CMOs |
|
$ |
126 |
|
|
$ |
|
|
|
$ |
1,859 |
|
|
$ |
1,728 |
|
Other
asset-backed securities Trust preferred securities |
|
|
2,192 |
|
|
|
3,529 |
|
|
|
2,242 |
|
|
|
5,592 |
|
Equity
securities Auction rate securities |
|
|
|
|
|
|
31,025 |
|
|
|
|
|
|
|
31,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,318 |
|
|
$ |
34,554 |
|
|
$ |
4,101 |
|
|
$ |
38,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 12 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(3.) INVESTMENT SECURITIES (Continued)
As of September 30, 2009, 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 September 30, 2009, 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 operations.
(4.) LOANS
Loans outstanding, including net unearned income and net deferred fees and costs of $16.3 million
and $12.3 million as of September 30, 2009 and December 31, 2008, respectively, are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
Commercial |
|
$ |
197,404 |
|
|
$ |
158,543 |
|
Commercial real estate |
|
|
296,648 |
|
|
|
262,234 |
|
Agricultural |
|
|
42,545 |
|
|
|
44,706 |
|
Residential real estate |
|
|
147,447 |
|
|
|
177,683 |
|
Consumer indirect |
|
|
345,448 |
|
|
|
255,054 |
|
Consumer direct and home equity |
|
|
229,870 |
|
|
|
222,859 |
|
|
|
|
|
|
|
|
Total loans |
|
|
1,259,362 |
|
|
|
1,121,079 |
|
Less: Allowance for loan losses |
|
|
20,782 |
|
|
|
18,749 |
|
|
|
|
|
|
|
|
Total loans, net |
|
$ |
1,238,580 |
|
|
$ |
1,102,330 |
|
|
|
|
|
|
|
|
(5.) GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill totaled $37.4 million as of September 30, 2009 and December 31,
2008. The Company performs a goodwill impairment test on an annual basis or more frequently if
events and circumstances warrant. As of September 30, 2009, the Company performed the annual
goodwill impairment test and determined that no impairment existed.
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.
- 13 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(6.) COMPREHENSIVE INCOME (LOSS)
Presented below is a reconciliation of net income (loss) to comprehensive income (loss) including
the components of other comprehensive income (loss) for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
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 |
|
$ |
972 |
|
|
$ |
376 |
|
|
$ |
596 |
|
|
$ |
(53,276 |
) |
|
$ |
(20,610 |
) |
|
$ |
(32,666 |
) |
Reclassification adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized net gains included in income |
|
|
(2,928 |
) |
|
|
(1,133 |
) |
|
|
(1,795 |
) |
|
|
(232 |
) |
|
|
(90 |
) |
|
|
(142 |
) |
Impairment charges included in income |
|
|
4,101 |
|
|
|
1,587 |
|
|
|
2,514 |
|
|
|
38,345 |
|
|
|
14,834 |
|
|
|
23,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,145 |
|
|
|
830 |
|
|
|
1,315 |
|
|
|
(15,163 |
) |
|
|
(5,866 |
) |
|
|
(9,297 |
) |
Pension and post-retirement benefit liabilities |
|
|
517 |
|
|
|
200 |
|
|
|
317 |
|
|
|
(34 |
) |
|
|
(14 |
) |
|
|
(20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
$ |
2,662 |
|
|
$ |
1,030 |
|
|
|
1,632 |
|
|
$ |
(15,197 |
) |
|
$ |
(5,880 |
) |
|
|
(9,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
9,004 |
|
|
|
|
|
|
|
|
|
|
|
(23,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
$ |
10,636 |
|
|
|
|
|
|
|
|
|
|
$ |
(32,333 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive loss, net of tax, for the periods indicated were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Net unrealized gain on securities available for sale |
|
$ |
4,778 |
|
|
$ |
3,463 |
|
Unfunded pension and post-retirement benefit liabilities |
|
|
(7,159 |
) |
|
|
(7,476 |
) |
|
|
|
|
|
|
|
|
|
$ |
(2,381 |
) |
|
$ |
(4,013 |
) |
|
|
|
|
|
|
|
(7.) 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. On May 6, 2009 the shareholders of the Company approved two share-based
compensation plans, the 2009 Management Stock Incentive Plan (Management Plan) and the 2009
Directors Stock Incentive Plan (Directors Plan). An aggregate of 690,000 shares has been
reserved for issuance by the Company under the terms of the Management Plan pursuant to the grant
of incentive stock options (not to exceed 500,000 shares), non-qualified stock options and
restricted stock grants all which are defined in the Plan. An aggregate of 250,000 shares has been
reserved for issuance by the Company under the terms of the Directors Plan pursuant to the grant
of non-qualified stock options and restricted stock grants, all which are defined in the Plan.
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 Company awarded grants of 48,500 restricted shares to certain key officers during the nine
months ended September 30, 2009. The market price of the restricted shares on the date of grant
was $13.21. Both a performance requirement and a service requirement must be satisfied before the
participant becomes vested in the shares. The performance period for the awards is the Companys
fiscal year ending on December 31, 2009. As a result of not satisfying certain performance
requirements for the fiscal year ending December 31, 2008, 41,200 restricted shares granted in the
first nine months of 2008 were forfeited during the first nine months of 2009. There was no
reversal of restricted stock award expense required during the nine months ended September 30,
2009, as the Company reduced share-based compensation expense related to the forfeited shares
during 2008. During the nine months ended September 30, 2009 the Company granted 8,000 restricted
shares to directors, of which 4,000 shares vested immediately and 4,000 shares will vest after
completion of a one-year service requirement. The market price of the restricted shares on the
date of grant was $14.86.
- 14 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(7.) SHARE-BASED COMPENSATION PLANS (Continued)
The share-based compensation expense associated included in the consolidated statements of
operations (unaudited) is as follows for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Stock Incentive Plan |
|
$ |
57 |
|
|
$ |
125 |
|
|
$ |
179 |
|
|
$ |
304 |
|
Director Stock Incentive Plan |
|
|
11 |
|
|
|
12 |
|
|
|
34 |
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
137 |
|
|
|
213 |
|
|
|
332 |
|
Restricted stock awards: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Stock Incentive Plan |
|
|
92 |
|
|
|
(160 |
) |
|
|
394 |
|
|
|
197 |
|
Director Stock Incentive Plan |
|
|
15 |
|
|
|
|
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
(160 |
) |
|
|
477 |
|
|
|
197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation |
|
$ |
175 |
|
|
$ |
(23 |
) |
|
$ |
690 |
|
|
$ |
529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.) 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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
423 |
|
|
$ |
364 |
|
|
$ |
1,267 |
|
|
$ |
1,092 |
|
Interest cost on projected benefit obligation |
|
|
456 |
|
|
|
391 |
|
|
|
1,369 |
|
|
|
1,171 |
|
Expected return on plan assets |
|
|
(462 |
) |
|
|
(524 |
) |
|
|
(1,386 |
) |
|
|
(1,570 |
) |
Amortization of unrecognized prior service cost |
|
|
3 |
|
|
|
3 |
|
|
|
9 |
|
|
|
9 |
|
Amortization of unrecognized loss |
|
|
182 |
|
|
|
|
|
|
|
546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
602 |
|
|
$ |
234 |
|
|
$ |
1,805 |
|
|
$ |
702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 April 2009, the Company made the minimum required contribution for fiscal year
2009 of $1.6 million to the pension plan. The Company may make additional contributions to its
pension plan in fiscal year 2009.
Defined Contribution Plan
Employees that meet certain age and service requirements are eligible to participate in the Company
sponsored 401(k) plan. Under the plan, participants may make contributions, in the form of salary
deferrals, up to the maximum Internal Revenue Code limit. The Company matches a participants
contributions up to 4.5% of compensation, calculated as 100% of the first 3% of compensation and
50% of the next 3% of compensation deferred by the participant. The Company may also make
additional discretionary matching contributions, although no such additional discretionary
contributions were made in 2008 or during the first nine months of 2009. The expense included in
salaries and employee benefits in the consolidated statements of operations for this plan amounted
to $234 thousand and $244 thousand for the three months ended September 30, 2009 and September 30,
2008, respectively. For the nine months ended September 30, 2009 and September 30, 2008 the
expense for the plan amounted to $686 thousand and $760 thousand, respectively.
- 15 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(8.) EMPLOYEE BENEFIT PLANS (Continued)
Supplemental Executive Retirement Plans
During the third quarter of 2008 the Company established non-qualified supplemental executive
retirement plans (SERPs) for two active executives. The Company has accrued a liability, all of
which is unfunded, of $876 thousand as of September 30, 2009, and recorded expense of $78 thousand
and $567 thousand for the three and nine month periods, respectively, ended September 30, 2009.
The Company expensed $76 thousand during the three month and nine months periods ended September
30, 2008.
(9.) FAIR VALUE MEASUREMENTS
Valuation Hierarchy
On January 1, 2008, the Company adopted the Fair Value Measurements and Disclosures Topic of the
ASC (Fair Value Topic). The Fair Value Topic defines fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. The Fair Value Topic establishes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into three levels.
|
|
|
Level 1 Unadjusted quoted prices in active markets for assets or liabilities
identical to those to be reported at fair value. An active market is a market in which
transactions occur for the item to be fair valued with sufficient frequency and volume to
provide pricing information on an ongoing basis. |
|
|
|
Level 2 Inputs other than quoted prices included within Level 1 inputs that
are observable for the asset or liability, either directly or indirectly. These inputs
include: (a) quoted prices for similar assets or liabilities in active markets; (b) quoted
prices for identical or similar assets or liabilities in markets that are not active, such
as when there are few transactions for the asset or liability, the prices are not current,
price quotations vary substantially over time or in which little information is released
publicly; (c) inputs other than quoted prices that are observable for the asset or
liability; and (d) inputs that are derived principally from or corroborated by observable
market data by correlation or other means. The Companys Level 2 assets primarily include
debt securities classified as available for sale and not included in Level 3. |
|
|
|
Level 3 Significant unobservable inputs for the asset or liability. These
inputs should be used to determine fair value only when observable inputs are not
available. Unobservable inputs should be developed based on the best information available
in the circumstances, which might include internally generated data and assumptions being
used to price the asset or liability. The Companys Level 3 assets primarily include
pooled trust preferred securities. |
Investment Securities. Fair values of equity securities are determined using public quotations,
when available. Where quoted market prices are not available, fair values may be estimated based
on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for
which the determination of fair value may require significant judgment or estimation. Fair
values of public bonds and those private securities that are actively traded in the secondary
market have been determined through the use of third-party pricing services using market
observable inputs. Private placement securities and other securities where the Company does not
receive a public quotation are valued by discounting the expected cash flows. Market rates used
are applicable to the yield, credit quality and average maturity of each security. Private
equity securities may also utilize internal valuation methodologies appropriate for the specific
asset. Fair values might also be determined using broker quotes or through the use of internal
models or analysis.
Financial Assets Measured at Fair Value on a Recurring Basis
The following table summarizes financial assets measured and recorded at fair value on a recurring
basis as of September 30, 2009, segregated by the level of the valuation inputs within the fair
value hierarchy utilized to measure fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government
sponsored enterprises |
|
$ |
|
|
|
$ |
177,265 |
|
|
$ |
|
|
|
$ |
177,265 |
|
State and political subdivisions |
|
|
|
|
|
|
89,672 |
|
|
|
|
|
|
|
89,672 |
|
Mortgage-backed securities |
|
|
|
|
|
|
357,026 |
|
|
|
|
|
|
|
357,026 |
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities |
|
|
|
|
|
|
|
|
|
|
1,335 |
|
|
|
1,335 |
|
Other |
|
|
|
|
|
|
350 |
|
|
|
96 |
|
|
|
446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
$ |
|
|
|
$ |
624,313 |
|
|
$ |
1,431 |
|
|
$ |
625,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 16 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(9.) FAIR VALUE MEASUREMENTS (Continued)
The following table presents changes in Level 3 available for sale securities measured at fair
value on a recurring basis during the nine months ended September 30, 2009 (in thousands):
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
3,772 |
|
Capitalized interest |
|
|
184 |
|
Principal paydowns and amortization of premiums |
|
|
(9 |
) |
Coupon payments applied to principal |
|
|
(224 |
) |
Total losses (realized/unrealized): |
|
|
|
|
Included in earnings |
|
|
(2,192 |
) |
Included in other comprehensive income |
|
|
(100 |
) |
|
|
|
|
Balance at September 30, 2009 |
|
$ |
1,431 |
|
|
|
|
|
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 September 30, 2009, 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 September 30, 2009, a
valuation allowance against loans held for sale was not necessary as their fair value was in excess
of their 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. Due primarily to
a decline in the estimated prepayment speed of the Companys sold loan portfolio with servicing
retained, the fair value of the Companys MSR increased during 2009. As a result of this increase,
the Company reduced its corresponding valuation allowance by $165 thousand during the first nine
months of 2009. A valuation allowance of $197 thousand existed as of September 30, 2009. 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.
During the third quarter of 2009, 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 $1.1 million were
reduced by specific valuation allowance allocations totaling $247 thousand to a total reported fair
value of $872 thousand. 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 three or nine month periods ended September 30, 2009.
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.
- 17 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(9.) FAIR VALUE MEASUREMENTS (Continued)
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.
The estimated fair value approximates carrying value for cash and cash equivalents, Federal Home
Loan Bank (FHLB) and Federal Reserve Bank (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 held for sale. The fair value is based on estimates, quoted market prices and investor
commitments.
Loans. 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.
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 September 30, 2009 and December 31, 2008 may not
necessarily represent the underlying fair value of the Company.
The estimated fair values of financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
60,106 |
|
|
$ |
60,106 |
|
|
$ |
55,187 |
|
|
$ |
55,187 |
|
Securities available for sale |
|
|
625,744 |
|
|
|
625,744 |
|
|
|
547,506 |
|
|
|
547,506 |
|
Securities held to maturity |
|
|
45,056 |
|
|
|
46,122 |
|
|
|
58,532 |
|
|
|
59,147 |
|
Loans held for sale |
|
|
1,032 |
|
|
|
1,055 |
|
|
|
1,013 |
|
|
|
1,032 |
|
Loans |
|
|
1,238,580 |
|
|
|
1,305,274 |
|
|
|
1,102,330 |
|
|
|
1,169,660 |
|
Company owned life insurance |
|
|
24,532 |
|
|
|
24,532 |
|
|
|
23,692 |
|
|
|
23,692 |
|
Accrued interest receivable |
|
|
8,777 |
|
|
|
8,777 |
|
|
|
7,556 |
|
|
|
7,556 |
|
FHLB and FRB stock |
|
|
7,185 |
|
|
|
7,185 |
|
|
|
6,035 |
|
|
|
6,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, savings and money market deposits |
|
|
1,084,996 |
|
|
|
1,084,996 |
|
|
|
985,796 |
|
|
|
985,796 |
|
Time deposits |
|
|
712,182 |
|
|
|
719,037 |
|
|
|
647,467 |
|
|
|
654,334 |
|
Short-term borrowings |
|
|
73,265 |
|
|
|
73,265 |
|
|
|
23,465 |
|
|
|
23,465 |
|
Long-term borrowings (excluding junior subordinated debentures) |
|
|
30,146 |
|
|
|
31,097 |
|
|
|
30,653 |
|
|
|
32,005 |
|
Junior subordinated debentures |
|
|
16,702 |
|
|
|
12,249 |
|
|
|
16,702 |
|
|
|
12,232 |
|
Accrued interest payable |
|
|
8,745 |
|
|
|
8,745 |
|
|
|
7,041 |
|
|
|
7,041 |
|
- 18 -
|
|
|
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 Obama Administrations regulatory reform proposals
concerning the financial services sector released on June 17, 2009; |
|
|
|
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.
- 19 -
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 2008 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 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. Illiquid credit markets and volatile equity have combined with declines in consumer
spending to increase the uncertainty inherent in these estimates and assumptions. 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 2008 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,
2008.
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.
During third quarter of 2009, we announced the appointment of Karl F. Krebs to the position of
Executive Vice President and Chief Financial Officer (CFO). Mr. Krebs succeeded Mr. Ronald
Miller, who retired as CFO effective October 1, 2009 as part of the Companys management succession
plan. As previously announced, Mr. Miller will continue to serve as Executive Vice President and
Secretary and will be assisting with the transition and special projects until his formal
retirement in early 2010.
RESULTS OF OPERATIONS
Summary of Performance
Net income was $3.4 million for the third quarter of 2009 compared to a net loss of $28.4 million
for the third quarter of 2008. Net income applicable to common shareholders for the third quarter
of 2009 was $2.5 million, or $0.23 per diluted share, compared with a net loss of $28.8 million, or
$2.66 per diluted share, for the third quarter of last year. Net income for the nine months ended
September 30, 2009 totaled $9.0 million compared to a net loss of $23.0 million for the same period
in 2008. For the first nine months of 2009 net income applicable to common shareholders was $6.2
million, or $0.57 per diluted share, compared with a net loss of $24.1 million, or $2.21 per
diluted share, for the first nine months of 2008.
Included in the results for the three and nine month periods ended September 30, 2008, is a pre-tax
OTTI charge of $31.0 million related to auction rate preferred equity securities collateralized by
preferred stock of Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC). The tax benefit recognized on this OTTI charge was based on its treatment
being classified as a capital loss for tax purposes, which significantly limited the tax benefit.
A provision of EESA, enacted during the fourth quarter of 2008, permitting banks to recognize
losses relating to FNMA and FHLMC preferred stock as an ordinary loss, increased the tax benefit to
the Company in the fourth quarter. Had the tax benefit been recognized during the third quarter of
2008, it would have reduced the net losses for the three and nine month periods ended September 30,
2008 by $12.0 million.
Details of the changes in the various components of net income are further discussed in the
sections that follow.
- 20 -
Net Interest Income
The principal source of the Companys revenue is net interest income. Net interest income is the
difference between interest income on interest-earning assets, such as loans and investment
securities and the interest expense on liabilities used to fund those assets, such as
interest-bearing deposits and borrowings. Net interest income is impacted by both changes in the
amount and composition of interest-earning assets and interest-bearing liabilities, as well as
market interest rates.
Net interest income was $18.1 million and $16.7 million for the three months ended September 30,
2009 and 2008, respectively. For the nine months ended September 30, 2009 and 2008, net interest
income was $53.1 million and $48.0 million, respectively. The increases for both periods resulted
primarily from favorable changes in the mix of our interest-earning assets and repricing of
interest-bearing liabilities at lower interest rates.
Net interest income was $18.1 million for the third quarter, up $1.3 million or 8%, from the third
quarter of 2008. For the third quarter of 2009, average loans and securities represented
66% and 31%, respectively, of average earning assets compared to 59% and 41% in the third quarter
of 2008. The tax equivalent net interest margin was relatively unchanged at 3.99% and 3.98% for
the third quarters of 2009 and 2008, respectively. A decrease of $861 thousand, or 4%, in total
interest income was surpassed by a decrease of $2.2 million, or 28%, in total interest expense.
Interest on investment securities and interest-earning deposits was $5.0 million for the third
quarter of 2009, compared to $7.5 million for the third quarter of 2008. The average balance of
investment securities was $585.8 million with an average tax equivalent yield of 3.79% for the
third quarter of 2009, compared to an average balance of $721.4 million with an average yield of
4.66% for the third quarter of 2008. The decrease in yield is primarily due to lower market
interest rates, coupled with less risk and shorter average maturities in the investment securities.
In addition, selected higher yielding securities were sold for gains during the three months ended
September 30, 2009. The sale of these securities, coupled with principal payments, maturities and
calls on investment securities has contributed to lower interest income as the proceeds from these
transactions were reinvested at lower yields.
Interest on loans was $18.7 million for third quarter of 2009, compared to $17.0 million for the
third quarter of 2008. The average balance of loans was $1.236 billion with an average yield of
6.01% for the third quarter of 2009 compared to an average balance of $1.039 billion with an
average yield of 6.52% for the third quarter of 2008. Average commercial loans in the third
quarter of 2009 increased $83.6 million, as compared to the third quarter of 2008 primarily due to
continued strong growth in our commercial loan portfolio. The average balance of consumer indirect
loans, comprised almost entirely of automobile loans, increased $133.5 million for the third
quarter of 2009 over the corresponding quarter last year. This 67% increase in volume was
primarily responsible for the $2.3 million increase in interest income on consumer indirect loans
when comparing the third quarter of 2009 to that of 2008.
Interest on deposits was $4.8 million for the third quarter of 2009, compared to $6.5 million for
the third quarter of 2008. The average balance of interest-bearing deposits was $1.430 billion
with an average cost of 1.34% for the third quarter of 2009 compared to an average balance of
$1.300 billion with an average cost of 2.00% for the third quarter of 2008. The average balance of
noninterest-bearing deposits increased by 2% to $298.7 million during the third quarter of this
year compared to the same quarter last year. The increase in the balance of total average deposits
is due to a 7% increase in public and 9% increase in nonpublic deposits, while the decrease in
average cost is due primarily to the beneficial repricing of certificates of deposits, and to a
lesser extent savings and money market accounts, at lower interest rates. The declines in interest
and average cost on total borrowed funds from last years third quarter to this years third
quarter are due to a combination of lower market interest rates and average borrowings outstanding.
For the nine months ended September 30, 2009, net interest income was $53.1 million, an increase of
$5.0 million or 10% over the same period in 2008. For the nine months ended September 30, 2009,
average loans and securities represented 65% and 32%, respectively, of average earning assets
compared to 56% and 42% for the same period in 2008. The nine month period ended September 30,
2009 reflected an increase of 15 basis points in net interest margin to 4.03% compared to the same
period last year. The improved net interest margin resulted principally from lower funding costs
and the benefits associated with a higher percentage of earning assets being deployed in higher
yielding loan assets. A decrease of $4.3 million, or 6%, in total interest income was surpassed by
a decrease of $9.3 million, or 35%, in total interest expense.
Interest on investment securities and interest-earning deposits was $16.5 million for the nine
months ended September 30, 2009, compared to $24.2 million for the same period in 2008. The
average balance of investment securities was $593.5 million with an average tax equivalent yield of
4.17% for the nine months ended September 30, 2009 compared to an average balance of was $739.9
million with an average yield of 4.87% for the same period in 2008. The decrease in yield is
primarily due to lower market interest rates as proceeds from securities transactions, including
the sale of selected higher yielding securities during the nine months ended September 30, 2009,
were reinvested at lower rates. A change in the mix of the investment portfolio that included a
decline in the level of tax-exempt securities and resulting interest income also contributed to the
decrease in yield.
- 21 -
Interest on loans was $53.5 million for first nine months of 2009, compared to $50.1 million for
the first nine months of 2008. The average balance of loans was $1.190 billion with an average
yield of 6.01% for the nine month period ended September 30, 2009 compared to an average balance of
$998.0 million with an average yield of 6.70% for the same period in 2008. Average commercial
loans increased by $64.0 million during the first nine months of 2009, as compared to same period
in 2008 primarily due to strong growth in our commercial loan portfolio. The average balance of
consumer indirect loans, comprised almost entirely of automobile loans, increased $136.0 million
for the first nine months of 2009 over the corresponding period last year. This 82% increase in
volume was primarily responsible for the $6.9 million increase in interest income on consumer
indirect loans when comparing the nine months ended September 30, 2009 to the same period in 2008.
Interest on deposits was $14.7 million for the nine month period ended September 30, 2009, compared
to $23.2 million for the same period in 2008. The average balance of interest-bearing deposits was
$1.422 billion with an average cost of 1.38% for the nine month period ended September 30, 2009
compared to an average balance of $1.326 billion with an average cost of 2.34% for the same period
in 2008. The average balance of noninterest-bearing deposits increased by 4% to $288.9 million
during the first nine months of this year compared to the same period last year. The increase in
the balance of total average deposits is due to a 4% increase in public and a 10% increase in
nonpublic deposits, while the decrease in average cost is due primarily to the beneficial repricing
of certificates of deposits, and to a lesser extent savings and money market accounts, at lower
interest rates.
The following table provides a reconciliation between tax equivalent net interest income as
presented in the average balance sheets above and net interest income in the consolidated financial
statements filed herewith in Part I, Item 1, Financial Statements (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net interest income (tax equivalent) |
|
$ |
18,669 |
|
|
$ |
17,686 |
|
|
$ |
55,202 |
|
|
$ |
51,448 |
|
Less: tax-exempt tax equivalent adjustment |
|
|
591 |
|
|
|
940 |
|
|
|
2,152 |
|
|
|
3,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
18,078 |
|
|
$ |
16,746 |
|
|
$ |
53,050 |
|
|
$ |
48,018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 22 -
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 September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest-earning deposits |
|
$ |
39,945 |
|
|
$ |
20 |
|
|
|
0.20 |
% |
|
$ |
12,897 |
|
|
$ |
68 |
|
|
|
2.10 |
% |
Investment securities (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
450,266 |
|
|
|
3,819 |
|
|
|
3.39 |
|
|
|
493,438 |
|
|
|
5,577 |
|
|
|
4.52 |
|
Tax-exempt (2) |
|
|
135,564 |
|
|
|
1,737 |
|
|
|
5.13 |
|
|
|
227,981 |
|
|
|
2,835 |
|
|
|
4.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
585,830 |
|
|
|
5,556 |
|
|
|
3.79 |
|
|
|
721,419 |
|
|
|
8,412 |
|
|
|
4.66 |
|
Loans held for sale |
|
|
1,490 |
|
|
|
21 |
|
|
|
5.76 |
|
|
|
799 |
|
|
|
14 |
|
|
|
6.81 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
194,803 |
|
|
|
2,299 |
|
|
|
4.68 |
|
|
|
147,350 |
|
|
|
2,244 |
|
|
|
6.06 |
|
Commercial real estate |
|
|
288,658 |
|
|
|
4,515 |
|
|
|
6.20 |
|
|
|
249,769 |
|
|
|
4,234 |
|
|
|
6.74 |
|
Agricultural |
|
|
43,250 |
|
|
|
597 |
|
|
|
5.48 |
|
|
|
45,965 |
|
|
|
732 |
|
|
|
6.34 |
|
Residential real estate |
|
|
148,325 |
|
|
|
2,266 |
|
|
|
6.11 |
|
|
|
173,175 |
|
|
|
2,669 |
|
|
|
6.17 |
|
Consumer indirect |
|
|
334,123 |
|
|
|
5,938 |
|
|
|
7.05 |
|
|
|
200,586 |
|
|
|
3,626 |
|
|
|
7.19 |
|
Consumer direct and home equity |
|
|
226,355 |
|
|
|
3,076 |
|
|
|
5.39 |
|
|
|
222,241 |
|
|
|
3,499 |
|
|
|
6.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,235,514 |
|
|
|
18,691 |
|
|
|
6.01 |
|
|
|
1,039,086 |
|
|
|
17,004 |
|
|
|
6.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,862,779 |
|
|
|
24,288 |
|
|
|
5.19 |
|
|
|
1,774,201 |
|
|
|
25,498 |
|
|
|
5.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(20,893 |
) |
|
|
|
|
|
|
|
|
|
|
(16,385 |
) |
|
|
|
|
|
|
|
|
Other noninterest-earning assets |
|
|
198,144 |
|
|
|
|
|
|
|
|
|
|
|
150,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,040,030 |
|
|
|
|
|
|
|
|
|
|
$ |
1,908,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
$ |
361,147 |
|
|
$ |
174 |
|
|
|
0.19 |
% |
|
$ |
342,188 |
|
|
$ |
738 |
|
|
|
0.86 |
% |
Savings and money market |
|
|
369,562 |
|
|
|
271 |
|
|
|
0.29 |
|
|
|
366,449 |
|
|
|
853 |
|
|
|
0.93 |
|
Certificates of deposit |
|
|
699,011 |
|
|
|
4,381 |
|
|
|
2.49 |
|
|
|
591,025 |
|
|
|
4,947 |
|
|
|
3.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,429,720 |
|
|
|
4,826 |
|
|
|
1.34 |
|
|
|
1,299,662 |
|
|
|
6,538 |
|
|
|
2.00 |
|
Short-term borrowings |
|
|
47,794 |
|
|
|
77 |
|
|
|
0.64 |
|
|
|
52,608 |
|
|
|
287 |
|
|
|
2.17 |
|
Long-term borrowings |
|
|
46,848 |
|
|
|
716 |
|
|
|
6.09 |
|
|
|
65,415 |
|
|
|
987 |
|
|
|
6.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,524,362 |
|
|
|
5,619 |
|
|
|
1.46 |
|
|
|
1,417,685 |
|
|
|
7,812 |
|
|
|
2.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
298,723 |
|
|
|
|
|
|
|
|
|
|
|
294,136 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
21,925 |
|
|
|
|
|
|
|
|
|
|
|
15,652 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
195,020 |
|
|
|
|
|
|
|
|
|
|
|
181,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,040,030 |
|
|
|
|
|
|
|
|
|
|
$ |
1,908,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax-equivalent) |
|
|
|
|
|
$ |
18,669 |
|
|
|
|
|
|
|
|
|
|
$ |
17,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.73 |
% |
|
|
|
|
|
|
|
|
|
|
3.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earning assets |
|
$ |
338,417 |
|
|
|
|
|
|
|
|
|
|
$ |
356,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (tax-equivalent) |
|
|
|
|
|
|
|
|
|
|
3.99 |
% |
|
|
|
|
|
|
|
|
|
|
3.98 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of
average interest-earning assets to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
122.20 |
% |
|
|
|
|
|
|
|
|
|
|
125.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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%. |
- 23 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and interest-earning deposits |
|
$ |
44,209 |
|
|
$ |
73 |
|
|
|
0.22 |
% |
|
$ |
29,751 |
|
|
$ |
572 |
|
|
|
2.57 |
% |
Investment securities (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
428,387 |
|
|
|
12,222 |
|
|
|
3.80 |
|
|
|
492,434 |
|
|
|
16,570 |
|
|
|
4.49 |
|
Tax-exempt (2) |
|
|
165,146 |
|
|
|
6,331 |
|
|
|
5.11 |
|
|
|
247,462 |
|
|
|
10,508 |
|
|
|
5.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
593,533 |
|
|
|
18,553 |
|
|
|
4.17 |
|
|
|
739,896 |
|
|
|
27,078 |
|
|
|
4.87 |
|
Loans held for sale |
|
|
2,176 |
|
|
|
82 |
|
|
|
5.02 |
|
|
|
891 |
|
|
|
41 |
|
|
|
6.11 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
181,515 |
|
|
|
6,326 |
|
|
|
4.66 |
|
|
|
144,060 |
|
|
|
6,981 |
|
|
|
6.47 |
|
Commercial real estate |
|
|
277,633 |
|
|
|
13,114 |
|
|
|
6.32 |
|
|
|
248,544 |
|
|
|
12,831 |
|
|
|
6.90 |
|
Agricultural |
|
|
42,771 |
|
|
|
1,780 |
|
|
|
5.57 |
|
|
|
45,283 |
|
|
|
2,391 |
|
|
|
7.05 |
|
Residential real estate |
|
|
163,665 |
|
|
|
7,443 |
|
|
|
6.06 |
|
|
|
169,939 |
|
|
|
8,021 |
|
|
|
6.29 |
|
Consumer indirect |
|
|
301,110 |
|
|
|
15,737 |
|
|
|
6.99 |
|
|
|
165,153 |
|
|
|
8,815 |
|
|
|
7.13 |
|
Consumer direct and home equity |
|
|
223,187 |
|
|
|
9,136 |
|
|
|
5.47 |
|
|
|
225,050 |
|
|
|
11,066 |
|
|
|
6.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,189,881 |
|
|
|
53,536 |
|
|
|
6.01 |
|
|
|
998,029 |
|
|
|
50,105 |
|
|
|
6.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,829,799 |
|
|
|
72,244 |
|
|
|
5.27 |
|
|
|
1,768,567 |
|
|
|
77,796 |
|
|
|
5.87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(20,128 |
) |
|
|
|
|
|
|
|
|
|
|
(15,857 |
) |
|
|
|
|
|
|
|
|
Other noninterest-earning assets |
|
|
195,985 |
|
|
|
|
|
|
|
|
|
|
|
146,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,005,656 |
|
|
|
|
|
|
|
|
|
|
$ |
1,899,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
$ |
362,870 |
|
|
$ |
584 |
|
|
|
0.22 |
% |
|
$ |
343,247 |
|
|
$ |
2,616 |
|
|
|
1.02 |
% |
Savings and money market |
|
|
377,877 |
|
|
|
785 |
|
|
|
0.28 |
|
|
|
368,882 |
|
|
|
3,134 |
|
|
|
1.13 |
|
Certificates of deposit |
|
|
681,204 |
|
|
|
13,360 |
|
|
|
2.62 |
|
|
|
613,443 |
|
|
|
17,443 |
|
|
|
3.80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,421,951 |
|
|
|
14,729 |
|
|
|
1.38 |
|
|
|
1,325,572 |
|
|
|
23,193 |
|
|
|
2.34 |
|
Short-term borrowings |
|
|
34,740 |
|
|
|
171 |
|
|
|
0.66 |
|
|
|
37,111 |
|
|
|
571 |
|
|
|
2.06 |
|
Long-term borrowings |
|
|
46,935 |
|
|
|
2,142 |
|
|
|
6.09 |
|
|
|
50,089 |
|
|
|
2,584 |
|
|
|
6.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,503,626 |
|
|
|
17,042 |
|
|
|
1.51 |
|
|
|
1,412,772 |
|
|
|
26,348 |
|
|
|
2.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits |
|
|
288,918 |
|
|
|
|
|
|
|
|
|
|
|
279,064 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
20,148 |
|
|
|
|
|
|
|
|
|
|
|
15,897 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
192,964 |
|
|
|
|
|
|
|
|
|
|
|
191,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,005,656 |
|
|
|
|
|
|
|
|
|
|
$ |
1,899,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax-equivalent) |
|
|
|
|
|
$ |
55,202 |
|
|
|
|
|
|
|
|
|
|
$ |
51,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.76 |
% |
|
|
|
|
|
|
|
|
|
|
3.38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earning assets |
|
$ |
326,173 |
|
|
|
|
|
|
|
|
|
|
$ |
355,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (tax-equivalent) |
|
|
|
|
|
|
|
|
|
|
4.03 |
% |
|
|
|
|
|
|
|
|
|
|
3.88 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to
average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
121.69 |
% |
|
|
|
|
|
|
|
|
|
|
125.18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 -
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 |
|
|
Nine months ended |
|
|
|
September 30, 2009 vs. 2008 |
|
|
September 30, 2009 vs. 2008 |
|
|
|
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 |
|
$ |
53 |
|
|
$ |
(101 |
) |
|
$ |
(48 |
) |
|
$ |
190 |
|
|
$ |
(689 |
) |
|
$ |
(499 |
) |
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
(456 |
) |
|
|
(1,302 |
) |
|
|
(1,758 |
) |
|
|
(2,004 |
) |
|
|
(2,344 |
) |
|
|
(4,348 |
) |
Tax-exempt |
|
|
(1,182 |
) |
|
|
84 |
|
|
|
(1,098 |
) |
|
|
(3,233 |
) |
|
|
(944 |
) |
|
|
(4,177 |
) |
Total investment securities |
|
|
(1,433 |
) |
|
|
(1,423 |
) |
|
|
(2,856 |
) |
|
|
(4,907 |
) |
|
|
(3,618 |
) |
|
|
(8,525 |
) |
Loans held for sale |
|
|
10 |
|
|
|
(3 |
) |
|
|
7 |
|
|
|
49 |
|
|
|
(8 |
) |
|
|
41 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
627 |
|
|
|
(572 |
) |
|
|
55 |
|
|
|
1,570 |
|
|
|
(2,225 |
) |
|
|
(655 |
) |
Commercial real estate |
|
|
625 |
|
|
|
(344 |
) |
|
|
281 |
|
|
|
1,428 |
|
|
|
(1,145 |
) |
|
|
283 |
|
Agricultural |
|
|
(41 |
) |
|
|
(94 |
) |
|
|
(135 |
) |
|
|
(127 |
) |
|
|
(484 |
) |
|
|
(611 |
) |
Residential real estate |
|
|
(380 |
) |
|
|
(23 |
) |
|
|
(403 |
) |
|
|
(290 |
) |
|
|
(288 |
) |
|
|
(578 |
) |
Consumer indirect |
|
|
2,374 |
|
|
|
(62 |
) |
|
|
2,312 |
|
|
|
7,110 |
|
|
|
(188 |
) |
|
|
6,922 |
|
Consumer direct and home equity |
|
|
64 |
|
|
|
(487 |
) |
|
|
(423 |
) |
|
|
(91 |
) |
|
|
(1,839 |
) |
|
|
(1,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
3,041 |
|
|
|
(1,354 |
) |
|
|
1,687 |
|
|
|
8,983 |
|
|
|
(5,552 |
) |
|
|
3,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,232 |
|
|
|
(2,442 |
) |
|
|
(1,210 |
) |
|
|
2,624 |
|
|
|
(8,176 |
) |
|
|
(5,552 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
|
39 |
|
|
|
(603 |
) |
|
|
(564 |
) |
|
|
142 |
|
|
|
(2,174 |
) |
|
|
(2,032 |
) |
Savings and money market |
|
|
7 |
|
|
|
(589 |
) |
|
|
(582 |
) |
|
|
74 |
|
|
|
(2,423 |
) |
|
|
(2,349 |
) |
Certificates of deposit |
|
|
808 |
|
|
|
(1,374 |
) |
|
|
(566 |
) |
|
|
1,770 |
|
|
|
(5,853 |
) |
|
|
(4,083 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
604 |
|
|
|
(2,316 |
) |
|
|
(1,712 |
) |
|
|
1,582 |
|
|
|
(10,046 |
) |
|
|
(8,464 |
) |
Short-term borrowings |
|
|
(24 |
) |
|
|
(186 |
) |
|
|
(210 |
) |
|
|
(34 |
) |
|
|
(366 |
) |
|
|
(400 |
) |
Long-term borrowings |
|
|
(284 |
) |
|
|
13 |
|
|
|
(271 |
) |
|
|
(156 |
) |
|
|
(286 |
) |
|
|
(442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
552 |
|
|
|
(2,745 |
) |
|
|
(2,193 |
) |
|
|
1,600 |
|
|
|
(10,906 |
) |
|
|
(9,306 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
|
$ |
680 |
|
|
$ |
303 |
|
|
$ |
983 |
|
|
$ |
1,024 |
|
|
$ |
2,730 |
|
|
$ |
3,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. The provision for loan losses was $2.6 million and $6.6 million for the three and nine
months ended September 30, 2009, respectively, compared with $1.9 million and $4.0 million for the
same periods in 2008, respectively. The increases were primarily due to the increased size of our
lending portfolio and higher net charge-offs. See Non-Performing Assets and Allowance for Loan
Losses included herein for additional information.
- 25 -
Noninterest Income
The following table details the major categories of noninterest income for the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposits |
|
$ |
2,643 |
|
|
$ |
2,794 |
|
|
$ |
7,480 |
|
|
$ |
7,812 |
|
ATM and debit card |
|
|
920 |
|
|
|
852 |
|
|
|
2,639 |
|
|
|
2,460 |
|
Loan servicing |
|
|
304 |
|
|
|
112 |
|
|
|
1,031 |
|
|
|
530 |
|
Company owned life insurance |
|
|
271 |
|
|
|
223 |
|
|
|
806 |
|
|
|
269 |
|
Broker-dealer fees and commissions |
|
|
238 |
|
|
|
363 |
|
|
|
741 |
|
|
|
1,223 |
|
Net gain on sale of loans held for sale |
|
|
129 |
|
|
|
48 |
|
|
|
545 |
|
|
|
304 |
|
Net gain on investment securities |
|
|
1,721 |
|
|
|
12 |
|
|
|
2,928 |
|
|
|
232 |
|
Impairment charges on investment securities |
|
|
(2,318 |
) |
|
|
(34,554 |
) |
|
|
(4,101 |
) |
|
|
(38,345 |
) |
Net gain on sale of other assets |
|
|
19 |
|
|
|
102 |
|
|
|
177 |
|
|
|
254 |
|
Other |
|
|
479 |
|
|
|
700 |
|
|
|
1,366 |
|
|
|
1,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income (loss) |
|
$ |
4,406 |
|
|
$ |
(29,348 |
) |
|
$ |
13,612 |
|
|
$ |
(23,672 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of noninterest income fluctuated as discussed below.
Service charges on deposits declined in comparison to the prior year on both a quarter-to-date and
year-to-date basis, a direct result of fewer customer overdrafts and related service fees.
Conversely, ATM and debit card income increased during those same periods as the increased
popularity of electronic banking and transaction processing has resulted in higher ATM and debit
card point-of-sale usage fees.
Loan servicing income represents fees earned for servicing mortgage loans sold to third parties,
net of amortization expense and impairment losses, if any, associated with capitalized mortgage
servicing assets. Loan servicing income increased in the three and nine month periods ended
September 30, 2009 compared to the same periods a year ago, mainly from an increase in the sold and
serviced residential real estate portfolio and a recovery in the fair value of capitalized mortgage
servicing assets.
The Company invested $20.0 million in company owned life insurance during the third quarter of
2008, resulting in the $48 thousand and $537 thousand increase in income during the three and nine
month periods ended September 30, 2009, respectively, compared to the same periods in 2008.
Broker-dealer fees and commissions were down $125 thousand, or 34%, and $482 thousand, or 39%, in
the three and nine month months ended September 30, 2009 compared to the same periods a year ago.
Broker-dealer fees and commissions fluctuate mainly due to sales volume, which has declined during
2009 as a result of current market and economic conditions.
The $1.7 million net gain on sale of investment securities for the third quarter of 2009 is
comprised of $1.9 million in gross gains, primarily from securities issued by U.S. government
sponsored agencies, and $141 thousand in gross losses on sales of privately issued whole loan
collateralized mortgage obligations (CMOs).
Impairment charges on investment securities included valuation write-downs of $2.2 million on
pooled trust preferred securities and a $126 thousand write-down on a privately issued whole loan
CMO in the third quarter of 2009. The third quarter of 2008 impairment charges totaling $34.6
million related to auction rate preferred equity securities and pooled trust preferred securities.
See Investing Activities herein for additional information.
- 26 -
Noninterest Expense
The following table details the major categories of noninterest expense for the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
$ |
8,253 |
|
|
$ |
7,021 |
|
|
$ |
25,421 |
|
|
$ |
23,626 |
|
Occupancy and equipment |
|
|
2,730 |
|
|
|
2,642 |
|
|
|
8,289 |
|
|
|
7,789 |
|
FDIC assessments |
|
|
753 |
|
|
|
236 |
|
|
|
3,026 |
|
|
|
369 |
|
Professional services |
|
|
532 |
|
|
|
467 |
|
|
|
1,972 |
|
|
|
1,504 |
|
Computer and data processing |
|
|
578 |
|
|
|
603 |
|
|
|
1,757 |
|
|
|
1,764 |
|
Supplies and postage |
|
|
473 |
|
|
|
475 |
|
|
|
1,414 |
|
|
|
1,353 |
|
Advertising and promotions |
|
|
227 |
|
|
|
472 |
|
|
|
650 |
|
|
|
905 |
|
Other |
|
|
1,596 |
|
|
|
1,493 |
|
|
|
5,131 |
|
|
|
4,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
15,142 |
|
|
$ |
13,409 |
|
|
$ |
47,660 |
|
|
$ |
42,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of noninterest expense fluctuated as discussed below.
Salaries and benefits for both the three and nine month periods of 2009 increased over the
comparable 2008 periods despite reductions in the number of full-time equivalent employees
(FTEs). Salaries and wages expense increased $773 thousand and $187 thousand in the three and
nine month periods ended September 30, 2009, compared to the same periods a year ago. The 2008
expense amounts were reduced by $1.0 million in reversals of accrued compensation expense in
recognition of certain 2008 financial results not being met. Employee benefit costs expense
increased $460 thousand and $1.6 million in the three and nine month periods ended September 30,
2009, compared to the same periods a year ago, due largely to higher retirement plan expense.
The Company experienced increases of 3% and 6% in occupancy and equipment expense in the three and
nine month periods ended September 30, 2009, compared to the same periods a year ago, as a result
of additional expenses related to the opening of two new branches at the end of 2008, combined with
increased software maintenance costs.
FDIC assessments, comprised mostly of deposit insurance paid to the FDIC, increased by $517
thousand from $236 thousand for the three months ended September 30, 2008 to $753 thousand for the
three months ended September 30, 2009. Similarly, FDIC assessments increased by $2.7 million from
$369 thousand for the nine months ended September 30, 2008 to $3.0 million for the nine months
ended September 30, 2009. The increases resulted from a combination of an increase in deposit
levels subject to insurance premiums and higher FDIC insurance premium rates during the 2009
periods, coupled with utilization of approximately $367 thousand in carryforward credits that
reduced expense during the first six months of 2008. In addition, the 2009 year-to-date amount
includes a $923 thousand special assessment recognized during the second quarter.
Professional services increased $65 thousand and $468 thousand in the three and nine month periods
ended September 30, 2009, compared to the same periods a year ago. The Company has incurred higher
expenses associated with loan workouts and consulting services during 2009.
The efficiency ratio for the third quarter of 2009 was 63.43% compared with 58.10% for the third
quarter of 2008, and 67.51% for the nine months ended September 30, 2009, compared to 63.17% for
the same period a year ago. The 2009 efficiency ratios, compared to 2008, reflect higher levels of
noninterest expense, primarily salaries and employee benefits and FDIC assessments, partially
offset by increases in net interest income. 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 $1.3 million in the third quarter of 2009, compared to
$524 thousand in the third quarter of 2008. For the nine month period ended September 30, 2009,
income tax expense totaled $3.4 million compared to $1.3 million in the same period of 2008. These
changes were primarily due to the Companys recognition of a $12.0 million valuation allowance
against its deferred tax assets as of September 30, 2008, which was subsequently eliminated in the
fourth quarter of 2008. The recognition of the valuation allowance resulted in a $12.0 million
reduction of the tax benefit for the three and nine month periods ended September 30, 2008. The
effective tax rates recorded for 2009 on a quarter-to-date and year-to-date basis were 27.8% and
27.3%, respectively, in comparison to the September 30, 2008 quarter-to-date and year-to-date
effective tax rates of (1.9)% and (6.1)%, 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.
- 27 -
ANALYSIS OF FINANCIAL CONDITION
Investing Activities
Investment Securities Portfolio Composition
The following table sets forth selected information regarding the composition of the Companys
investment securities portfolio as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
Percent |
|
|
Amortized |
|
|
Percent |
|
|
|
Cost |
|
|
of Total |
|
|
Cost |
|
|
of Total |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government sponsored enterprises |
|
$ |
177,237 |
|
|
|
26.8 |
% |
|
$ |
67,871 |
|
|
|
11.3 |
% |
State and political subdivisions |
|
|
86,417 |
|
|
|
13.0 |
|
|
|
129,572 |
|
|
|
21.6 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
344,057 |
|
|
|
51.9 |
|
|
|
297,278 |
|
|
|
49.5 |
|
Non-Agency mortgage-backed securities |
|
|
8,825 |
|
|
|
1.3 |
|
|
|
42,296 |
|
|
|
7.0 |
|
Asset-backed securities |
|
|
1,415 |
|
|
|
0.2 |
|
|
|
3,918 |
|
|
|
0.7 |
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
923 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
|
617,951 |
|
|
|
93.2 |
|
|
|
541,858 |
|
|
|
90.3 |
|
State and political subdivisions (held to maturity) |
|
|
45,056 |
|
|
|
6.8 |
|
|
|
58,532 |
|
|
|
9.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
663,007 |
|
|
|
100.0 |
% |
|
$ |
600,390 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 other 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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Unrealized |
|
|
Percent |
|
|
Unrealized |
|
|
Percent |
|
|
|
Loss |
|
|
of Total |
|
|
Loss |
|
|
of Total |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and government sponsored enterprises |
|
$ |
242 |
|
|
|
25.6 |
% |
|
$ |
307 |
|
|
|
7.3 |
% |
State and political subdivisions |
|
|
3 |
|
|
|
0.3 |
|
|
|
42 |
|
|
|
1.0 |
|
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities |
|
|
340 |
|
|
|
35.9 |
|
|
|
981 |
|
|
|
23.1 |
|
Non-Agency mortgage-backed securities |
|
|
361 |
|
|
|
38.2 |
|
|
|
2,854 |
|
|
|
67.3 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale securities |
|
|
946 |
|
|
|
100.0 |
|
|
|
4,236 |
|
|
|
99.9 |
|
State and political subdivisions (held to maturity) |
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
946 |
|
|
|
100.0 |
% |
|
$ |
4,240 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
- 28 -
U.S. GOVERNMENT AGENCIES AND GOVERNMENT SPONSORED ENTERPRISES (GSE)
As of September 30, 2009, there were 27 securities in the U.S. Government agencies and GSE
portfolio that were in an unrealized loss position. These securities had an aggregate amortized
cost of $80.7 million and unrealized losses of $242 thousand. Of the securities in an unrealized
loss position, 7 securities with a total amortized cost of $10.5 million and unrealized losses of
$205 thousand were in an unrealized loss position for 12 months or longer. Because the decline in
fair value is attributable to changes in interest rates and illiquidity, 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 September 30, 2009.
STATE AND POLITICAL SUBDIVISIONS
At September 30, 2009, the state and political subdivisions portfolio (municipals) totaled $134.7
million, of which $89.7 million was classified as available for sale. As of that date, $45.1
million was classified as held to maturity, with a fair value of $46.1 million. As of September
30, 2009, there were 5 municipals that were in an unrealized loss position. These securities had
an aggregate amortized cost of $218 thousand and unrealized losses of $3 thousand.
AGENCY MORTGAGE-BACKED SECURITIES
At September 30, 2009, 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 Federal Home
Loan Mortgage Corporation (FHLMC). The contractual cash flows of the Companys Agency MBS are
guaranteed by FNMA, FHLMC or Government National Mortgage Association (GNMA). FNMA and FHLMC are
government sponsored enterprises that were placed under the conservatorship of the U.S. government
during the third quarter of 2008. The GNMA mortgage-backed securities are backed by the full faith
and credit of the U.S. government. The Company sold Agency MBS securities with an amortized cost
totaling $96.2 million during the nine months ended September 30, 2009, and realized a gain of $4.2
million on those sales.
Given the high credit quality inherent in Agency MBS, the Company does not consider any of the
unrealized losses as of September 30, 2009, on such MBS to be credit related. As a result of its
analyses, the Company determined at September 30, 2009 that the unrealized losses on its Agency MBS
are temporary. At September 30, 2009, 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 seven privately issued whole loan collateralized
mortgage obligations with a fair value of $8.9 million which had net unrealized gains of
approximately $100 thousand at September 30, 2009. As of that date, there were four non-Agency MBS
with an aggregate amortized cost of $3.8 million and unrealized losses of $361 thousand that have
been in an unrealized loss position for 12 months or longer.
The Company has sold ten non-Agency MBS with aggregate amortized costs of $21.4 million during the
nine months ended September 30, 2009, realizing net losses totaling $1.5 million on those sales.
Of the securities sold, the Company had recognized OTTI charges totaling $1.4 million on three of
the securities prior to the third quarter of 2009.
During the three and nine months ended September 30, 2009, the Company recognized aggregate OTTI
charges due to reasons of credit quality of $126 thousand and $1.9 million, respectively, against
certain of these non-Agency MBS that were acquired prior to July 2007. As of September 30, 2009,
four of the non-Agency MBS were rated below investment grade.
As a result of its analyses, the Company determined at September 30, 2009 that the unrealized
losses on its non-Agency MBS are temporary. These temporary unrealized losses are believed to be
primarily related to an overall widening in liquidity spreads related to the reduced liquidity and
uncertainty in the markets and not the credit quality of the individual issuer or underlying
assets. At September 30, 2009, the Company did not intend to sell any of its non-Agency MBS that
were in an unrealized loss position prior to recovery of amortized cost.
ASSET-BACKED SECURITIES (ABS)
As of September 30, 2009, the ABS portfolio totaled $1.8 million and consisted of positions in 15
securities, of which 14 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 as of September 30, 2009, and has stopped accruing interest
on the investments.
During the nine months ended September 30, 2009, the Company recognized aggregate OTTI charges of
$2.2 million against 12 of these ABS, all of which were acquired prior to November 2007. Since the
second quarter of 2008, the Company has written down each of the securities in the ABS portfolio,
resulting in OTTI charges totaling $32.2 million through September 30, 2009. The Company expects
to recover the remaining carrying value of $1.4 million, representing the Companys maximum
exposure to future OTTI charges on the current ABS portfolio. As of September 30, 2009, each of
the securities in the ABS portfolio was rated below investment grade. Due to the OTTI charges
recognized, there were no ABS in an unrealized loss position as of September 30, 2009.
- 29 -
EQUITY SECURITIES
During the first quarter of 2009 the Company liquidated its equity securities portfolio, which
consisted of auction rate preferred equity securities collateralized by FNMA and FHLMC preferred
stock and common equity securities. A $152 thousand loss was realized on the sale of the equity
securities portfolio, comprised of aggregate losses totaling $242 thousand related to the preferred
equity securities and an aggregate gain of $90 thousand from sale of the common equity securities.
OTHER INVESTMENTS
Recently, credit concern surrounding the Federal Home Loan Bank system has been widespread. As a
member of the Federal Home Loan Bank of New York (FHLB), Five Star Bank (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 $3.3 million at September 30, 2009, is included in other assets and recorded at cost.
Below Investment Grade Securities
The Companys non-Agency MBS and ABS are rated by a nationally recognized rating agency, such as
Moodys Investors Services, Inc. (Moodys), Standard & Poors Corporation (S&P) or Fitch, Inc.
(collectively, Rating Agencies). At September 30, 2009, the Companys non-Agency MBS were rated
from AAA to Ca by one or more of the Rating Agencies or were unrated (i.e., not assigned a rating
by any Rating Agency). The rating indicates the opinion of the Rating Agency as to the credit
worthiness of the investment, indicating the obligors ability to meet its financial commitment on
the obligation. Investment grade includes all securities with Fitch/S&P ratings above BB+ and
Moodys ratings above Ba1. Securities with a Fitch/S&P rating below BBB- and Moodys ratings below
Baa3 are considered to be below investment grade. The Company uses the lowest rating provided by
either of the Rating Agencies when classifying each security as investment grade or below
investment grade.
The following table provides detail of securities rated below investment grade (dollars in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment |
|
|
|
|
|
|
As of September 30, 2009 |
|
|
losses recognized in earnings |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
2009 |
|
|
|
|
Current |
|
of |
|
|
Par |
|
|
Amortized |
|
|
Fair |
|
|
Gains |
|
|
Prior to |
|
|
1st |
|
|
2nd |
|
|
3rd |
|
|
Total |
|
Rating(1) |
|
Cusips |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
(Losses) |
|
|
2009(4) |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
To Date |
|
Non-Agency MBS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ba1/CCC |
|
|
1 |
|
|
$ |
1,471 |
|
|
$ |
676 |
|
|
$ |
676 |
|
|
$ |
|
|
|
$ |
626 |
|
|
$ |
|
|
|
$ |
40 |
|
|
$ |
126 |
|
|
$ |
792 |
|
CC/B (2) |
|
|
1 |
|
|
|
2,487 |
|
|
|
1,243 |
|
|
|
1,338 |
|
|
|
95 |
|
|
|
1,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,240 |
|
Ca/CC |
|
|
1 |
|
|
|
3,411 |
|
|
|
2,590 |
|
|
|
2,681 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
794 |
|
|
|
|
|
|
|
794 |
|
CC (3) |
|
|
1 |
|
|
|
3,850 |
|
|
|
528 |
|
|
|
805 |
|
|
|
277 |
|
|
|
3,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
11,219 |
|
|
|
5,037 |
|
|
|
5,500 |
|
|
|
463 |
|
|
|
5,379 |
|
|
|
|
|
|
|
834 |
|
|
|
126 |
|
|
|
6,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Baa3/CC (4) |
|
|
1 |
|
|
|
661 |
|
|
|
68 |
|
|
|
350 |
|
|
|
282 |
|
|
|
545 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
595 |
|
B2/CCC |
|
|
1 |
|
|
|
2,971 |
|
|
|
37 |
|
|
|
37 |
|
|
|
|
|
|
|
2,435 |
|
|
|
|
|
|
|
|
|
|
|
476 |
|
|
|
2,911 |
|
Caa2/CCC |
|
|
1 |
|
|
|
1,992 |
|
|
|
36 |
|
|
|
36 |
|
|
|
|
|
|
|
1,615 |
|
|
|
|
|
|
|
|
|
|
|
313 |
|
|
|
1,928 |
|
Caa3/CC |
|
|
1 |
|
|
|
3,000 |
|
|
|
76 |
|
|
|
90 |
|
|
|
14 |
|
|
|
2,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,860 |
|
Ca/CC |
|
|
9 |
|
|
|
22,399 |
|
|
|
1,153 |
|
|
|
1,223 |
|
|
|
70 |
|
|
|
19,693 |
|
|
|
|
|
|
|
|
|
|
|
1,256 |
|
|
|
20,949 |
|
Ca/C |
|
|
2 |
|
|
|
3,113 |
|
|
|
45 |
|
|
|
45 |
|
|
|
|
|
|
|
2,826 |
|
|
|
|
|
|
|
|
|
|
|
147 |
|
|
|
2,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
|
|
|
34,136 |
|
|
|
1,415 |
|
|
|
1,781 |
|
|
|
366 |
|
|
|
29,974 |
|
|
|
50 |
|
|
|
|
|
|
|
2,192 |
|
|
|
32,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
$ |
45,355 |
|
|
$ |
6,452 |
|
|
$ |
7,281 |
|
|
$ |
829 |
|
|
$ |
35,353 |
|
|
$ |
50 |
|
|
$ |
834 |
|
|
$ |
2,318 |
|
|
$ |
38,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Ratings presented are Moodys/Fitch except as noted. |
|
(2) |
|
Ratings presented are Fitch /S&P. This security was rated as investment grade by
both rating agencies as of June 30, 2009 and downgraded during the third quarter of 2009. |
|
(3) |
|
Rating presented is S&P. |
|
(4) |
|
Ratings presented are Moodys/S&P. |
|
(5) |
|
Various securities were written down (deemed OTTI) in each of the last three
quarters of 2008. |
During the third quarter of 2009 the Company realized a loss of $141 thousand from the sale of
two non-Agency MBS securities which were rated below investment grade. At the time of sale the
securities had a combined adjusted carrying value of $1.6 million. The adjusted carrying value
reflects impairment charges of $539 thousand and $857 thousand taken against the securities during
the fourth quarter of 2008 and second quarter of 2009, respectively.
- 30 -
Lending Activities
Loan Portfolio Composition
The following table sets forth selected information regarding the composition of the Companys loan
portfolio as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Commercial |
|
$ |
197,404 |
|
|
|
15.7 |
% |
|
$ |
158,543 |
|
|
|
14.1 |
% |
Commercial real estate |
|
|
296,648 |
|
|
|
23.6 |
|
|
|
262,234 |
|
|
|
23.4 |
|
Agriculture |
|
|
42,545 |
|
|
|
3.4 |
|
|
|
44,706 |
|
|
|
4.0 |
|
Residential real estate |
|
|
147,447 |
|
|
|
11.7 |
|
|
|
177,683 |
|
|
|
15.8 |
|
Consumer indirect |
|
|
345,448 |
|
|
|
27.4 |
|
|
|
255,054 |
|
|
|
22.8 |
|
Consumer direct and home equity |
|
|
229,870 |
|
|
|
18.2 |
|
|
|
222,859 |
|
|
|
19.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
1,259,362 |
|
|
|
100.0 |
% |
|
|
1,121,079 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for loan losses |
|
|
20,782 |
|
|
|
|
|
|
|
18,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net |
|
$ |
1,238,580 |
|
|
|
|
|
|
$ |
1,102,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans increased $138.3 million to $1.259 billion as of September 30, 2009 from $1.121 billion
as of December 31, 2008.
Commercial loans increased $71.1 million to $536.6 million as of September 30, 2009 from $465.5
million as of December 31, 2008, a result of the Companys continued focus on commercial business
development programs.
Residential real estate loans decreased $30.3 million to $147.4 million as of September 30, 2009 in
comparison to $177.7 million as of December 31, 2008. 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. In addition, the Company securitized $16.0 million in
residential real estate loans during the second quarter of 2009. 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 by 35%, to $345.4 million as of September 30, 2009, from
$255.1 million as of December 31, 2008. The Company increased its indirect portfolio by managing
existing and developing new relationships with over 250 franchised auto dealers in Western and
Central New York State. During the first nine months of 2009 the Company originated $162.7 million
in indirect auto loans with a mix of approximately 33% new auto and 67% used auto. This compares
with $133.2 million in indirect loan auto originations with a mix of approximately 38% new auto and
62% used auto for the same period in 2008.
Loans Held for Sale
Loans held for sale (not included in the table above), all of which were residential real estate
loans, totaled $1.0 million as of September 30, 2009 and December 31, 2008.
The Company sells certain qualifying newly originated residential real estate mortgages to the
secondary market. Residential real estate mortgages serviced for others totaled $350.9 million and
$315.7 million as of September 30, 2009 and December 31, 2008, respectively, and are not included
in the consolidated statements of financial condition.
- 31 -
Non-Performing Assets and Allowance for Loan Losses
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2008 |
|
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
673 |
|
|
$ |
510 |
|
|
$ |
576 |
|
Commercial real estate |
|
|
911 |
|
|
|
2,360 |
|
|
|
2,039 |
|
Agriculture |
|
|
614 |
|
|
|
310 |
|
|
|
426 |
|
Residential real estate |
|
|
2,339 |
|
|
|
3,365 |
|
|
|
3,170 |
|
Consumer indirect |
|
|
548 |
|
|
|
445 |
|
|
|
412 |
|
Consumer direct and home equity |
|
|
731 |
|
|
|
1,199 |
|
|
|
986 |
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans |
|
|
5,816 |
|
|
|
8,189 |
|
|
|
7,609 |
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans 90 days or more delinquent |
|
|
1 |
|
|
|
7 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans |
|
|
5,817 |
|
|
|
8,196 |
|
|
|
7,641 |
|
Foreclosed assets |
|
|
696 |
|
|
|
1,007 |
|
|
|
1,009 |
|
Nonaccrual investment securities |
|
|
1,431 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets |
|
$ |
7,944 |
|
|
$ |
9,252 |
|
|
$ |
8,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans |
|
|
0.46 |
% |
|
|
0.73 |
% |
|
|
0.71 |
% |
Non-performing assets to total assets |
|
|
0.37 |
% |
|
|
0.48 |
% |
|
|
0.44 |
% |
Information regarding the activity in nonaccrual loans for the three and nine months ended
September 30, 2009 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months |
|
|
Nine months |
|
|
|
ended |
|
|
ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2009 |
|
Nonaccrual loans, beginning of period |
|
$ |
9,496 |
|
|
$ |
8,189 |
|
Additions |
|
|
3,228 |
|
|
|
12,723 |
|
Payments |
|
|
(3,542 |
) |
|
|
(5,865 |
) |
Charge-offs |
|
|
(2,887 |
) |
|
|
(5,824 |
) |
Returned to accruing status |
|
|
(380 |
) |
|
|
(2,504 |
) |
Transferred to other real estate or repossessed assets |
|
|
(99 |
) |
|
|
(903 |
) |
|
|
|
|
|
|
|
Nonaccrual loans, end of period |
|
$ |
5,816 |
|
|
$ |
5,816 |
|
|
|
|
|
|
|
|
Non-performing assets include nonaccrual loans, foreclosed assets and nonaccrual investment
securities. Non-performing assets at September 30, 2009 decreased $1.3 million from December 31,
2008. A $2.7 million decrease in nonaccrual loans and foreclosed assets was offset by a $1.4
million increase in nonaccrual investment securities during the nine month period ended September
30, 2009. The decrease in nonaccrual commercial loans was primarily related to a single credit
relationship totaling $1.0 million which was included in nonaccrual loans at December 31, 2008 and
returned to performing loans during 2009. In addition, the $1.3 million decrease in nonaccrual
residential loans and foreclosed assets was largely the result of on-going workout efforts. The
$1.4 million increase in nonaccrual investment securities relates to 14 pooled trust preferred
securities, comprising the majority of the ABS securities portfolio.
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 operations.
Subsequent receipts on nonaccrual assets are recorded as a reduction of principal, and interest
income is recorded only after principal recovery is reasonably assured.
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 $22.5
million and $20.5 million in loans that continued to accrue interest which were classified as
substandard as of September 30, 2009 and December 31, 2008, respectively.
- 32 -
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 September 30,
2009.
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 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 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 and carrying amounts of other real estate owned. 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 following table sets forth an analysis of the activity in the allowance for loan losses for the
periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance as of beginning of period |
|
$ |
20,614 |
|
|
$ |
16,038 |
|
|
$ |
18,749 |
|
|
$ |
15,521 |
|
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
1,620 |
|
|
|
98 |
|
|
|
2,292 |
|
|
|
451 |
|
Commercial real estate |
|
|
47 |
|
|
|
2 |
|
|
|
202 |
|
|
|
785 |
|
Agriculture |
|
|
|
|
|
|
43 |
|
|
|
3 |
|
|
|
47 |
|
Residential real estate |
|
|
18 |
|
|
|
10 |
|
|
|
189 |
|
|
|
288 |
|
Consumer indirect |
|
|
1,023 |
|
|
|
420 |
|
|
|
2,605 |
|
|
|
1,343 |
|
Consumer direct and home equity |
|
|
335 |
|
|
|
357 |
|
|
|
946 |
|
|
|
892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
3,043 |
|
|
|
930 |
|
|
|
6,237 |
|
|
|
3,806 |
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
110 |
|
|
|
142 |
|
|
|
334 |
|
|
|
596 |
|
Commercial real estate |
|
|
33 |
|
|
|
38 |
|
|
|
112 |
|
|
|
237 |
|
Agriculture |
|
|
26 |
|
|
|
4 |
|
|
|
35 |
|
|
|
14 |
|
Residential real estate |
|
|
2 |
|
|
|
9 |
|
|
|
10 |
|
|
|
23 |
|
Consumer indirect |
|
|
311 |
|
|
|
102 |
|
|
|
776 |
|
|
|
435 |
|
Consumer direct and home equity |
|
|
109 |
|
|
|
126 |
|
|
|
389 |
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
591 |
|
|
|
421 |
|
|
|
1,656 |
|
|
|
1,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
2,452 |
|
|
|
509 |
|
|
|
4,581 |
|
|
|
2,066 |
|
Provision for loan losses |
|
|
2,620 |
|
|
|
1,891 |
|
|
|
6,614 |
|
|
|
3,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
20,782 |
|
|
$ |
17,420 |
|
|
$ |
20,782 |
|
|
$ |
17,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan charge-offs to average loans (annualized) |
|
|
0.79 |
% |
|
|
0.20 |
% |
|
|
0.51 |
% |
|
|
0.28 |
% |
Allowance for loan losses to total loans |
|
|
1.65 |
% |
|
|
1.62 |
% |
|
|
1.65 |
% |
|
|
1.62 |
% |
Allowance for loan losses to non-performing loans |
|
|
357 |
% |
|
|
228 |
% |
|
|
357 |
% |
|
|
228 |
% |
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 $2.6 million and $6.6 million for the
three and nine month periods ended September 30, 2009, respectively, compared with provisions of
$1.9 million and $4.0 million for the corresponding periods in 2008. The increase in the provision
for loan losses is primarily due to growth and the changing mix of the loan portfolio, coupled with
an increase in net charge-offs. Net charge-offs increased by $1.9 million and $2.5 million when
comparing the three and nine month periods of 2009 to the prior year, respectively. The increase
in net charge-offs in 2009 was primarily due to a $1.4 million charge-off of one commercial
relationship during the third quarter of 2009. Also impacting the provision for loan losses in
2009 were considerations of general economic conditions in the Companys market area, as well as
growth in the commercial and indirect loan portfolios.
- 33 -
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
September 30, 2009, total deposits were $1.797 billion, an increase of $163.9 million in comparison
to $1.633 billion as of December 31, 2008.
Nonpublic deposits represent the largest component of the Companys funding. Total nonpublic
deposits were $1.366 billion and $1.280 billion as of September 30, 2009 and December 31, 2008,
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 September 30, 2009, total public deposits were $431.5 million in
comparison to $352.8 million as of December 31, 2008. 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 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 and
$30.7 million as of September 30, 2009 and December 31, 2008, respectively. 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 $51.0 million of immediate
credit capacity with FHLB as of September 30, 2009. The FHLB credit capacity is collateralized by
securities from the Companys investment portfolio and certain qualifying loans.
The Company has $45.4 million in secured borrowing capacity at the Federal Reserve Bank
(FRB) Discount Window, of which $32.0 million was outstanding at September 30, 2009. The FRB
credit capacity is collateralized by securities from the Companys investment portfolio.
The Company also had $70.0 million of credit available under unsecured lines of credit with
various banks as of September 30, 2009. There were no advances outstanding on these lines of
credit as of September 30, 2009. The Company also utilizes short-term retail repurchase agreements
with customers as a source of funds. These short-term repurchase agreements amounted to $41.3
million and $23.5 million as of September 30, 2009 and December 31, 2008, respectively.
Equity Activities
Total shareholders equity amounted to $195.9 million as of September 30, 2009, an increase of $5.6
million from $190.3 million as of December 31, 2008. The increase in shareholders equity through
the first nine months ended September 30, 2009 resulted primarily from $10.6 million in total
comprehensive income, partially offset by $6.0 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 September 30, 2009,
the Banks regulatory capital ratios exceeded all regulatory requirements.
- 34 -
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 repayment of matured borrowings, the ability to fund new and existing
loan commitments and the ability to take advantage of new business opportunities. The Company
achieves 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 $60.1 million as of September 30, 2009, an increase of
$4.9 million from $55.2 million as of December 31, 2008. The Companys net cash provided by
operating activities totaled $23.4 million. Net cash used in investing activities totaled $226.0
million, which included cash outflows of $159.8 million for net loan originations and $66.4 million
from investment securities transactions. Net cash provided by financing activities of $207.6
million was primarily attributed to a combined $213.7 million increase in deposits and net
borrowings, offset against $5.6 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
operations), 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). 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.
- 35 -
The Companys and the Banks actual and required regulatory capital ratios as of September 30, 2009
and December 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
|
|
Actual |
|
|
Adequacy Purposes |
|
|
Well Capitalized |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
155,601 |
|
|
|
7.89 |
% |
|
$ |
78,919 |
|
|
|
4.00 |
% |
|
$ |
98,649 |
|
|
|
5.00 |
% |
Bank (FSB) |
|
|
147,494 |
|
|
|
7.49 |
|
|
|
78,784 |
|
|
|
4.00 |
|
|
|
98,479 |
|
|
|
5.00 |
|
Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
155,601 |
|
|
|
10.73 |
|
|
|
58,015 |
|
|
|
4.00 |
|
|
|
87,023 |
|
|
|
6.00 |
|
Bank (FSB) |
|
|
147,494 |
|
|
|
10.21 |
|
|
|
57,772 |
|
|
|
4.00 |
|
|
|
86,658 |
|
|
|
6.00 |
|
Total risk-based capital (to
risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
173,763 |
|
|
|
11.98 |
|
|
|
116,030 |
|
|
|
8.00 |
|
|
|
145,038 |
|
|
|
10.00 |
|
Bank (FSB) |
|
|
165,581 |
|
|
|
11.46 |
|
|
|
115,544 |
|
|
|
8.00 |
|
|
|
144,430 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
150,426 |
|
|
|
8.05 |
% |
|
$ |
74,764 |
|
|
|
4.00 |
% |
|
$ |
93,456 |
|
|
|
5.00 |
% |
Bank (FSB) |
|
|
120,484 |
|
|
|
6.46 |
|
|
|
74,586 |
|
|
|
4.00 |
|
|
|
93,232 |
|
|
|
5.00 |
|
Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
150,426 |
|
|
|
11.83 |
|
|
|
50,881 |
|
|
|
4.00 |
|
|
|
76,322 |
|
|
|
6.00 |
|
Bank (FSB) |
|
|
120,484 |
|
|
|
9.52 |
|
|
|
50,624 |
|
|
|
4.00 |
|
|
|
75,936 |
|
|
|
6.00 |
|
Total risk-based capital (to
risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
166,362 |
|
|
|
13.08 |
|
|
|
101,762 |
|
|
|
8.00 |
|
|
|
127,203 |
|
|
|
10.00 |
|
Bank (FSB) |
|
|
136,340 |
|
|
|
10.77 |
|
|
|
101,248 |
|
|
|
8.00 |
|
|
|
126,560 |
|
|
|
10.00 |
|
Dividend Restrictions
In the ordinary course of business, the Company is dependent upon dividends from the 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. Due to these
requirements, as of September 30, 2009, the Bank is required to obtain approval from the New York
State Banking Department for future 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.
- 36 -
|
|
|
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, 2008, dated March
12, 2009, as filed with the Securities and Exchange Commission.
|
|
|
ITEM 4. |
|
Controls and Procedures |
Evaluation of disclosure controls and procedures
As of September 30, 2009, 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 September 30, 2009 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
- 37 -
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, 2008, dated
March 12, 2009, as filed with the Securities and Exchange Commission.
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, 2008, dated March 12,
2009, as filed with the Securities and Exchange Commission.
|
(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 10.1of 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 |
- 38 -
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Location |
|
|
|
|
|
|
|
|
10.10 |
|
|
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 |
|
|
|
|
|
|
|
|
10.11 |
|
|
Executive Agreement with Peter G. Humphrey
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
March 30, 2005 |
|
|
|
|
|
|
|
|
10.12 |
|
|
Executive Agreement with James T. Rudgers
|
|
Incorporated by
reference to
Exhibit 10.2 of the
Form 8-K, dated
March 30, 2005 |
|
|
|
|
|
|
|
|
10.13 |
|
|
Executive Agreement with Ronald A. Miller
|
|
Incorporated by
reference to
Exhibit 10.3 of the
Form 8-K, dated
March 30, 2005 |
|
|
|
|
|
|
|
|
10.14 |
|
|
Executive Agreement with Martin K. Birmingham
|
|
Incorporated by
reference to
Exhibit 10.4 of the
Form 8-K, dated
March 30, 2005 |
|
|
|
|
|
|
|
|
10.15 |
|
|
Agreement with Peter G. Humphrey
|
|
Incorporated by
reference to
Exhibit 10.6 of the
Form 8-K, dated
March 30, 2005 |
|
|
|
|
|
|
|
|
10.16 |
|
|
Executive Agreement with John J. Witkowski
|
|
Incorporated by
reference to
Exhibit 10.7 of the
Form 8-K, dated
March 14, 2005 |
|
|
|
|
|
|
|
|
10.17 |
|
|
Executive Agreement with George D. Hagi
|
|
Incorporated by
reference to
Exhibit 10.7 of the
Form 8-K, dated
February 2, 2006 |
|
|
|
|
|
|
|
|
10.18 |
|
|
Voluntary Retirement Agreement with James T. Rudgers
|
|
Incorporated by
reference to
Exhibit 10.1 of the
Form 8-K, dated
March 24, 2008 |
|
|
|
|
|
|
|
|
10.19 |
|
|
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 |
|
|
|
|
|
|
|
|
10.20 |
|
|
Voluntary Retirement Agreement with Ronald A. Miller
|
|
Incorporated by
reference to
Exhibit 10.2 of the
Form 8-K, dated
March 24, 2008 |
|
|
|
|
|
|
|
|
10.21 |
|
|
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 to18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
Filed Herewith |
- 39 -
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 |
, |
November 4, 2009 |
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
| |
|
|
|
| |
|
/s/ Karl F. Krebs
Karl F. Krebs |
, |
November 4, 2009 |
Executive Vice President and Chief Financial Officer |
|
| |
|
(Principal Financial and Principal Accounting Officer) |
|
| |
|
- 40 -
Exhibit Index
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
Description |
|
Location |
|
|
|
|
|
|
|
|
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 to18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
Filed Herewith |