Financial Institutions, Inc. 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-26481
FINANCIAL INSTITUTIONS, INC.
(Exact name of registrant as specified in its charter)
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New York
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16-0816610 |
(State of incorporation)
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(I.R.S. Employer Identification Number) |
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220 Liberty Street, Warsaw, NY
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14569 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code:
585-786-1100
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common stock, par value $0.01 per share
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NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
YES o NO þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.
YES
o NO þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated filer o Accelerated filer þ Non-accelerated filer o
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 aggregate market value of common stock held by non-affiliates of the registrant, as computed by
reference to the June 30, 2006 closing price reported by NASDAQ, was $221,734,895.
As of March 2, 2007 there were issued and outstanding, exclusive of treasury shares, 11,336,730
shares of the registrants common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants proxy statement to be filed with the Securities and Exchange
Commission in connection with the 2007 Annual Meeting of Shareholders are incorporated by reference
in Part III of this Annual Report on Form 10-K.
FINANCIAL INSTITUTIONS, INC.
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business
Forward Looking Statements
This Annual Report on Form 10-K, especially in Managements Discussion and Analysis of
Financial Condition and Results of Operation, contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. In general, the use of such words
as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions are
intended to identify forward-looking statements and may include:
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Statements regarding our business plans, and prospects; |
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Statements of our goals, intentions and expectations; |
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Statements regarding our growth and operating strategies; |
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Statements regarding the quality of our loan and investment portfolios; and |
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Estimates of our risks and future costs and benefits. |
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company notes that a variety
of factors could cause the Companys actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Companys forward-looking statements.
Some of the risks and uncertainties that may affect the operations, performance, development and
results of the Companys business, the interest rate sensitivity of its assets and liabilities, and
the adequacy of its allowance for loan losses, include but are not limited to the following:
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Significantly increased competition between depository and other financial
institutions; |
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Changes in the interest rate environment that reduces our margins or the fair value
of financial instruments; |
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General economic conditions, either nationally or in our market areas, that are
worse than expected; |
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Declines in the value of real estate, equipment, livestock and other assets serving
as collateral for our loans outstanding; |
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Legislative or regulatory changes that adversely affect our business; |
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Changes in consumer spending, borrowing and savings habits; |
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Changes in accounting policies and practices, as generally accepted in the United
States of America; and |
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Actions taken by regulators with jurisdiction over the Company or its subsidiaries. |
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.
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General
Financial Institutions, Inc. (FII), a bank holding company organized under the laws of New
York State, and its subsidiaries (collectively the Company) provide deposit, lending and other
financial services to individuals and businesses in Central and Western New York State. The
Company is subject to regulation by certain federal and state agencies.
The Company for many years operated under a decentralized, Super Community Bank business model,
with separate and largely autonomous subsidiary banks whose Boards and management had the authority
to operate within guidelines set forth in broad corporate policies established at the holding
company level. During 2005, FIIs Board of Directors decided to implement changes to the Companys
business model and governance structure. Effective December 3, 2005, the Company merged three of
its bank subsidiaries, Wyoming County Bank (100% owned) (WCB), National Bank of Geneva (100%
owned) (NBG) and Bath National Bank (100% owned) (BNB) into its New York State-chartered bank
subsidiary, First Tier Bank & Trust (100% owned) (FTB), which was then renamed Five Star Bank
(FSB or the Bank). The merger was accounted for at historical cost as a combination of
entities under common control.
FII formerly qualified as a financial holding company under the Gramm-Leach-Bliley Act, which
allowed expansion of business operations to include financial services subsidiaries, namely, Five
Star Investment Services, Inc. (100% owned) (FSIS) (formerly known as The FI Group, Inc.
(FIGI)) and the Burke Group, Inc. (formerly 100% owned) (BGI), collectively referred to as the
Financial Services Group (FSG). FSIS is a brokerage subsidiary that commenced operations as a
start-up company in March 2000. BGI, an employee benefits and compensation consulting firm, was
acquired by the Company in October 2001. During 2005, the Company sold the stock of BGI and its
results have been reported separately as a discontinued operation in the consolidated statements of
income. Since the sale of BGI occurred during 2005, there are no assets or liabilities associated
with the discontinued operation recorded at December 31, 2006 or 2005. BGIs cash flows are shown
in the consolidated statements of cash flows by activity (operating, investing and financing)
consistent with the applicable source of cash flow.
During 2003, FII terminated its financial holding company status and now operates as a bank holding
company. The change in status did not affect the non-financial subsidiaries or activities being
conducted by the Company, although future acquisitions or expansions of non-financial activities
may require prior Federal Reserve Board (FRB) approval and will be limited to those that are
permissible for bank holding companies.
In February 2001, the Company formed FISI Statutory Trust I (100% owned) (the Trust) and
capitalized the entity with a $502,000 investment in the Trusts common securities. The Trust was
formed to facilitate the private placement of $16.2 million in capital securities (trust preferred
securities). In accordance with the provisions of Financial Accounting Standards Board (FASB)
Interpretation No. 46, Consolidation of Variable Interest Entities, the Trust is not included in
the Companys consolidation; instead the $16.7 million in junior subordinated debentures are
recorded as a liability and a $502,000 investment in the trust recorded in other assets in the
Companys consolidated statements of financial condition.
Available Information
This annual report, including the exhibits and schedules filed as part of the annual report,
may be inspected at the public reference facility maintained by the SEC at its public reference
room at 100 F. Street, N.E., Room 1580, Washington, DC 20549 and copies of all or any part thereof
may be obtained from that office upon payment of the prescribed fees. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference room and you can
request copies of the documents upon payment of a duplicating fee, by writing to the SEC. In
addition, the SEC maintains a website that contains reports, proxy and information statements and
other information regarding registrants, including us, that file electronically with the SEC which
can be accessed at www.sec.gov.
The Company also makes available, free of charge through its website at www.fiiwarsaw.com, all
reports filed with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as
reasonably practicable after those
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documents are filed with, or furnished to, the SEC. Information available on our website is not a
part of, and is not incorporated into, this annual report on Form 10-K.
Executive Officers and Other Significant Employees of the Registrant
The following table sets forth current information regarding executive officers and other significant employees (ages are as
of December 31, 2006).
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Peter G. Humphrey
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52 |
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1983 |
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President and Chief Executive Officer. |
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James T. Rudgers
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57 |
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2004 |
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Executive Vice President and Chief of
Community Banking. From 2002 2004
was Executive Vice President of
Retail Banking at Hudson United Bank
Corporation. From 1997 2002 was
Senior Vice President and Principal
of Manchester Humphreys, Inc. |
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Ronald A. Miller
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58 |
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1996 |
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Executive Vice President, Chief
Financial Officer and Corporate
Secretary. |
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George D. Hagi
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54 |
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2006 |
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Executive Vice President and Chief
Risk Officer. From 1997 2005 was
Senior Vice President and Director of
Risk Management at First National
Bankshares of Florida and FNB Corp. |
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John J. Witkowski
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45 |
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2005 |
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Senior Vice President and Regional
President/Retail Banking Executive.
From 1993 2005 was Senior Vice
President and Director of Sales for
Business Banking/Client Development
Group at Bank of America. |
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Martin K. Birmingham
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41 |
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2005 |
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Senior Vice President and Regional
President/Commercial Market
Executive. From 1989 2005 was
Senior Team Leader and Regional
President of the Rochester Market at
Bank of America. |
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Kevin B. Klotzbach
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53 |
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2001 |
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Senior Vice President and Treasurer.
From 1999 2001 was Chief Investment
Officer at Greater Buffalo Savings
Bank. |
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Bruce H. Nagle
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58 |
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2006 |
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Senior Vice President and Director of
Human Resources. From 2000 2006
was Vice President of Human Resources
at University of Pittsburgh Medical
Center. |
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Richard J. Harrison
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62 |
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2003 |
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Senior Vice President and Senior
Retail Lending Administrator. From
2000 2003 was Executive Vice
President and Chief Credit Officer at
Savings Bank of the Fingerlakes. |
Market Area and Competition
The Company provides a wide range of consumer and commercial banking and financial services to
individuals, municipalities and businesses through a network of 50 branches and 70 ATMs in
fifteen contiguous counties of Western and Central New York State: Allegany, Cattaraugus, Cayuga,
Chautauqua, Chemung, Erie, Genesee, Livingston, Monroe, Ontario, Schuyler, Seneca, Steuben, Wyoming
and Yates Counties.
The Companys market area is geographically and economically diversified in that it serves both
rural markets and the larger more affluent markets of suburban Rochester and suburban Buffalo.
Rochester and Buffalo are the two largest cities in New York State outside of New York City, with
combined metropolitan area populations of over two million people. The Company anticipates
increasing its presence in the markets around these two cities.
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The Company faces significant competition in both making loans and attracting deposits, as Western
and Central New York have a high density of financial institutions. The Companys competition for
loans comes principally from commercial banks, savings banks, savings and loan associations,
mortgage banking companies, credit unions, insurance companies and other financial service
companies. Its most direct competition for deposits has historically come from commercial banks,
savings banks and credit unions. The Company faces additional competition for deposits from
non-depository competitors such as the mutual fund industry, securities and brokerage firms and
insurance companies.
Employees
The Company had approximately 640 full-time equivalent employees (FTEs) at December 31,
2006.
Operating Segments
The Companys primary reportable segment is its subsidiary bank, Five Star Bank (FSB).
During 2005, the Company completed a strategic realignment, which involved the merger of its
subsidiary banks into a single state-chartered bank, FSB. The Financial Services Group (FSG) was
also deemed a reportable segment in prior years, as the Company evaluated the performance of this
line of business separately. However, with the sale of BGI during 2005, the FSG segment no longer
meets the thresholds included in SFAS No. 131 for separation.
Lending Activities
General. The Bank offers a broad range of loans including commercial and agricultural
working capital and revolving lines of credit, commercial and agricultural mortgages, equipment
loans, crop and livestock loans, residential mortgage loans and home equity loans and lines of
credit, home improvement loans, automobile loans and personal loans. Most newly originated fixed
rate residential mortgage loans are sold in the secondary market and servicing rights are retained.
Lending Philosophy and Objectives. The Bank has thoroughly evaluated and updated its
lending policy in recent years. The revisions to the loan policy include a renewed focus on
lending philosophy and credit objectives.
The key elements of the Banks lending philosophy include the following:
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To ensure consistent underwriting, all employees must share a common view of the
risks inherent in lending activities as well as the standards to be applied in
underwriting and managing credit risk; |
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Pricing of credit products should be risk-based; |
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The loan portfolio must be diversified to limit the potential impact of negative events; and |
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Careful, timely exposure monitoring through dynamic use of our risk rating system, is
required to provide early warning and assure proactive management of potential problems. |
The Banks credit objectives are as follows:
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Compete effectively and service the legitimate credit needs of our target market; |
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Enhance our reputation for superior quality and timely delivery of products and services; |
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Provide pricing that reflects the entire relationship and is commensurate with the
risk profiles of our borrowers; |
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Retain, develop and acquire profitable, multi-product, value added relationships with
high quality borrowers; |
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Focus on government guaranteed lending and establish a specialization in this area to
meet the needs of the small businesses in our communities; and |
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Comply with the relevant laws and regulations. |
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Loan Approval Process. The Banks loan policy establishes standardized underwriting
guidelines, as well as the loan approval process and the appropriate committee structures necessary
to facilitate and insure the highest possible loan quality decision-making in a timely and
businesslike manner. The policy establishes requirements for extending credit based on the size,
risk rating and type of credit involved. The policy also sets limits on individual loan officer
lending authority and various forms of joint lending authority, while designating which loans are
required to be approved at the committee level.
Loan Review Program. The Banks policy includes loan reviews, under the supervision of the
Audit Committee of the Board of Directors and directed by the Chief Risk Officer, to review the
Banks credit function in order to render an independent and objective evaluation of the Banks
asset quality and credit administration process.
Risk Assessment Process. Risk ratings are assigned to loans in the commercial, commercial
real estate and agricultural portfolios. The risk ratings are specifically used as follows:
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Profile the risk and exposure in the loan portfolio and identify developing trends
and relative levels of risk; |
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Identify deteriorating credits; and |
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Reflect the probability that a given customer may default on its obligations. |
Through the loan approval process, loan administration and loan review program, management
continuously monitors the credit risk profile of the Bank and assesses the overall quality of the
loan portfolio and adequacy of the allowance for loan losses.
Delinquencies and Nonperforming Assets. The Bank has several procedures in place to assist
in maintaining the overall quality of its loan portfolio. Delinquent loan reports are monitored by
credit administration to identify adverse levels and trends. Loans are generally placed on
nonaccruing status and cease accruing interest when the payment of principal or interest is
delinquent for 90 days, or earlier in some cases, unless the loan is in the process of collection
and the underlying collateral further supports the carrying value of the loan.
Allowance for Loan Losses. The allowance for loan losses is established through charges or
credits to earnings in the form of a provision (credit) for loan losses. The allowance reflects
managements estimate of the amount of probable loan losses in the portfolio, based on the
following factors:
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Specific allocations for individually analyzed credits; |
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Risk assessment process; |
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Historical charge-off experience; |
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Evaluation of the loan portfolio with loan reviews; |
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Levels and trends in delinquent and nonaccruing loans; |
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Trends in volume and terms; |
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Collateral values; |
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Effects of changes in lending policy; |
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Experience, ability and depth of management; |
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National and local economic trends and conditions; and |
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Concentrations of credit. |
Management presents a quarterly review of the adequacy of the allowance for loan losses to the
Companys Board of Directors. In order to determine the adequacy of the allowance for loan losses,
the risk rating and delinquency status of loans and other factors are considered, such as
collateral value, government guarantees, portfolio composition, trends in economic conditions and
the financial strength of borrowers. Specific allocations for individually evaluated loans are
established when required. An allowance is also established for groups of loans with similar risk
characteristics, based upon average historical charge-off experience taking into account levels
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and trends in delinquencies, loan volumes, economic and industry trends and concentrations of
credit. See also the sections titled Analysis of Allowance for Loan Losses and Allocation of
Allowance for Loan Losses in Part II, Item 7, Managements Discussion and Analysis of Financial
Condition and Results of Operation.
Commercial. The Bank originates commercial loans in its primary market areas and
underwrites them based on the borrowers ability to service the loan from operating income. The
Bank offers a broad range of commercial lending products, including term loans and lines of credit.
Short and medium-term commercial loans, primarily collateralized, are made available to businesses
for working capital (including inventory and receivables), business expansion (including
acquisition of real estate, expansion and improvements) and the purchase of equipment. As a
general practice, where possible, a collateral lien is placed on any available real estate,
equipment or other assets owned by the borrower and a personal guarantee of the owner is obtained.
At December 31, 2006, $29.3 million, or 27.7%, of the aggregate commercial loan portfolio were at
fixed rates while $76.5 million, or 72.3%, were at variable rates. The Bank utilizes government
loan guarantee programs where available and appropriate. See Government Guarantee Programs
below.
Commercial Real Estate. In addition to commercial loans secured by real estate, the Bank
makes commercial real estate loans to finance the purchase of real property, which generally
consists of real estate with completed structures. Commercial real estate loans are secured by
first liens on the real estate and are typically amortized over a 10 to 20 year period. The
underwriting analysis includes credit verification, appraisals and a review of the borrowers
financial condition. At December 31, 2006, $40.4 million, or 16.6%, of the aggregate commercial
real estate loan portfolio were at fixed rates while $203.6 million, or 83.4%, were at variable
rates.
Agricultural. Agricultural loans are offered for short-term crop production, farm
equipment and livestock financing and agricultural real estate financing, including term loans and
lines of credit. Short and medium-term agricultural loans, primarily collateralized, are made
available for working capital (crops and livestock), business expansion (including acquisition of
real estate, expansion and improvement) and the purchase of equipment. At December 31, 2006, $14.1
million, or 24.9%, of the agricultural loan portfolio were at fixed rates while $42.7 million, or
75.1%, were at variable rates. The Bank utilizes government loan guarantee programs where
available and appropriate. See Government Guarantee Programs below.
Residential Real Estate. The Bank originates fixed and variable rate one-to-four family
residential mortgages and closed-end home equity loans collateralized by owner-occupied properties
located in its market areas. The Bank offers a variety of real estate loan products, which are
generally amortized for periods up to 30 years. Loans collateralized by one-to-four family
residential real estate generally have been originated in amounts of no more than 80% of appraised
value or have mortgage insurance. Mortgage title insurance and hazard insurance are normally
required. The Bank sells certain one-to-four family residential mortgages on the secondary
mortgage market and typically retains the right to service the mortgages. To assure maximum
salability of the residential loan products for possible resale, the Company has formally adopted
the underwriting, appraisal, and servicing guidelines of the Federal Home Loan Mortgage Corporation
(FHLMC) as part of its standard loan policy. At December 31, 2006, the residential mortgage
servicing portfolio totaled $355.2 million, the majority of which have been sold to FHLMC. At
December 31, 2006, $225.3 million, or 83.9%, of residential real estate loans retained in portfolio
were at fixed rates while $43.1 million, or 16.1%, were at variable rates.
Consumer and Home Equity Lines. The Bank originates direct and indirect automobile loans,
recreational vehicle loans, boat loans, home improvement loans, home equity lines of credit,
personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The
terms of these loans typically range from 12 to 180 months and vary based upon the nature of the
collateral and the size of loan. The majority of the consumer lending program is underwritten on a
secured basis using the customers home or the financed automobile, mobile home, boat or
recreational vehicle as collateral. At December 31, 2006, $153.0 million, or 60.8%, of consumer
and home equity loans were at fixed rates while $98.5 million, or 39.2%, were at variable rates.
Government Guarantee Programs. The Bank participates in government loan guarantee programs
offered by the Small Business Administration (or SBA), United States Department of Agriculture
(or USDA), Rural Economic and Community Development (or RECD) and Farm Service Agency (or
FSA), among others. At December 31, 2006, the Bank had loans with an aggregate principal balance
of $38.7 million that were covered by guarantees under these programs. The guarantees only cover a
certain percentage of these loans. By participating in these programs, the Bank is able to broaden
its base of borrowers while minimizing credit risk.
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Investing Activities
General. The Banks investment securities policy is contained within its overall
Asset-Liability Management and Investment Policy. This policy dictates that investment decisions
will be made based on the safety of the investment, liquidity requirements, potential returns, cash
flow targets, need for collateral and desired risk parameters. In pursuing these objectives, the
Bank considers the ability of an investment to provide earnings consistent with factors of quality,
maturity, marketability and risk diversification. The Banks Treasurer, guided by the ALCO
Committee, is responsible for investment portfolio decisions within the established policies.
The Banks investment securities strategy centers on providing liquidity to meet loan demand and
redeeming liabilities, meeting pledging requirements, managing overall interest rate and credit
risks and maximizing portfolio yield. The Companys policy generally limits security purchases to
the following:
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U.S. treasury securities; |
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U.S. government agency securities, which are securities issued by official Federal
government bodies (e.g. the Government National Mortgage Association (GNMA)); |
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U.S. government-sponsored enterprise (GSE) securities, which are securities issued
by independent organizations that are in part sponsored by the federal government (e.g.
the Federal Home Loan Bank (FHLB) system, the Federal National Mortgage Association
(FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC)); |
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Mortgage-backed pass-through securities (MBSs), collateralized mortgage obligations
(CMOs) and asset-backed securities (ABSs) issued by GNMA, FNMA, FHLMC and the Small
Business Associations (SBA) and other privately issued investment grade quality
securities; |
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Investment grade municipal securities, including tax, revenue and bond anticipation
notes and general obligation bonds; |
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Certain creditworthy un-rated securities issued by municipalities; |
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Investment grade corporate debt, certificates of deposit and qualified preferred stock. |
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Investments in corporate bonds are limited to no more than 10% of total investments
and to bonds rated as Baa or better by Moodys Investor Services, Inc. or BBB or better
by Standard & Poors Ratings Services at the time of purchase. |
Funding Activities
General. Deposits and borrowed funds are the primary sources of the Companys funds
for use in lending, investing and for other general purposes. In addition, repayments on loans and
securities, proceeds from sales of loans and securities, and cash flows from operations provide
additional sources of funds.
Deposits. The Bank offers a variety of deposit account products with a range of interest
rates and terms. The deposit accounts consist of noninterest-bearing demand, interest-bearing
demand, savings, money market, club accounts and certificates of deposit. The Bank also offers
certificates of deposit with balances in excess of $100,000 to local municipalities, businesses,
and individuals as well as Individual Retirement Accounts (IRAs) and other qualified plan
accounts. To enhance its deposit product offerings, the Company provides commercial checking
accounts for small to moderately sized commercial businesses, as well as a low-cost checking
account service for low-income customers. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest rates and
competition. The Banks deposits are obtained predominantly from the areas in which its branch
offices are located. The Bank relies primarily on competitive pricing of its deposit products,
customer service and long-standing relationships with customers to attract and retain these
deposits. On a secondary basis, the Company utilizes certificate of deposit sales in the national
brokered market (brokered deposits) as a wholesale funding source.
Borrowed Funds. Borrowings consist mainly of advances entered into with the Federal Home
Loan Bank (FHLB), federal funds purchased and securities sold under repurchase agreements. The
Company formerly had a term debt agreement with another commercial bank that was prepaid during
2006.
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Junior Subordinated Debentures Issued to Unconsolidated Subsidiary Trust. The Company
formed the Trust in February 2001 to facilitate the private placement of capital securities.
Supervision and Regulation
The supervision and regulation of financial and bank holding companies and their subsidiaries
is intended primarily for the protection of depositors, the deposit insurance funds regulated by
the Federal Deposit Insurance Corporation (FDIC) and the banking system as a whole, and not for
the protection of shareholders or creditors of bank holding companies. The various bank regulatory
agencies have broad enforcement power over bank holding companies and banks, including the power to
impose substantial fines, operational restrictions and other penalties for violations of laws and
regulations.
The following description summarizes some of the laws to which the Company is subject. References
to applicable statutes and regulations are brief summaries and do not claim to be complete. They
are qualified in their entirety by reference to such statutes and regulations. Management believes
the Company is in compliance in all material respects with these laws and regulations. Changes in
the laws, regulations or policies that impact the Company cannot necessarily be predicted, but they
may have a material effect on the business and earnings of the Company.
The Company
FII is a bank holding company registered under the Bank Holding Company Act of 1956, as
amended, and is subject to supervision, regulation and examination by the FRB. During 2003, FII
terminated its financial holding company status and now operates as a bank holding company. The
change in status did not affect any non-financial subsidiaries or activities being conducted by
FII, although future acquisitions or expansions of non-financial activities may require prior FRB
approval and will be limited to those that are permissible for bank holding companies. The Bank
Holding Company Act and other federal laws subject bank holding companies to particular
restrictions on the types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for violations of laws and
regulations.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy of the FRB that
bank holding companies should pay cash dividends on common stock only out of income available over
the past year, and only if prospective earnings retention is consistent with the holding companys
expected future needs and financial condition. The policy provides that bank holding companies
should not maintain a level of cash dividends that undermines the bank holding companys ability to
serve as a source of strength to its subsidiaries.
Under FRB policy, a bank holding company is expected to act as a source of financial strength to
each of its subsidiaries and commit resources to their support. Such support may be required at
times when, absent this FRB policy, a holding company may not be inclined to provide it. As
discussed below, a bank holding company in certain circumstances could be required to guarantee the
capital plan of an undercapitalized banking subsidiary.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in
unsafe and unsound banking practices. The FRBs Regulation Y, for example, generally requires a
holding company to give the FRB prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration paid for any
repurchases or redemptions in the preceding year, is equal to 10% or more of the companys
consolidated net worth. The FRB may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or regulation. Depending
upon the circumstances, the FRB could take the position that paying a dividend would constitute an
unsafe or unsound banking practice.
The FRB has broad authority to prohibit activities of bank holding companies and their non-banking
subsidiaries which represent unsafe and unsound banking practices or which constitute violations of
laws or regulations, and can assess civil money penalties for certain activities conducted on a
knowing and reckless basis, if those activities caused a substantial loss to a depository
institution. The penalties can be as high as $1,000,000 for each day the activity continues.
10
Anti-Tying Restrictions. Bank holding companies and their affiliates are prohibited from
tying the provision of certain services, such as extensions of credit, to other services offered by
a holding company or its affiliates. In 2002, the FRB adopted Regulation W, a comprehensive
synthesis of prior opinions and interpretations under Sections 23A and 23B of the Federal Reserve
Act. Regulation W contains an extensive discussion of tying arrangements, which could impact the
way banks and bank holding companies transact business with affiliates.
Capital Adequacy Requirements. The FRB has adopted a system using risk-based capital
guidelines to evaluate the capital adequacy of bank holding companies. Under the guidelines,
specific categories of assets are assigned different risk weights, based generally on the perceived
credit risk of the asset. These risk weights are multiplied by corresponding asset balances to
determine a risk-weighted asset base. The guidelines require a minimum total risk-based capital
ratio of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). Total
capital is the sum of Tier 1 and Tier 2 capital. As of December 31, 2006, the Companys ratio of
Tier 1 capital to total risk-weighted assets was 15.85% and the ratio of total capital to total
risk-weighted assets was 17.10%. See also the section titled Capital Resources in Part II, Item
7, Managements Discussion and Analysis of Financial Condition and Results of Operation and Note
16 of the notes to consolidated financial statements.
In addition to the risk-based capital guidelines, the FRB uses a leverage ratio as an additional
tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a companys
Tier 1 capital divided by quarterly average consolidated assets. Certain highly rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies may be
required to maintain a leverage ratio of up to 200 basis points above the regulatory minimum. As
of December 31, 2006, the Companys leverage ratio was 8.91%.
The federal banking agencies risk-based and leverage ratios are minimum supervisory ratios
generally applicable to banking organizations that meet certain specified criteria, assuming that
they have the highest regulatory rating. Banking organizations not meeting these criteria are
expected to operate with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking organization that are
higher than the minimum ratios when circumstances warrant. FRB guidelines also provide that
banking organizations experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to
take prompt corrective action to resolve problems associated with insured depository institutions
whose capital declines below certain levels. In the event an institution becomes
undercapitalized, it must submit a capital restoration plan. The capital restoration plan will
not be accepted by the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiarys compliance with the capital restoration plan up to a
certain specified amount. Any such guarantee from a depository institutions holding company is
entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser
of 5% of the institutions assets at the time it became undercapitalized or the amount necessary to
cause the institution to be adequately capitalized. The bank regulators have greater power in
situations where an institution becomes significantly or critically undercapitalized or fails
to submit a capital restoration plan. For example, a bank holding company controlling such an
institution can be required to obtain prior FRB approval of proposed dividends, or might be
required to consent to a consolidation or to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies. The Bank Holding Company Act requires every bank
holding company to obtain the prior approval of the FRB before it may acquire all or substantially
all of the assets of any bank, or ownership or control of any voting shares of any bank, if after
such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares
of such bank. In approving bank acquisitions by bank holding companies, the FRB is required to
consider the financial and managerial resources and future prospects of the bank holding company
and the banks concerned, the convenience and needs of the communities to be served, and various
competitive factors.
11
Control Acquisitions. The Change in Bank Control Act prohibits a person or group of
persons from acquiring control of a bank holding company unless the FRB has been notified and has
not objected to the transaction. Under a rebuttable presumption established by the FRB, the
acquisition of 10% or more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act, would, under the circumstances set
forth in the presumption, constitute acquisition of control of the Company.
In addition, any entity is required to obtain the approval of the FRB under the Bank Holding
Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or
more of the Companys outstanding common stock, or otherwise obtaining control or a controlling
influence over the Company.
The Bank
Five Star Bank (FSBor the Bank) is a New York State-chartered bank and a member of the
Federal Reserve System. The FDIC, through the Bank Insurance Fund, insures deposits of the Bank.
The supervision and regulation of FSB subjects the Bank to special restrictions, requirements,
potential enforcement actions and periodic examination by the FDIC, the FRB and the New York State
Banking Department. Because the FRB regulates the holding company parent, the FRB also has
supervisory authority that directly affects FSB.
Restrictions on Transactions with Affiliates and Insiders. Transactions between the
holding company and its subsidiaries, including the Bank, are subject to Section 23A of the Federal
Reserve Act, and to the requirements of Regulation W. In general, Section 23A imposes limits on
the amount of such transactions, and also requires certain levels of collateral for loans to
affiliated parties. It also limits the amount of advances to third parties, which are
collateralized by the securities, or obligations of FII or its subsidiaries.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act, and to the
requirements of Regulation W which generally requires that certain transactions between the holding
company and its affiliates be on terms substantially the same, or at least as favorable to the
Bank, as those prevailing at the time for comparable transactions with or involving other
nonaffiliated persons.
The restrictions on loans to directors, executive officers, principal shareholders and their
related interests (collectively referred to herein as insiders) contained in the Federal Reserve
Act and Regulation O apply to all insured institutions and their subsidiaries and holding
companies. These restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all loans to insiders
and their related interests. These loans cannot exceed the institutions total unimpaired capital
and surplus, and the FDIC may determine that a lesser amount is appropriate. Insiders are subject
to enforcement actions for knowingly accepting loans in violation of applicable restrictions.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by
the Bank provide a substantial part of FIIs operating funds and, for the foreseeable future, it is
anticipated that dividends paid by the Bank will continue to be its principal source of operating
funds. Capital adequacy requirements serve to limit the amount of dividends that may be paid by
the subsidiaries. Under federal law, the subsidiaries cannot pay a dividend if, after paying the
dividend, a particular subsidiary will be undercapitalized. The FDIC may declare a dividend
payment to be unsafe and unsound even though the bank would continue to meet its capital
requirements after the dividend.
During September 2006, FII requested approval from the NYS Banking Department to pay a $25.0
million cash dividend from FSB to FII. Regulatory approval was necessary as the requested dividend
amount exceeded the amount allowable under regulations. During October 2006, FSB received
regulatory approval and paid the $25.0 million dividend to FII. FSB will be required to obtain
approval from the NYS Banking Department for any future dividend that exceeds the sum of the
current years net income plus the retained profits for the preceding two years.
Because FII is a legal entity separate and distinct from its subsidiaries, FIIs right to
participate in the distribution of assets of any subsidiary upon the subsidiarys liquidation or
reorganization will be subject to the prior claims of the subsidiarys creditors. In the event of
a liquidation or other resolution of an insured depository institution, the
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claims of depositors and other general or subordinated creditors are entitled to a priority of
payment over the claims of holders of any obligation of the institution to its shareholders,
including any depository bank holding company (such as FII) or any shareholder or creditor thereof.
Examinations. The New York State Banking Department, the FRB and the FDIC periodically
examine and evaluate the Bank. Based upon such examinations, the appropriate regulator may revalue
the assets of the institution and require that it establish specific reserves to compensate for the
difference between what the regulator determines the value to be and the book value of such assets.
Audit Reports. Insured institutions with total assets of $500 million or more at the
beginning of a fiscal year must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the institutions holding
company can be used to satisfy this requirement. Auditors must receive examination reports,
supervisory agreements and reports of enforcement actions. In addition, financial statements
prepared in accordance with generally accepted accounting principles, managements certifications
concerning responsibility for the financial statements, internal controls and compliance with legal
requirements designated by the FDIC, and if total assets exceed $1.0 billion, an attestation by the
auditor regarding the statements of management relating to the internal controls must be submitted.
The FDIC Improvement Act of 1991 requires that independent audit committees be formed, consisting
of outside directors only. The committees of institutions with assets of more than $3.0 billion
must include members with experience in banking or financial management must have access to outside
counsel and must not include representatives of large customers.
Capital Adequacy Requirements. The FDIC has adopted regulations establishing minimum
requirements for the capital adequacy of insured institutions. The FDIC may establish higher
minimum requirements if, for example, a bank has previously received special attention or has a
high susceptibility to interest rate risk. The most recent notification from the FDIC categorized
the Bank as well-capitalized under the regulatory framework for prompt corrective action.
The FDICs risk-based capital guidelines generally require banks to have a minimum ratio of Tier 1
capital to total risk-weighted assets of 4.0% and a ratio of total capital to total risk-weighted
assets of 8.0%. The capital categories have the same definitions for the Company. As of December
31, 2006, the ratio of Tier 1 capital to total risk-weighted assets for the Bank was 14.35% and the
ratio of total capital to total risk-weighted assets was 15.61%. See Managements Discussion and
Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources and Note
16 of the notes to consolidated financial statements.
The FDICs leverage guidelines require banks to maintain Tier 1 capital of no less than 4.0% of
average total assets, except in the case of certain highly rated banks for which the requirement is
3.0% of average total assets. As of December 31, 2006, the ratio
of Tier 1 capital to quarterly average
total assets (leverage ratio) was 8.06% for FSB. See Managements Discussion and Analysis of
Financial Condition and Results of OperationsLiquidity and Capital Resources and Note 16 of the
notes to consolidated financial statements.
Corrective Measures for Capital Deficiencies. The federal banking regulators are required
to take prompt corrective action with respect to capital-deficient institutions. Agency
regulations define, for each capital category, the levels at which institutions are
well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized
and critically undercapitalized. A well-capitalized bank has a total risk-based capital ratio
of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage ratio of 5.0%
or higher; and is not subject to any written agreement, order or directive requiring it to maintain
a specific capital level for any capital measure. An adequately capitalized bank has a total
risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or higher; a
leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most
recent examination report and is not experiencing significant growth); and does not meet the
criteria for a well-capitalized bank. A bank is undercapitalized if it fails to meet any one of
the adequately capitalized ratios.
In addition to requiring undercapitalized institutions to submit a capital restoration plan, agency
regulations contain broad restrictions on certain activities of undercapitalized institutions
including asset growth, acquisitions, branch establishment and expansion into new lines of
business. With certain exceptions, an insured depository institution is prohibited from making
capital distributions, including dividends, and is prohibited from paying
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management fees to control persons if the institution would be undercapitalized after any such
distribution or payment.
As an institutions capital decreases, the FDICs enforcement powers become more severe. A
significantly undercapitalized institution is subject to mandated capital raising activities,
restrictions on interest rates paid and transactions with affiliates, removal of management and
other restrictions. The FDIC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver or conservator.
Banks with risk-based capital and leverage ratios below the required minimums may also be subject
to certain administrative actions, including the termination of deposit insurance upon notice and
hearing, or a temporary suspension of insurance without a hearing in the event the institution has
no tangible capital.
Deposit Insurance Assessments. The Bank must pay assessments to the FDIC for federal
deposit insurance protection that was impacted by legislation enacted during 2006. The Federal
Deposit Insurance Reform Act of 2005 and the Federal Deposit Insurance Reform Conforming Amendment
Act of 2005 were signed into law in 2006 (collectively the Reform Act) providing the following
changes:
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Merged the Bank Insurance Fund (BIF) and the Savings Association
Insurance Fund (SAIF) into a new fund, the Deposit Insurance Fund (DIF). |
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Increased the coverage limit for retirement accounts to $250,000.
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Indexed the coverage limit for deposit insurance for inflation. |
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Establishing a range of 1.15 percent to 1.50 percent within which the FDIC
may set the Designated Reserve Ratio (DRR). |
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Eliminating the restrictions on premium rates based on the DRR and
granting the FDIC the discretion to price deposit insurance according to risk for all
insured institutions regardless of the level of the reserve ratio. |
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Granting a one-time initial assessment credit to recognize institutions
past contributions to the fund. |
The Deposit Insurance Fund Act of 1996 contained a comprehensive approach to recapitalizing the
Savings Association Insurance Fund and to assuring the payment of the Financing Corporations
(FICO) bond obligations. Under this law, banks insured under the Bank Insurance Fund are
required to pay a portion of the interest due on bonds that were issued by FICO in 1987 to help
shore up the ailing Federal Savings and Loan Insurance Corporation. The FDIC bills and collects
this assessment on behalf of FICO.
Prior to the Companys restructuring in December 2005, the Companys former bank subsidiaries NBG
and BNB were operating under formal agreements with the Office of the Comptroller of the Currency
(OCC), which resulted in a higher FDIC risk classification and the Company experienced an
increase in FDIC insurance premiums in 2005. As a result of the merger of the Companys subsidiary
banks and the lower risk classification for FSB, the FDIC insurance premiums decreased in 2006. As
a result of the Reform Act previously described, the Company has a $1.3 million assessment credit
available to offset future FDIC premium assessments, but not the FICO assessment. Therefore, the
Company expects the Reform Act to have minimal impact on its 2007 consolidated results of
operations.
Federal Home Loan Bank System. FSB is a member of the FHLB System, which consists of 12
regional Federal Home Loan Banks. The FHLB System provides a central credit facility primarily for
member institutions. As members of the FHLB of New York, the Bank is required to acquire and hold
shares of capital stock in the FHLB. The minimum investment requirement is determined by a
membership investment component and an activity-based investment component. Under the
membership component, a certain minimum investment in capital stock is required to be maintained
as long as the institution remains a member of the FHLB. Under the activity-based component,
members are required to purchase capital stock in proportion to the volume of certain transactions
with the FLHB. As of December 31, 2006, FSB complied with these requirements.
Enforcement Powers. The FDIC, the New York State Banking Department and the FRB have broad
enforcement powers, including the power to terminate deposit insurance, impose substantial fines
and other civil and criminal
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penalties and appoint a conservator or receiver. Failure to comply with applicable laws,
regulations and supervisory agreements could subject the Company or the Bank, as well as the
officers, directors and other institution-affiliated parties of these organizations, to
administrative sanctions and potentially substantial civil money penalties.
Brokered Deposit Restrictions. Adequately capitalized institutions cannot accept, renew or
roll over brokered deposits except with a waiver from the FDIC, and are subject to restrictions on
the interest rates that can be paid on such deposits. Undercapitalized institutions may not
accept, renew or roll over brokered deposits.
Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) contains a cross-guarantee provision which generally makes commonly
controlled insured depository institutions liable to the FDIC for any losses incurred in connection
with the failure of a commonly controlled depository institution.
Community Reinvestment Act. The Community Reinvestment Act of 1977 (CRA) and the
regulations issued hereunder are intended to encourage banks to help meet the credit needs of their
service area, including low and moderate income neighborhoods, consistent with the safe and sound
operations of the banks. These regulations also provide for regulatory assessment of a banks
record in meeting the needs of its service area when considering applications regarding
establishing branches, mergers or other bank or branch acquisitions. FIRREA requires federal
banking agencies to make public a rating of a banks performance under the CRA. In the case of a
bank holding company, the CRA performance record of the banks involved in the transaction are
reviewed in connection with the filing of an application to acquire ownership or control of shares
or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can
substantially delay or block the transaction.
Consumer Laws and Regulations. In addition to the laws and regulations discussed herein,
the Bank is also subject to certain consumer laws and regulations that are designed to protect
consumers in transactions with banks. While the list set forth herein is not exhaustive, these
laws and regulations include, among others, the Truth in Lending Act, the Truth in Savings Act, the
Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, the Fair Housing Act, the Home Mortgage Disclosure Act and the Real Estate Settlement
Procedures Act. These laws and regulations mandate certain disclosure requirements and regulate
the manner in which financial institutions must deal with customers when taking deposits or making
loans to such customers. The Bank must comply with the applicable provisions of these consumer
protection laws and regulations as part of their ongoing customer relations. The Check Clearing
for the 21st Century Act (Check 21 Act or the Act), which became effective on October 28, 2004,
creates a new negotiable instrument, called a substitute check, which banks are required to
accept as the legal equivalent of a paper check if it meets the requirements of the Act. The Act
is designed to facilitate check truncation, to foster innovation in the check payment system, and
to improve the payment system by shortening processing times and reducing the volume of paper
checks.
Changing Regulatory Structure
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (Gramm-Leach) was signed into law on November 12, 1999.
Gramm-Leach permits, subject to certain conditions, combinations among banks, securities firms and
insurance companies. Under Gramm-Leach, bank holding companies are permitted to offer their
customers virtually any type of financial service including banking, securities underwriting,
insurance (both underwriting and agency), and merchant banking. In order to engage in these
additional financial activities, a bank holding company must qualify and register with the Board of
Governors of the Federal Reserve System as a financial holding company by demonstrating that each
of its subsidiaries is well capitalized, well managed, and has at least a satisfactory rating
under the CRA. On May 12, 2000, FII received approval from the Federal Reserve Bank of New York to
become a financial holding company resulting in the eventual formation of Five Star Investment
Services, Inc. (FSIS) (formerly known as The FI Group, Inc. (FIGI)). During 2003, FII
terminated its financial holding company status and now operates as a bank holding company. The
change in status did not affect the non-financial subsidiaries or activities being conducted by the
Company, although future acquisitions or expansions of non-financial activities may require prior
FRB approval and will be limited to those that are
15
permissible for bank holding companies. Gramm-Leach establishes that the federal banking agencies
will regulate the banking activities of financial holding companies and banks financial
subsidiaries, the SEC will regulate their securities activities and state insurance regulators will
regulate their insurance activities. Gramm-Leach also provides new protections against the
transfer and use by financial institutions of consumers nonpublic, personal information.
The major provisions of Gramm-Leach are:
Financial Holding Companies and Financial Activities. Title I establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies, securities firms, and
other financial service providers by revising and expanding the Bank Holding Company Act framework
to permit a holding company system to engage in a full range of financial activities through
qualification as a new entity known as a financial holding company. A bank holding company that
qualifies as a financial holding company can expand into a wide variety of services that are
financial in nature, if its subsidiary depository institutions are well-managed, well-capitalized
and have received at least a satisfactory rating on their last CRA examination. Services that
have been deemed to be financial in nature include securities underwriting, dealing and market
making, sponsoring mutual funds and investment companies, insurance underwriting and agency
activities and merchant banking.
Securities Activities. Title II narrows the exemptions from the securities laws previously
enjoyed by banks, requires the FRB and the SEC to work together to draft rules governing certain
securities activities of banks and creates a new, voluntary investment bank holding company.
Insurance Activities. Title III restates the proposition that the states are the
functional regulators for all insurance activities, including the insurance activities of federally
chartered banks, and bars the states from prohibiting insurance activities by depository
institutions. The law encourages the states to develop uniform or reciprocal rules for the
licensing of insurance agents.
Privacy. Under Title V, federal banking regulators were required to adopt rules that have
limited the ability of banks and other financial institutions to disclose non-public information
about consumers to nonaffiliated third parties. These limitations require disclosure of privacy
policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain
personal information to a nonaffiliated third party. Federal banking regulators issued final rules
on May 10, 2000 to implement the privacy provisions of Title V. Under the rules, financial
institutions must provide:
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Initial notices to customers about their privacy policies, describing the conditions
under which they may disclose nonpublic personal information to nonaffiliated third
parties and affiliates; |
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Annual notices of their privacy policies to current customers; and |
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A reasonable method for customers to opt out of disclosures to nonaffiliated third parties. |
Compliance with the rules is mandatory after July 1, 2001. The Bank was in full compliance with
the rules as of or prior to the respective effective dates.
Safeguarding Confidential Customer Information. Under Title V, federal banking regulators
are required to adopt rules requiring financial institutions to implement a program to protect
confidential customer information. In January 2000, the federal banking agencies adopted
guidelines requiring financial institutions to establish an information security program to:
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Identify and assess the risks that may threaten customer information; |
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Develop a written plan containing policies and procedures to manage and control these risks; |
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Implement and test the plan; and |
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Adjust the plan on a continuing basis to account for changes in technology, the
sensitivity of customer information and internal or external threats to information
security. |
The Bank approved security programs appropriate to its size and complexity and the nature and scope
of its operations prior to the July 1, 2001 effective date of the regulatory guidelines. The
implementation of the programs is an ongoing process.
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Community Reinvestment Act Sunshine Requirements. In February 2001, the federal banking
agencies adopted final regulations implementing Section 711 of Title VII, the CRA Sunshine
Requirements. The regulations require nongovernmental entities or persons and insured depository
institutions and affiliates that are parties to written agreements made in connection with the
fulfillment of the institutions CRA obligations to make available to the public and the federal
banking agencies a copy of each agreement. The regulations impose annual reporting requirements
concerning the disbursement, receipt and use of funds or other resources under these agreements.
The effective date of the regulations was April 1, 2001. Neither FII nor the Bank is a party to
any agreement that would be the subject of reporting pursuant to the CRA Sunshine Requirements.
USA Patriot Act
As part of the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act), signed into law on October 26,
2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism
Act of 2001 (IMLAFATA). IMLAFATA authorizes the Secretary of the Treasury, in consultation with
the heads of other government agencies, to adopt special measures applicable to banks, bank holding
companies or other financial institutions. During 2002, the Department of Treasury issued a number
of regulations relating to enhanced recordkeeping and reporting requirements for certain financial
transactions that are of primary money laundering concern, due diligence requirements concerning
the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain
types of accounts with foreign financial institutions. Covered financial institutions also are
barred from dealing with foreign shell banks. In addition, IMLAFATA expands the circumstances
under which funds in a bank account may be forfeited and requires covered financial institutions to
respond under certain circumstances to requests for information from federal banking agencies
within 120 hours.
Regulations were also adopted during 2002 to implement minimum standards to verify customer
identity, to encourage cooperation among financial institutions, federal banking agencies, and law
enforcement authorities regarding possible money laundering or terrorist activities, to prohibit
the anonymous use of concentration accounts, and to require all covered financial institutions to
have in place a Bank Secrecy Act compliance program. IMLAFATA also amends the Bank Holding Company
Act and the Bank Merger Act to require the federal banking agencies to consider the effectiveness
of a financial institutions anti-money laundering activities when reviewing an application under
these acts.
The Bank has in place a Bank Secrecy Act compliance program, and it engages in very few
transactions of any kind with foreign financial institutions or foreign persons.
Sarbanes-Oxley Act
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the Act)
implementing legislative reforms intended to address corporate and accounting fraud. In addition
to the establishment of a new accounting oversight board that enforces auditing, quality control
and independence standards and is funded by fees from all publicly traded companies, the law
restricts accounting firms from providing both auditing and consulting services to the same client.
To ensure auditor independence, any non-audit services being provided to an audit client requires
pre-approval by the issuers audit committee members. In addition, the audit partners must be
rotated. The Act requires chief executive officers and chief financial officers, or their
equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and
criminal penalties if they knowingly or willfully violate this certification requirement. In
addition, under the Act, legal counsel is required to report evidence of a material violation of
the securities laws or a breach of fiduciary duty by a company to its chief executive officer or
its chief legal officer, and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of directors or the board
itself.
Longer prison terms and increased penalties are also applied to corporate executives who violate
federal securities laws, the period during which certain types of suits can be brought against a
company or its officers has been extended, and bonuses issued to top executives prior to
restatement of a companys financial statements are subject to disgorgement if such restatement was
due to corporate misconduct. Executives are also prohibited from insider trading during retirement
plan blackout periods, and loans to company executives are restricted. The
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Act accelerates the time frame for disclosures by public companies, as they must immediately
disclose any material changes in their financial condition or operations. Directors and executive
officers must also provide information for most changes in ownership in a companys securities
within two business days of the change.
The Act also prohibits any officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate or mislead any
independent public or certified accountant engaged in the audit of the companys financial
statements for the purpose of rendering the financial statements materially misleading. The Act
also requires the SEC to prescribe rules requiring inclusion of an internal control report and
assessment by management in the annual report to stockholders. In addition, the Act requires that
each financial report required to be prepared in accordance with (or reconciled to) accounting
principles generally accepted in the United States of America and filed with the SEC reflect all
material correcting adjustments that are identified by a registered public accounting firm in
accordance with accounting principles generally accepted in the United States of America and the
rules and regulations of the SEC.
As directed by Section 302(a) of the Act, the Companys chief executive officer and chief financial
officer are each required to certify that the Companys quarterly and annual reports do not contain
any untrue statement of a material fact. The Act imposes several requirements, including having
these officers certify that: they are responsible for establishing, maintaining and regularly
evaluating the effectiveness of the Companys internal controls; they have made certain disclosures
to the Companys auditors and the Audit Committee of the Board of Directors about the Companys
internal controls; and they have included information in the Companys quarterly and annual reports
about their evaluation and whether there have been significant changes in the Companys internal
controls or in other factors that could significantly affect internal controls during the last
quarter.
Fair Credit Reporting Act and Fair and Accurate Transactions Act
In 1970, the U. S. Congress enacted the Fair Credit Reporting Act (the FCRA) in order to
ensure the confidentiality, accuracy, relevancy and proper utilization of consumer credit report
information. Under the framework of the FCRA, the United States has developed a highly advanced
and efficient credit reporting system. The information contained in that broad system is used by
financial institutions, retailers and other creditors of every size in making a wide variety of
decisions regarding financial transactions. Employers and law enforcement agencies have also made
wide use of the information collected and maintained in databases made possible by the FCRA. The
FCRA affirmatively preempts state law in a number of areas, including the ability of entities
affiliated by common ownership to share and exchange information freely, the requirements on credit
bureaus to reinvestigate the contents of reports in response to consumer complaints, among others.
By its terms, the preemption provisions of the FCRA were to terminate as of December 31, 2003.
With the enactment of the Fair and Accurate Transactions Act (the FACT Act) in late 2003, the
preemption provisions of FCRA were extended, although the FACT Act imposes additional requirements
on entities that gather and share consumer credit information. The FACT Act required the FRB and
the Federal Trade Commission (FTC) to issue final regulations within nine months of the effective
date of the Act. A series of regulations and announcements have been promulgated, including a
joint FTC/FRB announcement of effective dates for FCRA amendments, the FTCs Free Credit Report
rule, revisions to the FTCs FACT Act Rules, the FTCs final rules on identity theft and proof of
identity, the FTCs final regulation on consumer information and records disposal, the FTCs final
summaries and the final rule on prescreen notices.
18
FRB Final Rule on Trust Preferred Securities
On March 1, 2005, the FRB issued a final rule that allows the continued inclusion of trust
preferred securities in the Tier 1 capital of bank holding companies. Trust preferred securities,
however, will be subject to stricter quantitative limits. Key components of the final rule are:
|
|
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Trust preferred securities, together with other restricted core capital elements,
can be included in a bank holding companys Tier 1 capital up to 25% of the sum of core
capital elements, including restricted core capital elements; |
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|
Restricted core capital elements are defined to include: |
|
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Qualifying trust preferred securities; |
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Qualifying cumulative perpetual preferred stock (and related surplus); |
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Minority interest related to qualifying cumulative perpetual preferred stock
directly issued by a consolidated U.S. depository institution or foreign bank
subsidiary; and |
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Minority interest related to qualifying common or qualifying perpetual
preferred stock issued by a consolidated subsidiary that is neither a U.S.
depository institution nor a foreign bank subsidiary. |
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|
The sum of core capital elements will be calculated net of goodwill, less any
associated deferred tax liability; |
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Internationally active bank holding companies are further limited, and must limit
restricted core capital elements to 15% of the sum of core capital elements, including
restricted core capital elements, net of goodwill, although they may include qualifying
mandatory convertible preferred securities up to the 25% limit; |
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A five year transition period for application of quantitative limits, ending March 31,
2009. |
Expanding Enforcement Authority and Enforcement Matters
The FRB, the New York State Superintendent of Banks and the FDIC possess extensive authority
to police unsafe or unsound practices and violations of applicable laws and regulations by
depository institutions and their holding companies. For example, the FDIC may terminate the
deposit insurance of any institution that it determines has engaged in an unsafe or unsound
practice. The agencies can also assess civil money penalties, issue cease and desist or removal
orders, seek injunctions, and publicly disclose such actions.
Effect On Economic Environment
The policies of regulatory authorities, including the monetary policy of the FRB, have a
significant effect on the operating results of bank holding companies and their subsidiaries.
Among the means available to the FRB to affect the money supply are open market operations in U.S.
Government securities, changes in the discount rate on member bank borrowings and changes in
reserve requirements against member bank deposits. These means are used in varying combinations to
influence overall growth and distribution of bank loans, investments and deposits, and their use
may affect interest rates charged on loans or paid for deposits. FRB monetary policies have
materially affected the operating results of commercial banks in the past and are expected to
continue to do so in the future.
Item 1A. Risk Factors
Our financial results are subject to a number of risks. The factors discussed below are
intended to highlight risks that management believes are most relevant to our current operating
environment. This listing is not intended to capture all risks associated with our business.
Additional risks, including those generally affecting the industry in which we operate, risks that
we currently deem immaterial and risks generally applicable to companies that have recently
undertaken similar transactions, may also negatively impact our consolidated financial position,
consolidated results of operations, or liquidity.
19
Asset Quality. A significant source of risk for the Company arises from the possibility
that losses will be sustained because borrowers, guarantors and related parties may fail to perform
in accordance with the terms of their loans. Most loans originated by the Company are secured, but
loans may be unsecured depending on the nature of the loan. With respect to secured loans, the
collateral securing the repayment of these loans includes a wide variety of diverse real and
personal property that may be affected by changes in prevailing economic, environmental and other
conditions, including declines in the value of real estate, changes in interest rates, changes in
monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity,
environmental contamination and other external events.
The Company has adopted loan policies with well-defined risk tolerance limits including individual
loan officer and committee approval processes. Policies and procedures outline underwriting
standards, appraisal requirements, collateral valuations, financial information reviews, and
ongoing quality monitoring processes that management believes are appropriate to mitigate the risk
of loss within the loan portfolio. Such policies and procedures, however, may not prevent
unexpected losses that could have a material adverse effect on the Companys business, financial
condition, results of operations, or liquidity.
Interest Rate Risk. The banking industrys earnings depend largely on the relationship
between the yield on earning assets, primarily loans and investments, and the cost of funds,
primarily deposits and borrowings. This relationship, known as the interest rate spread, is
subject to fluctuation and is affected by economic and competitive factors which influence interest
rates, the volume and mix of interest-earning assets and interest-bearing liabilities and the level
of non-performing assets. Fluctuations in interest rates affect the demand of customers for the
Companys products and services. The Bank is subject to interest rate risk to the degree that
interest-bearing liabilities re-price or mature more slowly or more rapidly or on a different basis
than interest-earning assets. Significant fluctuations in interest rates could have a material
adverse effect on the Companys business, financial condition, results of operations or liquidity.
For additional information regarding interest rate risk, see Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk.
Changes in the Value of Goodwill and Other Intangible Assets. Under accounting standards,
the Company is not required to amortize goodwill but rather must evaluate goodwill for impairment
at least annually. If deemed impaired at any point in the future, an impairment charge
representing all or a portion of goodwill will be recorded to current earnings in the period in
which the impairment occurred. The capitalized value of other intangible assets is amortized to
earnings over their estimated lives. Other intangible assets are also subject to periodic
impairment reviews. If these assets are deemed impaired at any point in the future, an impairment
charge will be recorded to current earnings in the period in which the impairment occurred. See
also Note 7 of the notes to consolidated financial statements.
Breach of Information Security and Technology Dependence. The Company depends upon data
processing, software, communication and information exchange on a variety of computing platforms
and networks and over the internet. Despite instituted safeguards, the Company cannot be certain
that all of its systems are entirely free from vulnerability to attack or other technological
difficulties or failures. The Company relies on the services of a variety of vendors to meet its
data processing and communication needs. If information security is breached or other technology
difficulties or failures occur, information may be lost or misappropriated, services and operations
may be interrupted and the Company could be exposed to claims from customers. Any of these results
could have a material adverse effect on the Companys business, financial condition, results of
operations or liquidity.
Economic Conditions, Limited Geographic Diversification. The Companys banking operations
are located in Western and Central New York State. Because of the geographic concentration of its
operations, the Companys results depend largely upon economic conditions in this area, which
include volatility in wholesale milk prices, losses of manufacturing jobs in Rochester and Buffalo,
and minimal population growth throughout the region. Further deterioration in economic conditions
could adversely affect the quality of the Companys loan portfolio and the demand for its products
and services, and accordingly, could have a material adverse effect on the Companys business,
financial condition, results of operations or liquidity. See also the section titled Market Area
and Competition.
20
Ability of the Company to Execute Its Business Strategy. The financial performance and
profitability of the Company will depend on its ability to execute its strategic plan and manage
its future growth. Failure to execute these plans could have a material adverse effect on the
Companys business, financial condition, results of operations or liquidity. Moreover, the
Companys future performance is subject to a number of factors beyond its control, including
pending and future federal and state banking legislation, regulatory changes, unforeseen litigation
outcomes, inflation, lending and deposit rate changes, interest rate fluctuations, increased
competition and economic conditions. Accordingly, these issues could have a material adverse
effect on the Companys business, financial condition, results of operations or liquidity.
Dependence on Key Personnel. The Companys success depends to a significant extent on the
management skills of its existing executive officers and directors, many of whom have held officer
and director positions with the Company for many years. The loss or unavailability of any of its
key personnel, including Erland E. Kailbourne, Chairman of the Board of Directors, Peter G.
Humphrey, President and Chief Executive Officer, James T. Rudgers, Executive Vice President and
Chief of Community Banking, Ronald A. Miller, Executive Vice President and Chief Financial Officer,
George D. Hagi, Executive Vice President and Chief Risk Officer, John J. Witkowski, Senior Vice
President and Regional President/Retail Banking Executive, Martin K. Birmingham, Senior Vice
President and Regional President/Commercial Market Executive, Kevin B. Klotzbach, Senior Vice
President and Treasurer, Bruce H. Nagle, Senior Vice President and Director of Human Resources and
Richard J. Harrison, Senior Vice President and Senior Retail Lending Administrator, could have a
material adverse effect on the Companys business, financial condition, results of operations or
liquidity. See also Part III, Item 10, Directors, Executive Officers and Corporate Governance.
Competition. National competitors are much larger in total assets and capitalization, have
greater access to capital markets and offer a broader array of financial services than the Company.
There can be no assurance that the Company will be able to compete effectively in its markets.
Furthermore, developments increasing the nature or level of competition, together with changes in
our strategic plan and stricter loan underwriting standards, could have a material adverse effect
on the Companys business, financial condition, results of operations or liquidity. See also the
sections titled Market Area and Competition and Supervision and Regulation.
Government Regulation and Monetary Policy. The Company and the banking industry are
subject to extensive regulation and supervision under federal and state laws and regulations. The
restrictions imposed by such laws and regulations limit the manner in which the Company conducts
its banking business, undertakes new investments and activities and obtains financing. These
regulations are designed primarily for the protection of the deposit insurance funds and consumers
and not to benefit holders of the Companys securities. Financial institution regulation has been
the subject of significant legislation in recent years and may be the subject of further
significant legislation in the future, none of which is in the control of the Company. Significant
new laws or changes in, or repeals of, existing laws could have a material adverse effect on the
Companys business, financial condition, results of operations or liquidity. Further, federal
monetary policy, particularly as implemented through the Federal Reserve System, significantly
affects credit conditions for the Company, and any unfavorable change in these conditions could
have a material adverse effect on the Companys business, financial condition, results of
operations or liquidity. See also Supervision and Regulation.
Item 1B. Unresolved Staff Comments
None.
21
Item 2. Properties
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TYPE OF |
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LEASED OR |
|
EXPIRATION |
LOCATION |
|
FACILITY |
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OWNED |
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OF LEASE |
Allegany
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Branch
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Owned
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Amherst
|
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Branch
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Leased
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February 2020 |
Attica
|
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Branch
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Owned
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|
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Auburn
|
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Branch
|
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Owned
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|
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Avoca
|
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Branch
|
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Owned
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Batavia
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Branch
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Leased
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|
December 2016 |
Batavia (In-Store)
|
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Branch
|
|
Leased
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|
July 2009 |
Bath
|
|
Branch
|
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Owned
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|
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Bath
|
|
Drive-up Branch
|
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Owned
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|
Caledonia
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Branch
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Leased
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|
January 2007 |
Canandaigua
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Branch
|
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Owned
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|
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Cuba
|
|
Branch
|
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Owned
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|
|
Dansville
|
|
Branch
|
|
Leased
|
|
March 2014 |
Dundee
|
|
Branch
|
|
Owned
|
|
|
East Aurora
|
|
Branch
|
|
Leased
|
|
January 2013 |
East Rochester
|
|
Branch
|
|
Leased
|
|
September 2009 |
Ellicottville
|
|
Branch
|
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Owned
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|
|
Elmira
|
|
Branch
|
|
Owned
|
|
|
Elmira Heights
|
|
Branch
|
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Leased
|
|
August 2009 |
Erwin
|
|
Branch
|
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Leased
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|
July 2007 |
Geneseo
|
|
Branch
|
|
Owned
|
|
|
Geneva
|
|
Branch
|
|
Owned
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|
|
Geneva
|
|
Drive-up Branch
|
|
Owned
|
|
|
Geneva (Plaza)
|
|
Branch
|
|
Ground Leased
|
|
January 2016 |
Hammondsport
|
|
Branch
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Owned
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|
|
Honeoye Falls
|
|
Branch
|
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Leased
|
|
September 2017 |
Hornell
|
|
Branch
|
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Owned
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|
|
Horseheads
|
|
Branch
|
|
Leased
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|
October 2012 |
Lakeville
|
|
Branch
|
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Owned
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|
|
Lakewood
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|
Branch
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Owned
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Leroy
|
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Branch
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Owned
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Mount Morris
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Branch
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Owned
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Naples
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Branch
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Owned
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North Chili
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Branch
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Owned
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North Java
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Branch
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Owned
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North Warsaw
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Branch
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Owned
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Olean
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Branch
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Owned
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Olean
|
|
Drive-up Branch
|
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Owned
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|
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Orchard Park
|
|
Branch
|
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Ground Leased
|
|
January 2019 |
Ovid
|
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Branch
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Owned
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Pavilion
|
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Branch
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Owned
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Penn Yan
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Branch
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Owned
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Salamanca
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Branch
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Owned
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Strykersville
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Branch
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Owned
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Victor
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Branch
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Owned
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Warsaw (220 Liberty Street)
|
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Headquarters
|
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Owned
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Warsaw (31 North Main Street)
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Administrative Offices
|
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Owned
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Warsaw (55 North Main Street)
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Main Office
|
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Owned
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Waterloo
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Branch
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Owned
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Wayland
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Branch
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Owned
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|
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Williamsville
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|
Branch
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Leased
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|
August 2007 |
Wyoming
|
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Branch
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Leased
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June 2007 |
Yorkshire
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Branch
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Ground Leased
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November 2007 |
22
Item 3. Legal Proceedings
From time to time the Company is a party to or otherwise involved in legal proceedings arising
in the normal course of business. Management does not believe that there is any pending or
threatened proceeding against the Company, which, if determined adversely, would have a material
adverse effect on the Companys business, results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth quarter of the year
ended December 31, 2006.
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market and Dividend Information
The common stock of FII is traded on the NASDAQ Global Select Market under the symbol of FISI.
The following chart lists prices per share of actual sales transactions as reported by NASDAQ, as
well as the cash dividends declared.
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|
|
|
|
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Cash |
|
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|
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|
|
Dividends |
|
|
Sales Price Per Share |
|
Per Share |
|
|
High |
|
Low |
|
Close |
|
Declared |
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
21.17 |
|
|
$ |
18.16 |
|
|
$ |
18.89 |
|
|
$ |
0.08 |
|
Second Quarter |
|
|
20.86 |
|
|
|
17.43 |
|
|
|
20.86 |
|
|
|
0.08 |
|
Third Quarter |
|
|
25.38 |
|
|
|
19.15 |
|
|
|
23.36 |
|
|
|
0.09 |
|
Fourth Quarter |
|
|
24.25 |
|
|
|
22.07 |
|
|
|
23.05 |
|
|
|
0.09 |
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
24.93 |
|
|
$ |
18.93 |
|
|
$ |
19.81 |
|
|
$ |
0.16 |
|
Second Quarter |
|
|
20.21 |
|
|
|
17.05 |
|
|
|
18.02 |
|
|
|
0.08 |
|
Third Quarter |
|
|
20.76 |
|
|
|
15.86 |
|
|
|
18.41 |
|
|
|
0.08 |
|
Fourth Quarter |
|
|
21.98 |
|
|
|
15.52 |
|
|
|
19.62 |
|
|
|
0.08 |
|
FII pays regular quarterly cash dividends on its common stock, and its Board of Directors
presently intends to continue the payment of regular quarterly cash dividends, subject to the need
for those funds for debt service and other purposes. However, because substantially all of the
funds available for the payment of dividends are derived from the Bank, future dividends will
depend upon the earnings of the Bank, its financial condition and need for funds. Furthermore,
there are a number of federal banking policies and regulations that restrict both FIIs and the
Banks ability to pay dividends. For further discussion on dividend restrictions, refer to the
Part I, Item 1 sections titled Supervision and Regulation, The Company and The Bank, as these
restrictions may have the effect of reducing the amount of dividends that FII can declare to its
shareholders.
23
Shareholders
At March 2, 2007, the Company had approximately 1,950 common shareholders and 11,336,730 shares of
common stock outstanding (exclusive of treasury shares).
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchases
The table below sets forth the information with respect to purchases made by the Company or any
affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934)
of FII common stock during the three months ended December 31, 2006:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Value of Shares that |
|
|
Total |
|
|
|
|
|
Shares Purchased as |
|
May Yet Be |
|
|
Number of |
|
Average |
|
Part of Publicly |
|
Purchased Under |
|
|
Shares |
|
Price Paid |
|
Announced Plans or |
|
the Plans or |
Period |
|
Purchased |
|
per Share |
|
Programs |
|
Programs (1) |
|
10/01/06
10/31/06 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
5,000,000 |
|
11/01/06
11/30/06 |
|
|
4,351 |
|
|
|
22.48 |
|
|
|
4,351 |
|
|
|
4,902,000 |
|
12/01/06
12/31/06 |
|
|
1,000 |
(2) |
|
|
14.81 |
|
|
|
|
|
|
|
4,902,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,351 |
|
|
$ |
21.05 |
|
|
|
4,351 |
|
|
$ |
4,902,000 |
|
|
|
|
|
|
|
(1) |
|
On October 25, 2006, the Companys Board of Directors approved a one-year, $5.0 million
common stock repurchase program. Under the program, stock repurchases may be made either in
the open market or through privately negotiated transactions in amounts and at times and
prices as determined by the Company. |
|
(2) |
|
Shares were purchased in a private transaction pursuant to an agreement that priced the
shares at the Companys book value at the previous year-end. |
24
Performance Graph
The Stock Performance Graph compares the cumulative total return on FIIs common stock against the
cumulative total return of the NASDAQ Composite of U.S. Stocks and the SNL Financial LC (SNL) $1
Billion $5 Billion Bank Index, for the period of December 31, 2001 through December 31, 2006.
The graph assumes that $100 was invested on December 31, 2001 in our common stock and the
comparison groups and reinvestment of all cash dividends prior to any tax effect.
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Period Ending |
|
|
Index |
|
|
12/31/01 |
|
|
12/31/02 |
|
|
12/31/03 |
|
|
12/31/04 |
|
|
12/31/05 |
|
|
12/31/06 |
|
|
|
Financial Institutions, Inc. |
|
|
|
100.00 |
|
|
|
|
127.95 |
|
|
|
|
126.40 |
|
|
|
|
107.04 |
|
|
|
|
92.23 |
|
|
|
|
110.10 |
|
|
|
NASDAQ Composite |
|
|
|
100.00 |
|
|
|
|
68.76 |
|
|
|
|
103.67 |
|
|
|
|
113.16 |
|
|
|
|
115.57 |
|
|
|
|
127.58 |
|
|
|
SNL $1B-$5B Bank Index |
|
|
|
100.00 |
|
|
|
|
115.44 |
|
|
|
|
156.98 |
|
|
|
|
193.74 |
|
|
|
|
190.43 |
|
|
|
|
220.36 |
|
|
|
|
|
|
|
|
|
Source : SNL Financial LC, Charlottesville, VA
|
|
(434) 977-1600 |
|
© 2007
|
|
www.snl.com |
25
Item 6. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31: |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
Selected Financial Condition Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,907,552 |
|
|
$ |
2,022,392 |
|
|
$ |
2,156,329 |
|
|
$ |
2,173,732 |
|
|
$ |
2,105,034 |
|
Loans |
|
|
926,482 |
|
|
|
992,321 |
|
|
|
1,252,405 |
|
|
|
1,340,436 |
|
|
|
1,314,921 |
|
Allowance for loan losses |
|
|
17,048 |
|
|
|
20,231 |
|
|
|
39,186 |
|
|
|
29,064 |
|
|
|
21,660 |
|
Securities available for sale |
|
|
735,148 |
|
|
|
790,855 |
|
|
|
727,198 |
|
|
|
604,964 |
|
|
|
596,862 |
|
Securities held to maturity |
|
|
40,388 |
|
|
|
42,593 |
|
|
|
39,317 |
|
|
|
47,131 |
|
|
|
47,125 |
|
Total liabilities |
|
|
1,725,164 |
|
|
|
1,850,635 |
|
|
|
1,972,042 |
|
|
|
1,990,629 |
|
|
|
1,926,740 |
|
Deposits |
|
|
1,617,695 |
|
|
|
1,717,261 |
|
|
|
1,818,949 |
|
|
|
1,818,889 |
|
|
|
1,708,518 |
|
Borrowed funds (1) |
|
|
87,199 |
|
|
|
115,199 |
|
|
|
132,614 |
|
|
|
154,223 |
|
|
|
195,441 |
|
Total shareholders equity |
|
|
182,388 |
|
|
|
171,757 |
|
|
|
184,287 |
|
|
|
183,103 |
|
|
|
178,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31: |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
Selected Results of
Operations Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
103,070 |
|
|
$ |
103,887 |
|
|
$ |
106,175 |
|
|
$ |
111,450 |
|
|
$ |
118,439 |
|
Interest expense |
|
|
43,604 |
|
|
|
36,395 |
|
|
|
30,768 |
|
|
|
35,947 |
|
|
|
42,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
59,466 |
|
|
|
67,492 |
|
|
|
75,407 |
|
|
|
75,503 |
|
|
|
75,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Credit) provision for
loan losses |
|
|
(1,842 |
) |
|
|
28,532 |
|
|
|
19,676 |
|
|
|
22,526 |
|
|
|
6,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after
(credit)
provision for loan losses |
|
|
61,308 |
|
|
|
38,960 |
|
|
|
55,731 |
|
|
|
52,977 |
|
|
|
69,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income |
|
|
21,911 |
|
|
|
29,384 |
|
|
|
22,149 |
|
|
|
22,570 |
|
|
|
18,680 |
|
Noninterest expense |
|
|
59,612 |
|
|
|
65,492 |
|
|
|
61,767 |
|
|
|
57,283 |
|
|
|
49,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income
taxes |
|
|
23,607 |
|
|
|
2,852 |
|
|
|
16,113 |
|
|
|
18,264 |
|
|
|
38,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
(benefit) from continuing
operations |
|
|
6,245 |
|
|
|
(1,766 |
) |
|
|
3,170 |
|
|
|
3,923 |
|
|
|
12,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations |
|
|
17,362 |
|
|
|
4,618 |
|
|
|
12,943 |
|
|
|
14,341 |
|
|
|
26,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on discontinued
operations, net of tax |
|
|
|
|
|
|
(2,452 |
) |
|
|
(450 |
) |
|
|
(94 |
) |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,362 |
|
|
$ |
2,166 |
|
|
$ |
12,493 |
|
|
$ |
14,247 |
|
|
$ |
26,456 |
|
|
|
|
|
|
|
(1) |
|
Borrowed funds include junior subordinated debentures. |
26
Item 6. Selected Financial Data (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the years ended December 31: |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
Per Common Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.40 |
|
|
$ |
0.28 |
|
|
$ |
1.02 |
|
|
$ |
1.15 |
|
|
$ |
2.25 |
|
Net income |
|
|
1.40 |
|
|
|
0.06 |
|
|
|
0.98 |
|
|
|
1.14 |
|
|
|
2.26 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.40 |
|
|
$ |
0.28 |
|
|
$ |
1.02 |
|
|
$ |
1.14 |
|
|
$ |
2.22 |
|
Net income |
|
|
1.40 |
|
|
|
0.06 |
|
|
|
0.98 |
|
|
|
1.13 |
|
|
|
2.23 |
|
Cash dividends declared on common stock |
|
|
0.34 |
|
|
|
0.40 |
|
|
|
0.64 |
|
|
|
0.64 |
|
|
|
0.58 |
|
Book value |
|
|
14.53 |
|
|
|
13.60 |
|
|
|
14.81 |
|
|
|
14.81 |
|
|
|
14.46 |
|
Tangible book value |
|
|
11.15 |
|
|
|
10.19 |
|
|
|
11.31 |
|
|
|
11.22 |
|
|
|
10.74 |
|
Market value |
|
|
23.05 |
|
|
|
19.62 |
|
|
|
23.25 |
|
|
|
28.23 |
|
|
|
29.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average common equity |
|
|
10.02 |
% |
|
|
0.43 |
% |
|
|
6.55 |
% |
|
|
7.65 |
% |
|
|
17.01 |
% |
Return on average tangible common equity |
|
|
13.23 |
|
|
|
0.56 |
|
|
|
8.57 |
|
|
|
10.12 |
|
|
|
23.29 |
|
Return on average assets |
|
|
0.90 |
|
|
|
0.10 |
|
|
|
0.57 |
|
|
|
0.66 |
|
|
|
1.35 |
|
Common dividend payout (2) |
|
|
24.29 |
|
|
|
666.67 |
|
|
|
65.31 |
|
|
|
56.14 |
|
|
|
25.66 |
|
Net interest margin (3) |
|
|
3.55 |
|
|
|
3.65 |
|
|
|
3.90 |
|
|
|
3.99 |
|
|
|
4.40 |
|
Efficiency ratio (4) |
|
|
69.45 |
|
|
|
70.18 |
|
|
|
60.41 |
|
|
|
54.26 |
|
|
|
49.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans (5) |
|
|
1.71 |
% |
|
|
1.82 |
% |
|
|
4.31 |
% |
|
|
3.84 |
% |
|
|
2.82 |
% |
Nonperforming loans and other real estate
to total loans and other real estate (5) |
|
|
1.84 |
|
|
|
1.93 |
|
|
|
4.40 |
|
|
|
3.89 |
|
|
|
2.91 |
|
Nonperforming assets to total assets (5) |
|
|
0.89 |
|
|
|
0.97 |
|
|
|
2.56 |
|
|
|
2.40 |
|
|
|
1.82 |
|
Allowance for loan losses to total loans (5) |
|
|
1.84 |
|
|
|
2.04 |
|
|
|
3.13 |
|
|
|
2.17 |
|
|
|
1.65 |
|
Allowance for loan losses to nonperforming
loans (5) |
|
|
108 |
|
|
|
112 |
|
|
|
73 |
|
|
|
56 |
|
|
|
58 |
|
Net charge-offs to average total loans (5) |
|
|
0.14 |
|
|
|
4.27 |
|
|
|
0.74 |
|
|
|
1.11 |
|
|
|
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital ratios: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end common equity to total assets |
|
|
8.64 |
% |
|
|
7.62 |
% |
|
|
7.72 |
% |
|
|
7.61 |
% |
|
|
7.63 |
% |
Average common equity to average assets |
|
|
8.17 |
|
|
|
7.54 |
|
|
|
7.67 |
|
|
|
7.74 |
|
|
|
7.47 |
|
Period end tangible common equity to total
tangible assets |
|
|
6.77 |
|
|
|
5.82 |
|
|
|
6.01 |
|
|
|
5.87 |
|
|
|
5.78 |
|
Average tangible common equity to average
tangible assets |
|
|
6.32 |
|
|
|
5.80 |
|
|
|
5.97 |
|
|
|
5.96 |
|
|
|
5.56 |
|
Tier 1 leverage capital |
|
|
8.91 |
|
|
|
7.60 |
|
|
|
7.13 |
|
|
|
7.03 |
|
|
|
6.96 |
|
Tier 1 risk-based capital |
|
|
15.85 |
|
|
|
13.75 |
|
|
|
11.27 |
|
|
|
10.18 |
|
|
|
9.82 |
|
Total risk-based capital |
|
|
17.10 |
|
|
|
15.01 |
|
|
|
12.54 |
|
|
|
11.44 |
|
|
|
11.08 |
|
|
|
|
(2) |
|
Cash dividends declared on common stock divided by basic net income per common share. |
|
(3) |
|
Represents net interest income divided by average interest-earning assets. The interest
earned from tax-exempt securities includes a tax-equivalent adjustment. |
|
(4) |
|
The efficiency ratio represents noninterest expense less other real estate expense and
amortization of intangibles (all from continuing operations) divided by net interest income
(tax-equivalent) plus other noninterest income less gain on sale of securities, gain on sale
of credit card portfolio, gain on sale of trust relationships and net gain on sale of
commercial-related loans held for sale (all from continuing operations). |
|
(5) |
|
Ratios exclude nonaccruing commercial-related loans held for sale (which amounted to $577,000
at December 31, 2005 and zero for all other years presented) from nonperforming loans and
exclude loans held for sale from total loans. |
27
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operation
GENERAL
The principal objective of this discussion is to provide an overview of the financial condition and
results of operations of the Company during the year ended December 31, 2006 and the preceding two
years. This discussion and the tabular presentations should be read in conjunction with the
accompanying consolidated financial statements and accompanying notes.
Income. The Companys results of operations are dependent primarily on net interest income, which
is the difference between the income earned on loans and securities and the interest paid on
deposits and borrowings. Results of operations are also affected by the (credit) provision for
loan losses, service charges on deposits, financial services group fees and commissions, mortgage
banking revenues, gain or loss on the sale of securities, gain or loss on sale of loans and other
miscellaneous income.
Expenses. The Companys expenses primarily consist of salaries and employee benefits, occupancy
and equipment, supplies and postage, amortization of other intangible assets, computer and data
processing, professional fees and services, other miscellaneous expense and income tax expense
(benefit). Results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in interest rates, government policies and the actions
of regulatory authorities.
OVERVIEW
Net income was $17.4 million, $2.2 million and $12.5 million for 2006, 2005 and 2004, respectively.
Diluted earnings per share for the year ended December 31, 2006 was $1.40, compared to $0.06 in
2005 and $0.98 in 2004. The return on average common equity in 2006 was 10.02%, compared to 0.43%
in 2005 and 6.55% in 2004. The return on average assets in 2006 was 0.90%, compared to 0.10% in
2005 and 0.57% in 2004.
The primary factor for the improved 2006 results was a $1.8 million credit for loan losses in 2006
compared with a $28.5 million and $19.7 million provision for loan losses in 2005 and 2004,
respectively. The Company also reduced noninterest expense by $5.9 million in 2006 compared with
2005. The improved risk profile of the Companys loan portfolio contributed to the credit for loan
losses. Lower noninterest expense resulted from improved operating efficiencies from the
consolidation of the Companys subsidiary banks in December 2005, coupled with a reduction in costs
associated with asset quality issues and regulatory matters.
Net interest income, the principal source of the Companys earnings, was $59.5 million in 2006 down
from $67.5 million in 2005 and $75.4 million in 2004. Net interest margin was 3.55%, 3.65% and
3.90% for the years ended December 31, 2006, 2005 and 2004, respectively. The decline in net
interest income resulted from lower earning asset levels along with a narrowed net interest margin.
Effective December 3, 2005, the Company merged its subsidiary banks into the New York
State-chartered First Tier Bank & Trust (FTB), which was then renamed Five Star Bank (FSB).
The consolidation activities have improved operational efficiencies and have contributed to lower
noninterest expense in 2006 when compared with 2005 and 2004. The Company also sold the Burke
Group, Inc (BGI) subsidiary during 2005 to focus on its core community banking business. The
results of BGI have been reported separately as a discontinued operation in the consolidated
statements of income and the loss on discontinued operation totaled $2.5 million and $450,000 for
2005 and 2004, respectively. In addition, the Company sold its trust relationships during 2006 and
recognized a $1.4 million gain on the sale.
CRITICAL ACCOUNTING POLICIES
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States and are consistent with predominant practices in
the financial services industry. Application of critical accounting policies, which are those
policies that management believes are the most important to the Companys financial position 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
28
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
of the notes to consolidated financial statements. 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 and
goodwill require particularly subjective or complex judgments important to the Companys financial
position and results of operations, and, as such, are considered to be critical accounting policies
as discussed below.
Allowance for Loan Losses
The allowance for loan losses represents managements estimate of probable credit losses inherent
in the loan portfolio. Determining the amount of the allowance for loan losses is considered a
critical accounting estimate because it requires significant judgment and the use of subjective
measurements including managements assessment of the internal risk classifications of loans,
changes in the nature of the loan portfolio, industry concentrations and the impact of current
local, regional and national economic factors on the quality of the loan portfolio. Changes in
these estimates and assumptions are reasonably possible and may have a material impact on the
Companys consolidated financial statements, results of operations or liquidity. For additional
discussion related to the Companys accounting policies for the allowance for loan losses, see the
sections titled Analysis of Allowance for Loan Losses and Allocation of Allowance for Loan
Losses in Part II, Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operation and Note 1 of the notes to consolidated financial statements.
Goodwill
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets
prescribes the accounting for goodwill and intangible assets subsequent to initial recognition.
The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with
indefinite lives. Instead, these assets are subject to at least an annual impairment review, and
more frequently if certain impairment indicators are in evidence. Changes in the estimates and
assumptions used to evaluate impairment may have a material impact on the Companys consolidated
financial statements, results of operations or liquidity. During 2006, 2005 and 2004, the Company
evaluated goodwill for impairment using a discounted cash flow analysis and determined no
impairment existed. For additional discussion related to the Companys accounting policy for
goodwill and other intangible assets, see Note 1 of the notes to consolidated financial statements.
ANALYSIS OF FINANCIAL CONDITION
Overview
At December 31, 2006 the Company had total assets of $1.908 billion, a decrease of 6% from $2.022
billion at December 31, 2005. Loans at December 31, 2006 were $926.5 million, down $65.8 million,
or 6.6%, when compared to $992.3 million at December 31, 2005. The decline in loans was primarily
attributed to loan payments outpacing new loan originations and the consequences of the 2005 loan
sale. The Companys strategy is to rebuild a balanced quality loan portfolio, and loan
originations slowed due to more stringent underwriting requirements, firm pricing disciplines and a
highly competitive marketplace for quality loans. Total deposits amounted to $1.618 billion and
$1.717 billion at December 31, 2006 and 2005, respectively. Contributing to the decline in deposits
were fewer certificates of deposit, including brokered certificates of deposit, as the Company
actively managed to lower the level of these higher cost deposits. Other deposit categories
declined from deposit outflows associated with the effects of the 2005 loan sale and from
higher-rate competitor products. At December 31, 2006, total borrowed funds and junior
subordinated debentures were $87.2 million compared to $115.2 million at December 31, 2005. The
Company funded the reduction in borrowings with cash available from the decline in loans
experienced in 2006. Book value per common share was $14.53 and $13.60 at December 31,
29
2006 and 2005, respectively. At December 31, 2006 the Companys total shareholders equity was
$182.4 million compared to $171.8 million a year earlier.
Lending Activities
Loan Portfolio Composition
Loans outstanding, excluding loans held for sale and including net unearned income and net deferred
fees and costs, are summarized as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
Commercial |
|
$ |
105,806 |
|
|
$ |
116,444 |
|
|
$ |
203,178 |
|
|
$ |
248,313 |
|
|
$ |
262,630 |
|
Commercial real estate |
|
|
243,966 |
|
|
|
264,727 |
|
|
|
343,532 |
|
|
|
369,712 |
|
|
|
332,134 |
|
Agricultural |
|
|
56,808 |
|
|
|
75,018 |
|
|
|
195,185 |
|
|
|
235,199 |
|
|
|
233,769 |
|
Residential real estate |
|
|
268,446 |
|
|
|
274,487 |
|
|
|
259,055 |
|
|
|
246,621 |
|
|
|
244,927 |
|
Consumer and home equity |
|
|
251,456 |
|
|
|
261,645 |
|
|
|
251,455 |
|
|
|
240,591 |
|
|
|
241,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
926,482 |
|
|
|
992,321 |
|
|
|
1,252,405 |
|
|
|
1,340,436 |
|
|
|
1,314,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(17,048 |
) |
|
|
(20,231 |
) |
|
|
(39,186 |
) |
|
|
(29,064 |
) |
|
|
(21,660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net |
|
$ |
909,434 |
|
|
$ |
972,090 |
|
|
$ |
1,213,219 |
|
|
$ |
1,311,372 |
|
|
$ |
1,293,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans declined 6.6% or $65.8 million to $926.5 million at December 31, 2006 from $992.3
million at December 31, 2005. The decline in loans was primarily attributed to loan payments
outpacing new loan originations and the consequences of the 2005 loan sale. The Companys strategy
is to rebuild a balanced quality loan portfolio, and loan originations slowed due to more stringent
underwriting requirements, firm pricing disciplines and a highly competitive marketplace for
quality loans.
Commercial loans decreased $10.6 million or 9.1%, while commercial real estate loans decreased by
$20.8 million or 7.8%. At December 31, 2006, commercial loans totaled $105.8 million, representing
11.4% of total loans, and commercial real estate loans totaled $244.0 million, representing 26.4%
of total loans. At December 31, 2006, agricultural loans, which include agricultural real estate
loans, totaled $56.8 million or 6.1% of the total loan portfolio, down $18.2 million from 2005.
Collectively, commercial-related loans comprised $49.6 million or 75.3% of the decline in total
loans.
As of December 31, 2006, residential real estate loans totaled $268.4 million, a $6.1 million or
2.2% decrease from $274.5 million at December 31, 2005. Residential real estate loans represented
29.0% of the total loan portfolio at the end of 2006 compared to 27.7% at the end of 2005. The
Companys residential mortgage volume slowed as a result of the rising interest rate environment
and the increasingly competitive marketplace for mortgage loans.
The Company also offers a broad range of consumer loan products. Consumer and home equity lines of
credit totaled $251.5 and $261.6 million at December 31, 2006 and 2005, respectively. Consumer and
home equity lines of credit represented 27.1% of the total loan portfolio at year-end 2006. The
mix in the Companys consumer portfolio changed during 2006 as the Company focused on expanding its
indirect automobile lending program. At December 31, 2006, the Companys indirect consumer loans
were $106.4 million, an increase of $21.2 million or 24.9% from $85.2 million at December 31, 2005.
While the Company increased its indirect consumer loan portfolio, declines in consumer direct and
home equity lines of credit resulted from an increasingly competitive marketplace and more than
offset the increase in indirect consumer loans.
Loans Held for Sale and Commercial-Related Loan Sale Results
During the year ended December 31, 2005, the Company transferred $169.0 million in
commercial-related loans to held for sale, at an estimated fair value less costs to sell of $132.3
million. As a result, $36.7 million in commercial-related charge-offs were recorded. Subsequent
to the transfer, the Company decided not to proceed with the sale of $613,000 of these
commercial-related loans held for sale and returned the loans to portfolio at the lower of cost or
fair value. In the second half of 2005, the Company realized a net gain of $9.4 million on the
ultimate sale or settlement of commercial-related loans held for sale.
30
Loans held for sale (not included in the previous loan portfolio composition table) totaled
$992,000 at December 31, 2006, all of which were residential real estate loans. Loans held for
sale (not included in the previous loan portfolio composition table) totaled $1.3 million as of
December 31, 2005, comprised of nonaccruing commercial-related loans (including commercial real
estate and agricultural loans) of $577,000 and residential real estate loans of $676,000.
The Company also sells certain qualifying newly originated and refinanced residential real estate
mortgages on the secondary market. The sold and serviced residential real estate loan portfolio
decreased to $355.2 million at December 31, 2006 from $377.6 million at December 31, 2005. The
Companys residential mortgage volume slowed as a result of the rising interest rate environment
and the increasingly competitive marketplace for mortgage loans.
Nonaccruing Loans and Nonperforming Assets
The following table sets forth information regarding nonaccruing loans and other nonperforming
assets at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
Nonaccruing loans (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
$ |
2,205 |
|
|
$ |
4,389 |
|
|
$ |
20,576 |
|
|
$ |
12,983 |
|
|
$ |
12,760 |
|
Commercial real estate |
|
|
4,661 |
|
|
|
6,985 |
|
|
|
15,954 |
|
|
|
11,745 |
|
|
|
8,407 |
|
Agricultural |
|
|
4,836 |
|
|
|
2,786 |
|
|
|
13,165 |
|
|
|
18,870 |
|
|
|
8,739 |
|
Residential real estate |
|
|
3,602 |
|
|
|
3,096 |
|
|
|
1,733 |
|
|
|
2,496 |
|
|
|
1,065 |
|
Consumer and home equity |
|
|
533 |
|
|
|
505 |
|
|
|
518 |
|
|
|
578 |
|
|
|
915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccruing loans |
|
|
15,837 |
|
|
|
17,761 |
|
|
|
51,946 |
|
|
|
46,672 |
|
|
|
31,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,069 |
|
|
|
4,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans 90 days or more delinquent |
|
|
3 |
|
|
|
276 |
|
|
|
2,018 |
|
|
|
1,709 |
|
|
|
1,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
15,840 |
|
|
|
18,037 |
|
|
|
53,964 |
|
|
|
51,450 |
|
|
|
37,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned (ORE) |
|
|
1,203 |
|
|
|
1,099 |
|
|
|
1,196 |
|
|
|
653 |
|
|
|
1,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans and other
real estate owned |
|
|
17,043 |
|
|
|
19,136 |
|
|
|
55,160 |
|
|
|
52,103 |
|
|
|
38,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccruing commercial-related loans
held for sale |
|
|
|
|
|
|
577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
17,043 |
|
|
$ |
19,713 |
|
|
$ |
55,160 |
|
|
$ |
52,103 |
|
|
$ |
38,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans to total loans (2) |
|
|
1.71 |
% |
|
|
1.82 |
% |
|
|
4.31 |
% |
|
|
3.84 |
% |
|
|
2.82 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans and ORE to
total loans and ORE (2) |
|
|
1.84 |
% |
|
|
1.93 |
% |
|
|
4.40 |
% |
|
|
3.89 |
% |
|
|
2.91 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets to total assets |
|
|
0.89 |
% |
|
|
0.97 |
% |
|
|
2.56 |
% |
|
|
2.40 |
% |
|
|
1.82 |
% |
|
|
|
(1) |
|
Although loans are generally placed on nonaccruing status when they become 90 days or
more past due they may be placed on nonaccruing status earlier if they have been identified
by the Company as presenting uncertainty with respect to the collectibility of interest or
principal. Loans past due 90 days or more may remain on accruing status if they are both
well secured and in the process of collection. |
|
(2) |
|
Ratios exclude nonaccruing commercial-related loans held for sale from nonperforming
loans and exclude loans held for sale from total loans. |
Nonperforming loans (excluding nonaccruing commercial-related loans held for sale) decreased
to $15.8 million at December 31, 2006 from $18.0 million at December 31, 2005. Nonaccruing
commercial-related loans
31
decreased in 2006 and totaled $11.7 million and $14.2 million at December 31, 2006 and 2005. The
Company also experienced declines in accruing loans 90 days or more delinquent and nonaccruing
commercial-related loans held for sale during 2006. Offsetting those declines was a $104,000
increase in ORE to $1.2 million at December 31, 2006 compared to $1.1 million at December 31, 2005.
The following table details nonaccruing commercial-related loan activity for the year ended December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
Nonaccruing commercial-related loans at beginning of year |
|
$ |
14,160 |
|
|
$ |
49,695 |
|
Additions |
|
|
12,002 |
|
|
|
27,839 |
|
Payments |
|
|
(8,783 |
) |
|
|
(11,708 |
) |
Charge-offs |
|
|
(2,075 |
) |
|
|
(46,920 |
) |
Returned to accruing status |
|
|
(2,300 |
) |
|
|
(3,745 |
) |
Transferred to other real estate or repossessed assets |
|
|
(1,302 |
) |
|
|
(1,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccruing commercial-related loans at end of year |
|
$ |
11,702 |
|
|
$ |
14,160 |
|
|
|
|
|
|
|
|
During 2006, the Company received $8.8 million in payments on nonaccruing commercial-related
loans and $2.3 million of nonaccruing commercial-related loans were returned to accruing status.
In addition, the Company charged-off $2.1 million in nonaccruing commercial-related loans during
2006.
Approximately $8.6 million or 54.2% of the $15.8 million in nonaccruing loans at December 31, 2006
are current with respect to payment of principal and interest. Although these loans are current,
the Company classified the loans as nonaccruing because reasonable doubt exists with respect to the
future collectibility of principal and interest in accordance with the original contractual terms.
During the year ended December 31, 2006 the amount of interest income forgone on nonaccruing loans
totaled $1.5 million.
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 nonperforming 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 $16.2
million and $23.2 million in loans that continued to accrue interest which were classified as
substandard as of December 31, 2006 and 2005, respectively.
The following table summarizes loan delinquencies (excluding past due nonaccruing loans) as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
|
|
|
|
|
Accruing Loans |
|
|
|
|
|
|
Accruing Loans |
|
|
|
60-89 |
|
|
90 Days |
|
|
60-89 |
|
|
90 Days |
|
(Dollars in thousands) |
|
Days |
|
|
or More |
|
|
Days |
|
|
or More |
|
|
Commercial |
|
$ |
7 |
|
|
$ |
|
|
|
$ |
1,205 |
|
|
$ |
266 |
|
Commercial real estate |
|
|
30 |
|
|
|
|
|
|
|
560 |
|
|
|
9 |
|
Agriculture |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
|
|
Residential real estate |
|
|
29 |
|
|
|
|
|
|
|
412 |
|
|
|
|
|
Consumer and home equity |
|
|
119 |
|
|
|
3 |
|
|
|
201 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
185 |
|
|
$ |
3 |
|
|
$ |
2,403 |
|
|
$ |
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
Analysis of Allowance for Loan Losses
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 Banks 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 at December 31, 2006.
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 various factors. 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
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
Allowance for loan losses at beginning
of year |
|
$ |
20,231 |
|
|
$ |
39,186 |
|
|
$ |
29,064 |
|
|
$ |
21,660 |
|
|
$ |
19,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Addition resulting from acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
1,195 |
|
|
|
12,980 |
|
|
|
4,486 |
|
|
|
8,891 |
|
|
|
1,771 |
|
Commercial real estate |
|
|
501 |
|
|
|
15,397 |
|
|
|
1,779 |
|
|
|
2,953 |
|
|
|
944 |
|
Agricultural |
|
|
379 |
|
|
|
18,543 |
|
|
|
2,519 |
|
|
|
1,876 |
|
|
|
106 |
|
Residential real estate |
|
|
335 |
|
|
|
104 |
|
|
|
318 |
|
|
|
215 |
|
|
|
98 |
|
Consumer and home equity |
|
|
1,789 |
|
|
|
2,262 |
|
|
|
1,695 |
|
|
|
2,107 |
|
|
|
1,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs |
|
|
4,199 |
|
|
|
49,286 |
|
|
|
10,797 |
|
|
|
16,042 |
|
|
|
4,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
1,417 |
|
|
|
864 |
|
|
|
598 |
|
|
|
525 |
|
|
|
210 |
|
Commercial real estate |
|
|
132 |
|
|
|
280 |
|
|
|
103 |
|
|
|
35 |
|
|
|
69 |
|
Agricultural |
|
|
389 |
|
|
|
57 |
|
|
|
39 |
|
|
|
3 |
|
|
|
36 |
|
Residential real estate |
|
|
73 |
|
|
|
11 |
|
|
|
43 |
|
|
|
11 |
|
|
|
67 |
|
Consumer and home equity |
|
|
847 |
|
|
|
587 |
|
|
|
460 |
|
|
|
346 |
|
|
|
329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries |
|
|
2,858 |
|
|
|
1,799 |
|
|
|
1,243 |
|
|
|
920 |
|
|
|
711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
1,341 |
|
|
|
47,487 |
|
|
|
9,554 |
|
|
|
15,122 |
|
|
|
3,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Credit) provision for loan losses |
|
|
(1,842 |
) |
|
|
28,532 |
|
|
|
19,676 |
|
|
|
22,526 |
|
|
|
6,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year |
|
$ |
17,048 |
|
|
$ |
20,231 |
|
|
$ |
39,186 |
|
|
$ |
29,064 |
|
|
$ |
21,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs to average loans
outstanding during the year |
|
|
0.14 |
% |
|
|
4.27 |
% |
|
|
0.74 |
% |
|
|
1.11 |
% |
|
|
0.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to
total loans (2) |
|
|
1.84 |
% |
|
|
2.04 |
% |
|
|
3.13 |
% |
|
|
2.17 |
% |
|
|
1.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loans losses to
nonperforming loans (2) |
|
|
108 |
% |
|
|
112 |
% |
|
|
73 |
% |
|
|
56 |
% |
|
|
58 |
% |
|
|
|
(1) |
|
Included in charge-offs for the year ended December 31, 2005 are $36.7 million in
write-downs on commercial-related loans. |
|
(2) |
|
Ratios exclude nonaccruing loans held for sale from nonperforming loans and loans held
for sale from total loans. |
33
At December 31, 2006, the Companys allowance for loan losses totaled $17.0 million, a
decrease of $3.2 million from the previous year-end. The allowance for loan losses represents the
estimated probable losses inherent in the loan portfolio based on the Companys comprehensive
assessment. This assessment resulted in a credit for loan losses of $1.8 million for 2006. The
allowance for loan losses as a percentage of total loans was 1.84% and 2.04% at December 31, 2006
and 2005, respectively. The ratio of allowance for loan losses to nonperforming loans decreased to
108% at December 31, 2006 versus 112% at December 31, 2005.
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan losses by loan category at
the dates indicated. The allocation is made for analytical purposes and is not necessarily
indicative of the categories in which actual losses may occur. The total allowance is available to
absorb losses from any segment of the loan portfolio.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31: |
|
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
|
of |
|
of Loans |
|
of |
|
of Loans |
|
of |
|
of Loans |
|
of |
|
of Loans |
|
of |
|
of Loans |
|
|
Allowance |
|
in Each |
|
Allowance |
|
in Each |
|
Allowance |
|
in Each |
|
Allowance |
|
in Each |
|
Allowance |
|
in Each |
|
|
for |
|
Category |
|
for |
|
Category |
|
for |
|
Category |
|
for |
|
Category |
|
for |
|
Category |
|
|
Loan |
|
to Total |
|
Loan |
|
to Total |
|
Loan |
|
to Total |
|
Loan |
|
to Total |
|
Loan |
|
to Total |
(Dollars in thousands) |
|
Losses |
|
Loans |
|
Losses |
|
Loans |
|
Losses |
|
Loans |
|
Losses |
|
Loans |
|
Losses |
|
Loans |
|
|
|
Commercial |
|
$ |
2,443 |
|
|
|
11.4 |
% |
|
$ |
4,098 |
|
|
|
11.7 |
% |
|
$ |
11,420 |
|
|
|
16.2 |
% |
|
$ |
7,739 |
|
|
|
18.5 |
% |
|
$ |
5,321 |
|
|
|
20.0 |
% |
Commercial real estate |
|
|
4,458 |
|
|
|
26.4 |
|
|
|
6,564 |
|
|
|
26.7 |
|
|
|
9,297 |
|
|
|
27.4 |
|
|
|
5,354 |
|
|
|
27.6 |
|
|
|
4,725 |
|
|
|
25.3 |
|
Agricultural |
|
|
1,887 |
|
|
|
6.1 |
|
|
|
2,187 |
|
|
|
7.5 |
|
|
|
8,197 |
|
|
|
15.6 |
|
|
|
6,078 |
|
|
|
17.6 |
|
|
|
3,711 |
|
|
|
17.7 |
|
Residential real estate |
|
|
2,818 |
|
|
|
29.0 |
|
|
|
2,019 |
|
|
|
27.7 |
|
|
|
1,468 |
|
|
|
20.7 |
|
|
|
1,447 |
|
|
|
18.4 |
|
|
|
1,414 |
|
|
|
18.6 |
|
Consumer and home equity |
|
|
3,512 |
|
|
|
27.1 |
|
|
|
2,769 |
|
|
|
26.4 |
|
|
|
2,122 |
|
|
|
20.1 |
|
|
|
2,161 |
|
|
|
17.9 |
|
|
|
2,007 |
|
|
|
18.4 |
|
Unallocated |
|
|
1,930 |
|
|
|
|
|
|
|
2,594 |
|
|
|
|
|
|
|
6,682 |
|
|
|
|
|
|
|
6,285 |
|
|
|
|
|
|
|
4,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
17,048 |
|
|
|
100.0 |
% |
|
$ |
20,231 |
|
|
|
100.0 |
% |
|
$ |
39,186 |
|
|
|
100.0 |
% |
|
$ |
29,064 |
|
|
|
100.0 |
% |
|
$ |
21,660 |
|
|
|
100.0 |
% |
|
|
|
The Companys methodology in the estimation of the allowance for loan losses includes the
following broad areas:
1. |
|
Impaired commercial, commercial real estate, agricultural and agricultural real estate loans,
in excess of $100,000 are reviewed individually and assigned a specific loss allowance, if
considered necessary, in accordance with SFAS No. 114, Accounting by Creditors for Impairment
of a Loan an amendment of FASB Statements No. 5 and 15. |
|
2. |
|
The remaining portfolios of commercial, commercial real estate, agricultural and agricultural
real estate loans are segmented into the following loan classification categories:
uncriticized or pass, special mention, and substandard. The substandard category of loans
greater than $100,000 is then further divided into two groupings based on an assessment of the
individual loans collateralization levels (i.e. under collateralized or adequately
collateralized). Loans under collateralized by less than 5% of the outstanding loan balance
are treated the same as adequately collateralized loans. |
|
3. |
|
If applicable, substandard loans where the collateral deficiency is greater than 5% are split
into two categories based on outstanding loan balances (i.e.$3.0 million or more and less than
$3.0 million). The inherent risk of loss on the loans in each of these groupings is estimated
based upon historical net loan charge-off considerations, review of the amount of under
collateralization of the loans in the respective groupings, as well as other qualitative
factors. |
|
4. |
|
Uncriticized loans, special mention loans, adequately collateralized substandard loans and
all substandard loans under $100,000 are assigned allowance allocations based on historical
net loan charge-off experience for each of the respective loan categories, supplemented with
additional reserve amounts, if considered necessary, based upon qualitative factors. These
qualitative factors include the levels and trends in delinquencies, nonaccruing loans, and
risk ratings; trends in volume and terms of loans; effects of changes in lending policy;
experience, ability, and depth of management; national and local economic conditions, and
concentrations of credit, among others. |
34
5. |
|
The consumer loan portfolio is segmented into six types of loans: residential real estate,
home equity lines of credit, consumer direct, consumer indirect, overdrafts and personal lines
of credit. Each of those categories is subdivided into categories based on delinquency
status, either 90 days and over past due or under 90 days. Allowance allocations on these
types of loans are based on the average loss experience over the last three years for each
subdivision of delinquency status supplemented with qualitative factors containing the same
elements as described above. |
|
6. |
|
A further component of the allowance is the unallocated portion which takes into
consideration the inherent risk of loss in the portfolio not identified in the other three
categories and includes such elements as risks associated with variances in the rate of
historical loss experiences, information risks associated with the dependence upon timely and
accurate risk ratings on loans, and risks associated with the dependence on collateral
valuation techniques. This category has been reduced from the previous year due to a
reduction in these risks primarily resulting from the 2005 problem loan sale discussed
previously as well as the positive credit quality trends in 2006. |
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.
Loan Maturity and Repricing Schedule
The following table sets forth certain information regarding the contractual maturity or repricing
of loans in the portfolio as of December 31, 2006. Demand loans having no stated schedule of
repayment or maturity and overdrafts are reported as due in one year or less. Adjustable and
floating-rate loans are included in the period in which interest rates are next scheduled to adjust
rather than the period in which they contractually mature, and fixed-rate loans are included in the
period in which the final contractual repayment is due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One |
|
|
|
|
|
|
|
|
|
Within |
|
|
Through |
|
|
After |
|
|
|
|
|
|
One |
|
|
Five |
|
|
Five |
|
|
|
|
(Dollars in thousands) |
|
Year |
|
|
Years |
|
|
Years |
|
|
Total |
|
|
Commercial |
|
$ |
45,030 |
|
|
$ |
34,131 |
|
|
$ |
26,645 |
|
|
$ |
105,806 |
|
Commercial real estate |
|
|
3,976 |
|
|
|
23,382 |
|
|
|
216,608 |
|
|
|
243,966 |
|
Agricultural |
|
|
7,472 |
|
|
|
17,441 |
|
|
|
31,895 |
|
|
|
56,808 |
|
Residential real estate |
|
|
4,502 |
|
|
|
16,417 |
|
|
|
247,527 |
|
|
|
268,446 |
|
Consumer and home equity |
|
|
7,673 |
|
|
|
107,542 |
|
|
|
136,241 |
|
|
|
251,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
68,653 |
|
|
$ |
198,913 |
|
|
$ |
658,916 |
|
|
$ |
926,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans maturing after one year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With a predetermined interest rate |
|
|
|
|
|
$ |
164,586 |
|
|
$ |
285,013 |
|
|
|
|
|
With a floating or adjustable rate |
|
|
|
|
|
|
34,327 |
|
|
|
373,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
198,913 |
|
|
$ |
658,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Investing Activities
Investment Portfolio Composition
The Companys total investment security portfolio decreased $57.9 million to $775.5 million as of
December 31, 2006 compared to $833.4 million as of December 31, 2005. Further detail regarding the
Companys investment portfolio follows.
U.S. Government-Sponsored Enterprise (GSE) Securities. At December 31, 2006, the
available for sale GSE securities portfolio totaled $231.8 million. The portfolio consisted of
approximately $129.7 million, or 56%, of callable securities at December 31, 2006. At December 31,
2006 this category of securities also included $99.0 million of structured notes, the majority of
which were step callable agency debt issues. The step callable bonds step-up in rate at specified
intervals and are periodically callable by the issuer. At December 31, 2006, the current average
coupon of the structured notes was 4.13% and adjust on average to 6.56% within five years.
However, under current market conditions these notes are likely to be called. At December 31,
2005, the available for sale GSE securities portfolio totaled $251.9 million.
State and Municipal Obligations. At December 31, 2006, the portfolio of state and
municipal obligations totaled $238.7 million, of which $198.3 million was classified as available
for sale. At that date, $40.4 million was classified as held to maturity, with a fair value of
$40.4 million. At December 31, 2005, the portfolio of state and municipal obligations totaled
$262.9 million, of which $220.3 million was classified as available for sale. At that date, $42.6
million was classified as held to maturity, with a fair value of $42.9 million.
Mortgage-Backed Pass-through Securities (MBS), Collateralized Mortgage Obligations (CMO)
and Other Asset-Backed Securities (ABS). MBS, CMO and ABS securities, all of which were
classified as available for sale, totaled $300.0 million and $317.6 million at December 31, 2006
and 2005, respectively. The portfolio was comprised of $189.4 million of MBS, $107.4 million of
CMO and $3.2 million of other ABS securities at December 31, 2006. The MBSs were by U.S.
government agencies or GSEs (GNMA, FNMA or FHLMC). Approximately 92% of the MBSs were in fixed
rate securities that were most frequently formed with mortgages having an original balloon payment
of five or seven years. The adjustable rate agency mortgage-backed securities portfolio is
principally indexed to the one-year Treasury bill. The CMO portfolio consisted primarily of fixed
and variable rate government issues and fixed rate privately issued AAA rated securities. The ABS
securities are primarily Student Loan Marketing Association (SLMA) floaters, which are variable
rate securities backed by student loans. At December 31, 2005, the portfolio consisted of $234.3
million of MBSs, $77.4 million of CMOs and $5.9 million of other ABS securities.
Corporate Bonds and Other. At December 31, 2006, the Company held $3.9 million in
corporate bonds and other securities. At December 31, 2005, the Company held no corporate bonds
and other securities. The Companys investment policy limits investments in corporate
bonds to no more than 10% of total investments and to bonds rated as Baa or better by Moodys
Investors Service, Inc. or BBB or better by Standard & Poors Ratings Services at the time of
purchase.
Equity Securities. At December 31, 2006 and 2005, available for sale equity securities
totaled $1.1 million and $1.0 million, respectively.
Security Yields and Maturities Schedule
The following table sets forth certain information regarding the carrying values, weighted average
yields and contractual maturities of the Companys debt securities portfolio as of December 31,
2006. Actual maturities may differ from the contractual maturities presented, because borrowers
may have the right to call or prepay certain investments. No tax-equivalent adjustments were made
to the weighted average yields.
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More than One |
|
More than Five |
|
|
|
|
|
|
One Year or Less |
|
Year to Five Years |
|
Years to Ten Years |
|
After Ten Years |
|
Total |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
Amortized |
|
Average |
|
Amortized |
|
Average |
|
Amortized |
|
Average |
|
Amortized |
|
Average |
|
Amortized |
|
Average |
(Dollars in thousands) |
|
Cost |
|
Yield |
|
Cost |
|
Yield |
|
Cost |
|
Yield |
|
Cost |
|
Yield |
|
Cost |
|
Yield |
|
Available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE |
|
$ |
55,198 |
|
|
|
3.67 |
% |
|
$ |
78,611 |
|
|
|
3.94 |
% |
|
$ |
31,886 |
|
|
|
5.71 |
% |
|
$ |
70,029 |
|
|
|
6.04 |
% |
|
$ |
235,724 |
|
|
|
4.74 |
% |
MBS, CMO and ABS |
|
|
923 |
|
|
|
3.74 |
|
|
|
128,519 |
|
|
|
4.29 |
|
|
|
65,531 |
|
|
|
4.32 |
|
|
|
113,168 |
|
|
|
4.96 |
|
|
|
308,141 |
|
|
|
4.54 |
|
State and municipal
obligations |
|
|
41,036 |
|
|
|
3.39 |
|
|
|
135,004 |
|
|
|
3.44 |
|
|
|
20,146 |
|
|
|
3.94 |
|
|
|
2,242 |
|
|
|
3.52 |
|
|
|
198,428 |
|
|
|
3.48 |
|
Corporate and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,913 |
|
|
|
4.31 |
|
|
|
3,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
debt securities |
|
$ |
97,157 |
|
|
|
3.55 |
% |
|
$ |
342,134 |
|
|
|
3.87 |
% |
|
$ |
117,563 |
|
|
|
4.63 |
% |
|
$ |
189,352 |
|
|
|
5.33 |
% |
|
$ |
746,206 |
|
|
|
4.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal
obligations |
|
$ |
30,440 |
|
|
|
3.92 |
% |
|
$ |
6,832 |
|
|
|
4.29 |
% |
|
$ |
2,198 |
|
|
|
4.92 |
% |
|
$ |
918 |
|
|
|
5.27 |
% |
|
$ |
40,388 |
|
|
|
4.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
debt securities |
|
$ |
30,440 |
|
|
|
3.92 |
% |
|
$ |
6,832 |
|
|
|
4.29 |
% |
|
$ |
2,198 |
|
|
|
4.92 |
% |
|
$ |
918 |
|
|
|
5.27 |
% |
|
$ |
40,388 |
|
|
|
4.07 |
% |
|
|
|
Other-Than-Temporary Impairment
Management evaluates securities for other-than-temporary impairment on a quarterly basis, or as
economic or market concerns warrant such evaluation. Consideration is given to (1) the length of
time and the extent to which the fair value has been less than cost, (2) the financial condition
and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for recovery in fair value. The
net unrealized losses on securities available for sale amounted to $11.1 million and $10.3 million
as of December 31, 2006 and 2005, respectively. The unrealized losses present do not reflect
deterioration in the credit worthiness of the issuing securities and resulted primarily from
fluctuations in market interest rates. The Company intends to hold these securities until their
fair value recovers to their amortized cost, therefore management has determined that the
securities that were in an unrealized loss position at December 31, 2006 and 2005 represent only
temporary declines in fair value.
Funding Activities
Deposits
The Bank offers a broad array of deposit products including noninterest-bearing demand,
interest-bearing demand, savings and money market accounts and certificates of deposit. At
December 31, 2006, total deposits were $1.618 billion in comparison to $1.717 billion at December
31, 2005. The decline was primarily due to lower nonpublic deposits attributed to the timing of
rate campaigns, the loss of deposits associated with the effects of the 2005 commercial-related
loan sale, and fewer certificates of deposits, including brokered certificates of deposit, as the
Company actively managed to lower the level of these higher cost deposits. Public deposits
increased slightly to $352.6 million at December 31, 2006 from $351.3 million at December 31, 2005.
The Company considers all deposits to be core except certificates of deposit over $100,000. Core
deposits amounted to $1.422 billion or 87.9% of total deposits at December 31, 2006 compared to
$1.517 billion or 88.4% of total deposits at December 31, 2005. The core deposit base consisted
almost exclusively of in-market accounts. Core deposits are supplemented with certificates of
deposit over $100,000, which amounted to $195.4 million and $199.8 million as of December 31, 2006
and 2005, respectively. The Company also utilized brokered certificates of deposit as a funding
source. Brokered certificates of deposit included in certificates of deposit over $100,000 totaled
$16.7 million and $31.5 million at December 31, 2006 and 2005, respectively. The decline in
brokered certificates of deposit resulted from the Company utilizing cash available from the
decline in loans to repay the maturing brokered deposits.
37
The daily average balances, percentage composition and weighted average rates paid on deposits are
presented below for each of the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands) |
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
|
|
|
|
|
of Total |
|
Weighted |
|
|
|
|
|
of Total |
|
Weighted |
|
|
|
|
|
of Total |
|
Weighted |
|
|
Average |
|
Average |
|
Average |
|
Average |
|
Average |
|
Average |
|
Average |
|
Average |
|
Average |
|
|
Balance |
|
Deposits |
|
Rate |
|
Balance |
|
Deposits |
|
Rate |
|
Balance |
|
Deposits |
|
Rate |
|
Interest-bearing demand |
|
$ |
379,434 |
|
|
|
23.2 |
% |
|
|
1.77 |
% |
|
$ |
390,610 |
|
|
|
21.7 |
% |
|
|
1.26 |
% |
|
$ |
396,558 |
|
|
|
21.5 |
% |
|
|
0.73 |
% |
Savings and money market |
|
|
333,155 |
|
|
|
20.4 |
|
|
|
1.30 |
|
|
|
393,439 |
|
|
|
21.9 |
|
|
|
0.95 |
|
|
|
424,013 |
|
|
|
22.9 |
|
|
|
0.66 |
|
Certificates of deposit
under $100,000 |
|
|
460,210 |
|
|
|
28.1 |
|
|
|
3.80 |
|
|
|
510,981 |
|
|
|
28.5 |
|
|
|
2.84 |
|
|
|
527,298 |
|
|
|
28.5 |
|
|
|
2.45 |
|
Certificates of deposit
over $100,000 |
|
|
204,148 |
|
|
|
12.5 |
|
|
|
4.39 |
|
|
|
226,304 |
|
|
|
12.6 |
|
|
|
3.13 |
|
|
|
233,155 |
|
|
|
12.6 |
|
|
|
2.57 |
|
Noninterest-bearing
demand |
|
|
258,416 |
|
|
|
15.8 |
|
|
|
|
|
|
|
275,069 |
|
|
|
15.3 |
|
|
|
|
|
|
|
267,721 |
|
|
|
14.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
1,635,363 |
|
|
|
100.0 |
% |
|
|
2.29 |
% |
|
$ |
1,796,403 |
|
|
|
100.0 |
% |
|
|
1.68 |
% |
|
$ |
1,848,745 |
|
|
|
100.0 |
% |
|
|
1.33 |
% |
|
|
|
The following table indicates the amount of the Companys certificates of deposit by time
remaining until maturity as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 Months |
|
|
Over 3 To |
|
|
Over 6 To |
|
|
Over 12 |
|
|
|
|
(Dollars in thousands) |
|
Or Less |
|
|
6 Months |
|
|
12 Months |
|
|
Months |
|
|
Total |
|
|
Certificates of deposit
less than $100,000 |
|
$ |
80,566 |
|
|
$ |
84,102 |
|
|
$ |
238,896 |
|
|
$ |
70,757 |
|
|
$ |
474,321 |
|
|
Certificates of deposit
of $100,000 or more |
|
|
111,386 |
|
|
|
17,126 |
|
|
|
49,353 |
|
|
|
17,502 |
|
|
|
195,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total certificates of deposit |
|
$ |
191,952 |
|
|
$ |
101,228 |
|
|
$ |
288,249 |
|
|
$ |
88,259 |
|
|
$ |
669,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
Outstanding borrowings are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
Federal funds purchased and securities
sold under repurchase agreements |
|
$ |
32,310 |
|
|
$ |
20,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings: |
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
38,187 |
|
|
$ |
53,391 |
|
Other |
|
|
|
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings |
|
$ |
38,187 |
|
|
$ |
78,391 |
|
|
|
|
|
|
|
|
Total short-term borrowings increased $12.2 million to $32.3 million at December 31, 2006 from
$20.1 million at December 31, 2005 due to an increase in securities sold under repurchase
agreements. Total long-term borrowings decreased to $38.2 million at December 31, 2006 from $78.4
million at December 31, 2005. The Company funded the reduction in borrowings with cash available
from the decline in loans experienced in 2006.
The Company also has a credit agreement with another commercial bank and pledged the stock of FSB
as collateral for the credit facility. The credit agreement included a $25.0 million term loan
facility and a $5.0 million revolving loan facility. At June 30, 2005, the Company was in default
of an affirmative financial covenant in the credit agreement and reclassified the borrowing from
long-term to short-term. The bank waived the event of default at June 30, 2005. As of September
30, 2005, FII and the bank agreed to modify the covenants in the agreement. FII complied with the
modified covenants, therefore the term loan was classified as a long-term
38
borrowing at December 31, 2005. In addition, the interest rate and maturity of the term loan
facility were modified. The amended and restated term loan required monthly payments of interest
only at a variable interest rate of London Interbank Offered Rate (LIBOR) plus 2.00% through the
third quarter of 2006. During October 2006, FII repaid the $25.0 million term loan. The debt was
scheduled for repayment in equal annual installments of $6.25 million beginning in December 2007.
The $5.0 million revolving loan was also modified to accrue interest at a rate of LIBOR plus 1.75%
and is scheduled to mature April 2007. There were no advances outstanding on the revolving loan
during the year ended December 31, 2006 or December 31, 2005.
Junior Subordinated Debentures
In February 2001, the Company issued $16.7 million of junior subordinated debentures to a statutory
trust subsidiary. The junior subordinated debentures have a fixed interest rate equal to 10.20%
and mature in 30 years. The Company incurred $487,000 in costs related to the issuance that are
being amortized over 20 years using the straight-line method. The statutory trust subsidiary then
participated in the issuance of trust preferred securities of similar terms and maturity. As of
December 31, 2003, the Company deconsolidated the subsidiary trust, which had issued trust
preferred securities, and replaced the presentation of such instruments with the Companys junior
subordinated debentures issued to the subsidiary trust. Such presentation reflects the adoption of
FASB Interpretation No. 46 (FIN 46 R), Consolidation of Variable Interest Entities.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
Overview
For the year ended December 31, 2006, income from continuing operations was $17.4 million or $1.40
per diluted share, up from $4.6 million or $0.28 per diluted share from last year. For the year
ended December 31, 2006, net income was $17.4 million or $1.40 per diluted share compared with net
income of $2.2 million or $0.06 per diluted share for the prior year. The primary factor for the
improved 2006 results was a $1.8 million credit for loan losses in 2006 compared with a $28.5
million provision for loan losses in 2005. The Company also reduced noninterest expense by $5.9
million in 2006 compared with 2005. The improved risk profile of the Companys loan portfolio
contributed to the credit for loan losses. Lower noninterest expense resulted from improved
operating efficiencies from the consolidation of FIIs subsidiary banks in December 2005,
coupled with a reduction in costs associated with asset quality issues and regulatory matters. Net
interest income, the principal source of the Companys earnings, was $59.5 million in 2006 down
from $67.5 million in 2005. Net interest margin was 3.55% and 3.65% for the years ended December
31, 2006 and 2005, respectively. The decline in net interest income resulted from lower earning
asset levels along with a narrowed net interest margin. Return on average common equity was 10.02%
for 2006 compared to 0.43% in 2005.
Average Statements of Financial Condition and Net Interest Analysis
The following table sets forth certain information relating to the Companys consolidated
statements of financial condition and reflects the average yields earned on interest-earning
assets, as well as the average rates paid on interest-bearing liabilities for the years indicated.
Such yields and rates were derived by dividing interest income or expense by the average balances
of interest-earning assets or interest-bearing liabilities,
respectively, for the years shown. Tax-equivalent adjustments have been made. All average balances are average daily balances.
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31: |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
Average |
|
|
Interest |
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
|
|
|
Average |
|
|
Interest |
|
|
|
|
|
|
Outstanding |
|
|
Earned/ |
|
|
Yield/ |
|
|
Outstanding |
|
|
Earned/ |
|
|
Yield/ |
|
|
Outstanding |
|
|
Earned/ |
|
|
Yield/ |
|
(Dollars in thousands) |
|
Balance |
|
|
Paid |
|
|
Rate |
|
|
Balance |
|
|
Paid |
|
|
Rate |
|
|
Balance |
|
|
Paid |
|
|
Rate |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and
interest-bearing deposits |
|
$ |
36,572 |
|
|
$ |
1,877 |
|
|
|
5.13 |
% |
|
$ |
42,977 |
|
|
$ |
1,476 |
|
|
|
3.43 |
% |
|
$ |
35,245 |
|
|
$ |
448 |
|
|
|
1.27 |
% |
Commercial paper due in less
than 90 days |
|
|
8,285 |
|
|
|
411 |
|
|
|
4.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
559,945 |
|
|
|
23,897 |
|
|
|
4.27 |
|
|
|
545,496 |
|
|
|
22,200 |
|
|
|
4.07 |
|
|
|
475,180 |
|
|
|
19,343 |
|
|
|
4.07 |
|
Non-taxable |
|
|
251,439 |
|
|
|
13,663 |
|
|
|
5.43 |
|
|
|
251,640 |
|
|
|
13,172 |
|
|
|
5.23 |
|
|
|
241,999 |
|
|
|
12,802 |
|
|
|
5.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
811,384 |
|
|
|
37,560 |
|
|
|
4.63 |
|
|
|
797,136 |
|
|
|
35,372 |
|
|
|
4.44 |
|
|
|
717,179 |
|
|
|
32,145 |
|
|
|
4.48 |
|
Loans (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural |
|
|
426,408 |
|
|
|
32,554 |
|
|
|
7.63 |
|
|
|
612,987 |
|
|
|
38,690 |
|
|
|
6.31 |
|
|
|
800,133 |
|
|
|
46,393 |
|
|
|
5.80 |
|
Residential real estate |
|
|
271,691 |
|
|
|
17,090 |
|
|
|
6.29 |
|
|
|
264,506 |
|
|
|
16,808 |
|
|
|
6.35 |
|
|
|
248,872 |
|
|
|
16,555 |
|
|
|
6.65 |
|
Consumer and home equity |
|
|
255,081 |
|
|
|
18,360 |
|
|
|
7.20 |
|
|
|
258,459 |
|
|
|
16,151 |
|
|
|
6.25 |
|
|
|
246,327 |
|
|
|
15,115 |
|
|
|
6.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
953,180 |
|
|
|
68,004 |
|
|
|
7.13 |
|
|
|
1,135,952 |
|
|
|
71,649 |
|
|
|
6.31 |
|
|
|
1,295,332 |
|
|
|
78,063 |
|
|
|
6.03 |
|
Total interest-earning assets |
|
|
1,809,421 |
|
|
|
107,852 |
|
|
|
5.96 |
|
|
|
1,976,065 |
|
|
|
108,497 |
|
|
|
5.49 |
|
|
|
2,047,756 |
|
|
|
110,656 |
|
|
|
5.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(19,338 |
) |
|
|
|
|
|
|
|
|
|
|
(29,152 |
) |
|
|
|
|
|
|
|
|
|
|
(30,600 |
) |
|
|
|
|
|
|
|
|
Other noninterest-earning assets |
|
|
148,937 |
|
|
|
|
|
|
|
|
|
|
|
169,493 |
|
|
|
|
|
|
|
|
|
|
|
173,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,939,020 |
|
|
|
|
|
|
|
|
|
|
$ |
2,116,406 |
|
|
|
|
|
|
|
|
|
|
$ |
2,190,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
$ |
379,434 |
|
|
$ |
6,705 |
|
|
|
1.77 |
% |
|
$ |
390,610 |
|
|
$ |
4,917 |
|
|
|
1.26 |
% |
|
$ |
396,558 |
|
|
$ |
2,903 |
|
|
|
0.73 |
% |
Savings and money market |
|
|
333,155 |
|
|
|
4,320 |
|
|
|
1.30 |
|
|
|
393,439 |
|
|
|
3,733 |
|
|
|
0.95 |
|
|
|
424,013 |
|
|
|
2,812 |
|
|
|
0.66 |
|
Certificates of deposit |
|
|
664,358 |
|
|
|
26,420 |
|
|
|
3.98 |
|
|
|
737,285 |
|
|
|
21,605 |
|
|
|
2.93 |
|
|
|
760,453 |
|
|
|
18,909 |
|
|
|
2.49 |
|
Short-term borrowings |
|
|
26,157 |
|
|
|
571 |
|
|
|
2.18 |
|
|
|
24,998 |
|
|
|
377 |
|
|
|
1.51 |
|
|
|
28,237 |
|
|
|
284 |
|
|
|
1.01 |
|
Long-term borrowings |
|
|
67,023 |
|
|
|
3,860 |
|
|
|
5.76 |
|
|
|
82,142 |
|
|
|
4,035 |
|
|
|
4.91 |
|
|
|
95,446 |
|
|
|
4,132 |
|
|
|
4.33 |
|
Junior subordinated debentures
and trust preferred securities |
|
|
16,702 |
|
|
|
1,728 |
|
|
|
10.35 |
|
|
|
16,702 |
|
|
|
1,728 |
|
|
|
10.35 |
|
|
|
16,702 |
|
|
|
1,728 |
|
|
|
10.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,486,829 |
|
|
|
43,604 |
|
|
|
2.93 |
|
|
|
1,645,176 |
|
|
|
36,395 |
|
|
|
2.21 |
|
|
|
1,721,409 |
|
|
|
30,768 |
|
|
|
1.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand |
|
|
258,416 |
|
|
|
|
|
|
|
|
|
|
|
275,069 |
|
|
|
|
|
|
|
|
|
|
|
267,721 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
17,638 |
|
|
|
|
|
|
|
|
|
|
|
19,023 |
|
|
|
|
|
|
|
|
|
|
|
15,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,762,883 |
|
|
|
|
|
|
|
|
|
|
|
1,939,268 |
|
|
|
|
|
|
|
|
|
|
|
2,004,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (3) |
|
|
176,137 |
|
|
|
|
|
|
|
|
|
|
|
177,138 |
|
|
|
|
|
|
|
|
|
|
|
185,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
1,939,020 |
|
|
|
|
|
|
|
|
|
|
$ |
2,116,406 |
|
|
|
|
|
|
|
|
|
|
$ |
2,190,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest
income tax-equivalent |
|
|
|
|
|
|
64,248 |
|
|
|
|
|
|
|
|
|
|
|
72,102 |
|
|
|
|
|
|
|
|
|
|
|
79,888 |
|
|
|
|
|
Less: tax-equivalent adjustment |
|
|
|
|
|
|
4,782 |
|
|
|
|
|
|
|
|
|
|
|
4,610 |
|
|
|
|
|
|
|
|
|
|
|
4,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
59,466 |
|
|
|
|
|
|
|
|
|
|
$ |
67,492 |
|
|
|
|
|
|
|
|
|
|
$ |
75,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
|
|
|
|
|
|
|
|
3.03 |
% |
|
|
|
|
|
|
|
|
|
|
3.28 |
% |
|
|
|
|
|
|
|
|
|
|
3.61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earning assets |
|
$ |
322,592 |
|
|
|
|
|
|
|
|
|
|
$ |
330,889 |
|
|
|
|
|
|
|
|
|
|
$ |
326,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income as a percentage
of average interest-earning assets
(net interest margin) |
|
|
|
|
|
|
|
|
|
|
3.55 |
% |
|
|
|
|
|
|
|
|
|
|
3.65 |
% |
|
|
|
|
|
|
|
|
|
|
3.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
121.70 |
% |
|
|
|
|
|
|
|
|
|
|
120.11 |
% |
|
|
|
|
|
|
|
|
|
|
118.96 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts shown are amortized cost for both held to maturity and available for sale securities.
In order to make resultant yields on tax-exempt securities comparable to those on taxable
securities and loans, the interest earned from tax-exempt bonds is presented on a
tax-equivalent basis. |
|
(2) |
|
Includes the average balance and interest earned on loans held for sale. Includes net
unearned income and net deferred loan fees and costs. Loans held for sale and nonaccruing
loans are included in the average loan totals and payments on nonaccruing loans have been
recognized as disclosed in Note 1 of the notes to consolidated financial statements. |
|
(3) |
|
Includes unrealized losses on securities available for sale, net of related taxes. |
40
Net Interest Income
Net interest income, the principal source of the Companys earnings, was $59.5 million in 2006,
compared to $67.5 million in 2005. Net interest margin was 3.55% for the year ended December 31,
2006, a drop of 10 basis points from 3.65% for the same period last year. The decline in net
interest income resulted from a combination of lower earning asset levels, a changed mix of
earnings assets and a narrowed net interest margin as the inverted to flat yield curve prevalent
for most of 2006 negatively impacted net interest margin.
For the year ended December 31, 2006, average earning assets were $1.809 billion compared with
$1.976 billion for the prior year. Average total loans for the year ended December 31, 2006 were
$953.2 million, down $182.8 million, or 16.1%, when compared with $1.136 billion for the same
period last year. The bulk of the decline in average total loans in 2006 relates to the
commercial-related loan sale that occurred during 2005. Average total investment securities
(excluding federal funds sold, interest-bearing deposits and commercial paper due in less than 90
days) totaled $811.4 million for the year ended December 31, 2006, a $14.3 million increase compare
to $797.1 million for the same period last year. A portion of the cash available from the decline
in loans was redeployed in investment securities.
The overall mix of the Companys earning assets changed, with loans, which generally have a higher
interest yield than investments, representing a lower percentage of earning assets. For the year
ended December 31, 2006, loans comprised 52.7% of average earnings assets compared to 57.5% in
2005.
The Companys yield on average earning assets was 5.96% for 2006, up 47 basis points from 5.49% in
2005. The Companys loan portfolio yield was 7.13% for 2006, up 82 basis points from 2005, and the
tax-equivalent investment yield was 4.63% for 2006, up 19 basis points from 2005.
Total average interest-bearing deposits were $1.377 billion for the year ended December 31, 2006,
down 9.5% from $1.521 billion for the same period in 2005. Contributing to the decline in deposits
were fewer certificates of deposit, including brokered certificates of deposit. Other consumer
deposit categories declined due to deposit outflows associated with the effects of the 2005 loan
sale and from higher-rate competitor products. Total average short-term and long-term borrowings
were $93.2 million for the year ended December 31, 2006, down from $107.1 million compared to 2005.
The Company actively managed to reduce higher cost borrowings using cash available from the
decline in loans.
The rate on interest-bearing liabilities for the year ended December 31, 2006 was 2.93%, an
increase of 72 basis points over 2005. The increase primarily resulted from higher deposit
interest costs associated with higher general market interest rates.
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected the Companys
interest income and interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by current year rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) the net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately to the changes due to volume and the
changes due to rate.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31: |
|
|
2006 vs. 2005 |
|
|
2005 vs. 2004 |
|
|
|
Increase/(Decrease) |
|
|
Total |
|
|
Increase/(Decrease) |
|
|
Total |
|
|
|
Due To: |
|
|
Increase/ |
|
|
Due To: |
|
|
Increase/ |
|
(Dollars in thousands) |
|
Volume |
|
|
Rate |
|
|
(Decrease) |
|
|
Volume |
|
|
Rate |
|
|
(Decrease) |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and
interest-bearing deposits |
|
$ |
(328 |
) |
|
$ |
729 |
|
|
$ |
401 |
|
|
$ |
266 |
|
|
$ |
762 |
|
|
$ |
1,028 |
|
Commercial paper due in less
than 90 days |
|
|
411 |
|
|
|
|
|
|
|
411 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
613 |
|
|
|
1,084 |
|
|
|
1,697 |
|
|
|
2,857 |
|
|
|
|
|
|
|
2,857 |
|
Non-taxable |
|
|
(11 |
) |
|
|
502 |
|
|
|
491 |
|
|
|
519 |
|
|
|
(149 |
) |
|
|
370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
602 |
|
|
|
1,586 |
|
|
|
2,188 |
|
|
|
3,376 |
|
|
|
(149 |
) |
|
|
3,227 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural |
|
|
(14,215 |
) |
|
|
8,079 |
|
|
|
(6,136 |
) |
|
|
(11,771 |
) |
|
|
4,068 |
|
|
|
(7,703 |
) |
Residential real estate |
|
|
435 |
|
|
|
(153 |
) |
|
|
282 |
|
|
|
1,021 |
|
|
|
(768 |
) |
|
|
253 |
|
Consumer and home equity |
|
|
(243 |
) |
|
|
2,452 |
|
|
|
2,209 |
|
|
|
763 |
|
|
|
273 |
|
|
|
1,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
(14,023 |
) |
|
|
10,378 |
|
|
|
(3,645 |
) |
|
|
(9,987 |
) |
|
|
3,573 |
|
|
|
(6,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
$ |
(13,338 |
) |
|
$ |
12,693 |
|
|
$ |
(645 |
) |
|
$ |
(6,345 |
) |
|
$ |
4,186 |
|
|
$ |
(2,159 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand |
|
$ |
(197 |
) |
|
$ |
1,985 |
|
|
$ |
1,788 |
|
|
$ |
(74 |
) |
|
$ |
2,088 |
|
|
$ |
2,014 |
|
Savings and money market |
|
|
(776 |
) |
|
|
1,363 |
|
|
|
587 |
|
|
|
(284 |
) |
|
|
1,205 |
|
|
|
921 |
|
Certificates of deposit |
|
|
(2,887 |
) |
|
|
7,702 |
|
|
|
4,815 |
|
|
|
(686 |
) |
|
|
3,382 |
|
|
|
2,696 |
|
Short-term borrowings |
|
|
25 |
|
|
|
169 |
|
|
|
194 |
|
|
|
(50 |
) |
|
|
143 |
|
|
|
93 |
|
Long-term borrowings |
|
|
(881 |
) |
|
|
706 |
|
|
|
(175 |
) |
|
|
(640 |
) |
|
|
543 |
|
|
|
(97 |
) |
Junior subordinated debentures
and trust preferred securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
(4,716 |
) |
|
|
11,925 |
|
|
|
7,209 |
|
|
|
(1,734 |
) |
|
|
7,361 |
|
|
|
5,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
(8,622 |
) |
|
$ |
768 |
|
|
$ |
(7,854 |
) |
|
$ |
(4,611 |
) |
|
$ |
(3,175 |
) |
|
$ |
(7,786 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Credit) Provision for Loan Losses
The (credit) provision for loan losses represents managements estimate of the expense necessary to
maintain the allowance for loan losses at a level representative of probable credit losses inherent
in the portfolio. The credit for loan losses totaled $1.8 million in 2006, compared to the
provision for loan losses of $28.5 million in 2005. Net loan charge-offs were $1.3 million, or
0.14% of average loans, for the year ended December 31, 2006 compared to $47.5 million, or 4.27% of
average loans for 2005. The 2005 results reflected higher provision for loan losses and net
charge-offs as a result of write-downs associated with the decision to sell approximately $169.0
million of commercial-related loans. The credit for loan losses in 2006 was due to overall
improving credit quality as well as a decline in the loan portfolio. The ratio of allowance for
loan losses to total loans was 1.84% and 2.04% at December 31, 2006 and 2005, respectively. The
ratio of the allowance for loan losses to nonperforming loans was 108% at December 31, 2006 versus
112% at December 31, 2005. See the Analysis on Allowance for Loan Losses and Allocation of
Allowance for Loan Losses sections for further discussion.
42
Noninterest Income
The following table presents the major categories of noninterest income for the years ended December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Service charges on deposits |
|
$ |
11,504 |
|
|
$ |
11,586 |
|
ATM and debit card |
|
|
2,233 |
|
|
|
1,680 |
|
Financial services group fees and commissions |
|
|
1,890 |
|
|
|
2,687 |
|
Mortgage banking revenues |
|
|
1,194 |
|
|
|
1,597 |
|
Income from corporate owned life insurance |
|
|
521 |
|
|
|
90 |
|
Net gain on sale and call of securities |
|
|
30 |
|
|
|
14 |
|
Net gain on sale of student loans held for sale |
|
|
670 |
|
|
|
245 |
|
Net gain on
sale of commercial-related loans held for sale |
|
|
82 |
|
|
|
9,369 |
|
Net loss on sale of premises and equipment |
|
|
(3 |
) |
|
|
(321 |
) |
Net gain (loss) on sale of other real estate and repossessed assets |
|
|
90 |
|
|
|
(9 |
) |
Net gain on sale of trust relationships |
|
|
1,386 |
|
|
|
|
|
Other |
|
|
2,314 |
|
|
|
2,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
21,911 |
|
|
$ |
29,384 |
|
|
|
|
|
|
|
|
Noninterest income for the years ended December 31, 2006 and 2005 was $21.9 million and $29.4
million, respectively. The majority of the decline was attributed to the net gain of $9.4 million
on the sale of commercial-related loans recorded in 2005.
Service charges on deposits are down slightly for the year ended December 31, 2006 compared with
2005. The decline results from the decrease in deposit base, partially offset by a fee increase
imposed during 2006.
Automated Teller Machine (ATM) and debit card income, which represents fees for foreign ATM usage
and income associated with customer debit card purchases, totaled $2.2 million and $1.7 million for
the years ended December 31, 2006 and 2005, respectively. ATM and debit card income has increased
from the prior year as a result of an increase in ATM usage fees and more favorable terms on a new
debit card service contract.
Financial services group fees and commissions declined $797,000 for the year ended December 31,
2006 compared with the prior year as a result of lower volumes primarily in the broker-dealer
function. Included in financial services group fees and commissions are trust fees of $328,000
and $456,000 for the years ended December 31, 2006 and 2005, respectively. During 2006, the Bank
sold its trust relationships at the end of the third quarter and recorded a gain on sale of $1.4
million.
Mortgage banking revenues, which includes gains and losses from the sale of residential mortgage
loans, mortgage servicing income and the amortization and impairment (if any) of mortgage servicing
rights, have declined in 2006. The residential mortgage volume has slowed as a result of the
rising interest rate environment and the increasingly competitive marketplace for mortgage loans.
Included in noninterest income for year ended December 31, 2006 was $419,000 in income associated
with the proceeds from corporate owned life insurance policies received in the second quarter of
2006.
During the third quarter of 2005, the Bank began originating student loans with a forward
commitment to sell the student loans to a third-party at a fixed premium on the day of origination.
Included in the net gain on sale of student loans held for sale in 2006 was a $253,000 premium
received from the third-party as a result of achieved sales volumes. The Bank anticipates lower
future origination volumes and net gain on sale due to increased competition and changing market
conditions.
The variance in net loss on sale of premises and equipment, when comparing 2006 to 2005, relates
primarily to equipment and sign disposals recorded in 2005 as a result of the Companys
reorganization and consolidation of its subsidiary banks into FSB.
43
Net gain (loss) on sale of other real estate and repossessed assets increased for the year ended
December 31, 2006 compared to 2005, primarily as a result of a $107,000 gain recognized on the sale
of a commercial property during the first quarter of 2006.
Noninterest Expense
The following table presents the major categories of noninterest expense for the years ended
December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Salaries and employee benefits |
|
$ |
33,563 |
|
|
$ |
34,763 |
|
Occupancy and equipment |
|
|
9,465 |
|
|
|
9,022 |
|
Supplies and postage |
|
|
1,945 |
|
|
|
2,173 |
|
Amortization of other intangible assets |
|
|
420 |
|
|
|
430 |
|
Computer and data processing |
|
|
1,903 |
|
|
|
1,930 |
|
Professional fees and services |
|
|
2,837 |
|
|
|
5,074 |
|
Other |
|
|
9,479 |
|
|
|
12,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
59,612 |
|
|
$ |
65,492 |
|
|
|
|
|
|
|
|
Noninterest expense for the year ended December 31, 2006 decreased $5.9 million, or 9.0% to
$59.6 million from $65.5 million for the year ended December 31, 2005. This decline was
principally related to operational efficiencies gained from the consolidation of the Companys
subsidiary banks at the end of 2005, the elimination of professional service fees related to last
years asset quality and regulatory issues, and lower FDIC insurance costs.
For the year ended December 31, 2006, salaries and benefits declined $1.2 million from the year
ended December 31, 2005. This decline was principally from reduced staffing levels and lower
payroll related taxes and benefit costs. The Company focused on managing staff levels and filling
positions vacated through attrition only when necessary. In addition, salaries and benefits
included $821,000 of management stock compensation expense (excludes director stock compensation
expense) for the year ended December 31, 2006 as a result of the adoption of SFAS No. 123(R).
Since SFAS No. 123(R) was adopted effective January 1, 2006, there was no such stock compensation
expense included in salaries and benefits in 2005.
The Company has experienced a 4.9% increase in occupancy and equipment expenses when comparing 2006
to 2005. The Company has actively managed to reduce costs and lower overhead, but those efforts
were more than offset by rising utility and maintenance costs.
Supplies and postage are down 10.5% for the year ended December 31, 2006 compared to 2005. This
decline results from efficiencies gained through the consolidation of the Companys banking
charters and ongoing efforts to reduce costs.
Computer and data processing costs are down slightly in 2006 versus 2005.
Professional fees and services have declined 44.1% for the year ended December 31, 2006 compare to
2005, primarily a result of the resolution of asset quality issues and regulatory matters during
2005.
Other expenses decreased 21.7% for the year ended December 31, 2006. The decline in other expenses
related primarily to lower FDIC insurance premiums, which declined $1.2 million to $215,000 in 2006
versus $1.4 million in 2005. The Company also experienced a reduction in other operating expenses
in 2006, as one-time severance and restructuring costs were incurred during 2005 to merge the
Companys subsidiary banks.
The efficiency ratio for the year ended December 31, 2006 was 69.45% compared with 70.18% for 2005.
The improved efficiency ratio is reflective of the lower levels of noninterest expense, partially
offset by lower revenues. The efficiency ratio represents noninterest expense less other real
estate expense and amortization of intangibles (all from continuing operations) divided by net
interest income (tax-equivalent) plus other noninterest income less gain on sale of securities, net
gain on sale of commercial-related loans held for sale and gain on sale of trust relationships (all
from continuing operations).
44
Income Tax Expense (Benefit) From Continuing Operations
The income tax expense (benefit) from continuing operations provided for federal and New York State
income taxes, which amounted to expense of $6.2 million and a benefit of $1.8 million for the years
ended December 31, 2006 and 2005, respectively. The fluctuation in income tax expense corresponded
in general with taxable income levels for each year. The effective tax rate for 2006 was 26.5%,
compared to (61.9)% in 2005. The 2005 effective tax rate was due to the relationship between the
size of the favorable permanent differences and pre-tax income from continuing operations, which
resulted in the unusual effective tax benefit rate.
The current and deferred tax provision was calculated based on estimates and assumptions that could
differ from the actual results reflected in income tax returns filed during the subsequent year.
Adjustments based on filed returns are recorded when identified, which is generally before or
during the third quarter of the subsequent year.
The amount of income taxes paid is subject to ongoing audits by federal and state tax authorities,
which often result in proposed assessments. Our estimate for the potential outcome for any
uncertain tax issue is highly judgmental. We believe we have adequately provided for any
reasonably foreseeable outcome related to these matters. However, our future results may include
favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments
are made or resolved or when statutes of limitation on potential assessments expire. As a result,
our effective tax rate may fluctuate significantly on a quarterly basis.
Discontinued Operation
In 2005, the Company disposed of its BGI subsidiary. The results of BGI have been reported
separately as a discontinued operation in the consolidated statements of income for all periods
presented. As a result, the Company recorded a loss from operations of the discontinued
subsidiary of $340,000, a loss on the sale of BGI of $1.1 million and income tax expense associated
with discontinued operations of $1.0 million for the year ended December 31, 2005. Since the sale
occurred during 2005, there are no assets or liabilities associated with the discontinued operation
recorded at December 31, 2006 and 2005 in the consolidated statements of financial condition. Cash
flows from BGI are shown in the consolidated statements of cash flows by activity (operating,
investing and financing) consistent with the applicable source of the cash flow. See also Note 2
of the notes to consolidated financial statements.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Overview
For the year ended December 31, 2005, income from continuing operations was $4.6 million or $0.28
per diluted share, down from $12.9 million or $1.02 per diluted
share from the prior year. For the year
ended December 31, 2005, net income was $2.2 million or $0.06 per diluted share compared with net
income of $12.5 million or $0.98 per diluted share for the prior year. The primary reasons for the
decline in net income in 2005 were the $7.9 million decline in net interest income, the $8.9
million increase in the provision for loan losses, and an increase in noninterest expense of $3.7
million. The Company also sold its BGI subsidiary during 2005 and incurred a loss from
discontinued operations of $2.5 million in 2005 compared to $450,000 in 2004. Return on average
common equity was 0.43% for 2005 compared to 6.55% in 2004. The provision for loan losses in 2005
was $28.5 million, up $8.9 million from the prior year. Noninterest expenses totaled $65.5 million
in 2005, an increase of $3.7 million from 2004, which related to a $295,000 increase in salaries
and benefits and a $3.4 million increase in other operating expenses. Other operating expenses
included $1.4 million of restructuring costs incurred in 2005 to merge the Companys subsidiary
banks.
Net Interest Income
Net interest income, the principal source of the Companys earnings, was $67.5 million in 2005,
compared to $75.4 million in 2004. Net interest margin was 3.65% for the year ended December 31,
2005, a drop of 25 basis points from the 3.90% level for the same period last year. The Company
experienced a significant change in the mix of earning assets, with increased levels of investment
securities and federal funds sold and lower level of loans. Loan assets generally earn higher
yields than investment assets. For 2005, in comparison to 2004, average
45
investment securities and federal funds sold increased $87.7 million, while average loans decreased
$159.4 million. In addition to the lower loan base that resulted from the Companys decision to
sell $169.0 million in commercial-related loans during 2005, new loan originations slowed and
caused an additional drop in total loans.
The Companys yield on average earning assets was 5.49% for 2005, up 9 basis points from 5.40% in
2004. The Companys loan portfolio yield was 6.31% for 2005, up 28 basis points from 2004, and
tax-equivalent investment yield was 4.44% for 2005, down 4 basis points from 2004. The increased
loan portfolio yield in 2005 resulted from the higher general market interest rates and the
associated repricing of variable rate loans, as well as the decline in nonperforming loans that
resulted from the problem loan sale previously discussed. Improved loan yields were mitigated by
the shift in the mix of earning assets.
The average cost of funds for 2005 was 2.21%, an increase of 42 basis points over the same period
in 2004. The increases in the average cost of funds primarily resulted from higher deposit
interest costs associated with increased general market interest rates. Total average
interest-bearing liabilities were $1.65 billion for the year ended December 31, 2005, which
represented a $76.2 million decrease from 2004. Total average interest-bearing deposits were $1.52
billion for the year ended December 31, 2005, a decrease of $59.7 million or 4% lower than the
average interest-bearing deposits for 2004.
Provision for Loan Losses
The provision for loan losses represents managements estimate of the expense necessary to maintain
the allowance for loan losses at a level representative of probable credit losses inherent in the
portfolio. The provision for loan losses totaled $28.5 million in 2005, compared to $19.7 million
in 2004. Net loan charge-offs were $47.5 million, or 4.27% of average loans, for the year ended
December 31, 2005 compared to $9.6 million, or 0.74% of average loans for 2004. The ratio of the
allowance for loan losses to nonperforming loans was 112% at December 31, 2005 versus 73% at
December 31, 2004. The ratio of allowance for loan losses to total loans was 2.04% and 3.13% at
December 31, 2005 and 2004, respectively. The significant increase in the provision for loan
losses in 2005 as compared to 2004 was a result of the Companys decision to sell a substantial
portion of its problem loans during 2005. See the Analysis on Allowance for Loan Losses and
Allocation of Allowance for Loan Losses sections for further discussion.
Noninterest Income
The following table presents the major categories of noninterest income for the years ended December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
Service charges on deposits |
|
$ |
11,586 |
|
|
$ |
11,987 |
|
ATM and debit card |
|
|
1,680 |
|
|
|
1,374 |
|
Financial services group fees and commissions |
|
|
2,687 |
|
|
|
2,518 |
|
Mortgage banking revenues |
|
|
1,597 |
|
|
|
2,147 |
|
Income from corporate owned life insurance |
|
|
90 |
|
|
|
30 |
|
Net gain on sale of credit card portfolio |
|
|
|
|
|
|
1,177 |
|
Net gain on sale and call of securities |
|
|
14 |
|
|
|
248 |
|
Net gain on sale of student loans held for sale |
|
|
245 |
|
|
|
|
|
Net gain on
sale of commercial-related loans held for sale |
|
|
9,369 |
|
|
|
|
|
Net (loss) gain on sale of premises and equipment |
|
|
(321 |
) |
|
|
2 |
|
Net (loss) gain on sale of other real estate and repossessed assets |
|
|
(9 |
) |
|
|
193 |
|
Other |
|
|
2,446 |
|
|
|
2,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
29,384 |
|
|
$ |
22,149 |
|
|
|
|
|
|
|
|
Noninterest income increased 32.7% to $29.4 million in 2005 compared to $22.1 million in 2004.
The increase was primarily attributed to the net gain of $9.4 million on the sale of
commercial-related loans that more than offset the decline in mortgage banking activities, service
charges on deposit accounts and other noninterest income categories. The Company also realized a
$1.2 million gain on the sale of its credit card portfolio in 2004.
46
Noninterest Expense
The following table presents the major categories of noninterest expense for the years ended December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2005 |
|
|
2004 |
|
|
Salaries and employee benefits |
|
$ |
34,763 |
|
|
$ |
34,468 |
|
Occupancy and equipment |
|
|
9,022 |
|
|
|
8,436 |
|
Supplies and postage |
|
|
2,173 |
|
|
|
2,319 |
|
Amortization of other intangible assets |
|
|
430 |
|
|
|
709 |
|
Computer and data processing |
|
|
1,930 |
|
|
|
1,780 |
|
Professional fees and services |
|
|
5,074 |
|
|
|
3,439 |
|
Other |
|
|
12,100 |
|
|
|
10,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
65,492 |
|
|
$ |
61,767 |
|
|
|
|
|
|
|
|
Noninterest expense was $65.5 million in 2005 compared to $61.8 million in 2004. The most
significant component of noninterest expense was salaries and benefits, which totaled $34.8 million
in 2005 and $34.5 million in 2004. Salaries and benefits increased in 2005 from 2004, by only
$295,000 or less than 1%. While salaries and benefits costs increased as a result of the additions
to staff in the commercial loan origination and monitoring areas, the reduction in bonus and
incentive compensation awards in 2005 as compared to 2004 offset the cost increase to a large
degree. Occupancy and equipment increased to $9.0 million in 2005 from $8.4 in 2004. Higher
expense was incurred throughout 2005 to implement the numerous organizational changes, the majority
of which were included in other expense. Legal, consulting and professional fees totaled $4.7
million for 2005 and the increase was associated with resolving the Companys asset quality issues,
regulatory issues and restructuring, as well as legal costs related to the special committees
investigation resulting from a demand letter received from a law firm representing a shareholder.
The increase in noninterest expenses, coupled with the flattening of revenue growth, were the
principal factors in the rise in the Companys efficiency ratio to 70.18% for 2005, compared to
60.41% for 2004.
Income Tax Expense (Benefit) From Continuing Operations
The income tax expense (benefit) from continuing operations provides for federal and New York State
income taxes, which amounted to a benefit of $1.8 million and expense of $3.2 million for the years
ended December 31, 2005 and 2004, respectively. The fluctuation in income tax expense corresponded
in general with taxable income levels for each year. The effective tax rate for 2005 was (61.9)%,
compared to 19.7% in 2004. The 2005 effective tax rate was due to the relationship between the
size of the favorable permanent differences and pre-tax income from continuing operations, which
resulted in the unusual effective tax benefit rate.
Discontinued Operation
The Company disposed of its BGI subsidiary in 2005. As a result, the Company recorded a loss from
operations of the discontinued subsidiary of $340,000, a loss on the sale of BGI of $1.1 million
and income tax expense associated with discontinued operations of $1.0 million for the year ended
December 31, 2005. For the year ended December 31, 2004, the Company recorded a loss from
operations of discontinued subsidiary of $599,000 and associated income tax benefit of $149,000.
BGI was originally acquired by FII in a tax-free reorganization that limited FIIs tax basis,
resulting in a taxable gain on the sale of the subsidiary. See also Note 2 of the notes to
consolidated financial statements.
2006 FOURTH QUARTER RESULTS
Net income for the fourth quarter of 2006 was $3.0 million or $0.23 per diluted share, compared
with net income of $5.2 million or $0.43 per diluted share for the third quarter of 2006 and net
income of $2.9 million or $0.22 per diluted share in the fourth quarter of the prior year. The
decline from the third quarter of 2006 was attributed to the
combination of a $389,000 decline in
net interest income, a $570,000 increase in noninterest expense, the $491,000 credit for loan loss
in the third quarter of 2006 compared to no credit or provision for loan loss in the fourth quarter
of 2006 and the $1.4 million gain on the sale of the Companys trust operations recorded during the
47
third quarter of 2006. Fourth quarter 2006 net income of $3.0 million represented a slight
increase from fourth quarter 2005 net income of $2.9 million. The slight increase from the fourth
quarter last year is attributed to the combination of a $1.4 million decrease in provision for loan
loss and a $1.0 million decrease in noninterest expense, partially offset by a $1.7 million decline
in net interest income.
Net interest income for the fourth quarter of 2006 declined $1.7 million compared to the same
quarter last year, or 10.7%, to $14.3 million primarily the result of an 11 basis point drop in
tax-equivalent net interest margin, a $138.4 million reduction in average interest-earning assets
coupled with a change in the mix of those interest-earning assets from higher yielding loans to
lower yielding investments. The net interest margin for the fourth quarter of 2006 was 3.44%
compared with 3.55% in the same quarter last year.
The provision for loan losses totaled $1.4 million for fourth quarter 2005 compared with a credit
for loan losses of $491,000 for the third quarter of 2006 and no credit or provision recorded for
the fourth quarter of 2006. Net loan charge-offs were $633,000, or 0.27% of average loans, for the
fourth quarter 2006 compared to $2.0 million, or 0.79% of average loans for the fourth quarter
2005.
Noninterest income for the fourth quarter of 2006 declined $142,000, or 2.9%, to $4.8 million, from
$4.9 million in the fourth quarter of 2005. The primary reason was the $297,000 decline in
financial services group fees and commissions, as the Company sold its trust relationships during
the third quarter of 2006 and experienced lower sales volumes in the broker-dealer business.
Noninterest expense for the fourth quarter of 2006 was $15.2 million, a 6.2% decrease from $16.2
million in the fourth quarter of 2005. Salaries and benefits increased $387,000 to $8.3 million in
the fourth quarter of 2006 compared to the same quarter last year.
The increase resulted from stock compensation expense recorded in
2006 as a result of the adoption of SFAS No. 123(R) and the
reversal of certain bonus and incentive accruals in the prior year
due to full-year 2005 financial results. Professional fees
and services decreased to $747,000 in the fourth quarter of 2006, down 45.5% from $1.4 million in
the fourth quarter of 2005. Other noninterest expense decreased $878,000, or 25.4% to $2.6 million
in the fourth quarter of 2006 compared to the same quarter last year. This decrease in other
noninterest expenses was due in part to one-time restructuring costs incurred in the fourth quarter
of 2005.
Average total deposits were down 7.7% for the fourth quarter 2006 to $1.631 billion in comparison
to $1.766 billion in the same quarter last year. Contributing to the decline in deposits were
fewer certificates of deposit, including brokered certificates of deposit, as the Company actively
managed to lower the level of these higher cost deposits. Other deposit categories declined due to
deposit outflows associated with the effects of the 2005 loan sale and from competitors offering
higher rate products.
Average total loans declined 6.7% to $933.0 million for the fourth quarter 2006, compared with
$1.002 billion for the same quarter in the prior year. The Companys loan portfolio declined as
loan payments outpaced new loan originations. The Companys strategy is to rebuild a balanced
quality loan portfolio and loan originations slowed due to more stringent underwriting
requirements, firm pricing disciplines and a highly competitive marketplace for quality loans.
Nonperforming assets at December 31, 2006 were $17.0 million compared with $14.4 million at
September 30, 2006, and $19.7 million at December 31, 2005. The increase in the fourth quarter
2006 was principally due to one credit in the dairy industry.
48
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 borrowings as they mature, 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, the ability to sell securities, lines of credit, and access to 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 Federal Reserve Bank.
The primary sources of liquidity for FII are dividends from the Bank and access to 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,
short-term liquid assets. FSIS relies on cash flows from operations and funds from FII when
necessary.
The Companys cash and cash equivalents were $109.8 million at December 31, 2006, up from $91.9
million at December 31, 2005. The Company began investing in commercial paper due in less than 90
days during 2006 and has classified the short-term investment as a cash equivalent when applicable.
No such commercial paper was held as of December 31, 2006. The Companys net cash provided by
operating activities totaled $30.2 million and the principal source of operating activity cash flow
was net income adjusted for noncash income and expense items and changes in other assets and other
liabilities. Net cash provided by investing activities totaled $120.5 million, which included net
proceeds of $56.4 million from a decline in securities and $62.0 million of loan payments in excess
of loan originations. Net cash used in financing activities of $132.8 million was primarily
attributed to the $99.6 million decrease in deposits.
The Companys cash and cash equivalents were $91.9 million at December 31, 2005, an increase of
$45.8 million from $46.1 million at December 31, 2004. The Companys net cash provided by
operating activities totaled $45.1 million. The principal source of operating activity cash flow
was the Companys net income adjusted for noncash income and expenses items and changes in other
assets and other liabilities. The Company utilized its cash in investing activities through the
net acquisition of $84.5 million in securities and $4.8 million in premises and equipment. Net
cash provided from investment activities included $70.5 million of loan payments in excess of loan
originations, $140.5 million generated from the sale of commercial-related loans and $4.5 million
from the sale of the discontinued subsidiary. The Company utilized cash in financing activities by
funding a $101.7 million decrease in deposits, reducing debt by $17.4 million and paying $6.9
million in dividends to shareholders.
Contractual Obligations
The following table presents the Companys contractual obligations at December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than |
|
|
|
|
|
|
|
|
|
|
More Than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
|
Operating leases |
|
$ |
4,689 |
|
|
$ |
769 |
|
|
$ |
1,310 |
|
|
$ |
831 |
|
|
$ |
1,779 |
|
Service agreements and other |
|
|
2,049 |
|
|
|
536 |
|
|
|
575 |
|
|
|
575 |
|
|
|
363 |
|
Long-term borrowings |
|
|
38,187 |
|
|
|
12,321 |
|
|
|
25,720 |
|
|
|
146 |
|
|
|
|
|
Junior subordinated debentures |
|
|
16,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
61,627 |
|
|
$ |
13,626 |
|
|
$ |
27,605 |
|
|
$ |
1,552 |
|
|
$ |
18,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Off-Balance Sheet Arrangements
The Company has guaranteed distributions and payments for redemption or liquidation of trust
preferred securities issued by a wholly owned, deconsolidated subsidiary trust to the extent of
funds held by the trust. Although the guarantee is not separately recorded, the obligation
underlying the guarantee is fully reflected on the Companys consolidated statement of financial
condition as junior subordinated debentures. The subsidiarys trust preferred securities currently
qualify as Tier 1 capital under the Federal Reserve Boards capital adequacy guidelines. For
further information regarding the junior subordinated debentures issued to unconsolidated
subsidiary trust, see Note 10 of the notes to consolidated financial statements.
In the normal course of business, the Company has outstanding commitments to extend credit that are
not reflected in its consolidated financial statements. The commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee. At December 31,
2006 stand-by letters of credit totaling $5.8 million and unused loan commitments of $258.6 million
were contractually available. Comparable amounts for these commitments at December 31, 2005 were
$9.5 million and $231.5 million, respectively. The total commitment amounts do not necessarily
represent future cash requirements as many of the commitments are expected to expire without
funding. For further information regarding the outstanding loan commitments, see Note 12 of the
notes to consolidated financial statements.
The Company also extends rate lock agreements to borrowers related to the origination of
residential mortgage loans. To mitigate the interest rate risk inherent in these rate lock
agreements, as well as closed mortgage loans held for sale, the Company enters into forward
commitments to sell individual mortgage loans. Rate lock agreements and forward commitments are
considered derivatives and are recorded at fair value in accordance with SFAS No. 133. At December
31, 2006 and 2005, the total notional amount of these derivatives (rate lock agreements and forward
commitments) held by the Company amounted to $4.5 million and $8.2 million, respectively.
Capital Resources
The FRB has adopted a system using risk-based capital guidelines to evaluate the capital adequacy
of bank holding companies on a consolidated basis. The guidelines require a minimum total risk-based capital ratio of
8.0%. Leverage ratio is also utilized in assessing capital adequacy with a minimum requirement
that can range from 4.0% to 5.0%. The following table reflects the components of
those ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Total shareholders equity |
|
$ |
182,388 |
|
|
$ |
171,757 |
|
|
$ |
184,287 |
|
Less: Unrealized gain (loss) on securities
available for sale |
|
|
(6,800 |
) |
|
|
(6,178 |
) |
|
|
3,884 |
|
Unrecognized net periodic pension costs |
|
|
210 |
|
|
|
|
|
|
|
|
|
Unrecognized net periodic postretirement costs |
|
|
(1,814 |
) |
|
|
|
|
|
|
|
|
Disallowed goodwill and other intangible assets |
|
|
38,263 |
|
|
|
38,839 |
|
|
|
43,476 |
|
Plus: Minority interests in consolidated subsidiaries |
|
|
|
|
|
|
|
|
|
|
178 |
|
Qualifying trust preferred securities |
|
|
16,200 |
|
|
|
16,200 |
|
|
|
16,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital |
|
$ |
168,729 |
|
|
$ |
155,296 |
|
|
$ |
153,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted quarterly average assets |
|
$ |
1,894,611 |
|
|
$ |
2,042,731 |
|
|
$ |
2,149,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio |
|
|
8.91 |
% |
|
|
7.60 |
% |
|
|
7.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tier 1 capital |
|
$ |
168,729 |
|
|
$ |
155,296 |
|
|
$ |
153,305 |
|
Plus: Qualifying allowance for loan losses |
|
|
13,355 |
|
|
|
14,191 |
|
|
|
17,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital |
|
$ |
182,084 |
|
|
$ |
169,487 |
|
|
$ |
170,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net risk-weighted assets |
|
$ |
1,064,686 |
|
|
$ |
1,129,277 |
|
|
$ |
1,359,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital ratio |
|
|
17.10 |
% |
|
|
15.01 |
% |
|
|
12.54 |
% |
The Companys Tier 1 leverage ratio was 8.91% at December 31, 2006. The ratio increased from
7.60% at December 31, 2005. Total Tier 1 capital of $168.7 million at December 31, 2006 increased
$13.4 million from
50
$155.3 million at December 31, 2005. Total shareholders equity increased $10.6 million in 2006,
primarily resulting from the $17.4 million of net income and $865,000 in additional paid in capital
from the amortization of unvested stock-based compensation, offset by $5.3 million in dividends
declared, $604,000 in unrealized loss on securities available for sale and $1.6 million in
unrecognized net periodic pension and postretirement costs associated
with the adoption of SFAS No. 158.
The Companys total risk-based capital ratio was 17.10% at December 31, 2006, up from 15.01%
at December 31, 2005. Total risk-based capital was $182.1 million at December 31, 2006, an
increase of $12.6 million from $169.5 million at December 31, 2005. The risk-based capital ratio
improvement was also impacted by the change in the Companys asset composition, as the Company
experienced a decrease in higher risk-weighted loans, coupled with an increase in lower
risk-weighted investment securities.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1, Summary of Significant Accounting Policies Recent Accounting Pronouncements, in the
notes to consolidated financial statements for a discussion of recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 FIIs
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.
Net Interest Income at Risk Analysis
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 following table sets forth the results of the modeling analysis at December 31, 2006:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest |
|
|
|
|
|
|
|
|
Rates in Basis Points |
|
Net Interest Income |
|
Economic Value of Equity |
(Rate Shock) |
|
Amount |
|
$Change |
|
% Change |
|
Amount |
|
$Change |
|
% Change |
|
200 |
|
$ |
59,503 |
|
|
$ |
(2,871 |
) |
|
|
(4.60 |
)% |
|
$ |
302,527 |
|
|
$ |
(38,615 |
) |
|
|
(11.32 |
)% |
100 |
|
|
61,112 |
|
|
|
(1,262 |
) |
|
|
(2.02 |
)% |
|
|
321,789 |
|
|
|
(19,353 |
) |
|
|
(5.67 |
)% |
Static |
|
|
62,374 |
|
|
|
|
|
|
|
|
|
|
|
341,142 |
|
|
|
|
|
|
|
|
|
(100) |
|
|
63,721 |
|
|
|
1,347 |
|
|
|
2.16 |
% |
|
|
362,643 |
|
|
|
21,501 |
|
|
|
6.30 |
% |
(200) |
|
|
64,275 |
|
|
|
1,901 |
|
|
|
3.05 |
% |
|
|
377,987 |
|
|
|
36,845 |
|
|
|
10.80 |
% |
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 12 months. As of December 31, 2006, a 200 basis point increase in
rates would decrease net interest income by $2.9 million, or 4.60%, over the next twelve-month
period. A 200 basis point decrease in rates would increase net interest income by $1.9 million, or
3.05%, over a twelve-month period. As of December 31, 2006, a 200 basis point increase in rates
would decrease the economic value of equity by $38.6 million, or 11.32%, over the next twelve-month
period. A 200 basis point decrease in rates would increase the economic value of equity by $36.8
million, or 10.80%, over a twelve-month period. 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.
51
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.
Gap Analysis
The following table (the Gap Table) sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 2006 which management anticipates, based
upon certain assumptions, to re-price or mature in each of the future time periods shown. Except
as stated below, the amount of assets and liabilities shown which re-price or mature during a
particular period were determined in accordance with the earlier of the re-pricing date or the
contractual maturity of the asset or liability. The table sets forth an approximation of the
projected re-pricing of assets and liabilities on the basis of contractual maturities, anticipated
prepayments and scheduled rate adjustments within the selected time intervals. All non-maturity
deposits (demand deposits and savings deposits) are subject to immediate withdrawal and are
therefore shown to re-price in the period of less than 30 days. Prepayment and re-pricing rates
can have a significant impact on the estimated gap. The results shown are based on numerous
assumptions and there can be no assurance that the presented results will approximate actual future
activity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
Volumes Subject to Repricing Within |
|
|
|
0-30 |
|
|
31-180 |
|
|
181-365 |
|
|
1-3 |
|
|
3-5 |
|
|
>5 |
|
|
Non- |
|
|
|
|
(Dollars in thousands) |
|
days |
|
|
days |
|
|
days |
|
|
years |
|
|
years |
|
|
years |
|
|
Sensitive |
|
|
Total |
|
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and
interest-bearing
deposits |
|
$ |
62,233 |
|
|
$ |
|
|
|
$ |
194 |
|
|
$ |
179 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
62,606 |
|
Investment securities (1) |
|
|
9,004 |
|
|
|
100,480 |
|
|
|
68,695 |
|
|
|
257,052 |
|
|
|
164,300 |
|
|
|
176,005 |
|
|
|
|
|
|
|
775,536 |
|
Loans (2) |
|
|
299,341 |
|
|
|
60,852 |
|
|
|
71,477 |
|
|
|
193,521 |
|
|
|
141,558 |
|
|
|
155,317 |
|
|
|
5,408 |
|
|
|
927,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-
earning assets |
|
|
370,578 |
|
|
|
161,332 |
|
|
|
140,366 |
|
|
|
450,752 |
|
|
|
305,858 |
|
|
|
331,322 |
|
|
|
5,408 |
|
|
|
1,765,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand,
savings and money market |
|
|
674,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674,224 |
|
Certificates of deposit |
|
|
84,846 |
|
|
|
207,841 |
|
|
|
288,737 |
|
|
|
77,043 |
|
|
|
10,743 |
|
|
|
478 |
|
|
|
|
|
|
|
669,688 |
|
Borrowed funds (3) |
|
|
32,315 |
|
|
|
1,023 |
|
|
|
11,294 |
|
|
|
25,720 |
|
|
|
145 |
|
|
|
16,702 |
|
|
|
|
|
|
|
87,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-
bearing liabilities |
|
|
791,385 |
|
|
|
208,864 |
|
|
|
300,031 |
|
|
|
102,763 |
|
|
|
10,888 |
|
|
|
17,180 |
|
|
|
|
|
|
|
1,431,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period gap |
|
$ |
(420,807 |
) |
|
$ |
(47,532 |
) |
|
$ |
(159,665 |
) |
|
$ |
347,989 |
|
|
$ |
294,970 |
|
|
$ |
314,142 |
|
|
$ |
5,408 |
|
|
$ |
334,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap |
|
$ |
(420,807 |
) |
|
$ |
(468,339 |
) |
|
$ |
(628,004 |
) |
|
$ |
(280,015 |
) |
|
$ |
14,955 |
|
|
$ |
329,097 |
|
|
$ |
334,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period gap to total assets |
|
|
(22.06 |
)% |
|
|
(2.49 |
)% |
|
|
(8.37 |
)% |
|
|
18.24 |
% |
|
|
15.46 |
% |
|
|
16.47 |
% |
|
|
0.29 |
% |
|
|
17.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap to total assets |
|
|
(22.06 |
)% |
|
|
(24.55 |
)% |
|
|
(32.92 |
)% |
|
|
(14.68 |
)% |
|
|
0.78 |
% |
|
|
17.25 |
% |
|
|
17.54 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest-earning
assets to cumulative interest-
bearing liabilities |
|
|
46.83 |
% |
|
|
53.18 |
% |
|
|
51.70 |
% |
|
|
80.04 |
% |
|
|
101.06 |
% |
|
|
123.00 |
% |
|
|
123.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts shown include the amortized cost of held to maturity securities and the fair value
of available for sale securities. |
|
(2) |
|
Amounts shown include loans held for sale and are net of unearned income and net deferred
fees and costs. |
|
(3) |
|
Amounts shown include junior subordinated debentures. |
For purposes of interest rate risk management, the Company directs more attention on
simulation modeling, such as net interest income at risk as previously discussed, rather than gap
analysis. The net interest income at risk simulation modeling is considered by management to be
more informative in forecasting future income at risk.
52
Item 8. Financial Statements and Supplementary Data
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share amounts) |
|
2006 |
|
|
2005 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
47,166 |
|
|
$ |
46,987 |
|
Federal funds sold and interest-bearing deposits in other banks |
|
|
62,606 |
|
|
|
44,953 |
|
Securities available for sale, at fair value |
|
|
735,148 |
|
|
|
790,855 |
|
Securities held to maturity (fair value of $40,421 and
$42,898 at December 31, 2006 and 2005, respectively) |
|
|
40,388 |
|
|
|
42,593 |
|
Loans held for sale |
|
|
992 |
|
|
|
1,253 |
|
|
|
|
|
|
|
|
|
|
Loans |
|
|
926,482 |
|
|
|
992,321 |
|
Less: Allowance for loan losses |
|
|
17,048 |
|
|
|
20,231 |
|
|
|
|
|
|
|
|
Loans, net |
|
|
909,434 |
|
|
|
972,090 |
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
|
34,562 |
|
|
|
36,471 |
|
Goodwill |
|
|
37,369 |
|
|
|
37,369 |
|
Other assets |
|
|
39,887 |
|
|
|
49,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,907,552 |
|
|
$ |
2,022,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing demand |
|
$ |
273,783 |
|
|
$ |
284,958 |
|
Interest-bearing demand, savings and money market |
|
|
674,224 |
|
|
|
755,229 |
|
Certificates of deposit |
|
|
669,688 |
|
|
|
677,074 |
|
|
|
|
|
|
|
|
Total deposits |
|
|
1,617,695 |
|
|
|
1,717,261 |
|
Short-term borrowings |
|
|
32,310 |
|
|
|
20,106 |
|
Long-term borrowings |
|
|
38,187 |
|
|
|
78,391 |
|
Junior subordinated debentures issued to unconsolidated
subsidiary trust (Junior subordinated debentures) |
|
|
16,702 |
|
|
|
16,702 |
|
Other liabilities |
|
|
20,270 |
|
|
|
18,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,725,164 |
|
|
|
1,850,635 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
3% cumulative preferred stock, $100 par value,
authorized 10,000 shares, issued and outstanding
1,586 shares at December 31, 2006 and 2005 |
|
|
159 |
|
|
|
159 |
|
8.48% cumulative preferred stock, $100 par value,
authorized 200,000 shares, issued and outstanding
174,639 and 174,747 shares at December 31, 2006
and 2005, respectively |
|
|
17,464 |
|
|
|
17,475 |
|
Common stock, $0.01 par value, authorized 50,000,000
shares, issued 11,348,122 and 11,334,874 shares
at December 31, 2006 and 2005, respectively |
|
|
113 |
|
|
|
113 |
|
Additional paid-in capital |
|
|
24,439 |
|
|
|
23,278 |
|
Retained earnings |
|
|
148,730 |
|
|
|
136,925 |
|
Accumulated other comprehensive loss |
|
|
(8,404 |
) |
|
|
(6,178 |
) |
Treasury
stock, at cost 5,351 and 1,000 shares
at December 31, 2006 and 2005, respectively |
|
|
(113 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
182,388 |
|
|
|
171,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,907,552 |
|
|
$ |
2,022,392 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share amounts) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
68,004 |
|
|
$ |
71,649 |
|
|
$ |
78,063 |
|
Interest and dividends on securities |
|
|
32,778 |
|
|
|
30,762 |
|
|
|
27,664 |
|
Other interest income |
|
|
2,288 |
|
|
|
1,476 |
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
103,070 |
|
|
|
103,887 |
|
|
|
106,175 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
37,445 |
|
|
|
30,255 |
|
|
|
24,624 |
|
Short-term borrowings |
|
|
571 |
|
|
|
377 |
|
|
|
284 |
|
Long-term borrowings |
|
|
3,860 |
|
|
|
4,035 |
|
|
|
4,132 |
|
Junior subordinated debentures |
|
|
1,728 |
|
|
|
1,728 |
|
|
|
1,728 |
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
43,604 |
|
|
|
36,395 |
|
|
|
30,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
59,466 |
|
|
|
67,492 |
|
|
|
75,407 |
|
|
(Credit) provision for loan losses |
|
|
(1,842 |
) |
|
|
28,532 |
|
|
|
19,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after (credit) provision for loan losses |
|
|
61,308 |
|
|
|
38,960 |
|
|
|
55,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposits |
|
|
11,504 |
|
|
|
11,586 |
|
|
|
11,987 |
|
ATM and debit card |
|
|
2,233 |
|
|
|
1,680 |
|
|
|
1,374 |
|
Financial services group fees and commissions |
|
|
1,890 |
|
|
|
2,687 |
|
|
|
2,518 |
|
Mortgage banking revenues |
|
|
1,194 |
|
|
|
1,597 |
|
|
|
2,147 |
|
Income from corporate owned life insurance |
|
|
521 |
|
|
|
90 |
|
|
|
30 |
|
Net gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
1,177 |
|
Net gain on sale and call of securities |
|
|
30 |
|
|
|
14 |
|
|
|
248 |
|
Net gain on sale of student loans held for sale |
|
|
670 |
|
|
|
245 |
|
|
|
|
|
Net gain on
sale of commercial-related loans held for sale |
|
|
82 |
|
|
|
9,369 |
|
|
|
|
|
Net (loss) gain on sale of premises and equipment |
|
|
(3 |
) |
|
|
(321 |
) |
|
|
2 |
|
Net gain (loss) on sale of other real estate and repossessed assets |
|
|
90 |
|
|
|
(9 |
) |
|
|
193 |
|
Net gain on sale of trust relationships |
|
|
1,386 |
|
|
|
|
|
|
|
|
|
Other |
|
|
2,314 |
|
|
|
2,446 |
|
|
|
2,473 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
|
21,911 |
|
|
|
29,384 |
|
|
|
22,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
33,563 |
|
|
|
34,763 |
|
|
|
34,468 |
|
Occupancy and equipment |
|
|
9,465 |
|
|
|
9,022 |
|
|
|
8,436 |
|
Supplies and postage |
|
|
1,945 |
|
|
|
2,173 |
|
|
|
2,319 |
|
Amortization of other intangible assets |
|
|
420 |
|
|
|
430 |
|
|
|
709 |
|
Computer and data processing |
|
|
1,903 |
|
|
|
1,930 |
|
|
|
1,780 |
|
Professional fees and services |
|
|
2,837 |
|
|
|
5,074 |
|
|
|
3,439 |
|
Other |
|
|
9,479 |
|
|
|
12,100 |
|
|
|
10,616 |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
59,612 |
|
|
|
65,492 |
|
|
|
61,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
23,607 |
|
|
|
2,852 |
|
|
|
16,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) from continuing operations |
|
|
6,245 |
|
|
|
(1,766 |
) |
|
|
3,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
17,362 |
|
|
|
4,618 |
|
|
|
12,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued subsidiary |
|
|
|
|
|
|
(340 |
) |
|
|
(599 |
) |
Loss on sale of discontinued subsidiary |
|
|
|
|
|
|
(1,071 |
) |
|
|
|
|
Income tax expense (benefit) |
|
|
|
|
|
|
1,041 |
|
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations |
|
|
|
|
|
|
(2,452 |
) |
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
17,362 |
|
|
$ |
2,166 |
|
|
$ |
12,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.40 |
|
|
$ |
0.28 |
|
|
$ |
1.02 |
|
Net income |
|
$ |
1.40 |
|
|
$ |
0.06 |
|
|
$ |
0.98 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
1.40 |
|
|
$ |
0.28 |
|
|
$ |
1.02 |
|
Net income |
|
$ |
1.40 |
|
|
$ |
0.06 |
|
|
$ |
0.98 |
|
See accompanying notes to consolidated financial statements.
54
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
3% |
|
|
8.48% |
|
|
|
|
|
|
Additional |
|
|
Comprehensive |
|
|
Total |
|
(Dollars in thousands, |
|
Preferred |
|
|
Preferred |
|
|
Common |
|
|
Paid in |
|
|
Retained |
|
|
Income |
|
|
Treasury |
|
|
Shareholders |
|
except per share amounts) |
|
Stock |
|
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
(Loss) |
|
|
Stock |
|
|
Equity |
|
|
Balance December 31, 2003 |
|
$ |
167 |
|
|
$ |
17,568 |
|
|
$ |
113 |
|
|
$ |
21,055 |
|
|
$ |
136,938 |
|
|
$ |
8,197 |
|
|
$ |
(935 |
) |
|
$ |
183,103 |
|
Purchase of 12 shares of 3% preferred stock |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
Purchase of 112 shares of 8.48% preferred stock |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12 |
) |
Purchase of 2,000 shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30 |
) |
|
|
(30 |
) |
Issue 2,266 shares of common stock directors plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
52 |
|
Issue 65,975 shares of common stock -
exercised stock options, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
667 |
|
|
|
|
|
|
|
|
|
|
|
464 |
|
|
|
1,131 |
|
Tax benefit from stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204 |
|
Issue 14,524 shares of common stock -
Burke Group, Inc. acquisition and earnout |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223 |
|
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
325 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,493 |
|
|
|
|
|
|
|
|
|
|
|
12,493 |
|
Net unrealized loss on securities available
for sale (net of tax of ($2,765)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,164 |
) |
|
|
|
|
|
|
(4,164 |
) |
Reclassification adjustment for net gains
included in net income (net of tax of $99) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(149 |
) |
|
|
|
|
|
|
(149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3% Preferred $3.00 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
8.48% Preferred $8.48 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,490 |
) |
|
|
|
|
|
|
|
|
|
|
(1,490 |
) |
Common $0.64 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,170 |
) |
|
|
|
|
|
|
|
|
|
|
(7,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2004 |
|
$ |
165 |
|
|
$ |
17,557 |
|
|
$ |
113 |
|
|
$ |
22,185 |
|
|
$ |
140,766 |
|
|
$ |
3,884 |
|
|
$ |
(383 |
) |
|
$ |
184,287 |
|
|
Purchase of 68 shares of 3% preferred stock |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Purchase of 824 shares of 8.48% preferred stock |
|
|
|
|
|
|
(82 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86 |
) |
Purchase of 6,000 shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(89 |
) |
|
|
(89 |
) |
Issue 3,140 shares of common stock directors plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
57 |
|
Issue 67,253 shares of common stock -
exercised stock options, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648 |
|
|
|
|
|
|
|
|
|
|
|
292 |
|
|
|
940 |
|
Tax benefit from stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129 |
|
Issue 20,406 shares of common stock -
Burke Group, Inc. contingent earnout |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282 |
|
|
|
|
|
|
|
|
|
|
|
143 |
|
|
|
425 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,166 |
|
|
|
|
|
|
|
|
|
|
|
2,166 |
|
Net unrealized loss on securities available
for sale (net of tax of ($6,670)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,053 |
) |
|
|
|
|
|
|
(10,053 |
) |
Reclassification adjustment for net gains
included in net income (net of tax of $5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,062 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,896 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3% Preferred $3.00 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
8.48% Preferred $8.48 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,483 |
) |
|
|
|
|
|
|
|
|
|
|
(1,483 |
) |
Common $0.40 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,519 |
) |
|
|
|
|
|
|
|
|
|
|
(4,519 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005 |
|
$ |
159 |
|
|
$ |
17,475 |
|
|
$ |
113 |
|
|
$ |
23,278 |
|
|
$ |
136,925 |
|
|
$ |
(6,178 |
) |
|
$ |
(15 |
) |
|
$ |
171,757 |
|
|
Purchase of 108 shares of 8.48% preferred stock |
|
|
|
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
Purchase of 20,351 shares of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(335 |
) |
|
|
(335 |
) |
Issue 5,693 shares of common stock directors retainer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
84 |
|
|
|
112 |
|
Issue 10,355 shares of common stock -
exercised stock options, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173 |
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
196 |
|
Excess tax benefit from stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Issue 13,200 shares of common stock -
restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131 |
|
|
|
(261 |
) |
|
|
|
|
|
|
130 |
|
|
|
|
|
Amortization of unvested stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
821 |
|
Amortization of unvested restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
44 |
|
Defined benefit pension plan adjustment for SFAS 158: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost (net of tax of ($1,087)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,704 |
) |
|
|
|
|
|
|
(1,704 |
) |
Net loss (net of tax of ($70)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110 |
) |
|
|
|
|
|
|
(110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net adjustment for defined benefit pension plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement benefit plan adjustment for SFAS 158: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service benefit (net of tax of $287) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450 |
|
|
|
|
|
|
|
450 |
|
Net loss (net of tax of ($153)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net adjustment for postretirement benefit plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,362 |
|
|
|
|
|
|
|
|
|
|
|
17,362 |
|
Net unrealized loss on securities available
for sale (net of tax of ($229)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(604 |
) |
|
|
|
|
|
|
(604 |
) |
Reclassification adjustment for net gains
included in net income (net of tax of ($12)) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3% Preferred $3.00 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
8.48% Preferred $8.48 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,481 |
) |
|
|
|
|
|
|
|
|
|
|
(1,481 |
) |
Common $0.34 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,854 |
) |
|
|
|
|
|
|
|
|
|
|
(3,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006 |
|
$ |
159 |
|
|
$ |
17,464 |
|
|
$ |
113 |
|
|
$ |
24,439 |
|
|
$ |
148,730 |
|
|
$ |
(8,404 |
) |
|
$ |
(113 |
) |
|
$ |
182,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2006, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,362 |
|
|
$ |
2,166 |
|
|
$ |
12,493 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,125 |
|
|
|
4,388 |
|
|
|
4,421 |
|
Net amortization of premiums and discounts on securities |
|
|
644 |
|
|
|
874 |
|
|
|
1,801 |
|
(Credit) provision for loan losses |
|
|
(1,842 |
) |
|
|
28,532 |
|
|
|
19,676 |
|
Amortization of unvested stock options |
|
|
821 |
|
|
|
|
|
|
|
|
|
Amortization of unvested restricted stock awards |
|
|
44 |
|
|
|
|
|
|
|
|
|
Tax benefit from stock options exercised |
|
|
22 |
|
|
|
129 |
|
|
|
204 |
|
Deferred income tax expense (benefit) |
|
|
63 |
|
|
|
7,702 |
|
|
|
(4,477 |
) |
Proceeds from sale of loans held for sale |
|
|
69,451 |
|
|
|
86,258 |
|
|
|
66,451 |
|
Originations of loans held for sale |
|
|
(68,793 |
) |
|
|
(84,287 |
) |
|
|
(64,218 |
) |
Net gain on sale of securities |
|
|
(30 |
) |
|
|
(14 |
) |
|
|
(248 |
) |
Net gain on sale of loans held for sale |
|
|
(973 |
) |
|
|
(776 |
) |
|
|
(910 |
) |
Net gain on sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
(1,177 |
) |
Net gain on
sale of commercial-related loans held for sale |
|
|
(82 |
) |
|
|
(9,369 |
) |
|
|
|
|
Net (gain) loss on sale and disposal of other assets |
|
|
(87 |
) |
|
|
339 |
|
|
|
(195 |
) |
Loss on sale of discontinued subsidiary |
|
|
|
|
|
|
1,071 |
|
|
|
|
|
Minority interest in net income of subsidiaries |
|
|
|
|
|
|
54 |
|
|
|
26 |
|
Net gain on sale of trust relationships |
|
|
(1,386 |
) |
|
|
|
|
|
|
|
|
Decrease in other assets |
|
|
8,538 |
|
|
|
9,279 |
|
|
|
4,782 |
|
Increase (decrease) in other liabilities |
|
|
2,325 |
|
|
|
(1,247 |
) |
|
|
2,943 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
30,202 |
|
|
|
45,099 |
|
|
|
41,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
(66,769 |
) |
|
|
(260,291 |
) |
|
|
(353,567 |
) |
Held to maturity |
|
|
(32,524 |
) |
|
|
(27,382 |
) |
|
|
(30,828 |
) |
Proceeds from maturity, call and principal pay-down of securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
119,305 |
|
|
|
176,604 |
|
|
|
181,707 |
|
Held to maturity |
|
|
34,724 |
|
|
|
24,091 |
|
|
|
38,603 |
|
Proceeds from sale of securities available for sale |
|
|
1,699 |
|
|
|
2,445 |
|
|
|
40,930 |
|
Net loan pay-downs |
|
|
61,996 |
|
|
|
70,511 |
|
|
|
68,833 |
|
Net proceeds from sale of credit card portfolio |
|
|
|
|
|
|
|
|
|
|
5,703 |
|
Net proceeds
from sale of commercial-related loans |
|
|
659 |
|
|
|
140,453 |
|
|
|
|
|
Net proceeds from sale of discontinued subsidiary |
|
|
|
|
|
|
4,538 |
|
|
|
|
|
Proceeds from sales of other assets |
|
|
1,847 |
|
|
|
59 |
|
|
|
103 |
|
Proceeds from sales of trust relationships |
|
|
1,386 |
|
|
|
|
|
|
|
|
|
Purchase of premises and equipment |
|
|
(1,871 |
) |
|
|
(4,843 |
) |
|
|
(5,947 |
) |
Purchase of bank subsidiary minority interest |
|
|
|
|
|
|
(212 |
) |
|
|
|
|
Proceeds from sale of equity investment in Mercantile Adjustment Bureau |
|
|
|
|
|
|
|
|
|
|
2,400 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
120,452 |
|
|
|
125,973 |
|
|
|
(52,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in deposits |
|
|
(99,566 |
) |
|
|
(101,689 |
) |
|
|
58 |
|
Net increase (decrease) in short-term borrowings |
|
|
12,204 |
|
|
|
(8,448 |
) |
|
|
5,029 |
|
Repayment of long-term borrowings |
|
|
(40,204 |
) |
|
|
(8,967 |
) |
|
|
(26,640 |
) |
Purchase of preferred and common shares |
|
|
(346 |
) |
|
|
(178 |
) |
|
|
(43 |
) |
Issuance of common shares |
|
|
112 |
|
|
|
57 |
|
|
|
52 |
|
Stock options exercised |
|
|
196 |
|
|
|
940 |
|
|
|
1,131 |
|
Excess tax benefit from stock options exercised |
|
|
8 |
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(5,226 |
) |
|
|
(6,902 |
) |
|
|
(8,652 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(132,822 |
) |
|
|
(125,187 |
) |
|
|
(29,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
17,832 |
|
|
|
45,885 |
|
|
|
(39,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of the year |
|
|
91,940 |
|
|
|
46,055 |
|
|
|
85,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year |
|
$ |
109,772 |
|
|
$ |
91,940 |
|
|
$ |
46,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
42,438 |
|
|
$ |
35,178 |
|
|
$ |
29,398 |
|
Income taxes paid |
|
|
4,051 |
|
|
|
|
|
|
|
6,553 |
|
Income taxes received |
|
|
(6,300 |
) |
|
|
|
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in purchase acquisitions/earnouts |
|
$ |
|
|
|
$ |
425 |
|
|
$ |
325 |
|
Net transfer of loans to/from held for sale at estimated fair value |
|
|
|
|
|
|
131,658 |
|
|
|
|
|
Real estate and other assets acquired in settlement of loans |
|
|
2,502 |
|
|
|
1,833 |
|
|
|
3,082 |
|
See accompanying notes to consolidated financial statements.
56
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Basis of Presentation
Financial Institutions, Inc. (FII), a bank holding company organized under the laws of New York
State, and its subsidiaries (collectively the Company) provide deposit, lending and other
financial services to individuals and businesses in Central and Western New York State. The
Company is subject to regulation by certain federal and state agencies.
The Company for many years operated under a decentralized, Super Community Bank business model,
with separate and largely autonomous subsidiary banks whose Boards and management had the authority
to operate within guidelines set forth in broad corporate policies established at the holding
company level. During 2005, FIIs Board of Directors implemented changes to the Companys business
model and governance structure. Effective December 3, 2005, the Company merged three of its bank
subsidiaries, Wyoming County Bank (100% owned) (WCB), National Bank of Geneva (100% owned)
(NBG) and Bath National Bank (100% owned) (BNB) into its New York State-chartered bank
subsidiary, First Tier Bank & Trust (100% owned) (FTB), which was then renamed Five Star Bank
(FSB or the Bank). The merger was accounted for at historical cost as a combination of
entities under common control.
FII formerly qualified as a financial holding company under the Gramm-Leach-Bliley Act, which
allowed expansion of business operations to include financial services subsidiaries, namely, Five
Star Investment Services, Inc. (100% owned) (FSIS) (formerly known as The FI Group, Inc.
(FIGI)) and the Burke Group, Inc. (formerly 100% owned) (BGI), collectively referred to as the
Financial Services Group (FSG). FSIS is a brokerage subsidiary that commenced operations as a
start-up company in March 2000. BGI, an employee benefits and compensation consulting firm, was
acquired by the Company in October 2001. During 2005, the Company sold the stock of BGI and its
results have been reported separately as a discontinued operation in the consolidated statements of
income for all periods presented in these financial statements. Since the sale of BGI occurred
during 2005, there are no assets or liabilities associated with the discontinued operation recorded
at December 31, 2006 and 2005. BGIs cash flows are shown in the consolidated statements of cash
flows by activity (operating, investing and financing) consistent with the applicable source of
cash flow.
During 2003, FII terminated its financial holding company status and now operates as a bank holding
company. The change in status did not affect the non-financial subsidiaries or activities being
conducted by the Company, although future acquisitions or expansions of non-financial activities
may require prior Federal Reserve Board (FRB) approval and will be limited to those that are
permissible for bank holding companies.
In February 2001, the Company formed FISI Statutory Trust I (100% owned) (the Trust) and
capitalized the entity with a $502,000 investment in the Trusts common securities. The Trust was
formed to facilitate the private placement of $16.2 million in capital securities (trust preferred
securities). Effective December 31, 2003, the provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 46, Consolidation of Variable Interest Entities, resulted in the
deconsolidation of the Trust. The deconsolidation resulted in the derecognition of the $16.2
million in trust preferred securities and the recognition of $16.7 million in junior subordinated
debentures and a $502,000 investment in the trust recorded in other assets in the Companys
consolidated statements of financial position.
The consolidated financial information included herein combines the results of operations, the
assets, liabilities and shareholders equity of FII and its subsidiaries. All significant
inter-company transactions and balances have been eliminated in consolidation.
The consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America and prevailing practices in the banking
industry. In preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities, and the reported revenues and expenses for the period. Actual results
could differ from those estimates. A material estimate that is particularly
57
susceptible to near-term change is the allowance for loan losses, which is discussed in further
detail later in this note.
Certain amounts in the prior years consolidated financial statements are reclassified when
necessary to conform to the current years presentation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and due from banks, federal funds
sold and interest-bearing deposits in other banks are considered cash and cash equivalents.
Securities
The Company classifies its securities as either available for sale or held to maturity at the time
of purchase. Securities that the Company has the ability and intent to hold to maturity, are
carried at amortized cost and classified as held to maturity. Securities classified as available
for sale are carried at estimated fair value. Unrealized gains or losses related to securities
available for sale are included in accumulated other comprehensive income (loss), a component of
shareholders equity, net of the related deferred income tax effect.
A decline in the fair value of any security below cost that is deemed other-than-temporary is
charged to income resulting in the establishment of a new cost basis for the security. Interest
income includes interest earned on the securities adjusted for amortization of premiums and
accretion of discounts on the related securities using the interest method. Realized gains or
losses from the sale of available for sale securities are recognized on the trade date using the
specific identification method.
The Company classifies securities in the following categories:
|
|
|
U.S. treasury securities; |
|
|
|
|
U.S. government agency securities; |
|
|
|
|
U.S. government-sponsored enterprise (GSE) securities; |
|
|
|
|
Mortgage-backed pass-through securities (MBS), collateralized mortgage obligations
(CMO) and other asset-backed securities (ABS); |
|
|
|
|
State and municipal obligations; |
|
|
|
|
Corporate bonds and other; and |
|
|
|
|
Equity securities |
Loans Held for Sale and Mortgage Banking Activities
Loans held for sale are recorded at the lower of aggregated cost or fair value, by category. If
necessary, a valuation allowance is recorded by a charge to income for unrealized losses
attributable to changes in market interest rates. Subsequent increases in fair value are adjusted
through the valuation allowance, but only to the extent of the valuation allowance. Gains and
losses on the disposition of loans held for sale are determined on the specific identification
method. Loan servicing fees are recognized on an accrual basis.
The Company originates and sells certain residential real estate loans in the secondary market.
The Company typically retains the right to service the mortgages upon sale. The Company makes the
determination of whether or not to identify the mortgage as a loan held for sale at the time the
application is received from the borrower based on the Companys intent and ability to hold the
loan.
Capitalized mortgage servicing rights are recorded at their fair value at the time a loan is sold
and servicing rights are retained. Capitalized mortgage servicing rights are reported in other
assets in the consolidated statements of financial position and are amortized to noninterest income
in the consolidated statements of income in proportion to and over the period of estimated net
servicing income. The Company uses a valuation model that calculates the present value of future
cash flows to determine the fair value of servicing rights. In using this valuation method, the
Company incorporates assumptions that market participants would use in estimating future net
servicing
58
income, which include estimates of the cost to service the loan, the discount rate, an inflation
rate and prepayment speeds. The carrying value of originated mortgage servicing rights is
periodically evaluated for impairment. Impairment is determined by stratifying rights by
predominant risk characteristics, such as interest rates and terms, using discounted cash flows and
market-based assumptions. Impairment is recognized through a valuation allowance, to the extent
that fair value is less than the capitalized asset. Subsequent increases in fair value are
adjusted through the valuation allowance, but only to the extent of the valuation allowance.
The Company also extends rate lock commitments to borrowers related to the origination of
residential mortgage loans. To mitigate the interest rate risk inherent in these rate lock
commitments, as well as closed mortgage loans held for sale, the Company enters into forward
commitments to sell individual mortgage loans. Rate lock and forward commitments are considered
derivatives and are recorded at fair value in accordance with SFAS No. 133. The mortgage forward
sale commitments are with U.S. government agencies or government-sponsored enterprises, namely
Federal Home Loan Mortgage Corporation (FHLMC), State of New York Mortgage Agency (SONYMA) and
Federal Housing Agency (FHA).
Mortgage banking activities (a component of noninterest income in the consolidated statements of
income) consist of fees earned for servicing mortgage loans sold to third parties, net gains (or
net losses) recognized on sales of residential real state loans, and amortization and impairment
losses recognized on capitalized mortgage servicing assets.
The Company also originates student loans and has a forward commitment to sell the student loans to
a third-party at a fixed premium on the day of origination. The Company does not retain the right
to service the loans upon sale.
During 2005, the Company decided to sell a substantial amount of commercial-related problem loans.
The Company transferred the commercial-related loans to held for sale at the estimated fair value
less costs to sell, which resulted in commercial-related charge-offs being recorded. The majority
of the commercial-related loans held for sale were sold or settled during 2005 resulting in a net
gain.
Loans
Loans are stated at the principal amount outstanding, net of unearned income and deferred loan
origination fees and costs, which are accreted or amortized to interest income based on the
interest method. Interest income on loans is recognized based on loan principal amounts
outstanding at applicable interest rates. Accrual of interest on loans is suspended and all unpaid
accrued interest is reversed when management believes that reasonable doubt exists with respect to
the collectibility of principal or interest.
Loans, including impaired loans, are generally classified as nonaccruing if they are past due as to
maturity or payment of principal or interest for a period of more than 90 days (120 days for
consumer loans), unless such loans are well-collateralized and in the process of collection. Loans
that are on a current payment status or past due less than 90 days may also be classified as
nonaccruing if repayment in full of principal and/or interest is uncertain.
Loans may be returned to accrual status when all principal and interest amounts contractually due
(including arrearages) are reasonably assured of repayment and there is a sustained period of
repayment performance (generally a minimum of six months) in accordance with the contractual terms
of the loan.
While a loan is classified as nonaccruing, payments received are generally used to reduce the
principal balance. When the future collectibility of the recorded loan balance is expected,
interest income may be recognized on a cash basis. In the case where a nonaccruing loan had been
partially charged-off, recognition of interest on a cash basis is limited to that which would have
been recognized on the recorded loan balance at the contractual interest rate. Interest
collections in excess of that amount are recorded as recoveries to the allowance for loan losses
until prior charge-offs have been fully recovered.
A loan is considered impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts of principal and interest under the original terms
of the agreement or the loan is restructured in a troubled debt restructuring. Accordingly, the
Company evaluates impaired commercial and agricultural loans individually based on the present
value of future cash flows discounted at the loans effective
59
interest rate, or at the loans observable market price or the net realizable value of the
collateral if the loan is collateral dependent. The majority of the Companys loans are secured.
Allowance for Loan Losses
The allowance for loan losses is established through charges to earnings in the form of a provision
for loan losses. When a loan or portion of a loan is determined to be uncollectible, the portion
deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are
credited to the allowance.
The Company periodically evaluates the allowance for loan losses in order to maintain the allowance
at a level that represents managements estimate of probable losses in the loan portfolio at the
balance sheet date. Managements evaluation of the allowance is based on a continuing review of
the loan portfolio.
For larger
balance commercial-related loans, the Company conducts a periodic assessment on a
loan-by-loan basis of losses, when it is deemed probable, based upon known facts and circumstances,
that full contractual interest and principal on an individual loan will not be collected in
accordance with its contractual terms, and the loan is considered impaired. An impairment reserve
is established based upon the present value of expected future cash flows, discounted at the loans
original effective interest rate, or as a practical expedient, at the loans observable market
price or the fair value of the collateral if the loan is collateral dependent. Generally, impaired
loans include loans in nonaccruing status, loans that have been assigned a specific allowance for
credit losses, loans that have been partially charged off, and loans designated as a troubled debt
restructuring. Problem commercial loans are assigned risk ratings under the
allowance for credit losses methodology.
The
allowance for loan losses for smaller balance homogeneous loans are estimated based on historical charge-off experience, levels
and trends of delinquent and nonaccruing loans, trends in volume and terms, effects of changes in
lending policy, the experience, ability and depth of management, national and local economic trends
and conditions, and concentrations of credit risk.
The unallocated portion of the allowance for loan losses is based on managements consideration of
such elements as risks associated with variances in the rate of historical loss experiences,
information risks associated with the dependence upon timely and accurate risk ratings on loans,
and risks associated with the dependence on collateral valuation techniques.
While management evaluates currently available information in establishing the allowance for loan
losses, future adjustments to the allowance may be necessary if conditions differ substantially
from the assumptions used in making the evaluations. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review a financial institutions
allowance for loan losses. Such agencies may require the financial institution to recognize
additions to the allowance based on their judgments about information available to them at the time
of their examination.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization.
Depreciation is computed on the straight-line method over the estimated useful lives of the assets.
The Company generally amortizes buildings and building improvements over a period of 15 to 39
years and furniture and equipment over a period of 3 to 10 years. Leasehold improvements are
amortized over the shorter of the lease term or the useful life of the improvements. Premises and
equipment are periodically reviewed for impairment or when circumstances present indicators of
impairment.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in
accordance with the purchase method of accounting for business combinations. Goodwill is not being
amortized, but is required to be tested for impairment annually and if an event occurs or
circumstances change that would make it more likely than not to reduce the fair value of a
reporting unit below its carrying value. Other intangible assets are being amortized on the
straight-line method, over the expected periods to be benefited. Other intangible assets are
periodically reviewed for impairment or when events or changed circumstances may affect the
underlying basis of the assets.
60
Other Real Estate Owned
Other real estate owned consists of properties formerly pledged as collateral to loans, which have
been acquired by the Company through foreclosure proceedings or acceptance of a deed in lieu of
foreclosure. Upon transfer of a loan to foreclosure status, an appraisal is obtained and any
difference of the loan balance over the fair value, less estimated costs to sell, is recorded
against the allowance for loan losses. Other real estate owned is subsequently recorded at the
lower of cost or fair value, less estimated costs to sell. Expenses and subsequent adjustments to
the fair value are treated as other noninterest expense in the consolidated statements of income.
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) Stock
The non-marketable investments in FHLB and FRB stock are included in other assets in the
consolidated statements of financial condition at par value or cost and are periodically reviewed
for impairment. The dividends received relative to these investments are included in other
noninterest income in the consolidated statements of income.
As a member of the FHLB system, the Company is required to maintain a specified investment in FHLB
stock in proportion to the volume of certain transactions with the FHLB. FHLB stock totaled $3.6
million and $4.4 million at December 31, 2006 and 2005, respectively.
As a member of the FRB system, the Company is required to maintain a specified investment in FRB
stock based on a ratio relative to the Companys capital. FRB stock totaled $2.8 million and $2.7
million at December 31, 2006 and 2005, respectively.
Equity Method Investments
During 2002, the Company made a $2.4 million cash investment to acquire a 50% interest in
Mercantile Adjustment Bureau, LLC, a full-service accounts receivable management firm located in
Rochester, New York. The Company accounted for this investment using the equity method. During
2004, the Company sold its 50% interest in Mercantile Adjustment Bureau, LLC. As part of the
transaction, the Company accepted a $300,000 term note and received $2.4 million in cash. The
entire unpaid principal and interest on the term note is due and payable in June 2009.
The Company also has investments in limited partnerships and accounts for these investments under
the equity method. These investments are included in other assets in the consolidated statements
of financial position and totaled $1.9 million and $1.7 million at December 31, 2006 and 2005,
respectively.
Securities Sold Under Repurchase Agreements
Securities sold under repurchase agreements (repurchase agreements) are agreements in which the
Company transfers the underlying securities to a third-party custodians account that explicitly
recognizes the Companys interest in the securities. The repurchase agreements are accounted for
as secured financing transactions provided the Company maintains effective control over the
transferred securities and meets other criteria as specified in Statement of Financial Accounting
Standard (SFAS) No. 140. The Companys repurchase agreements are accounted for as secured
financings; accordingly, the transaction proceeds are reflected as liabilities and the securities
underlying the repurchase agreements continue to be carried in the Companys securities portfolio.
61
Retirement and Postretirement Benefit Plans
The defined benefit pension plan and defined contribution profit sharing (401(k)) plan benefits are
expensed as applicable employees earn benefits. The recognition of defined benefit pension plan
and postretirement plan expense is significantly impacted by estimates made by management such as
discount rates used to value certain liabilities and expected return on assets. The Company uses
third-party specialists to assist management in appropriately measuring the expense associated with
the defined benefit pension and postretirement benefit plans.
Effective December 31, 2006, the Company adopted certain provisions of SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires the Company to recognize the
over-funded status (asset) or under-funded status (liability) of its defined benefit pension and
postretirement benefit plans on its consolidated statements of financial position as an adjustment
to accumulated other comprehensive income (loss).
Stock Compensation Plans
Prior to January 1, 2006, the Company accounted for stock-based compensation under the recognition
and measurement provisions of Accounting Principles Board (APB) No. 25, Accounting for Stock
Issued to Employees as permitted by SFAS No. 123, Accounting for Stock-Based Compensation.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No.
123(R), Share-Based Payment using the modified-prospective transition method. Under that
transition method, compensation cost recognized in 2006 included compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006, and those granted
subsequent to January 1, 2006, based on the grant-date fair value estimate in accordance with the
provisions of SFAS No. 123(R).
The following table illustrates the effect on net earnings and earnings per share as if the Company
had applied the fair value recognition provision of SFAS No. 123 to stock-based compensation during
the years ended December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share amounts) |
|
2005 |
|
|
2004 |
|
|
Reported net income |
|
$ |
2,166 |
|
|
$ |
12,493 |
|
|
|
|
|
|
|
|
|
|
Less: Total stock-based compensation expense
determined under fair value based method for
all awards, net of related tax effects (1) |
|
|
348 |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
|
1,818 |
|
|
|
12,186 |
|
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends |
|
|
1,488 |
|
|
|
1,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available to common shareholders |
|
$ |
330 |
|
|
$ |
10,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share: |
|
|
|
|
|
|
|
|
Reported |
|
$ |
0.06 |
|
|
$ |
0.98 |
|
Pro forma |
|
|
0.03 |
|
|
|
0.96 |
|
|
|
|
|
|
|
|
|
|
Diluted income per share: |
|
|
|
|
|
|
|
|
Reported |
|
$ |
0.06 |
|
|
$ |
0.98 |
|
Pro forma |
|
|
0.03 |
|
|
|
0.95 |
|
(1) |
|
For purposes of this pro forma disclosure, the value of the stock-based compensation is
amortized to expense on a straight-line basis over the vesting periods. |
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and the
respective tax bases. Deferred tax assets and liabilities
62
are measured using enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date. Net
deferred tax assets are periodically evaluated to determine if a valuation allowance is required.
Financial Instruments With Off-Balance Sheet Risk
The Companys financial instruments with off-balance sheet risk are commercial stand-by letters of
credit and mortgage, home equity and commercial loan commitments. These financial instruments are
reflected in the statements of financial condition upon funding.
Financial Services Group (FSG) Fees and Commissions
FSG fees and commissions are derived from sales of investment products and services to customers
and from trust services provided to customers prior to the sale of the trust relationships during
the third quarter of 2006. Fees and commissions are recorded on the accrual basis of accounting.
Assets held in fiduciary or agency capacities for customers were not included in the accompanying
consolidated statements of financial condition, since such items are not assets of the Company.
Segment Information
In accordance with the provisions of SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, the Companys primary reportable segment is its subsidiary bank, Five Star
Bank (FSB). During 2005, the Company completed a strategic realignment, which involved the
merger of its subsidiary banks into a single state-chartered bank, FSB. FSG was also deemed a
reportable segment in prior years, as the Company evaluated the performance of this line of
business separately. However, with the sale of BGI during 2005, the FSG segment no longer meets
the thresholds included in SFAS No. 131 for separation.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment, which revised SFAS No.
123 and superseded APB Opinion No. 25. SFAS No. 123(R) requires companies to recognize in the
income statement, over the requisite service period, the estimated grant-date fair value of stock
options and other equity-based compensation issued to employees and directors using option pricing
models, which eliminates the ability to account for stock options under the intrinsic value method
prescribed by APB Opinion No. 25 and allowed under the original provisions of SFAS No. 123. The
Company adopted this statement effective January 1, 2006 and chose to apply the
modified-prospective transition method. Accordingly, awards granted, modified or settled after
January 1, 2006 are accounted for in accordance with SFAS No. 123(R) and any unvested equity awards
granted prior to that date are recognized in the consolidated statements of income as service is
rendered based on their grant-date fair value calculated in accordance with SFAS No. 123. The
disclosures required by SFAS No. 123(R) are included in Note 14 and the pro forma expense
disclosures for the years ended December 31, 2005 and 2004 are disclosed in the Stock Compensation
Plans section of Note 1.
In November 2005, the FASB issued Staff Position No. FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments (the FSP). The FSP
addresses the determination of when an investment is considered impaired; whether the impairment is
other-than-temporary; and how to measure an impairment loss. The FSP also addresses accounting
considerations subsequent to the recognition of an other-than-temporary impairment on a debt
security, and requires certain disclosures about unrealized losses that have not been recognized as
other-than-temporary impairments. The FSP replaces the impairment guidance in Emerging Issues Task
Force (EITF) Issue No. 03-1 with references to existing authoritative literature concerning
other-than-temporary determinations (principally SFAS No. 115 and Securities and Exchange
Commission (SEC) Staff Accounting Bulletin 59). Under the FSP, impairment losses must be
recognized in earnings equal to the entire difference between the securitys cost and its fair
value at the financial statement date, without considering partial recoveries subsequent to that
date. The FSP requires that an investor recognize an other-than-temporary impairment loss when it
determines that an impaired security will not fully recover prior to the expected time of sale or
maturity. The Company adopted the FSP effective January 1, 2006
63
and
adoption did not have an effect on its consolidated financial position, consolidated
results of operations, or liquidity.
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments. SFAS No. 155 amends SFAS No. 133 and SFAS
No. 140, and improves the financial reporting of certain hybrid financial instruments by requiring
more consistent accounting that eliminates exemptions and provides a means to simplify the
accounting for these instruments. Specifically, SFAS No. 155 allows financial instruments that
have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the
derivative from its host) if the holder elects to account for the whole instrument on a fair value
basis. SFAS No. 155 is effective for all financial instruments acquired or issued in fiscal years
beginning after September 15, 2006. The Company plans to adopt this statement effective January 1,
2007 and does not expect adoption to have a material effect on its consolidated financial position,
consolidated results of operations, or liquidity.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an
amendment of SFAS No. 140, which requires that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable and permits the entities
to elect either fair value measurement with changes in fair value reflected in earnings or the
amortization and impairment requirements of SFAS No. 140 for subsequent measurement. SFAS No. 156
is effective for fiscal years beginning after September 15, 2006. Earlier adoption is permitted as
of the beginning of an entitys fiscal year, provided the entity has not yet issued financial
statements, including interim financial statements for any period of that fiscal year. The Company
did not elect for early adoption and plans to adopt this statement effective January 1, 2007 and
does not expect adoption to have a material effect on its consolidated financial position,
consolidated results of operations, or liquidity.
In June 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 prescribes a recognition threshold
and measurement attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return, and also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company plans to adopt
this statement effective January 1, 2007 and does not expect adoption to have a material effect on
its consolidated financial position, consolidated results of operations, or liquidity.
In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements. SAB No. 108 addresses how the effects of uncorrected misstatements should be
considered when quantifying misstatements in current year financial statements. SAB No. 108
requires companies to quantify misstatements using a balance sheet and income statement approach
and to evaluate whether either approach results in quantifying an error that is material in light
of relevant quantitative and qualitative factors. SAB No. 108 is effective for the Companys
fiscal year ended December 31, 2006 and application did not have an effect on consolidated
financial position, consolidated results of operations, or liquidity.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value under generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that
fair value is a market-based measurement, not an entity-specific measurement, and states that a
fair value measurement should be determined based on assumptions that market participants would use
in pricing the asset or liability. The Company is required to adopt SFAS No. 157 for fiscal years
beginning after November 15, 2007. The Company plans to adopt this statement on January 1, 2008
and is currently assessing the impact that the adoption will have on its consolidated financial
position, consolidated results of operations, or liquidity.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106, and
132(R). SFAS No. 158 requires companies to recognize the over-funded or under-funded status of a
defined benefit postretirement plan (other than a multi-employer plan) as an asset or liability in
its balance sheet and to recognize changes in that funded status in the year in which the changes
occur through comprehensive income. The Company adopted this provision of SFAS No. 158 for the
year ended December 31, 2006 and the required disclosures are included in
64
Note 13. SFAS No. 158 also requires companies to measure the funded status of a plan as of the
date of the companys fiscal year-end, with limited exceptions. The Company is required and plans
to adopt this provision for the fiscal year ending December 31, 2008 and does not expect adoption
to have a material effect on its consolidated financial position, consolidated results of
operations, or liquidity.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS No. 159 allows
entities to irrevocably elect fair value as the initial and subsequent measurement attribute for
certain financial assets and financial liabilities that are not otherwise required to be measured
at fair value, with changes in fair value recognized in earnings as they occur. SFAS No. 159 also
requires entities to report those financial assets and financial liabilities measured at fair value
in a manner that separates those reported fair values from the carrying amounts of similar assets
and liabilities measured using another measurement attribute on the face of the statement of
financial position. Lastly, SFAS No. 159 establishes presentation and disclosure requirements
designed to improve comparability between entities that elect different measurement attributes for
similar assets and liabilities. The Company is required to adopt SFAS No. 159 for fiscal years
beginning after November 15, 2007, with early adoption permitted if an entity also early adopts the
provisions of SFAS No. 157. The Company plans to adopt this statement on January 1, 2008 and is
currently assessing the impact the adoption will have on its consolidated financial position,
consolidated results of operations, or liquidity.
(2) Discontinued Operation
In 2005, the Company decided to dispose of its BGI subsidiary. The results of BGI have been
reported separately as a discontinued operation in the consolidated statements of income.
As a result, the Company recorded a loss from operations of the discontinued subsidiary of
$340,000, a loss on the sale of BGI of $1.1 million and income tax expense associated with
discontinued operations of $1.0 million for the year ended December 31, 2005. Since the sale
occurred during 2005, there are no assets or liabilities associated with the discontinued operation
recorded in the consolidated statements of financial condition at December 31, 2006 and 2005. Cash
flows from BGI are shown in the consolidated statements of cash flows by activity (operating,
investing and financing) consistent with the applicable source of the cash flow.
(3) Securities
The aggregate amortized cost and fair value of securities available for sale and held to maturity
are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE |
|
$ |
235,724 |
|
|
$ |
59 |
|
|
$ |
3,987 |
|
|
$ |
231,796 |
|
MBS, CMO and ABS |
|
|
308,141 |
|
|
|
106 |
|
|
|
8,204 |
|
|
|
300,043 |
|
State and municipal obligations |
|
|
198,428 |
|
|
|
1,272 |
|
|
|
1,390 |
|
|
|
198,310 |
|
Corporate bonds and other |
|
|
3,913 |
|
|
|
|
|
|
|
1 |
|
|
|
3,912 |
|
Equity securities |
|
|
80 |
|
|
|
1,007 |
|
|
|
|
|
|
|
1,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
746,286 |
|
|
$ |
2,444 |
|
|
$ |
13,582 |
|
|
$ |
735,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal obligations |
|
$ |
40,388 |
|
|
$ |
157 |
|
|
$ |
124 |
|
|
$ |
40,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity |
|
$ |
40,388 |
|
|
$ |
157 |
|
|
$ |
124 |
|
|
$ |
40,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2005 |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE |
|
$ |
256,827 |
|
|
$ |
122 |
|
|
$ |
5,014 |
|
|
$ |
251,935 |
|
MBS, CMO and ABS |
|
|
324,399 |
|
|
|
297 |
|
|
|
7,069 |
|
|
|
317,627 |
|
State and municipal obligations |
|
|
219,824 |
|
|
|
2,179 |
|
|
|
1,743 |
|
|
|
220,260 |
|
Equity securities |
|
|
81 |
|
|
|
952 |
|
|
|
|
|
|
|
1,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
$ |
801,131 |
|
|
$ |
3,550 |
|
|
$ |
13,826 |
|
|
$ |
790,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal obligations |
|
$ |
42,593 |
|
|
$ |
479 |
|
|
$ |
174 |
|
|
$ |
42,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities held to maturity |
|
$ |
42,593 |
|
|
$ |
479 |
|
|
$ |
174 |
|
|
$ |
42,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividends on securities totaled $32.8 million, $30.8 million and $27.7 million
for the years ended December 31, 2006, 2005 and 2004, respectively. Taxable interest and dividend
income totaled $23.9 million, $22.2 million and $19.4 million for the years ended December 31,
2006, 2005 and 2004, respectively. Non-taxable interest and dividend income totaled $8.9 million,
$8.6 million and $8.3 million for the years ended December 31, 2006, 2005 and 2004, respectively.
The amortized cost and fair value of debt securities by contractual maturity follow at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
|
Available for Sale |
|
|
Held to Maturity |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
|
Due in one year or less |
|
$ |
97,157 |
|
|
$ |
96,778 |
|
|
$ |
30,440 |
|
|
$ |
30,387 |
|
Due in one to five years |
|
|
342,134 |
|
|
|
336,434 |
|
|
|
6,832 |
|
|
|
6,838 |
|
Due in five to ten years |
|
|
117,563 |
|
|
|
115,208 |
|
|
|
2,198 |
|
|
|
2,250 |
|
Due after ten years |
|
|
189,352 |
|
|
|
185,641 |
|
|
|
918 |
|
|
|
946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
746,206 |
|
|
$ |
734,061 |
|
|
$ |
40,388 |
|
|
$ |
40,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities of MBS, CMO and ABS are classified in accordance with the contractual repayment
schedules, however actual maturities may differ from contractual maturities for these types of
securities since issuers generally have the right to prepay obligations.
During 2006, proceeds from sale of securities available for sale were $1.7 million, realized gross
gains were $30,000 and there were no gross losses. During 2005, proceeds from sale of securities
available for sale were $2.4 million, realized gross gains were $14,000 and there were no gross
losses. During 2004, proceeds from sale of securities available for sale were $40.9 million,
realized gross gains were $248,000 and there were no gross losses.
Securities held to maturity and available for sale with carrying values of $544.8 million and
$560.8 million were pledged as collateral for municipal deposits and repurchase agreements at
December 31, 2006 and 2005, respectively.
Information on temporarily impaired securities segregated according to the period of time such
securities were in a continuous unrealized loss position, is summarized as follows at December 31:
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE |
|
$ |
5,231 |
|
|
$ |
36 |
|
|
$ |
223,565 |
|
|
$ |
3,951 |
|
|
$ |
228,796 |
|
|
$ |
3,987 |
|
MBS, CMO and ABS |
|
|
45,967 |
|
|
|
627 |
|
|
|
233,972 |
|
|
|
7,577 |
|
|
|
279,939 |
|
|
|
8,204 |
|
State and municipal obligations |
|
|
15,004 |
|
|
|
38 |
|
|
|
89,258 |
|
|
|
1,352 |
|
|
|
104,262 |
|
|
|
1,390 |
|
Corporate bonds and other |
|
|
3,912 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
3,912 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
|
70,114 |
|
|
|
702 |
|
|
|
546,795 |
|
|
|
12,880 |
|
|
|
616,909 |
|
|
|
13,582 |
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal obligations |
|
|
27,706 |
|
|
|
69 |
|
|
|
3,495 |
|
|
|
55 |
|
|
|
31,201 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
97,820 |
|
|
$ |
771 |
|
|
$ |
550,290 |
|
|
$ |
12,935 |
|
|
$ |
648,110 |
|
|
$ |
13,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2005 |
|
|
|
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GSE |
|
$ |
95,853 |
|
|
$ |
1,403 |
|
|
$ |
141,975 |
|
|
$ |
3,611 |
|
|
$ |
237,828 |
|
|
$ |
5,014 |
|
MBS, CMO and ABS |
|
|
180,971 |
|
|
|
2,984 |
|
|
|
110,774 |
|
|
|
4,085 |
|
|
|
291,745 |
|
|
|
7,069 |
|
State and municipal obligations |
|
|
72,726 |
|
|
|
834 |
|
|
|
33,546 |
|
|
|
909 |
|
|
|
106,272 |
|
|
|
1,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
|
|
349,550 |
|
|
|
5,221 |
|
|
|
286,295 |
|
|
|
8,605 |
|
|
|
635,845 |
|
|
|
13,826 |
|
|
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal obligations |
|
|
23,955 |
|
|
|
169 |
|
|
|
235 |
|
|
|
5 |
|
|
|
24,190 |
|
|
|
174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
373,505 |
|
|
$ |
5,390 |
|
|
$ |
286,530 |
|
|
$ |
8,610 |
|
|
$ |
660,035 |
|
|
$ |
14,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables above represent 1,173 and 1,113 of investment securities where the current fair
value is less than the related amortized cost as of December 31, 2006 and 2005, respectively. The
securities in an unrealized loss position for twelve months or longer totaled 842 and 348 at
December 31, 2006 and 2005, respectively. Management evaluates securities for other-than-temporary
impairment on a quarterly basis, or as economic or market concerns warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which the fair value has been
less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value. The unrealized losses presented
above do not reflect deterioration in the credit worthiness of the issuing securities and result
primarily from fluctuations in market interest rates. The Company has the ability and intent to
hold these securities until their fair value recovers to their amortized cost, therefore management
has determined that the securities that were in an unrealized loss position at December 31, 2006,
and 2005 represent only temporary declines in fair value.
(4) Loans Held for Sale
During the year ended December 31, 2005, the Company transferred $169.0 million in
commercial-related loans to held for sale, at an estimated fair value less costs to sell of $132.3
million. As a result, $36.7 million in commercial-related charge-offs were recorded. Subsequent
to the transfer date, the Company decided not to proceed with the sale of $613,000 of these
commercial-related loans held for sale and returned the loans to portfolio at the lower of cost or
fair value. In the second half of 2005, the Company realized a net gain of $9.4 million on the
ultimate sale or settlement of commercial-related loans held for sale.
67
A summary of loans held for sale is as follows at December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Commercial and agricultural * |
|
$ |
|
|
|
$ |
577 |
|
Residential real estate |
|
|
992 |
|
|
|
676 |
|
|
|
|
|
|
|
|
|
Total loans held for sale |
|
$ |
992 |
|
|
$ |
1,253 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
All commercial and agricultural loans held for sale are in nonaccruing status. |
Residential mortgages serviced for others amounting to $355.2 million and $377.6 million at
December 31, 2006 and 2005, respectively, are not included in the consolidated statements of
financial condition. Proceeds from the sale of loans held for sale (excluding commercial-related)
were $69.5 million, $86.3. million and $66.5 million for the years ended December 31, 2006, 2005
and 2004, respectively. Net gain on the sale of loans held for sale (excluding commercial-related)
was $973,000, $776,000 and $910,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
The activity in capitalized mortgage servicing assets, included in other assets in the consolidated
statements of financial condition, is summarized as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Mortgage servicing assets at beginning of year |
|
$ |
1,557 |
|
|
$ |
1,946 |
|
|
$ |
2,294 |
|
|
Originations |
|
|
224 |
|
|
|
309 |
|
|
|
451 |
|
Amortization |
|
|
(616 |
) |
|
|
(698 |
) |
|
|
(799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing assets at end of year |
|
|
1,165 |
|
|
|
1,557 |
|
|
|
1,946 |
|
|
Valuation allowance |
|
|
(2 |
) |
|
|
(3 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage servicing assets at end of year, net |
|
$ |
1,163 |
|
|
$ |
1,554 |
|
|
$ |
1,876 |
|
|
|
|
|
|
|
|
|
|
|
(5) Loans
Loans outstanding, including net unearned income and net deferred fees and costs of $4.5 million
and $3.3 million at December 31, 2006 and 2005, respectively, are summarized as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Commercial |
|
$ |
105,806 |
|
|
$ |
116,444 |
|
Commercial real estate |
|
|
243,966 |
|
|
|
264,727 |
|
Agricultural |
|
|
56,808 |
|
|
|
75,018 |
|
Residential real estate |
|
|
268,446 |
|
|
|
274,487 |
|
Consumer and home equity |
|
|
251,456 |
|
|
|
261,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
926,482 |
|
|
|
992,321 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(17,048 |
) |
|
|
(20,231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net |
|
$ |
909,434 |
|
|
$ |
972,090 |
|
|
|
|
|
|
|
|
The Companys significant concentrations of credit risk in the loan portfolio relate to a
geographic concentration pertaining to the communities that the Company serves.
68
The following table sets forth the changes in the allowance for loan losses for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Allowance for loan losses at beginning of year |
|
$ |
20,231 |
|
|
$ |
39,186 |
|
|
$ |
29,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan charge-offs |
|
|
4,199 |
|
|
|
49,286 |
|
|
|
10,797 |
|
Loan recoveries |
|
|
2,858 |
|
|
|
1,799 |
|
|
|
1,243 |
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
1,341 |
|
|
|
47,487 |
|
|
|
9,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Credit) provision for loan losses |
|
|
(1,842 |
) |
|
|
28,532 |
|
|
|
19,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses at end of year |
|
$ |
17,048 |
|
|
$ |
20,231 |
|
|
$ |
39,186 |
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth information regarding nonaccruing loans and other nonperforming
assets at December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Nonaccruing loans: |
|
|
|
|
|
|
|
|
Commercial |
|
$ |
2,205 |
|
|
$ |
4,389 |
|
Commercial real estate |
|
|
4,661 |
|
|
|
6,985 |
|
Agricultural |
|
|
4,836 |
|
|
|
2,786 |
|
Residential real estate |
|
|
3,602 |
|
|
|
3,096 |
|
Consumer and home equity |
|
|
533 |
|
|
|
505 |
|
|
|
|
|
|
|
|
Total nonaccruing loans |
|
|
15,837 |
|
|
|
17,761 |
|
|
|
|
|
|
|
|
|
|
Accruing loans 90 days or more delinquent |
|
|
3 |
|
|
|
276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
15,840 |
|
|
|
18,037 |
|
|
|
|
|
|
|
|
|
|
Other real estate owned (ORE) |
|
|
1,203 |
|
|
|
1,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans and ORE |
|
|
17,043 |
|
|
|
19,136 |
|
|
|
|
|
|
|
|
|
|
Nonaccruing commercial-related loans held for sale |
|
|
|
|
|
|
577 |
|
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
17,043 |
|
|
$ |
19,713 |
|
|
|
|
|
|
|
|
During the
years ended December 31, 2006, 2005 and 2004, the amount of interest income forgone on nonaccruing
loans outstanding at the respective year-ends totaled
$1.5 million, $1.4 million and $4.8 million,
respectively.
Impaired loans, all of which were assigned a specific allowance for loan losses, totaled $11.7
million and $14.2 million at December 31, 2006 and 2005, respectively. The total specific
allowance for impaired loans totaled $1.6 million and $2.6 million at December 31, 2006 and 2005,
respectively.
Additional information related to impaired loans is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Average balance of impaired loans |
|
$ |
11,972 |
|
|
$ |
25,182 |
|
|
$ |
45,645 |
|
Interest income recognized on impaired loans (cost recovery) |
|
|
|
|
|
|
|
|
|
|
102 |
|
Loans outstanding to certain officers, directors, or companies in which they have 10% or more
beneficial ownership, including officers and directors of the Company, as well as its subsidiaries
(Insiders), approximated $1.1 million and $2.0 million at December 31, 2006 and 2005,
respectively. At December 31, 2006, there were no loans to insiders identified as potential
problem loans. At December 31, 2005, there were no loans to insiders identified as potential
problem loans, however there was an insider loan totaling $155,000 classified as nonaccruing and
impaired. These loans were made on substantially the same terms, including interest rate and
collateral, as comparable transactions with other customers.
69
An analysis of activity with respect to insider loans is as follows during the years ended December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Insider loans at beginning of year |
|
$ |
2,007 |
|
|
$ |
27,165 |
|
|
|
|
|
|
|
|
|
|
New loans to insiders |
|
|
445 |
|
|
|
576 |
|
Repayments received from insiders |
|
|
(858 |
) |
|
|
(916 |
) |
Other changes (primarily changes in director
and subsidiary director status) |
|
|
(475 |
) |
|
|
(24,818 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insider loans at end of year |
|
$ |
1,119 |
|
|
$ |
2,007 |
|
|
|
|
|
|
|
|
For purposes of analyzing the activity in insider loans, credit renewals are not included as
new loans to insiders.
(6) Premises and Equipment
A summary of premises and equipment is as follows at December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Land and land improvements |
|
$ |
4,344 |
|
|
$ |
4,344 |
|
Buildings and leasehold improvements |
|
|
34,287 |
|
|
|
34,017 |
|
Furniture, fixtures, equipment and vehicles |
|
|
22,368 |
|
|
|
21,695 |
|
|
|
|
|
|
|
|
Premises and equipment |
|
|
60,999 |
|
|
|
60,056 |
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation and amortization |
|
|
(26,437 |
) |
|
|
(23,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net |
|
$ |
34,562 |
|
|
$ |
36,471 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense, included in occupancy and equipment expense in the
consolidated statements of income, amounted to $3.7 million, $3.8 million and $3.4 million for the
years ended December 31, 2006, 2005 and 2004, respectively.
(7) Goodwill and Other Intangible Assets
The carrying amount of goodwill, all of which was allocated to FSB, totaled $37.4 million at
December 31, 2006 and 2005. In accordance with SFAS No. 142, the Company has evaluated goodwill
for impairment annually using a discounted cash flow analysis and determined no impairment existed.
There were no indicators of impairment after the annual test was performed.
Other intangible assets, included in other assets in the consolidated statements of financial
condition, consist entirely of core deposit intangibles and are summarized as follows at December
31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Other intangible assets |
|
$ |
11,263 |
|
|
$ |
11,452 |
|
|
|
|
|
|
|
|
|
|
Accumulated amortization |
|
|
(10,369 |
) |
|
|
(10,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets, net |
|
$ |
894 |
|
|
$ |
1,314 |
|
|
|
|
|
|
|
|
70
Intangible amortization expense for these other intangible assets amounted to $420,000,
$430,000 and $709,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
Amortization of other intangible assets was computed using the straight-line method over the
estimated lives of the respective assets (primarily 5 and 7 years). Based on the current level of
intangible assets, estimated future amortization expense for other intangible assets is as follows:
Year ending December 31:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
2007 |
|
$ |
307 |
|
2008 |
|
|
307 |
|
2009 |
|
|
280 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
894 |
|
|
|
|
|
(8) Deposits
Scheduled maturities for certificates of deposit at December 31, 2006 are as follows:
Mature in year ending December 31:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
2007 |
|
$ |
581,430 |
|
2008 |
|
|
68,685 |
|
2009 |
|
|
8,352 |
|
2010 |
|
|
7,900 |
|
2011 |
|
|
2,844 |
|
Thereafter |
|
|
477 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
669,688 |
|
|
|
|
|
Certificates of deposit greater than $100,000 totaled $195.4 million and $199.8 million at
December 31, 2006 and 2005, respectively. Interest expense on certificates of deposit greater than
$100,000 amounted to $9.0 million, $7.1 million and $6.0 million for the years ended December 31,
2006, 2005 and 2004, respectively.
As of December 31, 2006 and 2005, overdrawn deposits included in loans on the consolidated
statements of financial condition amounted to $864,000 and $905,000, respectively.
(9) Borrowings
Outstanding borrowings are as follows at December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Short-term borrowings: |
|
|
|
|
|
|
|
|
Federal funds purchased and securities
sold under repurchase agreements |
|
$ |
32,310 |
|
|
$ |
20,106 |
|
|
|
|
|
|
|
|
Long-term borrowings: |
|
|
|
|
|
|
|
|
FHLB advances |
|
$ |
38,187 |
|
|
$ |
53,391 |
|
Other |
|
|
|
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term borrowings |
|
$ |
38,187 |
|
|
$ |
78,391 |
|
|
|
|
|
|
|
|
Information related to federal funds purchased and securities sold under repurchase agreements
are as follows as of and for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Weighted average interest rate at year-end |
|
|
2.15 |
% |
|
|
1.46 |
% |
|
|
0.92 |
% |
Maximum outstanding at any month-end |
|
$ |
32,353 |
|
|
$ |
27,675 |
|
|
$ |
30,524 |
|
Average amount outstanding during the year |
|
$ |
25,892 |
|
|
$ |
24,550 |
|
|
$ |
25,764 |
|
The average amounts outstanding are computed using daily average balances. Related interest
expense for 2006, 2005 and 2004 was $559,000, $364,000 and $241,000, respectively.
71
At December 31, 2006, FHLB advances totaled $38.2 million and carried a weighted average interest
rate of 5.12%. FHLB borrowings include both term and amortizing advances and are classified as
short-term or long-term in accordance with the original terms. At December 31, 2006, all of the
advances were classified as long-term and mature on various dates through 2011. FHLB advances
include a $20.0 million fixed-rate callable advance, which can be called by the FHLB on a quarterly
basis. FHLB advances are collateralized by $3.6 million of FHLB stock and investment securities
with a fair value of approximately $71.2 million at December 31, 2006. At December 31, 2006, the
Bank had remaining credit available of approximately $31.5 million under lines of credit with the
FHLB. The Bank also had $102.1 million of remaining credit available under unsecured lines of
credit with various other banks at December 31, 2006.
The Company also had a credit agreement with another commercial bank and pledged the stock of FSB
as collateral for the credit facility. The credit agreement included a $25.0 million term loan
facility and a $5.0 million revolving loan facility. At June 30, 2005, the Company was in default
of an affirmative financial covenant in the credit agreement and reclassified the borrowing from
long-term to short-term. The bank waived the event of default at June 30, 2005. As of September
30, 2005, FII and the bank agreed to modify the covenants in the agreement. FII complied with the
modified covenants, therefore the term loan was classified as a long-term borrowing at December 31,
2005. In addition, the interest rate and maturity of the term loan facility were modified. The
amended and restated term loan required monthly payments of interest only at a variable interest
rate of London Interbank Offered Rate (LIBOR) plus 2.00% through the third quarter of 2006.
During October 2006, FII repaid the $25.0 million term loan. The debt was scheduled for repayment
in equal annual installments of $6.25 million beginning in December 2007. The $5.0 million
revolving loan was also modified to accrue interest at a rate of LIBOR plus 1.75% and is scheduled
to mature April of 2007. There were no advances outstanding on the revolving loan during the year
ended December 31, 2006 and 2005.
At December 31, 2006, the aggregate maturities of long-term borrowings, including maturities of
amortizing advances, are as follows:
Mature in year ending December 31:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
2007 |
|
$ |
12,321 |
|
2008 |
|
|
5,212 |
|
2009 |
|
|
20,508 |
|
2010 |
|
|
80 |
|
2011 |
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,187 |
|
|
|
|
|
(10) Junior Subordinated Debentures
In February 2001, the Company established FISI Statutory Trust I (the Trust), which is a
statutory business trust formed under Connecticut law. The Trust exists for the exclusive purposes
of (i) issuing and selling 30 year guaranteed preferred beneficial interests in the trust assets
(trust preferred or capital securities) in the aggregate amount of $16.2 million at a fixed
rate of 10.20%, (ii) using the proceeds from the sale of the capital securities to acquire the
junior subordinated debentures issued by the Company and (iii) engaging in only those other
activities necessary, advisable or incidental thereto.
The Companys junior subordinated debentures are the primary assets of the Trust and, accordingly,
payments under the corporation obligated junior debentures are the sole revenue of the Trust. The
capital securities of the Trust are non-voting. The Company owns all of the common securities of
the Trust. The capital securities qualified as Tier 1 capital under regulatory definitions as of
December 31, 2006 and 2005.
The Companys primary sources of funds to pay interest on the debentures held by the Trust are
current dividends from FSB. Accordingly, the Companys ability to service the debentures is
dependent upon the ability of FSB to pay dividends to the Company. Since the junior subordinated
debentures are classified as debt for financial statement purposes, the associated tax-deductible
expense has been recorded as interest expense in the consolidated statements of income.
72
The Company incurred $487,000 in costs to issue the securities and the costs are being amortized
over 20 years using the interest method.
As of December 31, 2003, the Company deconsolidated the subsidiary Trust, which had issued trust
preferred securities, and replaced the presentation of such instruments with the Companys junior
subordinated debentures issued to the subsidiary Trust. Such presentation reflects the adoption of
FASB Interpretation No. 46 (FIN 46 R), Consolidation of Variable Interest Entities.
(11) Income Taxes
Total income tax expense (benefit) is allocated as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Income (loss) from continuing operations |
|
$ |
6,245 |
|
|
$ |
(1,766 |
) |
|
$ |
3,170 |
|
Loss on discontinued operations |
|
|
|
|
|
|
1,041 |
|
|
|
(149 |
) |
Additional paid-in capital for stock options exercised |
|
|
(8 |
) |
|
|
(129 |
) |
|
|
(204 |
) |
Shareholders equity for unrealized loss on
securities available for sale |
|
|
(241 |
) |
|
|
(6,675 |
) |
|
|
(2,864 |
) |
Shareholders equity for unrecognized net periodic
defined benefit pension costs |
|
|
(1,157 |
) |
|
|
|
|
|
|
|
|
Shareholders equity for unrecognized net periodic
postretirement benefit costs |
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,973 |
|
|
$ |
(7,529 |
) |
|
$ |
(47 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) from continuing operations is as follows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
6,152 |
|
|
$ |
(9,254 |
) |
|
$ |
6,161 |
|
State |
|
|
30 |
|
|
|
(214 |
) |
|
|
1,486 |
|
|
|
|
|
|
|
|
|
|
|
Total current tax expense (benefit) |
|
|
6,182 |
|
|
|
(9,468 |
) |
|
|
7,647 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
(1,498 |
) |
|
|
7,493 |
|
|
|
(3,630 |
) |
State |
|
|
1,561 |
|
|
|
209 |
|
|
|
(847 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred tax expense (benefit) |
|
|
63 |
|
|
|
7,702 |
|
|
|
(4,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
from continuing operations |
|
$ |
6,245 |
|
|
$ |
(1,766 |
) |
|
$ |
3,170 |
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the actual and statutory tax rates for income from
continuing operations for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
Statutory rate |
|
|
34.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt interest income |
|
|
(12.8 |
) |
|
|
(106.9 |
) |
|
|
(18.4 |
) |
Disallowed interest expense |
|
|
1.5 |
|
|
|
10.1 |
|
|
|
1.4 |
|
State taxes, net of federal income tax benefit |
|
|
4.4 |
|
|
|
(0.1 |
) |
|
|
2.5 |
|
Other |
|
|
(0.6 |
) |
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
26.5 |
% |
|
|
(61.9 |
)% |
|
|
19.7 |
% |
|
|
|
|
|
|
|
|
|
|
73
The following table presents the tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities at December 31:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
6,054 |
|
|
$ |
7,441 |
|
Unrealized loss on securities available for sale |
|
|
4,338 |
|
|
|
4,097 |
|
Core deposit intangible |
|
|
675 |
|
|
|
821 |
|
Interest on nonaccruing loans |
|
|
996 |
|
|
|
1,011 |
|
Tax attribute carryforward benefits |
|
|
2,575 |
|
|
|
1,374 |
|
Accrued employee benefits |
|
|
247 |
|
|
|
412 |
|
Stock compensation |
|
|
268 |
|
|
|
|
|
Other |
|
|
223 |
|
|
|
148 |
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
15,376 |
|
|
|
15,304 |
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Prepaid pension and postretirement plan costs |
|
|
45 |
|
|
|
1,135 |
|
Depreciation and amortization of premises and equipment |
|
|
1,330 |
|
|
|
1,617 |
|
Net deferred loan origination costs |
|
|
1,752 |
|
|
|
1,310 |
|
Loan servicing assets |
|
|
453 |
|
|
|
620 |
|
Other |
|
|
19 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities |
|
|
3,599 |
|
|
|
4,728 |
|
|
|
|
|
|
|
|
|
Net deferred tax assets (included in other assets) at end of year |
|
|
11,777 |
|
|
|
10,576 |
|
|
Net deferred tax assets (included in other assets) at beginning of year |
|
|
10,576 |
|
|
|
11,603 |
|
|
|
|
|
|
|
|
|
(Increase) decrease in net deferred tax assets |
|
|
(1,201 |
) |
|
|
1,027 |
|
|
Change in unrealized loss on securities available for sale |
|
|
241 |
|
|
|
6,675 |
|
|
Unrecognized net periodic pension costs |
|
|
1,157 |
|
|
|
|
|
|
Unrecognized net periodic postretirement costs |
|
|
(134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense |
|
$ |
63 |
|
|
$ |
7,702 |
|
|
|
|
|
|
|
|
Realization of the net deferred tax assets is dependent upon the generation of future taxable
income or the existence of sufficient taxable income within the carry-back period. A valuation
allowance is provided when it is more likely than not that some portion of the deferred tax assets
will not be realized. In assessing the need for a valuation allowance, management considers the
scheduled reversal of the deferred tax liabilities, the level of historical taxable income and
projected future taxable income over the periods in which the temporary differences comprising the
deferred tax assets will be deductible. Based on its assessment, management determined that no
valuation allowance is necessary at December 31, 2006 and 2005.
The Company has the following tax attribute carryforward benefits available at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year(s) of |
(Dollars in thousands) |
|
2006 |
|
|
Expiration |
|
|
|
|
|
|
|
Federal: |
|
|
|
|
|
|
Net operating loss |
|
$ |
208 |
|
|
2021 |
Tax credits |
|
|
2,153 |
|
|
None |
|
|
|
|
|
|
|
New York State: |
|
|
|
|
|
|
Net operating loss |
|
$ |
5,401 |
|
|
2021-2025 |
Charitable contribution |
|
|
267 |
|
|
2010 |
Tax credits |
|
|
107 |
|
|
None |
The federal net operating loss carryforward and $208,000 of the New York State net operating
loss carryforward are subject to annual limitations imposed by the Internal Revenue Code (IRC).
The Company believes the limitations will not prevent the carryforward benefits from being
utilized.
74
(12) Commitments and Contingencies
Commitments
In the normal course of business there are various outstanding commitments to extend credit that
are not reflected in the accompanying consolidated financial statements. Loan commitments have
off-balance-sheet credit risk until commitments are fulfilled or expire. The credit risk amounts
are equal to the contractual amounts, assuming that the amounts are ultimately advanced in full and
that the collateral or other security is of no value. The Companys policy generally requires
customers to provide collateral, usually in the form of customers operating assets or property,
prior to the disbursement of approved loans. At December 31, 2006, stand-by letters of credit
totaling $5.8 million and unused loan commitments and lines of credit of $258.6 million were
contractually available. Approximately 18% of the unused loan commitments and lines of credit were
at fixed rates at December 31, 2006. There were no significant commitments to lend to
nonperforming borrowers at December 31, 2006. Comparable amounts for the stand-by letters of
credit and commitments at December 31, 2005 were $9.5 million and $231.5 million, respectively.
Commitments generally have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without funding, the total
commitment amounts do not necessarily represent future cash requirements.
The Company also extends rate lock agreements to borrowers related to the origination of
residential mortgage loans. To mitigate the interest rate risk inherent in these rate lock
agreements, as well as closed mortgage loans held for sale, the Company enters into forward
commitments to sell individual mortgage loans. Rate lock agreements and forward commitments are
considered derivatives and are recorded at fair value in accordance with SFAS No. 133. At December
31, 2006 and 2005, the total notional amount of these derivatives (rate lock agreements and forward
commitments) held by the Company amounted to $4.5 million and $8.2 million, respectively. The fair
value of these derivatives in a gain position were recorded as other assets, while the fair value
of these derivatives in a loss position were recorded as other liabilities in the consolidated
statements of financial condition. In addition, the net change in the fair values of these
derivatives was recognized in current earnings as other noninterest income or other noninterest
expense in the consolidated statements of income. These fair values and changes in fair values
were not significant at or for the years ended December 31, 2006 and 2005.
Lease Obligations
The Company was obligated under a number of noncancellable operating leases for land, buildings and
equipment. Certain of these leases provide for escalation clauses and contain renewal options
calling for increased rentals if the lease is renewed. The future minimum lease payments on
operating leases are as follows at December 31, 2006:
Operating lease payments in year ending December 31:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
2007 |
|
$ |
769 |
|
2008 |
|
|
682 |
|
2009 |
|
|
628 |
|
2010 |
|
|
420 |
|
2011 |
|
|
411 |
|
Thereafter |
|
|
1,779 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,689 |
|
|
|
|
|
Rent expense, included in occupancy and equipment expense in the consolidated statements of
income, totaled $761,000, $645,000 and $646,000 for the years ended December 31, 2006, 2005 and
2004, respectively.
Contingent Liabilities
In the ordinary course of business there are various threatened and pending legal proceedings
against the Company. Based on consultation with outside legal counsel, management believes that
the aggregate liability, if any, arising from such litigation would not have a material adverse
effect on the Companys consolidated financial statements.
75
(13) Retirement and Postretirement Benefit Plans
Adoption of SFAS No. 158
The Company adopted SFAS No. 158 effective December 31, 2006, which required the over-funded or
under-funded status of its defined benefit pension and postretirement benefit plans to be
recognized as an asset or liability in the consolidated statements of financial condition. Future
changes in the funded status of the defined benefit and postretirement plans will be recognized in
the year in which the changes occur through accumulated other comprehensive income or loss.
The incremental effect of applying SFAS No. 158 on individual line items in the consolidated
statements of financial condition is as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
Before |
|
|
|
|
|
After |
(Dollars in thousands) |
|
Adoption |
|
Adjustment |
|
Adoption |
|
Prepaid pension asset, included in other assets |
|
$ |
3,086 |
|
|
$ |
(2,971 |
) |
|
$ |
115 |
|
Net deferred tax assets, include in other assets |
|
|
10,754 |
|
|
|
1,023 |
|
|
|
11,777 |
|
Accrued postretirement liability, included in other liabilities |
|
|
791 |
|
|
|
(344 |
) |
|
|
447 |
|
Accumulated other comprehensive income (loss) |
|
|
(6,800 |
) |
|
|
(1,604 |
) |
|
|
(8,404 |
) |
Defined Benefit Pension Plan
The Company participates in The New York State Bankers Retirement System, which is a defined
benefit pension plan covering substantially all employees. 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 meet participation requirements on or before
January 1, 2008 shall be eligible to receive benefits.
The following table sets forth the defined benefit pension plans change in benefit obligation and
change in plan assets using the most recent actuarial data at September 30 (measurement date for
plan accounting and disclosure):
76
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
(25,966 |
) |
|
$ |
(22,704 |
) |
|
$ |
(20,080 |
) |
Service cost |
|
|
(1,725 |
) |
|
|
(1,578 |
) |
|
|
(1,374 |
) |
Interest cost |
|
|
(1,341 |
) |
|
|
(1,285 |
) |
|
|
(1,186 |
) |
Actuarial gain (loss) |
|
|
1,928 |
|
|
|
(1,354 |
) |
|
|
(968 |
) |
Benefits paid |
|
|
1,093 |
|
|
|
765 |
|
|
|
747 |
|
Plan expenses |
|
|
205 |
|
|
|
190 |
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
|
(25,806 |
) |
|
|
(25,966 |
) |
|
|
(22,704 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
22,953 |
|
|
|
19,962 |
|
|
|
17,560 |
|
Actual return on plan assets |
|
|
2,698 |
|
|
|
2,367 |
|
|
|
1,900 |
|
Employer contributions |
|
|
1,568 |
|
|
|
1,579 |
|
|
|
1,406 |
|
Benefits paid |
|
|
(1,093 |
) |
|
|
(765 |
) |
|
|
(747 |
) |
Plan expenses |
|
|
(205 |
) |
|
|
(190 |
) |
|
|
(157 |
) |
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
|
25,921 |
|
|
|
22,953 |
|
|
|
19,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unfunded status |
|
|
115 |
|
|
|
(3,013 |
) |
|
|
(2,742 |
) |
Unamortized net asset at transition |
|
|
|
|
|
|
(26 |
) |
|
|
(64 |
) |
Unrecognized net loss subsequent to transition |
|
|
|
|
|
|
6,050 |
|
|
|
5,648 |
|
Unamortized prior service cost |
|
|
|
|
|
|
195 |
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension asset, included in other assets |
|
$ |
115 |
|
|
$ |
3,206 |
|
|
$ |
3,055 |
|
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation was $21.8 million at September 30, 2006 and 2005, respectively.
Net periodic pension cost consists of the following components for the years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Service cost |
|
$ |
1,725 |
|
|
$ |
1,578 |
|
|
$ |
1,374 |
|
Interest cost on projected benefit obligation |
|
|
1,341 |
|
|
|
1,285 |
|
|
|
1,186 |
|
Expected return on plan assets |
|
|
(1,866 |
) |
|
|
(1,632 |
) |
|
|
(1,436 |
) |
Amortization of net transition asset |
|
|
(26 |
) |
|
|
(38 |
) |
|
|
(38 |
) |
Amortization of unrecognized loss |
|
|
223 |
|
|
|
218 |
|
|
|
219 |
|
Amortization of unrecognized prior service cost |
|
|
14 |
|
|
|
18 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
1,411 |
|
|
$ |
1,429 |
|
|
$ |
1,323 |
|
|
|
|
|
|
|
|
|
|
|
The actuarial assumptions used to determine the net periodic pension cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
Weighted average discount rate |
|
|
5.25 |
% |
|
|
5.75 |
% |
|
|
6.00 |
% |
Expected long-term rate of return |
|
|
7.50 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
Rate of compensation increase |
|
|
3.50 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
The actuarial assumptions used to determine the accumulated benefit obligation were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
Weighted average discount rate |
|
|
5.82 |
% |
|
|
5.25 |
% |
|
|
5.75 |
% |
Expected long-term rate of return |
|
|
7.50 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
The weighted average discount rate was derived using an actuarial discount rate model based on
expected cash outflows from the plan.
The expected long-term rate-of-return on plan assets reflects long-term earnings expectations on
existing plan assets and those contributions expected to be received during the current plan year.
In estimating that rate,
77
appropriate consideration was given to historical returns earned by plan assets in the fund and the
rates of return expected to be available for reinvestment. Average rates of return over the past
1,3,5 and 10 year periods were determined and subsequently adjusted to reflect current capital
market assumptions and changes in investment allocations.
The estimated amounts that will be amortized from accumulated other comprehensive income (loss)
into net periodic benefit cost in 2007 are as follows:
|
|
|
|
|
(Dollars in thousands) |
|
2007 |
|
|
Unrecognized loss |
|
$ |
31 |
|
Prior service cost |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
42 |
|
|
|
|
|
The pension plan weighted average asset allocations by asset category are as follows at September 30:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Asset category: |
|
|
|
|
|
|
|
|
Equity securities |
|
|
59.8 |
% |
|
|
58.8 |
% |
Debt securities |
|
|
39.9 |
|
|
|
41.2 |
|
Other |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
The New York State Bankers Retirement System (the System) was established in 1938 to provide
for the payment of benefits to employees of participating banks. The System is overseen by a Board
of Trustees who meet quarterly to set the investment policy guidelines.
The System utilizes two investment management firms, each investing approximately 50% of the total
portfolio. The Systems investment objective is to exceed the investment benchmarks in each asset
category. Each firm operates under a separate written investment policy approved by the Trustees
and designed to achieve an allocation approximating 60% (may vary from 50%-70%) invested in equity
securities and 40% (may vary from 30%-50%) invested in debt securities. Each firm reports at least
quarterly to the Investment Committee and semi-annually to the Board.
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. The minimum required contribution is zero for the year ended December 31, 2007,
however the Company is considering making a discretionary contribution to the pension plan during
2007.
The future benefit payments that reflect expected future service, as appropriate, are expected to
be paid as follows:
Future pension benefit payments in year ending December 31:
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
2007 |
|
$ |
1,019 |
|
2008 |
|
|
1,022 |
|
2009 |
|
|
1,045 |
|
2010 |
|
|
1,091 |
|
2011 |
|
|
1,166 |
|
2012-2016 |
|
|
7,943 |
|
Postretirement Benefit Plan
Prior to December 31, 2001, BNB provided health and dental care benefits to retired employees who
met specified age and service requirements through a postretirement health and dental care plan in
which both BNB and the retiree shared the cost. The plan provided for substantially the same
medical insurance coverage as for active employees until their death and was integrated with
Medicare for those retirees aged 65 or older. In 2001, the plans eligibility requirements were
amended to curtail eligible benefit payments to only retired employees
78
and active participants who were fully vested under the Plan. In 2003, retirees under age 65 began
contributing to health coverage at the same cost-sharing level as that of active employees. The
retirees aged 65 or older were offered new Medicare supplemental plans as alternatives to the plan
historically offered. The cost sharing of medical coverage was standardized throughout the group
of retirees aged 65 or older. In addition, to be consistent with the administration of the
Companys dental plan for active employees, all retirees who continued dental coverage began paying
the full monthly premium. The accrued liability included in other liabilities in the consolidated
statements of financial condition related to this plan amounted to $447,000 and $806,000 as of
December 31, 2006 and 2005, respectively. The expense included in salaries and employee benefits
in the consolidated statements of income for this plan was not significant for the years ended
December 31, 2006, 2005 and 2004.
Defined Contribution Plan
The Company also sponsors a defined contribution profit sharing (401(k)) plan covering
substantially all employees. The Company matches certain percentages of each eligible employees
contribution to the plan. The expense included in salaries and employee benefits in the
consolidated statements of income for this plan amounted to $553,000, $301,000 and $1.1 million in
2006, 2005 and 2004, respectively.
(14) Stock Compensation Plans
The Company has a Management Stock Incentive Plan and a Directors Stock Incentive Plan (the
Plans). Under the Plans, the Company may grant stock options to purchase shares of common stock,
shares of restricted stock or stock appreciation rights to its directors and key employees. The
Company had previously only granted stock options to purchase shares of common stock under the
Plans, but during the third quarter of 2006, restricted stock awards were granted to certain
Executives and Senior Officers of the Management team. Grants under the plans may be made up to
10% of the number of shares of common stock issued, including treasury shares. The exercise price
of each option equals the market price of the Companys stock on the date of the grant. The
maximum term of each option is ten years and the vesting period generally ranges between three and
five years.
Prior to January 1, 2006, the Company applied Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in accounting for
stock-based compensation. No stock-based compensation expense was recognized in the consolidated
statements of income prior to 2006 for stock options, as the exercise price was equal to the market
price of the common stock on the date of all grants made by the Company.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, requiring the Company to recognize expense related to the fair
value of the stock-based compensation awards. The Company elected the modified prospective
transition method as permitted by SFAS No. 123(R); accordingly, results from prior periods have not
been restated. Under the transition method, stock-based compensation expense for the year ended
December 31, 2006 includes:
|
(a) |
|
compensation expense for all stock-based compensation awards granted prior to, but not
yet vested as of December 31, 2005, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based
Compensation; and |
|
|
(b) |
|
compensation expense for all stock-based compensation awards granted subsequent to
December 31, 2005, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). |
Historically, SFAS No. 123 required pro forma disclosure of stock-based compensation expense
and the Company has recognized pro forma compensation expense for stock option awards on a
straight-line basis over the applicable vesting periods. This policy differs from the policy
required to be applied to awards granted after the adoption of SFAS No. 123(R), which requires that
compensation expense be recognized for awards over the requisite service period of the award or to
an employees eligible retirement date, if earlier. The Company will recognize compensation
expense over the remaining vesting periods for awards granted prior to adoption of SFAS No. 123(R), and for
all awards after December 31, 2005, compensation expense will be recognized over the awards
requisite service period or over a period ending with an employees eligible retirement date, if
earlier.
79
The expense associated with the amortization of unvested stock compensation included in the
consolidated statements of income for the year ended December 31, 2006 is as follows:
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
Stock options: |
|
|
|
|
Management Stock Incentive Plan (1) |
|
$ |
522 |
|
Director Stock Incentive Plan (2) |
|
|
299 |
|
|
|
|
|
|
|
|
|
|
Total amortization of unvested stock options |
|
|
821 |
|
|
|
|
|
|
Restricted stock awards: |
|
|
|
|
Management Stock Incentive Plan (1) |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
Total amortization of unvested restricted stock awards |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
Total amortization of unvested stock compensation |
|
$ |
865 |
|
|
|
|
|
|
|
|
(1) |
|
Included in salaries and employee benefits in the consolidated statements of income. |
|
(2) |
|
Included in other noninterest expense in the consolidated statements of income. |
The following table summarizes the stock option activity for the year ended December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Price |
|
|
Term |
|
|
Intrinsic |
|
(Dollars in thousands, except per share amounts) |
|
Options |
|
|
per Share |
|
|
(in Years) |
|
|
Value |
|
|
Outstanding at December 31, 2005 |
|
|
426,238 |
|
|
$ |
19.58 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
99,597 |
|
|
|
19.73 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(10,355 |
) |
|
|
18.90 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,298 |
) |
|
|
21.24 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(11,250 |
) |
|
|
22.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
498,932 |
|
|
$ |
19.54 |
|
|
|
5.78 |
|
|
$ |
1,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2006 |
|
|
473,320 |
|
|
$ |
19.49 |
|
|
|
5.63 |
|
|
$ |
1,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006 |
|
|
309,649 |
|
|
$ |
18.94 |
|
|
|
3.99 |
|
|
$ |
1,481 |
|
As of December 31, 2006, there was $734,000 of unrecognized compensation expense related to
unvested stock options that is expected to be recognized over a weighted average period of 2.13
years.
The weighted average grant date fair value and Black-Scholes option valuation assumptions used for
the stock option grants totaling 99,597, 143,263 and 104,234 for the years ended December 31, 2006,
2005 and 2004, respectively were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Fair value of stock options granted |
|
$ |
8.14 |
|
|
$ |
6.35 |
|
|
$ |
9.25 |
|
Risk-free interest rate |
|
|
4.96 |
%(1) |
|
|
4.17 |
% |
|
|
4.20 |
% |
Expected dividend yield |
|
|
1.65 |
% |
|
|
1.94 |
% |
|
|
2.69 |
% |
Expected stock price volatility |
|
|
41.75 |
%(2) |
|
|
26.79 |
% |
|
|
35.70 |
% |
Expected term of stock options (in
years) |
|
6.19 yrs |
(3) |
|
6.22 yrs |
|
|
10.00 yrs |
|
|
|
|
(1) |
|
Based on the average of the five and seven year Treasury constant maturity (TCM)
interest rates that is consistent with the expected term of the stock options. |
|
(2) |
|
Expected stock price volatility is based on actual experience using a historical period
that is consistent with the expected term of the stock options. |
|
(3) |
|
The Company estimated the expected term of the stock options using the simplified
method prescribed by SEC Staff Accounting Bulletin (SAB) No. 107. |
80
The aggregate intrinsic value of option (the amount by which the market price of the stock on
the date of exercise exceeded the market price of the stock on the date of grant) exercises for the
years ended December 31, 2006, 2005 and 2004 was $54,000, $322,000 and $511,000, respectively. The
total cash received as a result of option exercises under stock compensation plans for the years
ended December 31, 2006, 2005 and 2004 was $196,000, $940,000 and $1.1 million, respectively. In
connection with these option exercises, the tax benefits realized from stock compensation plans
were $22,000, $129,000 and $204,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
The following table summarizes the restricted stock award activity for the year ended December 31,
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Market Price |
|
|
|
Shares |
|
|
at Grant Date |
|
|
Outstanding at December 31, 2005 |
|
|
|
|
|
$ |
|
|
Awarded |
|
|
13,200 |
|
|
|
19.75 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
13,200 |
|
|
$ |
19.75 |
|
As of December 31, 2006, there was $217,000 of unrecognized compensation expense related to
unvested restricted stock awards that is expected to be recognized over a weighted average period
of 2.41 years.
(15) Earnings Per Common Share
Basic earnings per share, after giving effect to preferred stock dividends, has been computed using
weighted average common shares outstanding. Diluted earnings per share reflect the effects, if
any, of incremental common shares issuable upon exercise of dilutive stock options.
Earnings per common share have been computed based on the following for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Income from continuing operations |
|
$ |
17,362 |
|
|
$ |
4,618 |
|
|
$ |
12,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Preferred stock dividends |
|
|
1,486 |
|
|
|
1,488 |
|
|
|
1,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to
common shareholders |
|
|
15,876 |
|
|
|
3,130 |
|
|
|
11,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations, net of tax |
|
|
|
|
|
|
(2,452 |
) |
|
|
(450 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders |
|
$ |
15,876 |
|
|
$ |
678 |
|
|
$ |
10,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used to
calculate basic earnings per common share |
|
|
11,328 |
|
|
|
11,303 |
|
|
|
11,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Effect of common stock equivalents |
|
|
36 |
|
|
|
31 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used to
calculate diluted earnings per common share |
|
|
11,364 |
|
|
|
11,334 |
|
|
|
11,240 |
|
|
|
|
|
|
|
|
|
|
|
There were approximately 251,000, 354,000 and 229,000 weighted average common stock
equivalents from outstanding stock options for the years ended December 31, 2006, 2005 and 2004,
respectively that were not considered in the calculation of diluted earnings per share since their
effect would have been anti-dilutive.
(16) Supervision and Regulation
The supervision and regulation of financial and bank holding companies and their subsidiaries is
intended primarily for the protection of depositors, the deposit insurance funds regulated by the
FDIC and the banking system as a whole, and not for the protection of shareholders or creditors of
bank holding companies. The various bank regulatory agencies have broad enforcement power over
bank holding companies and banks, including the
81
power to impose substantial fines, operational restrictions and other penalties for violations of
laws and regulations.
The Bank is required to maintain a reserve balance at the Federal Reserve Bank of New York. The
reserve requirements for the Bank totaled $1.2 million and $1.0 million at December 31, 2006 and
2005, respectively.
The Company is also subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken, could have a direct
material impact on the Companys consolidated financial statements.
For evaluating regulatory capital adequacy, companies are required to determine capital and assets
under regulatory accounting practices. Quantitative measures established by regulation to ensure
capital adequacy require the Company to maintain minimum amounts and ratios. The leverage ratio
requirement is based on period-end capital to average adjusted total assets during the previous
three months. Compliance with risk-based capital requirements is determined by dividing regulatory
capital by the sum of a companys weighted asset values. Risk weightings are established by the
regulators for each asset category according to the perceived degree of risk. As of December 31,
2006 and 2005, the Company and FSB met all capital adequacy requirements to which they are subject.
The Bank must pay assessments to the Federal Deposit Insurance Corporation (FDIC) for federal
deposit insurance protection. The FDIC has adopted a risk-based assessment system as required by
the FDIC Improvement Act. Under this system, FDIC-insured depository institutions pay insurance
premiums at rates based on their risk classification. Institutions assigned to higher risk
classifications (that is, institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a lower risk. An
institutions risk classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to the regulators. In addition, the FDIC can impose
special assessments in certain instances.
Prior to the Companys restructuring in December 2005, the Companys former bank subsidiaries NBG
and BNB were operating under formal agreements with the Office of the Comptroller of the Currency
(OCC), which resulted in a higher FDIC risk classification and the Company experienced an
increase in FDIC insurance premiums in 2005. As a result of the merger of the Companys subsidiary
banks and the lower risk classification for FSB, the FDIC insurance premiums decreased in 2006.
FDIC insurance premiums, included in other noninterest expense in the consolidated statements of
income, amounted to $215,000, $1,368,000 and $566,000 for the years ended December 31, 2006, 2005
and 2004, respectively.
Payments of dividends by the subsidiary Bank to FII are limited or restricted in certain
circumstances under banking regulations. During September 2006, FII requested approval from the
NYS Banking Department to pay a $25.0 million cash dividend from FSB to FII. Regulatory approval
was necessary as the requested dividend amount exceeded the amount allowable under regulations.
During October 2006, FSB received regulatory approval and paid the $25.0 million dividend to FII.
FSB will be required to obtain approval from the NYS Banking Department for any future dividend
that exceeds the sum of the current years net income plus the retained profits for the preceding
two years. FII used the dividend proceeds to repay a $25.0 million term loan with another
commercial bank during October 2006.
The following is a summary of the actual capital amounts and ratios for the Company and the Bank(s)
as of December 31:
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
Actual Regulatory |
|
|
|
|
|
|
Capital |
|
Minimum Requirements |
|
Well-Capitalized |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Leverage capital (Tier 1) as percent
of three-month average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
168,729 |
|
|
|
8.91 |
% |
|
$ |
75,784 |
|
|
|
4.00 |
% |
|
$ |
94,731 |
|
|
|
5.00 |
% |
FSB |
|
|
152,328 |
|
|
|
8.06 |
|
|
|
75,584 |
|
|
|
4.00 |
|
|
|
94,480 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As percent of risk-weighted,
period-end assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core capital (Tier 1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
168,729 |
|
|
|
15.85 |
|
|
|
42,587 |
|
|
|
4.00 |
|
|
|
63,881 |
|
|
|
6.00 |
|
FSB |
|
|
152,328 |
|
|
|
14.35 |
|
|
|
42,446 |
|
|
|
4.00 |
|
|
|
63,669 |
|
|
|
6.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (Tiers 1 and 2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
182,084 |
|
|
|
17.10 |
|
|
|
85,175 |
|
|
|
8.00 |
|
|
|
106,469 |
|
|
|
10.00 |
|
FSB |
|
|
165,639 |
|
|
|
15.61 |
|
|
|
84,892 |
|
|
|
8.00 |
|
|
|
106,115 |
|
|
|
10.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2005 |
|
|
Actual Regulatory |
|
|
|
|
|
|
Capital |
|
Minimum Requirements |
|
Well-Capitalized |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Leverage capital (Tier 1) as percent
of three-month average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
$ |
155,296 |
|
|
|
7.60 |
% |
|
$ |
81,709 |
|
|
|
4.00 |
% |
|
$ |
102,137 |
|
|
|
5.00 |
% |
FSB |
|
|
166,989 |
|
|
|
8.20 |
|
|
|
81,477 |
|
|
|
4.00 |
|
|
|
101,846 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As percent of risk-weighted,
period-end assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core capital (Tier 1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
155,296 |
|
|
|
13.75 |
|
|
|
45,171 |
|
|
|
4.00 |
|
|
|
67,757 |
|
|
|
6.00 |
|
FSB |
|
|
166,989 |
|
|
|
14.87 |
|
|
|
44,923 |
|
|
|
4.00 |
|
|
|
67,385 |
|
|
|
6.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (Tiers 1 and 2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company |
|
|
169,487 |
|
|
|
15.01 |
|
|
|
90,342 |
|
|
|
8.00 |
|
|
|
112,928 |
|
|
|
10.00 |
|
FSB |
|
|
181,104 |
|
|
|
16.13 |
|
|
|
89,847 |
|
|
|
8.00 |
|
|
|
112,309 |
|
|
|
10.00 |
|
83
(17) Fair Value of Financial Instruments
The fair value of a financial instrument is defined as the price a willing buyer and a willing
seller would exchange in other than a distressed sale situation. The following table presents the
carrying amounts and estimated fair values of the Companys financial instruments at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
|
Financial Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
109,772 |
|
|
$ |
109,772 |
|
|
$ |
91,940 |
|
|
$ |
91,940 |
|
Securities available for sale |
|
|
735,148 |
|
|
|
735,148 |
|
|
|
790,855 |
|
|
|
790,855 |
|
Securities held to maturity |
|
|
40,388 |
|
|
|
40,421 |
|
|
|
42,593 |
|
|
|
42,898 |
|
Loans held for sale |
|
|
992 |
|
|
|
993 |
|
|
|
1,253 |
|
|
|
1,261 |
|
Loans, net |
|
|
909,434 |
|
|
|
907,435 |
|
|
|
972,090 |
|
|
|
970,361 |
|
Accrued interest receivable |
|
|
9,160 |
|
|
|
9,160 |
|
|
|
8,822 |
|
|
|
8,822 |
|
FHLB and FRB stock |
|
|
6,485 |
|
|
|
6,485 |
|
|
|
7,158 |
|
|
|
7,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand |
|
|
273,783 |
|
|
|
273,783 |
|
|
|
284,958 |
|
|
|
284,958 |
|
Interest-bearing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and interest-bearing demand |
|
|
674,224 |
|
|
|
674,224 |
|
|
|
755,229 |
|
|
|
755,229 |
|
Certificates of deposit |
|
|
669,688 |
|
|
|
669,688 |
|
|
|
677,074 |
|
|
|
677,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
1,617,695 |
|
|
|
1,617,695 |
|
|
|
1,717,261 |
|
|
|
1,717,261 |
|
Short-term borrowings |
|
|
32,310 |
|
|
|
32,310 |
|
|
|
20,106 |
|
|
|
20,106 |
|
Long-term borrowings |
|
|
38,187 |
|
|
|
37,037 |
|
|
|
78,391 |
|
|
|
74,316 |
|
Junior subordinated debentures |
|
|
16,702 |
|
|
|
17,533 |
|
|
|
16,702 |
|
|
|
18,048 |
|
Accrued interest payable |
|
|
13,132 |
|
|
|
13,132 |
|
|
|
11,966 |
|
|
|
11,966 |
|
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments.
Cash and cash equivalents: The carrying amounts reported in the consolidated statements of
financial condition for cash, due from banks, federal funds sold and interest-bearing deposits
approximate the fair value of those assets.
Securities: Fair value is based on quoted market prices, where available. Where quoted market
prices are not available, fair value is based on quoted market prices of comparable instruments.
Loans held for sale: The fair value of loans held for sale is based on estimates, quoted market
prices and investor commitments.
Loans, net: 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.
Accrued interest receivable/payable: The carrying amounts of accrued interest receivable and
accrued interest payable approximate their fair values because of the relatively short time period
between the accrual period and the expected receipt or payment due date.
FHLB and FRB stock: The carrying amounts, which represent par value or cost, reported in the
consolidated statements of financial condition for the non-marketable investments in FHLB and FRB
stock approximate the fair value of those assets.
Deposits: The fair value for savings, interest-bearing and noninterest-bearing demand accounts is
equal to the carrying amount because of the customers ability to withdraw funds immediately. The
fair values of certificates
84
of deposit are estimated using a discounted cash flow approach that applies prevailing market
interest rates for similar maturity instruments. The unrealized gains on certificates of deposit
are limited to the amount of prepayment penalties, if any. Fair value can only exceed the carrying
amount to the extent of withdrawal fees.
Short-term Borrowings: Carrying value approximates fair value for short-term borrowings.
Long-term Borrowings: 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 and trust preferred securities: 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.
Off-Balance Sheet Financial Instruments: The fair value of stand-by letters of credit and
commitments to extend credit is based on the fees currently charged to enter into similar
agreements. The aggregate of these fees is not significant.
85
(18) Condensed Parent Company Only Financial Statements
The following are the condensed financial statements of FII as of and for the years ended December 31:
Condensed Statements of Condition
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
Assets: |
|
|
|
|
|
|
|
|
Cash and due from subsidiaries |
|
$ |
15,631 |
|
|
$ |
11,417 |
|
Securities available for sale, at fair value |
|
|
1,087 |
|
|
|
1,034 |
|
Note receivable |
|
|
300 |
|
|
|
300 |
|
Investment in and receivables due from
subsidiaries and associated companies |
|
|
182,467 |
|
|
|
199,743 |
|
Other assets |
|
|
4,340 |
|
|
|
5,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
203,825 |
|
|
$ |
217,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Long-term borrowings |
|
$ |
|
|
|
$ |
25,000 |
|
Junior subordinated debentures |
|
|
16,702 |
|
|
|
16,702 |
|
Other liabilities |
|
|
4,735 |
|
|
|
4,286 |
|
Shareholders equity |
|
|
182,388 |
|
|
|
171,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
203,825 |
|
|
$ |
217,745 |
|
|
|
|
|
|
|
|
Condensed Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Dividends from subsidiaries and
associated companies |
|
$ |
35,455 |
|
|
$ |
5,872 |
|
|
$ |
5,601 |
|
Management and service fees from subsidiaries |
|
|
643 |
|
|
|
15,433 |
|
|
|
13,763 |
|
Other income |
|
|
427 |
|
|
|
75 |
|
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
Total income |
|
|
36,525 |
|
|
|
21,380 |
|
|
|
19,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
6,319 |
|
|
|
20,325 |
|
|
|
16,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit and
(distributions in excess of earnings) equity
in undistributed earnings of subsidiaries |
|
|
30,206 |
|
|
|
1,055 |
|
|
|
2,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
2,164 |
|
|
|
1,904 |
|
|
|
1,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before (distributions in excess of earnings)
equity in undistributed earnings of subsidiaries |
|
|
32,370 |
|
|
|
2,959 |
|
|
|
3,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Distributions in excess of earnings) equity
in undistributed earnings of subsidiaries |
|
|
(15,008 |
) |
|
|
(793 |
) |
|
|
8,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,362 |
|
|
$ |
2,166 |
|
|
$ |
12,493 |
|
|
|
|
|
|
|
|
|
|
|
86
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,362 |
|
|
$ |
2,166 |
|
|
$ |
12,493 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
642 |
|
|
|
756 |
|
|
|
782 |
|
Distributions in excess of earnings (equity
in undistributed earnings) of subsidiaries |
|
|
15,008 |
|
|
|
793 |
|
|
|
(8,543 |
) |
Increase in other assets |
|
|
(211 |
) |
|
|
(852 |
) |
|
|
(2,609 |
) |
Increase (decrease) in other liabilities |
|
|
1,120 |
|
|
|
(922 |
) |
|
|
1,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
33,921 |
|
|
|
1,941 |
|
|
|
3,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of securities |
|
|
21 |
|
|
|
|
|
|
|
500 |
|
Increase in note receivable |
|
|
|
|
|
|
|
|
|
|
(300 |
) |
Proceeds from sale of equity investment in
Mercantile Adjustment Bureau |
|
|
|
|
|
|
|
|
|
|
2,400 |
|
Net proceeds from sale of discontinued subsidiary |
|
|
|
|
|
|
4,538 |
|
|
|
|
|
Equity investment in subsidiaries |
|
|
|
|
|
|
(512 |
) |
|
|
(150 |
) |
Purchase of premises and equipment, net |
|
|
528 |
|
|
|
(388 |
) |
|
|
(261 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
549 |
|
|
|
3,638 |
|
|
|
2,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayment on long-term borrowings |
|
|
(25,000 |
) |
|
|
|
|
|
|
|
|
Purchase of preferred and common shares |
|
|
(346 |
) |
|
|
(178 |
) |
|
|
(43 |
) |
Issuance of common shares |
|
|
112 |
|
|
|
57 |
|
|
|
52 |
|
Stock options exercised |
|
|
196 |
|
|
|
940 |
|
|
|
1,131 |
|
Excess tax benefit from stock options exercised |
|
|
8 |
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(5,226 |
) |
|
|
(6,902 |
) |
|
|
(8,652 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net used in financing activities |
|
|
(30,256 |
) |
|
|
(6,083 |
) |
|
|
(7,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
4,214 |
|
|
|
(504 |
) |
|
|
(1,777 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of year |
|
|
11,417 |
|
|
|
11,921 |
|
|
|
13,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year |
|
$ |
15,631 |
|
|
$ |
11,417 |
|
|
$ |
11,921 |
|
|
|
|
|
|
|
|
|
|
|
87
Selected Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
(Dollars in thousands, except per share data) |
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
Quarter |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
25,275 |
|
|
$ |
25,750 |
|
|
$ |
25,823 |
|
|
$ |
26,222 |
|
Interest expense |
|
|
9,796 |
|
|
|
10,738 |
|
|
|
11,141 |
|
|
|
11,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
15,479 |
|
|
|
15,012 |
|
|
|
14,682 |
|
|
|
14,293 |
|
Provision (credit) for loan losses |
|
|
250 |
|
|
|
(1,601 |
) |
|
|
(491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision (credit) for loan
losses |
|
|
15,229 |
|
|
|
16,613 |
|
|
|
15,173 |
|
|
|
14,293 |
|
Noninterest income |
|
|
4,956 |
|
|
|
5,181 |
|
|
|
6,979 |
|
|
|
4,795 |
|
Noninterest expense |
|
|
15,275 |
|
|
|
14,581 |
|
|
|
14,593 |
|
|
|
15,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,910 |
|
|
|
7,213 |
|
|
|
7,559 |
|
|
|
3,925 |
|
Income taxes |
|
|
1,171 |
|
|
|
1,839 |
|
|
|
2,314 |
|
|
|
921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,739 |
|
|
$ |
5,374 |
|
|
$ |
5,245 |
|
|
$ |
3,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic |
|
$ |
0.30 |
|
|
$ |
0.44 |
|
|
$ |
0.43 |
|
|
$ |
0.23 |
|
Net income diluted |
|
|
0.30 |
|
|
|
0.44 |
|
|
|
0.43 |
|
|
|
0.23 |
|
Cash dividends declared |
|
|
0.08 |
|
|
|
0.08 |
|
|
|
0.09 |
|
|
|
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of operations data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
26,420 |
|
|
$ |
25,818 |
|
|
$ |
25,495 |
|
|
$ |
26,154 |
|
Interest expense |
|
|
8,051 |
|
|
|
8,960 |
|
|
|
9,238 |
|
|
|
10,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
18,369 |
|
|
|
16,858 |
|
|
|
16,257 |
|
|
|
16,008 |
|
Provision for loan losses |
|
|
3,692 |
|
|
|
21,889 |
|
|
|
1,529 |
|
|
|
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan losses |
|
|
14,677 |
|
|
|
(5,031 |
) |
|
|
14,728 |
|
|
|
14,586 |
|
Noninterest income |
|
|
4,907 |
|
|
|
4,791 |
|
|
|
14,749 |
|
|
|
4,937 |
|
Noninterest expense |
|
|
16,418 |
|
|
|
16,592 |
|
|
|
16,312 |
|
|
|
16,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before
income taxes |
|
|
3,166 |
|
|
|
(16,832 |
) |
|
|
13,165 |
|
|
|
3,353 |
|
Income taxes from continuing operations |
|
|
781 |
|
|
|
(7,264 |
) |
|
|
4,205 |
|
|
|
512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
2,385 |
|
|
|
(9,568 |
) |
|
|
8,960 |
|
|
|
2,841 |
|
(Loss) income from discontinued operation,
net of income taxes |
|
|
(96 |
) |
|
|
(2,397 |
) |
|
|
11 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
2,289 |
|
|
$ |
(11,965 |
) |
|
$ |
8,971 |
|
|
$ |
2,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per common share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
$ |
0.18 |
|
|
$ |
(0.88 |
) |
|
$ |
0.76 |
|
|
$ |
0.22 |
|
Net income (loss) |
|
|
0.17 |
|
|
|
(1.09 |
) |
|
|
0.76 |
|
|
|
0.22 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
0.18 |
|
|
|
(0.88 |
) |
|
|
0.76 |
|
|
|
0.22 |
|
Net income (loss) |
|
|
0.17 |
|
|
|
(1.09 |
) |
|
|
0.76 |
|
|
|
0.22 |
|
Cash dividends declared |
|
|
0.16 |
|
|
|
0.08 |
|
|
|
0.08 |
|
|
|
0.08 |
|
88
Report of Independent Registered Public Accounting Firm
The Board of Directors of
Financial Institutions, Inc.:
We have audited the accompanying consolidated statements of financial condition of Financial
Institutions, Inc. and subsidiaries (the Company) as of December 31, 2006 and 2005, and the related
consolidated statements of income, changes in shareholders equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31, 2006. These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company and subsidiaries as of December 31, 2006
and 2005, and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with U.S. generally accepted accounting
principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2006, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 13, 2007 expressed an unqualified opinion on managements assessment of, and the
effective operation of, internal control over financial reporting.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions
of SFAS No. 123(R), Share Based Payments and SFAS No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans for the year ended December 31, 2006.
KPMG LLP
Buffalo, New York
March 13, 2007
89
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
a) As of the end of the period covered by this report, 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 annual 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.
b) Management Report on Internal Control over Financial Reporting
Management of Financial Institutions, Inc. (the Company) is responsible for establishing and
maintaining adequate internal control over financial reporting. Management assessed the Companys
internal control over financial reporting based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this assessment, management has concluded that, as of December 31,
2006, the Company maintained effective internal control over financial reporting.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
KPMG LLP, a registered public accounting firm, has audited the consolidated financial statements
included in the annual report, and has issued an attestation report on managements assessment of
the Companys internal control over financial reporting.
c) Changes to Internal Control Over Financial Reporting
There were no changes in the Companys internal control over financial reporting that occurred
during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
d) Report of Independent Registered Public Accounting Firm
The Board of Directors of
Financial Institutions, Inc.:
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Financial Institutions, Inc. (the Company)
maintained effective internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our
90
responsibility is to express an opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in a reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Financial Institutions, Inc. maintained effective
internal control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on criteria established in Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of financial condition of Financial
Institutions, Inc. and subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of income, changes in shareholders equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 31, 2006, and our report dated March 13,
2007 expressed an unqualified opinion on those financial statements.
KPMG LLP
Buffalo, New York
March 13, 2007
91
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information under the headings Election of Directors and Information with Respect to
Board of Directors and Corporate Governance Information, which includes identifying the audit
committee financial expert who serves on the Audit Committee of the Companys Board of Directors
and the information under the heading Section 16(a) Beneficial Ownership Reporting Compliance are
incorporated by reference from the Companys Proxy Statement for its 2007 Annual Meeting of
Shareholders to be filed with the SEC within 120 days following the end of the Companys fiscal
year. The information under the heading Executive Officers and Other Significant Employees of the Registrant in Part I, Item 1
of this Form 10-K is also incorporated by reference in this section.
The Company has adopted a Code of Business Conduct and Ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or controller, or
persons performing similar functions. The Code of Business Conduct and Ethics is posted on the
Companys internet website at www.fiiwarsaw.com. In addition, the Company will provide a copy of
the Code of Business Conduct and Ethics to anyone, without charge, upon request addressed to
Director of Human Resources at Financial Institutions, Inc., 220 Liberty Street, Warsaw, NY 14569.
The Company intends to disclose any amendment to, or waiver from, a provision of its Code of
Business Conduct and Ethics that applies to the Companys principal executive officer, principal
financial officer, principal accounting officer or controller, or persons performing similar
functions, and that relates to any element of the Code of Business Conduct and Ethics, by posting
such information on the Companys website.
Item 11. Executive Compensation
The information under the heading Executive Compensation is incorporated herein by reference
to the Registrants Proxy Statement for its 2007 Annual Meeting of Shareholders to be filed with
the SEC within 120 days following the end of the Companys fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information under the heading Stock Ownership is incorporated herein by reference to the
Registrants Proxy Statement for its 2007 Annual Meeting of Shareholders to be filed with the SEC
within 120 days following the end of the Companys fiscal year.
The following table provides information as of December 31, 2006, regarding the Companys equity
compensation plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
Number of Securities |
|
|
Number of Securities to be |
|
Exercise Price of |
|
Remaining Available for |
|
|
Issued Upon Exercise of |
|
Outstanding |
|
Future Issuance Under |
|
|
Outstanding Options, |
|
Options, Warrants |
|
Equity Compensation |
Plan Category |
|
Warrants and Rights |
|
and Rights |
|
Plans |
Equity Compensation
Plans Approved by
Shareholders |
|
|
498,932 |
|
|
$ |
19.54 |
|
|
|
933,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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Equity Compensation
Plans not Approved
by Shareholders |
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92
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information under the headings Certain Relationships and Related Party Transactions and Corporate Governance Information is
incorporated herein by reference to the Registrants Proxy Statement for its 2007 Annual Meeting of
Shareholders to be filed with the SEC within 120 days following the end of the Companys fiscal
year.
Item 14.
Principal Accountant Fees and Services
Information under the headings Audit Committee Report and Independent Auditors is
incorporated herein by reference to the Registrants Proxy Statement for its 2007 Annual Meeting of
Shareholders to be filed with the SEC within 120 days following the end of the Companys fiscal
year.
PART IV
Item 15. Exhibits and Financial Statement Schedules
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(a) |
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List of Documents Filed as Part of this Report |
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(1) |
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Financial Statements. |
The financial statements listed below and the Report of the Independent Registered Public
Accounting Firm are included in this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Financial Condition as of December 31, 2006 and 2005
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and
2004
Consolidated Statements of Changes in Shareholders Equity and Comprehensive
Income for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows the years ended December 31, 2006, 2005 and
2004
Notes to Consolidated Financial Statements
All schedules are omitted since the required information is either not applicable, not
required, or is contained in the respective financial statements or in the notes thereto.
93
The following is a list of all exhibits filed or incorporated by reference as part of
this Report.
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Exhibit No. |
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Description |
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Location |
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3.1
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Amended and Restated Certificate of
Incorporation
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Incorporated by reference to Exhibit 3.1
of the Registrants Registration Statement
on Form S-1 dated June 25, 1999
(File No. 333-76865)
(The S-1 Registration Statement) |
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3.2
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Amended and Restated Bylaws dated
May 23, 2001
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Incorporated by reference to Exhibit 3.2
of the Form 10-K for the year ended
December 31, 2001, dated March 11, 2002 |
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3.3
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Amended and Restated Bylaws dated
February 18, 2004
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Incorporated by reference to Exhibit 3.3
of the Form 10-K for the year ended
December 31, 2003, dated March 12, 2004 |
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3.4
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Amended and Restated Bylaws dated
February 22, 2006
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Incorporated by reference to Exhibit 3.4
of the Form 10-K for the year ended
December 31, 2005, dated March 15, 2006 |
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10.1
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1999 Management Stock Incentive Plan
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Incorporated by reference to Exhibit 10.1
of the S-1 Registration Statement |
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10.2
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Amendment Number One to the FII
1999 Management Stock Incentive Plan
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Incorporated by reference to Exhibit 10.1
of the Form 8-K, dated July 28, 2006 |
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10.3
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Form of Non-Qualified Stock Option
Agreement Pursuant to the FII
1999 Management Stock Incentive Plan
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Incorporated by reference to Exhibit 10.2
of the Form 8-K, dated July 28, 2006 |
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10.4
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Form of Restricted Stock Award
Agreement Pursuant to the FII
1999 Management Stock Incentive Plan
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Incorporated by reference to Exhibit 10.3
of the Form 8-K, dated July 28, 2006 |
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10.5
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1999 Directors Stock Incentive Plan
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Incorporated by reference to Exhibit 10.2
of the S-1 Registration Statement |
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10.6
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Stock Ownership Requirements
(effective January 1, 2005)
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Incorporated by reference to Exhibit 10.4
of the Form 10-K for the year ended
December 31, 2004, dated March 16, 2005 |
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10.7
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Executive Agreement with Peter G. Humphrey
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Incorporated by reference to Exhibit 10.1
of the Form 8-K, dated June 30, 2005 |
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10.8
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Executive Agreement with James T. Rudgers
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Incorporated by reference to Exhibit 10.2
of the Form 8-K, dated June 30, 2005 |
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10.9
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Executive Agreement with Ronald A. Miller
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Incorporated by reference to Exhibit 10.3
of the Form 8-K, dated June 30, 2005 |
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10.10
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Executive Agreement with Martin K. Birmingh
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am Incorporated by reference to Exhibit 10.4
of the Form 8-K, dated June 30, 2005 |
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10.11
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Agreement with Peter G. Humphrey
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Incorporated by reference to Exhibit 10.6
of the Form 8-K, dated June 30, 2005 |
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10.12
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Executive Agreement with John J. Witkowski
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Incorporated by reference to Exhibit 10.7
of the Form 8-K, dated September 14, 2005 |
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10.13
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Executive Agreement with George D. Hagi
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Incorporated by reference to Exhibit 10.7
of the Form 8-K, dated February 2, 2006 |
94
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Exhibit No. |
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Description |
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Location |
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10.14
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Term and Revolving Credit Loan Agreements
between FII and M&T Bank, dated
December 15, 2003
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Incorporated by reference to Exhibit 1.1
of the Form 10-K for the year ended
December 31, 2003, dated March 12, 2004 |
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10.15
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Second Amendment to Term Loan Credit
Agreement between FI and M&T Bank, dated
September 30, 2005
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Incorporated by reference to Exhibit 10.17
of the Form 10-Q for the quarterly period
ended September 30, 2005, dated
November 4, 2005 |
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10.16
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Fourth Amendment to Revolving Credit
Agreement between FII and M&T Bank, dated
September 30, 2005
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Incorporated by reference to Exhibit 10.17
of the Form 10-Q for the quarterly period
ended September 30, 2005, dated
November 4, 2005 |
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10.17
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Amended Stock Ownership Requirements,
dated December 14, 2005
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Incorporated by reference to Exhibit 10.19
of the Form 10-K for the year ended
December 31, 2005, dated March 15, 2006 |
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10.18
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2006 Annual Incentive Plan,
dated March 13, 2006
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Incorporated by reference to Exhibit 10.20
of the Form 10-K for the year ended
December 31, 2005, dated March 15, 2006 |
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10.19
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Executive Enhanced Incentive Plan
dated January 25, 2006
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Incorporated by reference to Exhibit 10.21
of the Form 10-K for the year ended
December 31, 2005, dated March 15, 2006 |
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10.20
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Trust Company Agreement and Plan of Merger
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Incorporated by reference to Exhibit 10.1 of
the Form 8-K dated April 3, 2006 |
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10.21
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2007 Annual Incentive Plan,
dated March 13, 2007
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Filed Herewith |
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10.22
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2007 Director (Non-Management) Compensation
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Filed Herewith |
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11.1
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Statement of Computation of Per Share Earnings
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Incorporated by reference to Note 15 of
the Registrants consolidated financial
statements under Item 8 filed herewith. |
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21
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Subsidiaries of Financial Institutions, Inc.
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Filed Herewith |
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23
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Consent of Independent Registered Public
Accounting Firm
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Filed Herewith |
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31.1
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Certification of Annual Report on Form 10-K
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 -CEO
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Filed Herewith |
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31.2
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Certification of Annual Report on Form 10-K
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 -CFO
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Filed Herewith |
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32.1
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Certification of Annual Report on Form 10-K
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 -CEO
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Filed Herewith |
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32.2
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Certification of Annual Report on Form 10-K
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 -CFO
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Filed Herewith |
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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FINANCIAL INSTITUTIONS, INC. |
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Date: March 13, 2007
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By:
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Peter G. Humphrey |
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Peter G. Humphrey |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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By:
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Ronald A. Miller |
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Ronald A. Miller |
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Executive Vice President and Chief Financial Officer |
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(Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on
behalf of the Registrant and in the capacities and on the date indicated have signed this report
below.
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Signatures |
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Title |
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Date |
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Erland E. Kailbourne
Erland E. Kailbourne
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Chairman of the Board of Directors
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March 13, 2007 |
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Peter G. Humphrey
Peter G. Humphrey
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President, Chief Executive Officer and
Director
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March 13, 2007 |
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Karl V. Anderson, Jr.
Karl V. Anderson, Jr.
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Director
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March 13, 2007 |
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John E. Benjamin
John E. Benjamin
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Director
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March 13, 2007 |
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Thomas P. Connolly
Thomas P. Connolly
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Director
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March 13, 2007 |
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Barton P. Dambra
Barton P. Dambra
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Director
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March 13, 2007 |
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Samuel M. Gullo
Samuel M. Gullo
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Director
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March 13, 2007 |
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Susan R. Holliday
Susan R. Holliday
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Director
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March 13, 2007 |
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Joseph F. Hurley
Joseph F. Hurley
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Director
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March 13, 2007 |
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Robert N. Latella
Robert N. Latella
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Director
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March 13, 2007 |
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John R. Tyler, Jr.
John R. Tyler, Jr.
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Director
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March 13, 2007 |
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James H. Wyckoff
James H. Wyckoff
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Director
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March 13, 2007 |
96