A pioneer of the super community banking structure, Financial Institutions Inc. in Warsaw, N.Y., is consolidating its four bank subsidiaries to cut costs and get a better grip on the internal-control and credit-quality problems that have dogged it for the past three years.
Under a plan unveiled last week, Financial Institutions is folding the $459 million-asset Bath National Bank, the $655 million-asset National Bank of Geneva, and the $738 million-asset Wyoming County Bank into its smallest bank, the $250 million-asset First Tier Bank and Trust. It also plans to rename First Tier before the scheduled fourth-quarter completion of the consolidation.
Peter G. Humphrey, Financial Institutions’ chairman, president, and chief executive, said the move will ultimately save $3 million a year.
This step seemed inevitable — the company recently slashed its quarterly dividend in half and sold more than $100 million of problem loans at a significant loss – but is nonetheless a major departure for the $2.2 billion-asset Financial Institutions, which has operated as a multibank holding company since the 1930s.
It had long touted its decentralized strategy as one that ensured most banking decisions were made locally instead of at the holding-company level. But evidence of internal-control and credit-quality problems started surfacing a few years ago, and Financial Institutions began to centralize.
Toward the end of 2003 it expanded the powers of its chief credit officer, and in June 2004 it centralized its credit-administration function. In October it named James T. Rudgers to a newly created position, chief of community banking, supervising the subsidiaries. Mr. Rudgers was hired from Hudson United Bancorp of Mahwah, N.J., where he had been an executive vice president.
“Historically, we felt the benefits of decentralization outweighed the risk, but as we began seeing issues on the credit side and our regulatory burden increased, that changed,” Mr. Humphrey said Friday. “Internal controls became very expensive and redundant in a super community banking structure.”
A number of companies that worked through bad-loan issues and later consolidated their charters did so to make themselves more fetching to acquirers, but Mr. Humphrey said Financial Institutions is not actively pursuing a sale.
Indeed, he said the consolidation under way now and the loan sale that preceded it have gone a long way toward getting Financial Institutions back on track.
“I think by the end of the year we’ll have things well in hand,” he said. “We’re moving forward in a positive fashion and I feel good about that.”
Still, a leaner Financial Institutions will probably draw suitors. John Blaylock, an associate director at Alex Sheshunoff & Co. Investment Banking in Austin, said that despite its credit-quality woes Financial Institutions still has “an attractive franchise,” with more than four dozen branches in upstate New York.
“They’re going to be more attractive, and some buyers are going to make offers,” he said.
Financial Institutions has been grappling with higher-than-average levels of nonperforming loans since the end of 2002. Last fall, however, it appeared the company had begun to put the credit-quality problems behind it; it reported sharp third-quarter declines in nonperforming loans and its loan-loss provision.
But Financial Institutions disclosed in December that it had uncovered serious weaknesses in the financial-reporting processes of National Bank of Geneva and Wyoming County Bank.
In January, Financial Institutions reported that nonperforming loans rose nearly 5.4% during the fourth quarter of 2004, to $52.4 million, or 4.18% of total loans.
It reported a net loss of $12 million for the second quarter, largely because of a $37 million chargeoff related to the loan sale.
In the second-quarter 10-Q report it filed with the Securities and Exchange Commission Aug. 9, the company said it had made some progress on the financial-reporting issues it reported in December, but it said considerable problems remained, especially at National Bank of Geneva.
Financial Institutions has replaced the presidents at Wyoming County Bank and National Bank of Geneva — its two largest operating units — this year. Less than two weeks ago it announced it had hired John Witkowski, a former Bank of America Corp. executive, as Wyoming County Bank’s president; he succeeded Jon Cooper, who had resigned in April.
Martin Birmingham was named National Bank of Geneva’s president in March, the same month Randolph C. Brown resigned from the post.
Mr. Birmingham and Mr. Witkowski have agreed to stay on after the merger. Mr. Birmingham will be in charge of commercial lending, while Mr. Witkowski will oversee the retail banking operation. Mr. Rudgers will retain his position.
