Rochester Business Journal

The abrupt retirement of Peter Humphrey as president and CEO of Financial Institutions Inc. and its Five Star Bank subsidiary may not have been a surprise to its board of directors, but it was to a local manager of a bank-related hedge fund-whose questions were underscored by the company's separation agreement with Humphrey.
 
"We've been talking with Peter about this for two years," FII board chairman John Benjamin said after Tuesday's announcement that Humphrey had retired as the fourth-generation top executive, effective immediately.
 
"Even to the point of six months ago, I asked for requests for proposals from three search teams, in anticipation that this was going to occur in the foreseeable future."
 
The departure came a week and a day after the conversion of four former branches of HSBC Bank USA N.A. to Five Star Bank. Four branches acquired from First Niagara Bank N.A. were converted in June.
 
Robert Bolton, principal at Iron Bay Capital Inc. and portfolio manager of the Iron Bay Fund L.P., questioned the timing of Humphrey's exit.
 
"Why would he not have stayed on while they found his replacement, if, in fact, this had been in discussions with the board for some time?" Bolton said.
 
"Why the immediacy, and why are they not out doing the appropriate search and leaving him in charge, instead of handing the reins to a non-banker while this gets done?"
 
Humphrey will get some $2.8 million over 10 years as part of a separation agreement, papers filed Wednesday with the U.S. Securities and Exchange Commission state.
 
That includes a cash payment of $349,950 and monthly payments totaling $1 million over 24 months beginning after Oct. 1. It also includes an executive retirement agreement that will pay Humphrey $1.5 million over 10 years, effective in October 2014.
 
Other terms provide for the immediate vesting of all outstanding stock options and give Humphrey title to his company car.
 
Humphrey has agreed not to compete with FII for two years in any area where the company does business and not to solicit FII clients, customers, vendors or employees during that period, the filing states.
 
Benjamin is president of Three Rivers Development Corp., the chief private-sector economic development organization in Corning. He was elected chairman of Financial Institutions in 2010 and will serve as interim CEO while a successor to Humphrey is sought.
 
"We didn't know exactly when it was going to occur," Benjamin said of the retirement. "It became a little more focused over the last three months or so. Then Peter and the board decided that the end of August seemed like a reasonable time.
 
"The recent acquisition of HSBC branches and First Niagara branches was completed," he noted. "The bank is doing extremely well, and I guess if you're going to retire, the best time to do it is when you're on top."
 
Humphrey replaced his father, Wolcott "Bud" Humphrey Jr., as president and CEO of the family-owned bank in 1996.
 
Humphrey did not respond to a request for comment that was left on his cellphone.
 
"Having served the institution for more than 35 years, I am stepping down to spend more time with my family and pursue other interests," he said in Tuesday's news release. "At the same time, I intend to remain on the board of directors and be involved in the regional and state business community."
 
Benjamin welcomed Humphrey's continued presence on the board.
 
"He is going to have involvement in the governance of the company," Benjamin said. "It's just time for a change. He viewed it as the right time for him. The board agreed, and we're moving forward."
 
FII became a publicly traded company in June 1999, three years after Humphrey became president and CEO. The stock peaked in May 2002 at an adjusted closing price of $29.20 a share-nearly triple its value after the IPO-and currently is trading around $17.50.
 
The company opened its first branch in Monroe County three months after the IPO.
 
Humphrey led the transition of the National Bank of Geneva, Wyoming County Bank in Warsaw, Bath National Bank and First Tier Bank & Trust in Salamanca to Five Star Bank on Dec. 5, 2005.
 
He also helped the company weather problems in its loan portfolio, selling $140 million in bad loans at 85 cents on the dollar in 2005.
 
Bolton, who has known Humphrey for 10 years, calls him a "great manager" who has shepherded the company through some difficult times.
 
"He's a legacy banker," Bolton said. "If he was forced out, that means he didn't agree with some sort of futuristic MO (method of operation). I'm just hypothesizing here, but he must not have agreed with what was put to him."
 
The company's roots trace back to the founding of the Bank of Geneva in March 1817, its website states. Humphrey's great-grandfather, Wolcott Humphrey, founded the Wyoming County Bank in the 1850s.
 
FII has $2.6 billion in assets, with 50 offices in 14 counties in western and central New York.
 
"I feel very good about the performance of the bank," Humphrey said in June. "It's due to a lot of hard work by a lot of people.
 
"It gets back to really being disciplined, sticking to the fundamentals of good community banking, taking care of your employees and treating your customers properly. And sticking to what you do best, and that is responding to our customers' needs. Our loan quality remains very strong. All of the risk metrics and the loan quality metrics are very good."
 
Two other changes in upper management have been made, the FII statement said. Richard Harrison has been promoted to chief operating officer after serving as executive vice president and chief of retail banking. Martin Birmingham has been named president and chief of community banking.
 
Birmingham came to FII in March 2005 as president and CEO of the National Bank of Geneva, a Five Star predecessor, after serving as Rochester region president for Bank of America Corp.
 
Harrison was hired in 2002 from the Savings Bank of the Finger Lakes, where he was an executive vice president and chief credit officer for the Geneva bank, which was acquired in 2003 by First Niagara Financial Group Inc.
 
"We're going to look at internal candidates (to replace Humphrey) as well as external," Benjamin said. "They're going to be put through the same process as any external candidate."
 
The search is under way, he added Tuesday.
 
"I would expect that we're going to sign a contract with a search firm probably sometime before Oct. 1 and begin the process right after that. It typically takes no longer than six months, probably-something between three and six months-to find a qualified candidate."
 
Humphrey's departure is among several in recent months for the bank, which is based in Warsaw, Wyoming County.
 
Executive Vice President and Chief Risk Officer George Hagi retired at the end of June after 6 1/2 years at the company. John Witkowski, executive vice president and retail banking executive, lost his job at the end of February after the company reorganized its retail management. Matthew Murtha, senior vice president and director of sales and marketing, retired earlier this year.
 
"It's been a little bit more than normal," Humphrey told the Rochester Business Journal in June, "but we've spent a lot of time looking at organizational and management development. With any company, whether it's a bank or a non-bank, you're only as good as your people.
 
"Our priority is to promote from within," he added. "We have, though, hired some people from the outside, who come with great experience. We have hired several commercial lenders in the Buffalo and the Rochester regions, who may be more familiar with the borrowers in those markets, to help us in our lending programs.
 
"Again, we're a small player in those markets. That's one way we can get greater exposure."
 
Although FII will have a new president and CEO, its mission will not change, Benjamin said.
 
"As we look forward, we're going to be looking for somebody with Peter's banking skills, because they are fantastic skills, and then we're going to be looking for somebody who can really build a strong management team as we go forward."
 
Benjamin said he is not interested in the position.
 
Bolton, meanwhile, thinks the board needs to explain Humphrey's sudden retirement to investors. Iron Bay Fund is among them; he said it holds a "long" position in FII shares.
 
"I think the company should be a little more forthcoming with that, instead of just hiding behind a press release," he said. "They haven't really laid that out. Clearly, the audience that owns the stock is going to want to know why."

8/31/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.