Financial Institutions, Inc. Reports Third Quarter

Financial Institutions, Inc. Reports Third Quarter Results

WARSAW, N.Y., Oct. 24, 2012 (GLOBE NEWSWIRE) -- Today Financial Institutions, Inc. (Nasdaq:FISI) (the "Company"), the parent company of Five Star Bank, announced financial results for the third quarter ended September 30, 2012. Net income was $4.3 million for the third quarter of 2012, bringing the Company's net income for the first nine months of 2012 to $17.1 million. Net income for the third quarter and first nine months of 2011 was $5.5 million and $17.0 million, respectively. After preferred dividends, third quarter earnings per diluted share was $0.28 compared with $0.37 per share for the third quarter of 2011. In the first nine months of 2012 earnings per diluted share increased $0.07 or 6% to $1.16 per share as compared to $1.09 per share for the same period last year.

Highlights for the third quarter of 2012 and other recent developments include:

• Second half of branch acquisition closed and fully converted on August 17, 2012

• Assumed deposits of $157.2 million and acquired in-market performing loans of $17.9 million at closing

• During the third quarter of 2012, the Company incurred pre-tax acquisition and conversion-related costs of approximately $1.9 million, or $0.09 per share on an after-tax basis. In addition, pre-tax costs of approximately $2.6 million, or $0.12 per share after-tax were incurred in association with the retirement of the Company's Chief Executive Officer.
• Non-GAAP net operating income available to common shareholders for the third quarter of 2012 was $6.8 million, or $0.50 per diluted share, compared to $5.8 million or $0.43 per share in the third quarter of 2011.
• Net interest income increased $2.5 million or 12% compared to the third quarter of 2011
• Realized pre-tax gains of $596 thousand from the sales of investment securities
• Excluding loans acquired, total loans grew $22.6 million during the third quarter
• Capital ratios remain well above regulatory minimums

• Tangible common equity to tangible assets of 7.05%
• Leverage ratio of 7.67%
• Total risk-based capital of 12.16%

• Common book value per share increased to $17.00 at September 30, 2012
• Quarterly cash dividend declaration of $0.14 per outstanding common share, $0.75 per share on Series A 3% preferred stock, and $2.12 per share on series B-1 8.48% preferred stock paid on October 2; Common stock dividend represents a yield of approximately 3%
• Management team strengthened with internal promotions

"We are making steady progress in the implementation of our strategy for increasing our regional presence and strengthening the Company's financial position," John E. Benjamin, Interim Chief Executive Officer said. "We have made meaningful strides in improving operations and the quality of our portfolio, while maintaining a strong capital position and continuing to increase shareholder value.  We are very pleased with our margin stability, exceptional loan growth, and the relatively low-risk profile of our balance sheet. With proper execution of our business plan we believe that Financial Institutions has a promising future."

During the third quarter of 2012 Five Star Bank completed the second half of its previously announced acquisition of Upstate New York retail branch locations (the "branch acquisitions"). Former HSBC Bank USA, N.A. branches located in Albion, Elmira, Elmira Heights, and Horseheads were acquired in August, complementing the former First Niagara Bank, N.A. locations in Batavia, Brockport, Medina, and Seneca Falls acquired in June.

Management Transition

In August the Company announced a management transition to reflect the increased size and scale of the overall organization following the completion of the former HSBC and First Niagara branch acquisitions and the retirement of Peter Humphrey as Chief Executive Officer. As part of the transition, the Company announced the promotion of Richard Harrison as Chief Operating Officer and Martin Birmingham as President and Chief of Community Banking, with a combined 45 years of local banking experience. Mr. Harrison and Mr. Birmingham were instrumental in the structuring, negotiating and integrating of the branch office acquisitions. The Company's Chairman John Benjamin was named Interim Chief Executive Officer.

Net Interest Income and Net Interest Margin

Net interest income totaled $23.1 million for the third quarter of 2012, an increase of $2.5 million or 12% compared with the third quarter of 2011. Average earning assets increased $297.2 million or 14% in the third quarter of 2012 compared with the third quarter of 2011, due largely to growth in the loan portfolio resulting from organic loan growth coupled with the branch acquisitions. Accordingly, average total loans were up $244.3 million or 17% during the third quarter of 2012 compared to the third quarter of 2011.

The net interest margin on a tax-equivalent basis was 3.96% in the third quarter of 2012, compared with 4.02% in the third quarter of 2011. The Company's yield on earning-assets decreased 30 basis points in the third quarter of 2012 compared with the same period last year, a result of cash flows being reinvested in the current low interest rate environment, which includes the impact of investing the cash from the branch acquisitions into lower yielding securities. The cost of interest-bearing liabilities decreased 29 basis points as compared to the third quarter of 2011, primarily a result of the redemption of the Company's 10.20% junior subordinated debentures during the third quarter of 2011 as well as the continued re-pricing of the Company's certificates of deposit.

Noninterest Income

Noninterest income totaled $6.4 million in the third quarter of 2012, compared with $8.0 million in the third quarter of 2011. Reflected in those amounts were net pre-tax gains on investment securities of $596 thousand in the third quarter of 2012 and $2.3 million in the third quarter of 2011. The third quarter 2012 gain resulted from the sale of a pooled trust-preferred security that had been written down in prior periods and included in non-performing assets.

Excluding gains from investment securities in both periods, noninterest income in the third quarter of 2012 totaled $5.8 million, compared with $5.7 million in the same quarter last year. This increase in noninterest income was primarily the result of increases in ATM and debit card income, broker-dealer fees and commissions and loan servicing income, partially offset by a loss on the sale of other assets and a decline in other noninterest income.

Noninterest Expense

Noninterest expense of $21.6 million in the third quarter of 2012 increased $4.6 million or 27% from the third quarter of 2011. The third quarter 2012 expenses include pre-tax acquisition and conversion-related costs of approximately $1.9 million. In addition, pre-tax costs of approximately $2.6 million were incurred in association with the retirement of the Company's CEO. Third quarter 2011 expenses included a loss on debt extinguishment which increased other noninterest expense by $1.1 million. Excluding these items, noninterest expense for the third quarter of 2012 increased $1.2 million or 8% compared to the third quarter of 2011 largely due to higher salaries and employee benefits and professional services costs, partially offset by lower advertising and promotions expense.

Balance Sheet and Capital Management

Total loans were $1.659 billion at September 30, 2012, up $34.8 million or 2% from June 30, 2012 and up $174.2 million or 12% from December 31, 2011. At September 30, 2012, total loans included $70.4 million in loans obtained in the branch acquisitions. Total investment securities were $768.2 million at September 30, 2012, down $19.0 million from June 30, 2012 and up $117.4 million from December 31, 2011.

Deposits were $2.332 billion at September 30, 2012, an increase of $196.4 million from the end of the second quarter of 2012 and up $400.1 million compared with the end of 2011, largely due to retail deposits assumed from the branch acquisitions. Retail deposits assumed during the second and third quarters of 2012 were $129.3 million and $157.2 million, respectively. Public deposit balances were 23% of total deposits at September 30, 2012 and June 30, 2012, compared to 20% of total deposits at December 31, 2011, due largely to the seasonality of municipal cash flows. The Company's deposit mix remains favorably weighted in lower cost demand, savings and money market accounts, which comprised 70% of total deposits at the end of the third quarter.

Shareholders' equity was $251.8 million at September 30, 2012, compared with $246.9 million at June 30, 2012 and $237.2 million at December 31, 2011. Net income for the quarter increased shareholders' equity by $4.3 million, which was partially offset by common and preferred stock dividends of $2.3 million. Accumulated other comprehensive income included in shareholders' equity increased $2.9 million during the third quarter due primarily to higher net unrealized gains on securities available for sale.

The Company's leverage ratio and total risk-based capital ratio decreased to 7.67% and 12.16%, respectively, at September 30, 2012, compared to 8.27% and 12.64%, respectively, at June 30, 2012, all of which exceeded the regulatory thresholds required to be classified as a "well capitalized" institution as established by the Company's primary banking regulators. Balance sheet growth, primarily related to the branch acquisitions, coupled with goodwill and intangible assets recorded in conjunction with the acquisitions, resulted in the lower capital ratios. Such goodwill and intangible assets are excluded from regulatory capital under regulatory accounting practices.

Credit Quality

Non-performing loans were $10.4 million or 0.63% of total loans at September 30, 2012, as compared with $11.3 million or 0.70% of total loans at June 30, 2012 and $7.1 million or 0.48% of total loans at December 31, 2011. The Company's ratio of non-performing loans to total loans continues to compare favorably to its peer group average, which was 2.76% of total loans at June 30, 2012, the most recent period for which information is available (Source: Federal Financial Institutions Examination Council — Bank Holding Company Performance Report as of June 30, 2012 — Top-tier bank holding companies having consolidated assets between $1 billion and $3 billion).

Net charge-offs of $1.6 million in the third quarter of 2012 represented 0.38% of average loans on an annualized basis compared to $1.1 million or 0.29% in the second quarter of 2012. The provision for loan losses was $1.8 million for the third quarter of 2012, compared to $1.5 million for the second quarter of 2012. For the first nine months of 2012, the provision for loan losses exceeded net charge-offs by $1.0 million as the Company continues to maintain the allowance for loan losses consistent with the growth in its loan portfolio and trends in asset quality.

The allowance for loan losses was $24.3 million at September 30, 2012, compared with $24.1 million at June 30, 2012 and $23.3 million at December 31, 2011. The ratio of the allowance for loan losses to total loans was 1.46% at September 30, 2012, compared with 1.49% at June 30, 2012 and 1.57% at December 31, 2011. Contributing to this ratio decline were the loans obtained in the branch acquisitions, which were recorded at fair market value as of the acquisition date with no allowance carried over, as required by U.S. generally accepted accounting principles. The ratio of allowance for loan losses to non-performing loans was 233% at September 30, 2012, compared with 213% at June 30, 2012 and 329% at December 31, 2011.

About Financial Institutions, Inc.

With over $2.6 billion in assets, Financial Institutions, Inc. provides diversified financial services through its subsidiaries, Five Star Bank and Five Star Investment Services, Inc. Five Star Bank provides a wide range of consumer and commercial banking services to individuals, municipalities and businesses through a network of over 50 offices and more than 70 ATMs in Western and Central New York State. Five Star Investment Services provides investment advice, brokerage and insurance products and services within the same New York State markets.  Financial Institutions, Inc. and its subsidiaries employ over 600 individuals. The Company's stock is listed on the Nasdaq Global Select Market under the symbol FISI. Additional information is available at the Company's website: www.fiiwarsaw.com .

Non-GAAP Financial Information

This news release contains financial information determined by methods other than in accordance with U.S. generally accepted accounting principles ("GAAP"). We believe that non-GAAP financial measures provide a meaningful comparison of the underlying operational performance of the Company, and facilitate investors' assessments of our business and performance trends in comparison to others in the financial services industry. In addition, we believe the exclusion of these non-operating items enables management to perform a more effective evaluation and comparison of the Company's results and to assess performance in relation to the company's ongoing operations. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Where non-GAAP disclosures are used in this news release, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in Appendix A to this document.

Safe Harbor Statement

This press release may contain forward-looking statements as defined by federal securities laws. These statements may address issues that involve significant risks, uncertainties, estimates and assumptions made by management. Actual results could differ materially from current beliefs or projections. There are a number of important factors that could affect the Company's forward-looking statements which include its ability to implement its strategic plan, its ability to redeploy investment assets into loan assets, whether it experiences greater credit losses than expected, the impact of the current management transition, the attitudes and preferences of its customers, its ability to successfully integrate recently acquired bank branches and profitably operate newly opened bank branches, the competitive environment, fluctuations in the fair value of securities in its investment portfolio, changes in the regulatory environment and general economic and credit market conditions nationally and regionally. For more information about these factors and other factors that could affect the Company's forward-looking statements, please see the Company's Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q on file with the SEC. All of these factors should be carefully reviewed, and readers should not place undue reliance on these forward-looking statements. Except as required by law, the Company undertakes no obligation to revise these statements following the date of this press release.