Financial Institutions, Inc. Reports First Quarter 2013 Net Income of $6.1 Million

WARSAW, N.Y., April 24, 2013 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (Nasdaq:FISI) (the "Company"), the parent company of Five Star Bank, today reported financial results for the first quarter ended March 31, 2013.

Summary of Performance

"Our first quarter results provide a solid start to 2013," said Martin K. Birmingham, the Company's President and Chief Executive Officer. "We delivered consistent earnings despite the pressure we experienced, like most of the banking industry, on our net interest margin."

Net income available to common shareholders was $5.8 million or $0.42 per diluted share in the quarter ended March 31, 2013, representing a $182 thousand, or $0.01 per diluted share, decrease from fourth quarter 2012. Net income of $6.1 million in the first quarter 2013 was $183 thousand, or 3% lower than the fourth quarter 2012 as a $270 thousand increase in noninterest income was offset by a $201 thousand decrease in net interest income and $189 thousand increase in the provision for loan losses. The Company's return on average assets and return on average common equity were 0.90% and 9.83%, respectively, during the first quarter 2013, compared to 0.95% and 9.95%, respectively, in the fourth quarter 2012.

Mr. Birmingham concluded, "We are committed to enhancing shareholder value by utilizing our earnings both for growth and returning a portion of earnings to shareholders as a cash dividend. This is evidenced by our recent announcement of a 12.5% increase in the quarterly cash dividend from $0.16 per share to $0.18 per share, which returned 43% percent of first quarter net income to shareholders."

Net Interest Income and Net Interest Margin

Net interest income of $22.9 million in the first quarter 2013 was $201 thousand lower than the fourth quarter 2012, partly a result of the fewer number of days in the first quarter versus the fourth quarter. The net interest margin (on a tax-equivalent basis) was 3.73% in the first quarter 2013 compared to 3.92% in fourth quarter 2012. The Company's yield on interest-earning assets decreased 22 basis points in the first quarter 2013 compared with the fourth quarter 2012, partly a result of cash flows being reinvested in the current low interest rate environment, coupled with the impact of a $100 million leverage strategy that utilized proceeds from FHLB advances to acquire high-quality investment securities. The underlying leverage strategy increased net interest income by approximately $270 thousand in the first quarter 2013.

Noninterest Income

Total noninterest income for the first quarter 2013 was $6.6 million compared to $6.3 million in the fourth quarter 2012. Noninterest income in the first quarter 2013 included gains totaling $892 thousand from the sale of three trust preferred securities that were written down in prior periods and included in non-performing assets. Net securities gains totaled $487 thousand in the fourth quarter 2012. During the fourth quarter 2012, the Company recognized a loss of $302 thousand from the disposal of other assets, primarily related to the consolidation of branches as part of the 2012 branch acquisitions. Excluding the net securities gains and gains/losses from the disposal of other assets, noninterest income in the first quarter 2013 was $438 thousand lower than the fourth quarter 2012, as a $225 thousand increase in broker-dealer revenue resulting from favorable market conditions and new business opportunities was more than offset by decreases of $385 thousand in service charges on deposits, reflecting typical seasonality, $99 thousand in ATM and debit card income and $139 thousand in mortgage banking revenue (defined as loan servicing income and net gains on the sale of loans held for sale).

Noninterest Expense

Total noninterest expense of $17.6 million for the first quarter 2013 increased by less than 1% from $17.5 million in the fourth quarter. Advertising and promotions expense decreased $216 thousand, largely attributable to the timing of promotional spending, while lower real estate owned expense drove a $111 thousand decrease in other noninterest expense when comparing the first quarter 2013 to the fourth quarter 2012. These decreases were offset by higher salaries and employee benefits and occupancy and equipment expense. Salaries and employee benefits increased $147 thousand as the Company typically experiences a higher level of payroll taxes in the first quarter. Occupancy and equipment expense increased $150 thousand due to an increase in service contract expense when comparing the first quarter 2013 to the fourth quarter 2012. In addition, the last three quarters include non-recurring professional service fees associated with the executive management transitions that began in 2012 with the retirement of the Company's former CEO.

Balance Sheet and Capital Management

Total assets were $2.828 billion at March 31, 2013, up $63.8 million from $2.764 billion at December 31, 2012. The increase in total assets is attributable to a $24.4 million increase in cash and cash equivalents, a $29.5 million increase in investment securities and a $11.6 million increase in loans.

Total loans were $1.717 billion at March 31, 2013, up $11.6 million or 1% compared to $1.706 billion at December 31, 2012. The increase in loans was attributable to organic growth, primarily in the commercial, home equity and consumer indirect loan categories. The average yield on the loan portfolio was 4.83% in the first quarter 2013, compared to 4.98% in the fourth quarter 2012.

Total investment securities were $871.2 million at March 31, 2013, up $29.5 million compared to $841.7 million at December 31, 2012. The average yield on the investment securities portfolio was 2.39% in the first quarter 2013 compared to 2.56% in the fourth quarter 2012.

Total deposits were $2.409 billion at March 31, 2013, up $147.7 million from $2.262 billion at December 31, 2012. Public deposit balances increased $178.6 million during the first quarter of 2013 due to the seasonality of municipal cash flows, coupled with successful business development efforts in our newly acquired branches. The repricing of matured certificates of deposit and the decrease in interest rates on various interest-bearing deposit accounts to reflect lower market interest rates resulted in our average cost of interest-bearing liabilities declining to 0.37% in the first quarter 2013 from 0.42% in the fourth quarter 2012.

Shareholders' equity was $254.9 million at March 31, 2013, up $1.0 million compared with $253.9 million at December 31, 2012. At March 31, 2013, the tangible common equity to tangible assets ratio and leverage ratio were 6.74% and 7.46%, respectively, compared to 6.86% and 7.71%, respectively, at December 31, 2012. The decrease in the Company's equity ratios was attributable to growth in our average assets.

At March 31, 2013, the Company's common book value and tangible common book value was $17.21 per share and $13.56 per share, respectively, compared to $17.15 per share and $13.49 per share, respectively, at December 31, 2012.

Credit Quality

Non-performing loans were $11.8 million or 0.69% of total loans at March 31, 2013, compared with $9.1 million or 0.53% of total loans at December 31, 2012. The Company's ratio of non-performing loans to total loans continues to compare favorably to its peer group average, which was 2.19% of total loans at December 31, 2012, the most recent period for which information is available (Source: Federal Financial Institutions Examination Council — Bank Holding Company Performance Report as of December 31, 2012 — Top-tier bank holding companies having consolidated assets between $1 billion and $3 billion).

The increase in non-performing loans during the first quarter 2013 was due to the addition of one credit relationship consisting of commercial business and commercial mortgage loans with unpaid principal balances totaling $3.4 million. The Company had internally downgraded the relationship to substandard status from special mention during the fourth quarter 2012. The further downgrade necessitated a specific allocation that increased our allowance for losses by approximately $570 thousand in the quarter.

Net loan charge-offs improved to $1.6 million in the first quarter 2013 from $2.1 million in the fourth quarter 2012. The provision for loan losses was $2.7 million in the first quarter 2013, compared to $2.5 million in the fourth quarter.

The allowance for loan losses was $25.8 million at March 31, 2013, compared with $24.7 million at December 31, 2012. The ratio of the allowance for loan losses to total loans was 1.50% at March 31, 2013, compared with 1.45% at December 31, 2012. The ratio of the allowance for loan losses for originated loans to total originated loans was 1.56% at March 31, 2013, compared with 1.51% at December 31, 2012. The ratio of allowance for loan losses to non-performing loans was 220% at March 31, 2013, compared with 271% at December 31, 2012.

About Financial Institutions, Inc.

With over $2.8 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 60 ATMs throughout 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"). The Company believes that non-GAAP financial measures provide a meaningful comparison of the underlying operational performance of the Company, and facilitate investors' assessments of its business and performance trends in comparison to others in the financial services industry. In addition, the Company believes 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.