Financial Institutions, Inc. Reports Quarterly Net Income Increase of 16% to $6.7 Million

WARSAW, N.Y., July 25, 2012 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (Nasdaq:FISI) (the "Company"), the parent company of Five Star Bank, today announced financial results for the second quarter ended June 30, 2012. Net income was $6.7 million for the second quarter of 2012, a 16% increase compared with $5.7 million for the second quarter of 2011, bringing the Company's net income for the first half of 2012 to $12.9 million compared to $11.5 million in 2011. After preferred dividends, second quarter earnings per diluted share was $0.46 compared with $0.39 per share for the second quarter of 2011. On a year to date basis, diluted earnings per share increased $0.16 or 22% to $0.88 per share as compared to $0.72 per share for the same period last year.

Highlights for the second quarter of 2012 were as follows:

• Increased quarterly dividend on common stock by 8% from $0.13 to $0.14 per share
• First Niagara branch acquisition closed and fully converted on June 22, 2012

• Assumed deposits of $129.3 million and acquired in-market performing loans of $58.6 million at closing

• Net interest income increased $1.1 million or 6% compared to the second quarter of 2011
• Realized pre-tax gains of $1.2 million from the sales of investment securities
• Continued strong quarterly performance

• Return on average assets of 1.08%
• Return on average common equity of 11.12%
• Return on average tangible common equity of 13.36%

• Excluding loans acquired from First Niagara, total loans grew $45.0 million during the second quarter
• Capital ratios remain well above regulatory minimums

• Tangible common equity to tangible assets of 7.20%
• Leverage ratio of 8.27%
• Total risk-based capital of 12.64%

• Common and tangible book value per share increased to $16.61 and $13.44, respectively, at June 30, 2012

"Our consistent, relationship-focused approach to community banking is making a positive difference for our customers and the company, as evidenced by our outstanding operating performance in the second quarter," said Peter G. Humphrey, President and Chief Executive Officer. "Along with the recent acquisition of four retail branch locations, commercial and indirect loan volumes have helped strengthen our presence in a very competitive environment."

On June 22, Five Star Bank completed its acquisition of four First Niagara Bank, N.A. retail branch locations in the Upstate New York communities of Batavia, Brockport, Medina, and Seneca Falls. Accounts were promptly converted to Five Star Bank's systems with minimal disruption to customers and operations. Five Star Bank is also slated to close on the acquisition of four HSBC Bank USA, N.A. retail branch locations in the communities of Albion, Elmira, Elmira Heights, and Horseheads in mid-August, subject to regulatory approval.

"The success of our recent conversion is a testament to the scalability of our entire Five Star Bank team and we look forward to repeating that success with our HSBC branch conversion next month," said Humphrey. "We believe our ability to complete these transitions quickly, coupled with Five Star Bank's strong community banking brand recognition, provide us many benefits and an immediate opportunity to strengthen our competitive advantage in the Western and Central New York market areas."

"Our second quarter results include $1.0 million of pre-tax expense or $0.04 per diluted share after taxes related to the recent acquisition of the four First Niagara branches," said Karl Krebs, Executive Vice President and Chief Financial Officer.

Net Interest Income and Net Interest Margin

Net interest income totaled $21.4 million for the three months ended June 30, 2012, an increase of $1.1 million or 6% compared with the second quarter of 2011. Average earning assets increased $184.1 million or 9% in the second quarter of 2012 compared with the second quarter last year, due to growth in the loan portfolio. Average total loans were up $183.2 million or 13% during the second quarter of 2012 compared to the second quarter of 2011, including a double digit increase in the commercial, home equity and consumer indirect portfolios.

The net interest margin on a tax-equivalent basis was 3.89% in the second quarter of 2012, compared with 4.00% in the second quarter of 2011. The Company's yield on earning-assets decreased 38 basis points in the second quarter of 2012 compared with the same quarter last year, a result of cash flows being reinvested in the current low interest rate environment, which includes the impact of investing the excess cash from our branch acquisition into low yielding securities. The cost of interest-bearing liabilities decreased 34 basis points compared with the second 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 $6.7 million in the second quarter of 2012, compared with $5.0 million in the second quarter of 2011. Reflected in those amounts were net pre-tax gains on investment securities of $1.2 million in the second quarter of 2012 and $4 thousand in the second quarter of 2011. The Company recognized gains from the sale of two pooled trust-preferred securities 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 second quarter of 2012 totaled $5.5 million, compared with $5.0 million in the same quarter last year. The improvement in noninterest income as compared with the earlier quarter resulted predominantly from increases in company owned life insurance, loan servicing income and net gains from the sale of loans held for sale, partially offset by a decline in service charges on deposit accounts. An additional $18.0 million investment in company owned life insurance during the third quarter of 2011 was largely responsible for the $162 thousand increase in company owned life insurance income. A decrease in the valuation allowance for capitalized mortgage servicing assets resulted in the $160 thousand increase in loan servicing income. Gains from the sale of residential mortgage loans held for sale were $208 thousand higher than in the second quarter of 2011 due to increased origination volume. Service charges on deposit accounts were down $269 thousand in the second quarter primarily due to lower overdraft fee income.

Noninterest Expense

Noninterest expense in the second quarter of 2012 totaled $16.6 million, compared with $15.2 million in the second quarter of 2011. Included in the 2012 amount are branch acquisition-related expenses considered to be non-operating in nature. Exclusive of those expenses, noninterest operating expense was $15.6 million in the second quarter of 2012, an increase of $435 thousand from the same period last year.  When comparing the second quarter of 2012 to the same quarter in 2011, the higher level of operating expense was due, in large part, to an increase in other noninterest expense, which included $249 thousand of severance expense associated with the retirement of one of our executive officers during the second quarter of 2012.

Balance Sheet and Capital Management

Total loans were $1.624 billion at June 30, 2012, up $103.1 million or 7% from March 31, 2012 and up $139.4 million or 9% from December 31, 2011. At June 30, 2012, total loans included $58.1 million in loans obtained in the First Niagara branch acquisition. Total investment securities were $787.2 million at June 30, 2012, up $63.5 million from March 31, 2012 and up $136.4 million from December 31, 2011.

Deposits were $2.135 billion at June 30, 2012, an increase of $68.7 million from the end of the first quarter and up $203.7 million compared with the end of 2011, largely due to $129.3 million in retail deposits assumed from the First Niagara branch acquisition. Public deposit balances decreased to 23% of total deposits at June 30, 2012, compared to 26% and 20% of total deposits at March 31, 2012 and December 31, 2011, respectively, due largely to the seasonality of municipal cash flows and the impact of the branch acquisition. The Company's deposit mix remains favorably weighted in lower cost demand, savings and money market accounts, which comprised 67% of total deposits at the end of the second quarter.

Shareholders' equity was $246.9 million at June 30, 2012, compared with $240.0 million at March 31, 2012 and $237.2 million at December 31, 2011.  Net income for the quarter increased shareholders' equity by $6.7 million, which was partially offset by common and preferred stock dividends of $2.3 million. Accumulated other comprehensive income included in shareholders' equity increased $2.4 million during the second 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 8.27% and 12.64%, respectively, at June 30, 2012, compared to 8.80% and 13.47%, respectively, at March 31, 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 completed and upcoming branch acquisitions, resulted in the lower capital ratios.  

In the second quarter 2012, U.S. banking regulators issued proposed rules for the U.S. adoption of the Basel III regulatory capital framework. The proposals narrow the definition of capital, increase the minimum levels of required capital, introduce capital buffers and increase the risk weights for various asset classes. On a fully-phased-in pro forma basis, the Company is currently estimated to exceed the proposed capital levels.

In his concluding remarks, Mr. Humphrey added, "We are committed to enhancing shareholder value by utilizing our earnings to support future growth of the balance sheet and returning a portion of earnings to shareholders as future cash dividends. Our Board of Directors believes this represents a prudent and balanced approach to rewarding shareholders for their support while continuing to grow the Company. This is evidenced by our recent acquisition as well as an 8% increase in our quarterly dividend to 14 cents per share."

Credit Quality

Non-performing loans increased to $11.3 million or 0.70% of total loans at June 30, 2012, compared to $8.2 million or 0.54% of total loans at March 31, 2012 and $7.1 million or 0.48% of total loans at December 31, 2011.  The increase in non-performing loans is primarily attributable to two commercial relationships. Our ratio of non-performing loans to total loans continues to compare favorably to the average of our peer group, which was 3.05% of total loans at March 31, 2012, the most recent period for which information is available (Source: Federal Financial Institutions Examination Council — Bank Holding Company Performance Report as of March 31, 2012 — Top-tier bank holding companies having consolidated assets between $1 billion and $3 billion). 

Net charge-offs of $1.1 million represented 0.29% of average loans on an annualized basis compared to $882 thousand or 0.24% in the first quarter of 2012. The provision for loan losses was $1.5 million for the second quarter of 2012, compared to $1.4 million for the first quarter of 2012. For the first six months of 2012, the provision for loan losses exceeded net charge-offs by $860 thousand as we continue to maintain the allowance for loan losses consistent with the growth in our loan portfolio and trends in asset quality.

The allowance for loan losses was $24.1 million at June 30, 2012, compared with $23.8 million at March 31, 2012 and $23.3 million at December 31, 2011. The ratio of the allowance for loan losses to total loans was 1.49% at June 30, 2012, compared with 1.56% at March 31, 2012 and 1.57% at December 31, 2011. Contributing to this ratio decline were the loans obtained in the First Niagara branch acquisition, which were recorded at fair market value as of the acquisition date with no allowance carried over. The ratio of allowance for loan losses to non-performing loans was 213% at June 30, 2012, compared with 289% at March 31, 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 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 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 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.