Financial Institutions, Inc. Reports Third Quarter 2013 Net Income of $6.2 Million

WARSAW, N.Y., Oct. 23, 2013 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (the "Company") (Nasdaq:FISI), the parent company of Five Star Bank, today reported financial results for the third quarter ended September 30, 2013. Net income for the third quarter 2013 was $6.2 million, compared to $6.9 million for the second quarter 2013. After preferred dividends, third quarter 2013 net income available to common shareholders was $5.8 million or $0.42 per diluted share compared with $6.5 million or $0.47 per share for the second quarter of 2013.

Highlights for the third quarter 2013 include:

• Increased quarterly cash dividend to $0.19 per outstanding common share, the fourth such increase since the beginning of 2012.
• Continued strong quarterly performance with a return on average common equity of 10.05% and return on average tangible common equity of 12.88%
• Total third quarter loans grew $36.3 million from the second quarter or 8.3% on an annualized basis driven by organic loan origination
• Third quarter 2013 noninterest expenses decreased by 2.6% from the second quarter 2013
• Common and tangible book value per share increased to $16.69 and $13.06, respectively, at September 30, 2013
• Capital ratios remain strong with total risk-based capital of 12.19%

Net income of $6.2 million in the third quarter 2013 was $686 thousand lower than the second quarter 2013 as a result of a $1.6 million increase in the provision for loan losses and a $207 thousand decrease in noninterest income, which were partially offset by a $279 thousand increase in net interest income, a $453 thousand decrease in noninterest expense and a $366 thousand decrease in income tax expense. The Company's return on average assets and return on average common equity were 0.88% and 10.05%, respectively, during the third quarter 2013, compared to 0.99% and 10.86%, respectively, in the second quarter 2013.

"We are very pleased with our exceptional loan growth, margin stability, and the relatively low-risk profile of our balance sheet," said Martin K. Birmingham, the Company's President and Chief Executive Officer. "Consistent with our strategy, we will continue to focus on all aspects of our customer-centric approach in the markets we serve while maintaining prudent expense management policies. A key focal point has been the implementation of initiatives to enhance customer satisfaction. We believe that successful execution of our strategy was demonstrated in the third quarter by our consistent ability to deliver strong organic loan growth. At the same time, our noninterest expense declined for the second consecutive quarter.

"We're also seeing the initial returns from our move to streamlined retail checking products, which have enjoyed widespread customer acceptance and satisfaction. Our approach -- emphasizing clearly-stated benefits without hidden fees -- is proving to be another successful element in our strategy for long-term customer relationship development and retention," added Mr. Birmingham.

"Based on our solid third quarter performance and the confidence we have in our future growth and operating performance, we made the decision to increase our quarterly cash dividend to $0.19 per outstanding common share. The higher dividend represents a 45% percent return of third quarter net income to shareholders and a 6% increase when compared with last quarter's dividend," concluded Mr. Birmingham.

Net Interest Income and Net Interest Margin

Net interest income was $22.8 million in the third quarter 2013, an increase of $279 thousand from the second quarter 2013. The net interest margin (on a tax-equivalent basis) was steady at 3.62% in the third quarter 2013 compared to 3.63% in the second quarter 2013.

Noninterest Income

Total noninterest income for the third quarter 2013 was $6.2 million compared to $6.4 million in the second quarter 2013. Noninterest income in the second quarter of 2013 included gains totaling $332 thousand from the sale of trust preferred securities. There were no securities sold during the third quarter 2013.

Excluding the second quarter gains from investment securities, noninterest income in the third quarter 2013 was $125 thousand or 2% higher than the second quarter 2013. This increase in noninterest income was the result of increases in service charges on deposits and other noninterest income, partially offset by decreases in mortgage banking revenue (defined as loan servicing income and net gains on the sale of loans held for sale), ATM and debit card income, broker-dealer fees and commissions and gains on the sale of other assets.

Noninterest Expense

Total noninterest expense declined by 2.6% to $17.0 million for the third quarter 2013 compared to $17.5 million in the second quarter 2013. The decrease in noninterest expense was primarily the result of lower professional service fees and computer and data processing expense. In addition, occupancy and equipment expense, supplies and postage, advertising and promotions and other noninterest expense combined for a total decrease of $301 thousand when comparing the third quarter 2013 to the second quarter 2013. Professional service fees decreased $279 thousand, due in part to executive management transitions and other corporate governance initiatives that resulted in higher expense in the second quarter of 2013. The timing of the annual update of a core software application resulted in a $123 thousand decrease in computer and data processing expense. These decreases were partially offset by higher salaries and employee benefits expense when comparing the third quarter 2013 to the second quarter 2013. The increase in salaries and employee benefits expense was primarily attributable to higher expenses for medical insurance, severance and employee stock based compensation. Medical insurance is generally higher in the first and third quarter each year due to the timing of the Company's contributions to employee health savings accounts. 

Balance Sheet and Capital Management

Total assets were $2.87 billion at September 30, 2013, up $103.7 million from $2.76 billion at December 31, 2012. The increase in total assets is primarily attributable to a $73.9 million increase in total loans and a $38.9 million increase in cash and cash equivalents, partially offset by a $12.4 million decrease in investment securities.

Total loans were $1.78 billion at September 30, 2013, up $73.9 million or 4% compared to $1.71 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 4.59% in the third quarter 2013, compared to 4.65% in the second quarter 2013.

Total investment securities were $829.3 million at September 30, 2013, down $12.4 million compared to $841.7 million at December 31, 2012. The decrease in investment securities occurred based on the combination of scheduled principal paydowns on amortizing securities and a change in the net unrealized gain/loss on the available-for-sale ("AFS") investment securities portfolio. The AFS portfolio had net unrealized losses totaling $1.9 million at September 30, 2013 compared to net unrealized gains of $26.6 million at December 31, 2012. The unrealized loss on the AFS portfolio was predominantly caused by changes in market interest rates.  The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change. Approximately $227.3 million in available for sale securities were transferred at fair value to held to maturity during the third quarter 2013 as a means of mitigating the fair value fluctuations in the AFS portfolio and reducing the volatility of tangible common equity. The average yield on the investment securities portfolio was 2.42% in the third quarter 2013 compared to 2.38% in the second quarter 2013.

Total deposits were $2.41 billion at September 30, 2013, up $152.4 million from $2.26 billion at December 31, 2012. Public deposit balances increased $139.2 million during the first nine months of 2013 due to the seasonality of municipal cash flows, coupled with successful business development efforts for the Company's newly acquired branches. The average cost of interest-bearing deposits in the third quarter 2013 was 0.36%, unchanged from the second quarter 2013.

Shareholders' equity was $247.8 million at September 30, 2013, down $6.1 million compared with $253.9 million at December 31, 2012.   Net income for the nine months ended September 30, 2013 increased shareholders' equity by $19.2 million, which was partially offset by common and preferred stock dividends of $8.7 million. Accumulated other comprehensive loss included in shareholders' equity decreased $16.6 million during the first nine months of 2013 due to the previously mentioned change in unrealized gain/loss on AFS securities. At September 30, 2013, the tangible common equity to tangible assets ratio and leverage ratio were 6.40% and 7.68%, respectively, compared to 6.86% and 7.71%, respectively, at December 31, 2012. The decrease in the Company's equity ratios was attributable to the decrease in shareholder's equity combined with a growth in our average assets.

At September 30, 2013, the Company's common book value and tangible common book value was $16.69 per share and $13.06 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 $10.3 million or 0.58% of total loans at September 30, 2013, compared with $9.1 million or 0.53% of total loans at December 31, 2012. The increase in non-performing loans during the first nine months of 2013 was primarily due to the first quarter addition of one credit relationship consisting of commercial business and commercial mortgage loans with unpaid principal balances totaling $2.4 million as of September 30, 2013.

During the third quarter 2013, the Company internally downgraded to substandard status from special mention one credit relationship consisting of a single commercial mortgage loan with an unpaid principal balance totaling $8.4 million. The downgrade necessitated a provision and increase in our allowance for losses of approximately $960 thousand.

Net loan charge-offs increased to $1.7 million in the third quarter 2013 from $1.4 million in the second quarter 2013. The provision for loan losses was $2.8 million in the third quarter 2013, compared to $1.2 million in the second quarter 2013. The increase in the provision in the third quarter 2013 was primarily related to the one commercial mortgage loan referenced above.

The allowance for loan losses was $26.7 million at September 30, 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 September 30, 2013, compared with 1.45% at December 31, 2012. The ratio of allowance for loan losses to non-performing loans was 258% at September 30, 2013, compared with 271% at December 31, 2012.

About Financial Institutions, Inc.

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, Inc. 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.

CONTACT: Kevin B. Klotzbach
         Chief Financial Officer & Treasurer
         Phone:  585.786.1130
         Email:  KBKlotzbach@five-starbank.com
         
         Jordan M. Darrow
         Darrow Associates, Inc.
         Phone:  631.367.1866
         Email:  jdarrow@darrowir.com