Financial Institutions, Inc. Reports Second Quarter 2014 Net Income of $7.0 Million

WARSAW, N.Y., July 23, 2014 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (the "Company") (Nasdaq:FISI), the parent company of Five Star Bank, today reported net income for the second quarter ended June 30, 2014 of $7.0 million, compared with $7.2 million for the first quarter of 2014 and $6.9 million for the second quarter of 2013. After preferred dividends, second quarter earnings per diluted common share was $0.48, compared with $0.50 per share for the first quarter of 2014 and $0.47 per share for the second quarter of 2013.

"We delivered solid earnings in the second quarter of 2014," said Martin K. Birmingham, the Company's President and Chief Executive Officer. "We grew loans, credit quality continued to improve, operating expenses were well managed and capital levels strengthened. While our near-term outlook is for a continuation of the low interest rate environment, we are making important progress on our strategic growth priorities which call for increased penetration of the Rochester and Buffalo markets and the diversification of our revenue base by expanding fee-based services. We are pleased to report that meaningful progress was made during the second quarter on both of these fronts and we expect these advancements to benefit our long-term performance."

Highlights:

• Announced the pending acquisition of Scott Danahy Naylon Co., Inc. ("SDN"), a full service insurance agency, to enhance and diversify revenue
• Quarterly net income was $7.0 million, up 3% from the same period a year ago
• Average loans increased by $144.7 million or 8% from the second quarter of 2013 and $32.0 million or 2% from the first quarter of 2014, as total loans at the end of second quarter of 2014 reached record levels
• Average deposits for the second quarter reached highest level in Company history at over $2.4 billion
• Non-performing assets decreased 44% from the first quarter of 2014
• Shareholders' equity and common book value per share reached record levels at the end of the second quarter
• Quarterly cash dividend of $0.19 per common share represents a 3.25% dividend yield as of June 30, 2014 and a return of 40% of second quarter net income to common shareholders
• Strong quarterly return on average common equity of 10.66% and return on average tangible common equity of 13.31%
• Capital ratios remain strong with the leverage ratio improving to 7.64% and total risk-based capital ratio increasing to 12.20% in the second quarter

Net Interest Income and Net Interest Margin

Net interest income totaled $23.1 million in the second quarter of 2014, down from $23.3 million in the first quarter of 2014 and up from $22.5 million in the second quarter of 2013. Average earning assets were up $3.2 million compared to the first quarter of 2014 and $190.4 million compared to the second quarter of 2013. The increase from the prior year period included increases of $144.7 million and $45.9 million in loans and investment securities, respectively. The growth in earning assets was offset by a narrowing net interest margin. Second quarter 2014 net interest margin was 3.47%, a decrease of 5 basis points from 3.52% reported in the first quarter of 2014 and a 16 basis point decrease from 3.63% reported in the second quarter of 2013.

"We had another solid quarter of performance, driven by loan and deposit growth and further enhanced by our recently adopted tax planning strategy," said Kevin B. Klotzbach, the Company's Executive Vice President and Chief Financial Officer. "We continue to be focused on earnings growth by carefully managing the aspects of our business that we can control, while maintaining high credit quality."

Noninterest Income and Expense

Noninterest income totaled $6.6 million in the second quarter of 2014, compared to $6.4 million in the first quarter of 2014 and second quarter of 2013. Included in these totals are gains realized from the sale of investment securities. Exclusive of those gains, noninterest income was $5.6 million in the recently completed quarter and $6.0 million in the first quarter of 2014 and second quarter of 2013. The main factor contributing to the lower noninterest income compared to the first quarter of 2014 was a decrease of $545 thousand from the Company's investments in limited partnerships, which are primarily small business investment companies. The income from these equity method investments fluctuates based on the performance of the underlying investments. The decrease in noninterest income compared to the second quarter of 2013 was primarily due to lower service charges on deposit accounts.

During the second quarter of 2014 the Company recognized gains of $949 thousand from the sale of investment securities. One pooled trust preferred security which had been classified as non-performing and 14 securities acquired in the first quarter of 2014 as part of our leverage strategy were sold during the second quarter of 2014. The leverage strategy utilizes the proceeds from short-term Federal Home Loan Bank advances to purchase high-quality investment securities.

Noninterest expense in the second quarter of 2014 totaled $17.8 million, compared with $17.2 million in the first quarter of 2014 and $17.5 million in the second quarter of 2013. The increases in noninterest expense were largely due to professional services associated with the pending acquisition of SDN and the hiring of additional loan officers and related personnel as part of the Company's expansion initiatives.

Income Taxes

Income tax expense was $3.1 million in both the first and second quarters of 2014, and $3.4 million in the second quarter of 2013. The effective tax rate was 30.5% for the second quarter of 2014, 30.0% for the first quarter of 2014 and 33.1% for the second quarter of 2013. Our reduced effective tax rate in 2014 reflects New York State tax savings generated by the Company's real estate investment trust, which became effective during February 2014.

Balance Sheet and Capital Management

Total assets were $2.99 billion at June 30, 2014, down $22.4 million from $3.02 billion at March 31, 2014 and up $211.0 million from $2.78 billion at June 30, 2013. The increase from the prior year was driven by loan growth and higher investment security balances.

Total loans were $1.90 billion at June 30, 2014, up $47.8 million or 3% from March 31, 2014 and up $153.3 million from June 30, 2013. The increase in loans was attributable to organic growth, primarily in commercial, home equity and consumer indirect loans. Total investment securities were $864.0 million at June 30, 2014, down $64.3 million or 7% compared with March 31, 2014 and up $36.1 million or 4% from June 30, 2013. During the second quarter of 2014 the Company sold approximately $42 million in investment securities acquired as part of our leverage strategy during the first quarter of 2014.

Total deposits were $2.45 billion at June 30, 2014, a decrease of $83.3 million from March 31, 2014 and an increase of $125.8 million from June 30, 2013. The decrease during the second quarter of 2014 was mainly due to seasonal outflows of municipal deposits, while the year-over-year increase was primarily due to successful business development efforts. Public deposit balances represented 25% of total deposits at June 30, 2014, compared to 28% at March 31, 2014 and 23% at June 30, 2013.

Short-term borrowings were $254.7 million at June 30, 2014, up $57.9 million and $61.3 million from March 31, 2014 and June 30, 2013, respectively. Short-term borrowings are utilized to offset seasonal outflows of municipal deposits.

Shareholders' equity and common book value per share reached record levels at the end of the second quarter 2014. Shareholders' equity was $269.8 million at June 30, 2014, compared with $262.9 million at March 31, 2014 and $244.9 million at June 30, 2013. Common book value per share was $18.21 at June 30, 2014, an increase of 3% from $17.72 at March 31, 2014 and 11% from $16.47 at June 30, 2013. Tangible common book value per share was $14.62 at June 30, 2014, an increase of 4% from $14.12 at March 31, 2014 and 14% from $12.84 at June 30, 2013.

During the second quarter of 2014, the Company declared a common stock dividend of $0.19 per common share, consistent with the prior quarter and up $0.01 per share from the second quarter of 2013. The second quarter 2014 dividend returned 40% of the quarter's net income to common shareholders.

The Company's leverage ratio was 7.64% at June 30, 2014, compared to 7.51% and 7.59% at March 31, 2014 and June 30, 2013, respectively. The capital ratios increased from the prior quarter due to an increase in shareholders' equity and a slight decrease in total assets.

Credit Quality

Overall credit quality improved during the second quarter of 2014. Non-performing assets at June 30, 2014 declined $7.4 million compared with March 31, 2014, driven by a decrease in non-performing loans. Non-performing commercial mortgage loans decreased primarily due to the resolution of a single commercial mortgage which had been modified as a troubled debt restructuring and placed on nonaccrual status during the fourth quarter 2013. The loan had a principal balance of $6.8 million as of March 31, 2014. Non-performing assets declined $2.5 million from second quarter of 2013 due to broad improvements in the consumer and commercial loan portfolios, partially offset by an increase in non-performing indirect loans. During the second quarter of 2014 the last of the remaining non-performing pooled trust preferred investment securities was sold. These securities had been transferred to non-performing status in years prior to 2010 and included in non-performing assets at fair value. Nonperforming assets to total assets were 0.32% at June 30, 2014 compared with 0.56% at March 31, 2014 and 0.43% at June 30, 2013.

The provision for loans losses for the second quarter of 2014 decreased $348 thousand compared with the first quarter of 2014 and increased $565 thousand compared to the second quarter of 2013. Net charge-offs for the second quarter of 2014 were $1.7 million, consistent with the first quarter of 2014 and up from $1.4 million in the second quarter of 2013. Net charge-offs expressed as an annualized percentage of average loans outstanding were 0.37% in both the first and second quarters of 2014 and 0.33% in the second quarter of 2013.

The allowance to total loans was 1.43% at June 30, 2014, and 1.47% at March 31, 2014 and June 30, 2013. The ratio of the allowance for loan losses to total loans declined in both comparisons, reflecting overall improvement in credit quality. The allowance to non-performing loans was 306% at June 30, 2014 compared with 167% at March 31, 2014, and 227% at June 30, 2013. The higher allowance to non-performing loans ratio at June 30, 2014 was driven by the reduction in non-performing loans previously described.

About Financial Institutions, Inc.

Financial Institutions, Inc. provides diversified financial services through its subsidiary, Five Star Bank. 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. Financial Institutions, Inc. and its subsidiary, Five Star Bank, employ over 600 individuals. The Company's stock is listed on the Nasdaq Global Select Market under the symbol FISI and is a member of the NASDAQ OMX ABA Community Bank Index. 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, breaches of its third party information systems, the attitudes and preferences of its customers, its ability to successfully integrate and profitably operate acquired businesses, 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: For additional information contact:
         Kevin B. Klotzbach
         Chief Financial Officer & Treasurer
         Phone: 585.786.1130
         Email: KBKlotzbach@five-starbank.com