Financial Institutions, Inc. Earns $22.8 Million in 2011; a Strong $5.8 Million Fourth Quarter

WARSAW, N.Y., Jan. 25, 2012 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (Nasdaq:FISI) (the "Company"), the parent company of Five Star Bank, today announced financial results for the fourth quarter and year ended December 31, 2011. Net income was $5.8 million for the fourth quarter of 2011 compared with $5.1 million for the fourth quarter of 2010, bringing the Company's net income for the full year of 2011 to $22.8 million compared to $21.3 million in 2010. After preferred dividends, fourth quarter diluted earnings per share was $0.39 compared with $0.38 per share for the fourth quarter of 2010. On a year to date basis, diluted earnings per share decreased $0.12 to $1.49 per share as compared to $1.61 per share for the same period last year. The current quarter and year to date earnings per share amounts were impacted by the 2,813,475 additional shares of common stock issued in conjunction with our follow-on public offering completed during the first quarter of 2011.

Highlights for the fourth quarter of 2011 were as follows:

• Net interest margin remained strong at 4.07%
• Net interest income increased $536 thousand or 3% compared to the third quarter of 2011
• Realized pre-tax gains totaling $656 thousand from the sales of certain investment securities
• Total loans grew $49.6 million or 3% during the fourth quarter
• Net loan charge-offs were $1.9 million or an annualized 0.51% of average loans for the fourth quarter, including a charge-off of $905 thousand related to one commercial business relationship.
• Allowance for loan losses was 1.57% of total loans at December 31, 2011 while the provision for loan losses totaled $2.2 million for the fourth quarter of 2011
• Capital remains well above regulatory minimums, with a leverage ratio of 8.63% and a total risk-based capital ratio of 13.45%
• Quarterly dividends increased to $0.13 per share
• Common and tangible book value per share were $15.92 and $13.21, respectively, at December 31, 2011

Highlights for the year ended December 31, 2011 were as follows:

• Grew total loans $138.8 million or 10%
• Total deposits increased $48.7 million or 3%
• Net interest income up $3.1 million or 4%
• Increased net income $1.5 million or 7%
• Earned ranking as one of the 100 best performing community banks in the United States by SNL Financial
• Raised $43 million through successful common equity offering
• Fully redeemed $37.5 million of Capital Purchase Program ("CPP") preferred stock and warrant issued to the U.S. Treasury
• Redeemed $16.7 million of the Company's 10.20% junior subordinated debentures

"The fourth quarter culminated an exceptional year for us," commented Peter G. Humphrey, President and Chief Executive Officer. "With our solid financial performance and enhanced capital position resulting from our stock offering earlier this year, a strong foundation has been laid for this franchise that we are confident will drive increased performance and growth benefitting our employees, shareholders, customers and communities for many years into the future."

The Company announced last week that it had entered into an agreement to acquire four retail banking branches currently owned by HSBC Bank USA, N.A. and four retail banking branches currently owned by First Niagara Bank, N.A. The deposits associated with these branches total approximately $376 million, while loans total approximately $94 million. The transaction is subject to customary closing conditions, including regulatory approvals, and is expected to close by the end of the third quarter of this year. "This acquisition is an ideal fit because it expands our branch network in Western and Central New York into a fifteenth contiguous county as well as significantly increases our presence in several of our current markets," said Mr. Humphrey.

Net Interest Income and Net Interest Margin

Net interest income totaled $21.2 million for the three months ended December 31, 2011, an increase of $536 thousand or 3% compared with the third quarter of 2011. Average earning assets increased $25.9 million during the fourth quarter, as a $64.6 million increase in average loans was partially offset by a $38.7 million decrease in investment securities. The Company had another strong quarter of commercial loan production and continues to grow its indirect consumer loan portfolio.

The net interest margin on a tax-equivalent basis was 4.07% in the fourth quarter, an increase of 5 basis points from the third quarter of this year. The Company's yield on earning-assets decreased by 4 basis points in the fourth quarter of 2011 compared with last quarter. The cost of interest-bearing liabilities decreased 11 basis points as compared with the third quarter of 2011, primarily a result of the redemption of the Company's 10.20% junior subordinated debentures and the continued re-pricing of the Company's certificates of deposit.

Net interest income for the year ended December 31, 2011 totaled $81.9 million, an increase of $3.1 million or 4% compared with $78.8 million for the same period last year. Average earning assets increased $98.6 million during 2011 compared with last year, while the tax-equivalent net interest margin decreased 3 basis points to 4.04% during the year ended December 31, 2011.

Noninterest Income

Total noninterest income for the fourth quarter of 2011 was $5.8 million, as compared to $8.0 million for the third quarter of 2011, a decrease of $2.2 million. The majority of the decrease related to lower pre-tax net gains from the sale of investment securities of $656 thousand during the fourth quarter of 2011 compared with $2.3 million during the third quarter of 2011. In addition, service charges on deposit accounts and other noninterest income were down from the third quarter of 2011. Service charges on deposit accounts were down $183 thousand in the fourth quarter primarily due to lower overdraft fee income. Other noninterest income decreased by $392 thousand from the third quarter of 2011, as the third quarter included $152 thousand related to non-recurring insurance proceeds and a $175 thousand annual dividend from the sale of credit insurance products.

Noninterest income totaled $23.9 million for the year ended December 31, 2011, compared to $19.5 million for the same period last year. The Company recognized net gains on the sale of investment securities of $3.0 million during 2011, compared to $169 thousand during 2010. Other than temporary impairment ("OTTI") charges on investment securities totaled $18 thousand and $594 thousand for the years ended December 31, 2011 and 2010, respectively.

Noninterest Expense

Total noninterest expense for the fourth quarter of 2011 was $16.3 million, a decrease of $753 thousand, as compared to $17.0 million for the third quarter of 2011. Excluding the $1.1 million loss on extinguishment of debt from the redemption of the Company's 10.20% junior subordinated debentures included in third quarter noninterest expense, total noninterest expense increased by $350 thousand when comparing the third and fourth quarters of 2011. Fourth quarter expense includes increases in professional services and other noninterest expense, partially offset by decreases in advertising and promotions and FDIC assessments. Professional services increased $224 thousand during the fourth quarter, largely attributable to the previously mentioned branch acquisition. Other noninterest expense for the fourth quarter included $279 thousand of severance expense associated with workforce realignment in an effort to reduce future costs. Advertising and promotions costs were down $113 thousand during the fourth quarter, as the third quarter expense included seasonal promotions and branch events. FDIC assessments were down $136 thousand, primarily a result of changes made by the FDIC pertaining to the method of calculating assessment rates.

For the full year 2011, noninterest expense was $63.8 million, an increase of $2.9 million or 5% over the full year 2010. Salaries and employee benefits rose by $2.6 million or 8% compared with 2010, reflecting an increase in incentive compensation, which was previously limited under the U.S. Department of the Treasury's Capital Purchase Program. The aforementioned changes made by the FDIC resulted in a $994 thousand decrease in FDIC assessments compared with 2010. The Company recorded a $1.1 million loss on extinguishment of debt as a result of the $16.7 million redemption of the 10.20% junior subordinated debentures during the third quarter of 2011.

Balance Sheet

Total loans were $1.485 billion at December 31, 2011, up $49.6 million or 3% from September 30, 2011 and up $138.8 million or 10% from December 31, 2010. Total investment securities were $650.8 million at December 31, 2011, down $51.8 million and $43.7 million from September 30, 2011 and December 31, 2010, respectively.

Deposits were $1.932 billion at December 31, 2011, a decrease of $52.1 million or 3% from the end of the third quarter and up $48.7 million or 3% compared with the fourth quarter of 2010. Public deposit balances decreased $76.3 million during the fourth quarter of 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 63.7% of total deposits at the end of the fourth quarter.

Shareholders' equity was $237.2 million at December 31, 2011, compared with $240.9 million at the end of the third quarter. Net income for the quarter increased shareholders' equity by $5.8 million, which was partially offset by common and preferred stock dividends of $2.1 million. Accumulated other comprehensive income included in shareholders' equity decreased $7.5 million during the fourth quarter due primarily to a decrease in the amounts reported in accumulated other comprehensive income related to the Company's pension and post-retirement benefit plans.

The Company's leverage ratio and total risk-based capital ratio declined to 8.63% and 13.45%, respectively, at the end of the fourth quarter, compared to 8.67% and 13.49%, respectively, at the end of the third quarter, 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.

"Our strong performance and capital position will allow us to fund the branch acquisition organically without raising additional capital," added Mr. Humphrey. "We are very excited about this opportunity and the value added to our shareholders by this transaction."

Asset Quality and Provision for Loan Losses

Non-performing loans totaled $7.1 million at December 31, 2011, down $721 thousand during the fourth quarter of 2011. The Company had a commercial business relationship with a principal balance of $1.9 million, included in nonaccrual loans at September 30, 2011, for which it allocated a $941 thousand specific reserve during the third quarter of 2011. A charge-off of $905 thousand was subsequently recorded for the loan relationship during the fourth quarter of 2011.

Maintaining a position well below the average of our peer group, the ratio of non-performing loans to total loans was 0.48% at December 31, 2011 compared to 0.54% at September 30, 2011, and 0.56% at December 31, 2010. The average of our peer group was 3.26% of total loans at September 30, 2011, the most recent period for which information is available (Source: Federal Financial Institutions Examination Council — Bank Holding Company Performance Report as of September 30, 2011 — Top-tier bank holding companies having consolidated assets between $1 billion and $3 billion).

Non-performing investment securities totaled $1.6 million at December 31, 2011, down from $5.3 million at September 30, 2011 and up from $572 thousand at December 31, 2010. Non-performing investment securities are included in non-performing assets at fair value and represent pooled trust preferred securities on which the Company has stopped accruing interest. The market for these securities began to improve during the second quarter of 2011, resulting in substantial increases to their fair value since the beginning of the year. There have been no securities transferred to non-performing status since the first quarter of 2009. During the fourth quarter of 2011, the Company recognized a gain of $650 thousand from the sale of one of the 11 securities classified as non-performing at September 30, 2011. The security had a fair value of $1.3 million at September 30, 2011 and $97 thousand at December 31, 2010.

Non-performing assets, which include non-performing loans, foreclosed assets and non-performing investment securities, were $9.2 million or 0.39% of total assets at December 31, 2011. This was down significantly from $13.7 million or 0.58% of total assets at September 30, 2011 and up from $8.9 million or 0.40% of total assets at December 31, 2010.

The provision for loan losses was $2.2 million for the fourth quarter of 2011, compared to $3.5 million last quarter and $2.0 million for the fourth quarter of 2010. Net charge-offs were $1.9 million, or 0.51% annualized, of average loans, up from $1.1 million, or 0.32% annualized, of average loans in the third quarter of 2011 and up from $1.2 million, or 0.37% annualized, of average loans in the fourth quarter of 2010. Net charge-offs for the fourth quarter of 2011 includes $905 thousand for the charge-off of a commercial business relationship mentioned above.

The allowance for loan losses was $23.3 million at December 31, 2011, compared to $23.0 million at September 30, 2011 and $20.5 million at December 31, 2010. The ratio of the allowance for loan losses to total loans was 1.57% at December 31, 2011, compared with 1.60% at September 30, 2011 and 1.52% at December 31, 2010. The ratio of allowance for loan losses to non-performing loans was 329% at December 31, 2011, compared with 295% at September 30, 2011 and 270% at December 31, 2010.

About Financial Institutions, Inc.

With over $2.3 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 brokerage and insurance products and services within the same New York State markets. Financial Institutions, Inc. and its subsidiaries employ over 600 individuals. Financial Institutions, Inc. was named to the 2010 Sandler O'Neill Sm-All Stars list of the top performing publicly-traded small-cap banks and thrifts in the nation and was included in the top 100 best performing community banks in the United States, according to a ranking released in April 2011 by SNL Financial. 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.

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, the attitudes and preferences of its customers, 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 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.