Financial Institutions (FISI) 8-K Financial Institutions, Inc. Reports Third Quarter Earnings

For More Information:
Ronald A. Miller
Senior Vice President and Chief Financial Officer
Phone: 585-786-1102

FOR IMMEDIATE RELEASE

Financial Institutions, Inc. Reports Third Quarter Earnings

WARSAW, N.Y., October 19, 2004 — Financial Institutions, Inc. (NASDAQ:FISI)

today reported diluted earnings per share for the third quarter of 2004 were $0.42, an increase of 27% over $0.33 per share for the same period last year. Third quarter 2004 net income was $5.1 million, an increase of $1.0 million, or 26%, over third quarter 2003 net income of $4.1 million. Third quarter earnings were positively impacted by a $3.4 million decrease in the provision for loan losses. Third quarter 2004 return on average assets and return on equity improved to 0.94% and 11.36%, respectively, compared with 0.75% and 8.70%, respectively, in the same period last year.
For the first nine months of 2004, net income was $13.3 million, or $1.08 per diluted share, up 11% compared with $12.0 million, or $0.97 per diluted share, for the same period in 2003. Return on average assets and return on average equity improved to 0.81% and 9.79%, respectively, for the nine-month period in 2004 compared with 0.74% and 8.73%, respectively for the same period in 2003. The growth in net income was primarily the result of a $4.7 million decrease in the provision for loan losses.
Asset Quality and Provision for Loan Losses
Nonperforming assets at September 30, 2004 declined to $49.7 million, compared with $52.1 million at December 31, 2003, and $51.9 million at September 30, 2003. The ratio of the allowance for loan losses to nonperforming loans improved to 65% at September 30, 2004, compared with 56% at December 31, 2003 and 57% at September 30, 2003. Net loan charge-offs for the third quarter of 2004 were $1.9 million, or 0.60% of average loans, compared with $3.1 million, or 0.89% of average loans in the same period last year.
The provision for loan losses for the third quarter of 2004 was $2.1 million compared with $5.6 million in the third quarter of last year. For the first nine-month period of 2004, the provision for loan losses was $9.5 million, down $4.7 million from $14.2 million in the first nine months of 2003.
Peter G. Humphrey, President and CEO of Financial Institutions, Inc. (FII) stated, “The third quarter results reflect our strong focus on improving credit quality with a resulting decline in our provision for loan losses. We continue to work at reducing our level of nonperforming assets in the most cost effective manner. We have also made investments in people and processes to provide for a stronger credit and sales culture within the organization. This investment in time and human resources was reflected in a higher cost structure.”
Net Interest Income

In the third quarter of 2004, net interest income increased 4% to $19.2 million compared with $18.5 million in the third quarter of 2003. Net interest margin expanded to 3.98% for the third quarter of 2004, an increase of 12 basis points from 3.86% for the same period last year and 16 basis points from 3.82% for the second quarter of 2004. The increase in net interest income and net interest margin was partially attributed to the recent increase in market interest rates, which has had a favorable impact on earning asset yields while minimally affecting funding costs. This improvement helped to offset the decline in average earning assets.

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Noninterest Income
Noninterest income decreased 10% in the third quarter of 2004 to $6.4 million compared with $7.1 million for the same period last year, primarily due to a decrease in mortgage banking income of $0.7 million from $1.1 million in the third quarter of 2003 to $417,000 in the current quarter. This decline was partially attributed to the lower volume of residential mortgage loans sold in the current quarter relative to the historically high levels of refinancing activity in 2003. Higher income from service fees reflects FII’s expanding portfolio of products provided to its customers throughout its four-bank service territory. This increase in income from service fees plus financial services fees and commissions and other income mostly offset lower income from the gain on securities compared with last year’s third quarter.
Noninterest expense

Noninterest expense for the third quarter of 2004 totaled $16.4 million, up 10% compared with $14.9 million for the third quarter of 2003. The increase in noninterest expense was mostly attributable to higher compliance costs, credit collection expenses and costs for additional lending and credit administration staff. The additional noninterest expenses, coupled with a slowing of revenue growth, were the principal factors in the rise in the Company’s efficiency ratio to 60.82% for the three months ended September 30, 2004, compared with 55.30% for the same period a year ago.
Balance Sheet Trends
FII depends in part on its strong core deposit base to fund its interest income activities. Average deposits grew a modest 2% for the quarter ended September 30, 2004 to $1.83 billion compared with $1.80 billion at the end of the third quarter last year. For the nine-month periods, the average balance of deposits increased 3% to $1.85 billion in 2004 from $1.79 billion in 2003.
Loans are the primary earning asset for the Company. Total loans declined in the third quarter to $1.27 billion as of September 30, 2004, down $77.9 million from December 31, 2003 and down $106.1 million from one year ago. As FII has been actively working to reduce credit risk in the loan portfolio and implement more stringent underwriting requirements, its loan origination process has slowed. The expansion of the loan origination staff and additional training on the new credit processes combined with expanded sales training activities should help the growth of the loan portfolio.
Mr. Humphrey noted, “As a result of our focused efforts on implementing a stronger credit process and reworking our loan portfolio, energy and resources were diverted from growing our customer base and loan origination. We are now adding resources to the front end of our business and are reinforcing our strong sales and service culture with training and support.”
At September 30, 2004 the Company had total assets of $2.21 billion, a 1% increase from $2.19 billion at September 30, 2003. Total shareholders’ equity at September 30, 2004 was $188.0 million compared with $182.7 million a year earlier, while book value per common share at September 30, 2004 was $15.21, an increase of 3% from $14.78 at September 30, 2003.

About Financial Institutions, Inc.
FII is the bank holding company parent of Wyoming County Bank, The National Bank of Geneva, Bath National Bank, and First Tier Bank and Trust with $2.2 billion in assets. Its four banks provide a wide range of consumer and commercial banking services to individuals, municipalities, and businesses through a network of 49 offices and 71 ATMs in Western and Central New York State. FII’s Financial Services Group also provides diversified financial services to its customers and clients, including brokerage, trust, insurance and employee benefits and compensation consulting. More information on FII and its subsidiaries is available through the Company web site atwww.fiiwarsaw.com.

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Safe Harbor Statement
This press release contains 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 the quality of collateral associated with nonperforming loans, the speed or cost of resolving bad loans, the ability to hire sales personnel, the likelihood of increasing the customer base and the loan portfolio, the economic conditions in the area the Company operates, customer preferences, the competition and other factors discussed in the Company’s filings with the Securities and Exchange Commission. The Company undertakes no obligation to revise these statements following the date of this press release.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Income
(Unaudited)
	For the three months ended
	September 30,
					$				%
(Dollars in thousands, except per share amounts)		2004		2003	Change			Change
Interest income	$	26,630	$	27,310	$	(680	)		(2	)%
Interest expense		7,403		8,770		(1,367	)		(16	)%
Net interest income		19,227		18,540		687			4	%
Provision for loan losses		2,147		5,590		(3,443	)		(62	)%
Net interest income after provision for loan losses		17,080		12,950		4,130			32	%
Noninterest income:
Service charges on deposits		3,108		2,973		135			5	%
Financial services group fees and commissions		1,423		1,408		15			1	%
Mortgage banking activities		417		1,113		(696	)		(63	)%
Gain on sale and call of securities		14		581		(567	)		(98	)%
Other		1,398		984		414			42	%
Total noninterest income		6,360		7,059		(699	)		(10	)%
Noninterest expense:
Salaries and employee benefits		9,220		8,491		729			9	%
Other		7,139		6,405		734			11	%
Total noninterest expense		16,359		14,896		1,463			10	%
Income before income taxes		7,081		5,113		1,968			38	%
Income taxes		1,964		1,058		906			86	%
Net income		5,117		4,055		1,062			26	%
Preferred stock dividends		374		374		—			—	%
Net income available to common shareholders	$	4,743	$	3,681	$	1,062			29	%
Memo: Taxable-equivalent net interest income	$	20,334	$	19,636	$	698			4	%

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Ratios and Other Data
(Unaudited)
	For the three months ended
	September 30,
							$			%
(Dollars in thousands, except per share amounts)		2004			2003		Change		Change
Per common share data:
Net income – basic	$	0.42		$	0.33		$	0.09		27	%
Net income – diluted	$	0.42		$	0.33		$	0.09		27	%
Cash dividends declared	$	0.16		$	0.16		$	—		—	%
Book value	$	15.21		$	14.78		$	0.43		3	%
Common shares outstanding:
Weighted average shares – actual		11,196,646			11,159,433
Weighted average shares – diluted		11,253,282			11,265,904
Period end actual		11,197,075			11,162,209
Performance ratios, annualized:
Return on average assets		0.94	%		0.75	%
Return on average common equity		11.36	%		8.70	%
Common dividend payout ratio		38.10	%		48.48	%
Net interest margin (tax-equivalent)		3.98	%		3.86	%
Efficiency ratio		60.82	%		55.30	%
Asset quality data and ratios:
Loans past due over 90 days and still accruing	$	1,179		$	1,723
Restructured loans		—			3,098
Nonaccrual loans		46,471			46,352
Other real estate owned		2,089			756
Total nonperforming assets	$	49,739		$	51,929
Net loan charge-offs	$	1,940		$	3,054
Nonperforming loans to total loans		3.76	%		3.73	%
Nonperforming assets to total loans and ORE		3.92	%		3.78	%
Allowance for loan losses to total loans		2.46	%		2.12	%
Allowance for loan losses to nonperforming loans		65	%		57	%
Net loan charge-offs to average loans (annualized)		0.60	%		0.89	%
Capital ratios:
Average common equity to average total assets		7.64	%		7.78	%
Leverage ratio		7.30	%		7.00	%
Tier 1 risk-based capital ratio		11.21	%		9.99	%
Risk-based capital ratio		12.47	%		11.25	%

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statement of Income
(Unaudited)
	For the nine months ended
(Dollars in thousands, except per share amounts)	September 30,
					$				%
		2004		2003	Change			Change
Interest income	$	79,361	$	84,601	$	(5,240	)		(6	)%
Interest expense		22,981		28,027		(5,046	)		(18	)%
Net interest income		56,380		56,574		(194	)		—	%
Provision for loan losses		9,459		14,199		(4,740	)		(33	)%
Net interest income after provision for loan losses		46,921		42,375		4,546			11	%
Noninterest income:
Service charges on deposits		8,973		8,399		574			7	%
Financial services group fees and commissions		4,388		4,110		278			7	%
Mortgage banking activities		1,541		2,849		(1,308	)		(46	)%
Gain on sale and call of securities		88		1,023		(935	)		(91	)%
Gain on sale of credit card portfolio		1,177		—		1,177			N/A
Other		3,310		2,940		370			13	%
Total noninterest income		19,477		19,321		156			1	%
Noninterest expense:
Salaries and employee benefits		27,440		25,408		2,032			8	%
Other		20,491		20,011		480			2	%
Total noninterest expense		47,931		45,419		2,512			6	%
Income before income taxes		18,467		16,277		2,190			13	%
Income taxes		5,143		4,276		867			20	%
Net income		13,324		12,001		1,323			11	%
Preferred stock dividends		1,122		1,122		—			—	%
Net income available to common shareholders	$	12,202	$	10,879	$	1,323			12	%
Memo: Taxable-equivalent net interest income	$	59,745	$	59,946	$	(201	)		—	%

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Ratios and Other Data
(Unaudited)
	For the nine months ended
	September 30,
							$			%
(Dollars in thousands, except per share amounts)		2004			2003		Change		Change
Per common share data:
Net income – basic	$	1.09		$	0.98		$	0.11		11	%
Net income – diluted	$	1.08		$	0.97		$	0.11		11	%
Cash dividends declared	$	0.48		$	0.48		$	—		—	%
Common shares outstanding:
Weighted average shares – actual		11,183,651			11,142,055
Weighted average shares – diluted		11,248,307			11,244,866
Period end actual		11,197,075			11,162,209
Performance ratios, annualized:
Return on average assets		0.81	%		0.74	%
Return on average common equity		9.79	%		8.73	%
Common dividend payout ratio		44.04	%		48.98	%
Net interest margin (tax-equivalent)		3.88	%		3.95	%
Efficiency ratio		60.49	%		55.87	%
Asset quality data and ratio:
Net loan charge-offs	$	7,355		$	6,806
Net loan charge-offs to average loans (annualized)		0.75	%		0.67	%

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Unaudited)
	September 30
							$				%
(Dollars in thousands)		2004			2003		Change			Change
ASSETS
Cash, due from banks and interest-bearing deposits	$	58,460		$	66,653		$	(8,193	)		(12	)%
Federal funds sold		29,857			53,228			(23,371	)		(44	)%
Investment securities		761,984			603,795			158,189			26	%
Loans		1,267,396			1,373,455			(106,059	)		(8	)%
Allowance for loan losses		(31,168	)		(29,052	)		(2,116	)		7	%
Loans, net		1,236,228			1,344,403			(108,175	)		(8	)%
Goodwill		40,946			40,621			325			1	%
Other assets		80,545			77,650			2,895			4	%
Total assets	$	2,208,020		$	2,186,350		$	21,670			1	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	272,115		$	263,433		$	8,682			3	%
Savings, money market, and int-bearing checking		852,770			826,114			26,656			3	%
Certificates of deposit		737,445			738,379			(934	)		—	%
Total deposits		1,862,330			1,827,926			34,404			2	%
Short-term borrowings		38,861			70,392			(31,531	)		(45	)%
Long-term borrowings		81,416			68,606			12,810			19	%
Junior subordinated debentures		16,702			—			16,702			N/A
Trust preferred securities		—			16,200			(16,200	)		(100	)%
Other liabilities		20,682			20,489			193			1	%
Total liabilities		2,019,991			2,003,613			16,378			1	%
Shareholders’ equity:
Preferred equity		17,733			17,735			(2	)		—	%
Common equity		170,296			165,002			5,294			3	%
Total shareholders’ equity(1)		188,029			182,737			5,292			3	%
Total liabilities and shareholders’ equity	$	2,208,020		$	2,186,350		$	21,670			1	%
(1) Includes the after-tax impact of net unrealized gains on investment securities classified as available for sale of $5,686 and $8,098 at September 30, 2004 and 2003, respectively.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Average Statements of Financial Condition
(Unaudited)
	For the three months ended September 30,
							$				%
(Dollars in thousands)		2004			2003		Change			Change
ASSETS
Cash, due from banks and interest-bearing deposits	$	44,789		$	45,077		$	(288	)		(1	)%
Federal funds sold		14,245			65,648			(51,403	)		(78	)%
Investment securities		741,971			579,085			162,886			28	%
Loans		1,284,746			1,378,713			(93,967	)		(7	)%
Allowance for loan losses		(31,290	)		(26,375	)		(4,915	)		19	%
Loans, net		1,253,456			1,352,338			(98,882	)		(7	)%
Goodwill		40,946			40,621			325			1	%
Other assets		80,501			74,639			5,862			8	%
Total assets	$	2,175,908		$	2,157,408		$	18,500			1	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	277,192		$	254,528		$	22,664			9	%
Savings, money market, and int-bearing checking		807,102			789,078			18,024			2	%
Certificates of deposit		748,916			753,866			(4,950	)		(1	)%
Total deposits		1,833,210			1,797,472			35,738			2	%
Short-term borrowings		43,182			65,336			(22,154	)		(34	)%
Long-term borrowings		81,970			71,151			10,819			15	%
Junior subordinated debentures		16,702			—			16,702			N/A
Trust preferred securities		—			16,200			(16,200	)		(100	)%
Other liabilities		16,971			21,677			(4,706	)		(22	)%
Total liabilities		1,992,035			1,971,836			20,199			1	%
Shareholders’ equity:
Preferred equity		17,734			17,735			(1	)		—	%
Common equity		166,139			167,837			(1,698	)		(1	)%
Total shareholders’ equity		183,873			185,572			(1,699	)		(1	)%
Total liabilities and shareholders’ equity	$	2,175,908		$	2,157,408		$	18,500			1	%

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Average Statements of Financial Condition
(Unaudited)
(Dollars in thousands)	For the nine months ended September 30,
							$				%
		2004			2003		Change			Change
ASSETS
Cash, due from banks and interest-bearing deposits	$	44,294		$	43,627		$	667			2	%
Federal funds sold		34,518			46,523			(12,005	)		(26	)%
Investment securities		711,170			621,990			89,180			14	%
Loans		1,307,497			1,356,183			(48,686	)		(4	)%
Allowance for loan losses		(30,292	)		(24,068	)		(6,224	)		26	%
Loans, net		1,277,205			1,332,115			(54,910	)		(4	)%
Goodwill		40,771			40,615			156			—	%
Other assets		79,937			72,307			7,630			11	%
Total assets	$	2,187,895		$	2,157,177		$	30,718			1	%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand	$	263,736		$	239,843		$	23,893			10	%
Savings, money market, and int-bearing checking		814,851			797,424			17,427			2	%
Certificates of deposit		766,999			748,428			18,571			2	%
Total deposits		1,845,586			1,785,695			59,891			3	%
Short-term borrowings		41,528			63,490			(21,962	)		(35	)%
Long-term borrowings		84,469			85,164			(695	)		(1	)%
Junior subordinated debentures		16,702			—			16,702			N/A
Trust preferred securities		—			16,200			(16,200	)		(100	)%
Other liabilities		15,355			22,365			(7,010	)		(31	)%
Total liabilities		2,003,640			1,972,914			30,726			2	%
Shareholders’ equity:
Preferred equity		17,734			17,738			(4	)		—	%
Common equity		166,521			166,525			(4	)		—	%
Total shareholders’ equity		184,255			184,263			(8	)		—	%
Total liabilities and shareholders’ equity	$	2,187,895		$	2,157,177		$	30,718			1	%

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