FOR IMMEDIATE RELEASE Financial Institutions, Inc. Announces Fourth Quarter and Fiscal Year 2005 Results
•
Completes bank merger
•
Resolves regulatory issues
•
Reduces risk profile
WARSAW, N.Y., January 26, 2006 — Financial Institutions, Inc. (NASDAQ: FISI) (“FII”), the parent company of Five Star Bank, today announced its financial results for the fourth quarter and year ended December 31, 2005. Income from continuing operations for the fourth quarter was $2.8 million or $0.22 per diluted share compared with a loss of $0.6 million or $0.09 per diluted share for the fourth quarter of 2004. Net income for the fourth quarter of 2005 was $2.9 million or $0.22 per diluted share compared with a loss of $0.8 million or $0.11 per diluted share in the fourth quarter of the prior year.
For the year ended December 31, 2005, income from continuing operations was $4.6 million or $0.28 per diluted share, down from $12.9 million or $1.02 per diluted share from last year. For the year ended December 31, 2005, net income was $2.2 million or $0.06 per diluted share compared with net income of $12.5 million or $0.98 per diluted share for the prior year. The primary reasons for the decline in net income in 2005 were the $7.9 million decline in net interest income, the $8.9 million increase in the provision for loan losses, and an increase in noninterest expense of $3.7 million. The Company also sold the Burke Group subsidiary in the third quarter of 2005 and incurred a loss from those discontinued operations of $2.5 million in 2005 compared to $0.5 million in 2004.
The decline in net interest income is attributed to an overall drop in average net interest margin of 25 basis points, a $72 million reduction in average earning assets coupled with a change in the mix of those earning assets from higher yielding loans into lower yielding investment securities. Legal, consulting and professional fees to handle the problem loan portfolio and regulatory issues increased $1.4 million in 2005 from 2004, plus $1.4 million in restructuring costs were incurred in 2005 to merge the Company’s subsidiary banks and these were the primary factors for the increase in noninterest expense.
Peter G. Humphrey, President and CEO, commented, “We accomplished what we set out to do this year. Our objectives were to resolve our regulatory issues, reduce the number of problem loans in our portfolio, restructure the organization and improve credit administration. By year-end, we achieved the objective of consolidating our former four banks into the state-chartered Five Star Bank. The ultimate objective of these goals is a reduction in the overall risk profile of our Company. The improvements in our credit processes and culture, combined with the addition of new executive team members, positions us to meaningfully improve the performance of the Company in the near term.”
Fourth Quarter Review Revenue Net interest income for 2005 declined $3.0 million compared to the same quarter last year, or 16%, to $16.0 million primarily the result of a 36 basis point drop in average net interest margin, a $122 million reduction in average earning assets coupled with a change in the mix of those earning assets from higher yielding loan assets into lower yielding investment assets. For the fourth quarter of 2005 average loans represented 52% of average total earning assets compared to 61% for the same quarter last year. The decline in net interest margin primarily results from the adverse change in the mix of earning assets, lower spread opportunities associated with a flatter yield curve, and a highly competitive marketplace for loan assets and deposits. The $8.8 million decline in the provision for loan losses in 2005 more than offsets the decline in net interest income, resulting in net interest income after the provision of $14.6 million, or a 66% increase over the prior year period. The fourth quarter 2004 provision for loan loss of $10.2 million resulted from increased levels of potential problem loans and nonperforming loans, with associated charge-offs.
Noninterest Income
Noninterest income for the fourth quarter of 2005 declined $180 thousand, or 4%, to $4.9 million, from $5.1 million in the fourth quarter of 2004. The primary reason was the $257 thousand decline in mortgage banking activities, as mortgage volume has slowed as a result of the rising interest rate environment.
Noninterest Expense
Noninterest expense for the fourth quarter of 2005 was $16.2 million, a 3% decrease from $16.6 million in the fourth quarter of 2004. Salaries and benefits declined $1.0 million to $7.9 million in the fourth quarter of 2005 compared to the same quarter last year. The decline was a result of staff reductions associated with the merger and a reversal in bonus and incentive accruals due to full-year 2005 financial results. Other noninterest expense increased $616 thousand to $8.3 million in the fourth quarter of 2005 compared to the same quarter last year. This increase in other noninterest expenses relates primarily to one-time restructuring costs incurred related to the reorganization of the Company.
Full Year and Year-end Review Revenue For all of 2005, net interest income declined $7.9 million primarily due to lower net interest margin, a reduction in average earning assets and an adverse change in the mix of earning assets from loans to investment securities. The provision for loan loss was $28.5 million compared with $19.7 million in 2004. The significant increase was a result of the Company’s decision to sell a substantial portion of its problem loans during 2005. For the year, noninterest income increased 33%, to $29.4 million, from the prior year’s noninterest income of $22.1 million. The increase was attributed to the net gain of $9.4 million on the sale of commercial related loans that more than offset the decline in mortgage banking activities, service charges on deposit accounts and other noninterest income categories.
Noninterest Expense
For the year, noninterest expense was up $3.7 million to $65.5 million compared with $61.8 million in 2004. Higher expenses were incurred throughout 2005 to implement the numerous organizational changes and restructuring charges of $1.4 million were incurred related to the reorganization. Legal, consulting and professional fees associated with resolving the Company’s asset quality and regulatory issues were $4.7 million in 2005 compared to $3.3 million in 2004.
Asset Quality and Mix Nonperforming assets at December 31, 2005 were $19.7 million, a significant decrease from $55.2 million at the same time last year. This decline was primarily a result of the sale of problem loans in 2005. The sale of non-performing problem loans during the year significantly reduced the ratio of nonperforming loans and other real estate owned to 1.93% of total loans and other real estate owned compared with 4.40% at December 31, 2004. The allowance for loan losses to nonperforming loans at December 31, 2005 also measurably improved to 112% compared with 73% at the same time in the prior year.
Financial condition
Total assets at December 31, 2005 were $2.0 billion compared with $2.2 billion the previous year. Net loans, which were at $972 million, were down 20% from the end of the year 2004. The sale of commercial related problem loans and tighter credit administration policies enacted throughout the year are the principal factors in the reduced loan levels.
Total deposits of $1.7 billion, were down 6% from the previous year. A majority of the decline in deposits relates to certificates of deposit, including brokered certificates of deposit, as the Company actively managed to lower the level of these higher cost deposits from the higher liquidity levels resulting from the decline in loans. Shareholders’ equity at December 31, 2005 was $171.8 million, down 7% from $184.3 million at the end of last year.
Operating Efficiencies Return (loss) on average common equity for the quarter (annualized) and the full year 2005 was 6.39% and .43% compared with (2.78)% and 6.55% for the same periods in 2004, respectively. Return (loss) on average assets for the fourth quarter (annualized) and the full year 2005 was 0.55% and 0.10% compared with (0.15)% and 0.57% for the same periods in 2004, respectively.
Outlook Mr. Humphrey noted, “Our primary objective in 2006 is to fully integrate the four formerly separate banks into Five Star Bank. This must occur not just in financial, operating and control systems, but throughout the entire organization. We need to convey the unification clearly to our marketplace, project a solid, growing, service-oriented bank while capitalizing on the cost savings we expect to realize from the restructuring.”
He continued, “We anticipate a challenging year for growing our revenue through lending as we redeploy our earning asset base, we are also building the foundation we need to continue to expand our presence within our 10,000 square mile operating footprint. We believe that our earnings potential for this year will primarily be the result of the savings we gain from the consolidation and our efforts to improve operational efficiencies. For the long term, these efforts are a crucial factor for our future growth.”
Mr. Humphrey concluded, “We realize that we have much yet to be accomplished in order to achieve acceptable performance. Rebuilding a solid loan portfolio will take some time in our highly competitive and somewhat soft marketplace. However, we are confident that this can be accomplished within our refocused risk management discipline and reasonable time frames. We appreciate our investors’ confidence in our ability to get beyond these issues and continue our growth.”
ABOUT FINANCIAL INSTITUTIONS, INC. With total assets of $2.0 billion, Financial Institutions, Inc. is the parent company of Five Star Bank which provides a wide range of consumer and commercial banking services to individuals, municipalities and businesses through a network of 50 offices and 72 ATMs in Western and Central New York State. FII affiliates also provide diversified financial services to its customers and clients, including brokerage, trust, and insurance. More information on FII and its subsidiaries is available through the Company web site atwww.fiiwarsaw.com.
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 effectiveness of its strategy and bank consolidation, its ability to reduce operating expenses, the attitudes and preferences of customers, the competitive environment 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.
FINANCIAL TABLES FOLLOW.
1
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Income and Other Data (Dollars in thousands, except per share amounts) (Unaudited)
Three months ended
December 31,
2005
2004
$ Change
% Change
Interest and dividend income
$
26,154
$
26,814
$
(660
)
(2
)%
Interest expense
10,146
7,789
2,357
30
%
Net interest income
16,008
19,025
(3,017
)
(16
)%
Provision for loan losses
1,422
10,217
(8,795
)
(86
)%
Net interest income after provision for loan losses
14,586
8,808
5,778
66
%
Noninterest income:
Service charges on deposits
2.981
3,014
(33
)
(1
)%
Financial services group fees and commissions
628
575
53
9
%
Mortgage banking activities
349
606
(257
)
(42
)%
Gain on sale and call of securities
-
160
(160
)
(100
)%
Net gain on sale of commercial related loans
157
-
157
-
%
Other
822
762
60
8
%
Total noninterest income
4,937
5,117
(180
)
(4
)%
Noninterest expense:
Salaries and employee benefits
7,882
8,921
(1,039
)
(12
)%
Other
8,288
7,672
616
8
%
Total noninterest expense
16,170
16,593
(423
)
(3
)%
Income (loss) from continuing operations before income taxes
3,353
(2,668
)
6,021
226
%
Income taxes from continuing operations
512
(2,028
)
2,540
125
%
Income (loss) from continuing operations
2,841
(640
)
3,481
544
%
Discontinued operations:
Loss from operations of discontinued subsidiary
-
(285
)
285
100
%
Gain on disposal of discontinued subsidiary
41
-
41
-
%
Income taxes
11
(94
)
105
112
%
Gain (loss) on discontinued operations, net of taxes
30
(191
)
221
116
%
Net income (loss)
$
2,871
$
(831
)
$
3,702
445
%
Preferred stock dividends
$
372
$
373
$
(1
)
-
%
Taxable-equivalent net interest income
$
17,187
$
20,141
$
(2,954
)
(15
)%
Per common share data:
Basic:
Income (loss) from continuing operations
$
0.22
$
(0.09
)
$
0.31
344
%
Net income (loss)
$
0.22
$
(0.11
)
$
0.33
300
%
Diluted:
Income (loss) from continuing operations
$
0.22
$
(0.09
)
$
0.31
344
%
Net income (loss)
$
0.22
$
(0.11
)
$
0.33
300
%
Cash dividends declared
$
0.08
$
0.16
$
(0.08
)
(50
)%
Common shares outstanding:
Weighted average shares – basic
11,334,091
11,214,777
Weighted average shares – diluted
11,360,046
11,214,777
2
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES Additional Data (Dollars in thousands, except per share amounts) (Unaudited)
Three months ended
December 31,
2005
2004
Performance ratios, annualized
Return (loss) on average assets
0.55
%
(0.15
)%
Return (loss) on average common equity
6.39
%
(2.78
)%
Common dividend payout ratio
36.36
%
>100
%
Net interest margin (tax-equivalent)
3.55
%
3.91
%
Efficiency ratio (1)
72.48
%
64.95
%
Asset quality data:
Past due over 90 days and accruing
$
276
$
2,018
Restructured loans
—
—
Nonaccrual loans
17,761
51,946
Total nonperforming loans
18,037
53,964
Other real estate owned (ORE)
1,099
1,196
Total nonperforming loans and ORE
19,136
55,160
Nonaccrual loans held for sale
577
—
Total nonperforming assets
$
19,713
$
55,160
Net loan charge-offs
$
1,975
$
2,199
Asset quality ratios:
Nonperforming loans to total loans (2)
1.82
%
4.30
%
Nonperforming loans and ORE to total loans and ORE (2)
1.93
%
4.40
%
Nonperforming assets to total assets
0.97
%
2.56
%
Allowance for loan losses to total loans (2)
2.04
%
3.12
%
Allowance for loan losses to nonperforming loans (2)
112
%
73
%
Net loan charge-offs to average loans (annualized)
0.79
%
0.70
%
Capital ratios:
Average common equity to average total assets
7.47
%
7.85
%
Leverage ratio
7.60
%
7.13
%
Tier 1 risk-based capital ratio
13.75
%
11.27
%
Risk-based capital ratio
15.01
%
12.54
%
(1)
Ratio excludes the operations of discontinued subsidiary.
(2)
Ratios exclude nonaccruing loans held for sale from nonperforming loans and exclude loans held for sale from total loans.
3
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Income (Loss) and Other Data (Dollars in thousands, except per share amounts) (Unaudited)
Years ended
December 31,
2005
2004
$ Change
% Change
Interest and dividend income
$
103,887
$
106,175
$
(2,288
)
(2
)%
Interest expense
36,395
30,768
5,627
18
%
Net interest income
67,492
75,407
(7,915
)
(10
)%
Provision for loan losses
28,532
19,676
8,856
45
%
Net interest income after provision for loan losses
38,960
55,731
(16,771
)
(30
)%
Noninterest income:
Service charges on deposits
11,586
11,987
(401
)
(3
)%
Financial services group fees and commissions
2,687
2,518
169
7
%
Mortgage banking activities
1,597
2,147
(550
)
(26
)%
Gain on sale and call of securities
14
248
(234
)
(94
)%
Gain on sale of credit card portfolio
-
1,177
(1,177
)
(100
)%
Net gain on sale of commercial related loans
9,369
-
9,369
-
%
Other
4,131
4,072
59
1
%
Total noninterest income
29,384
22,149
7,235
33
%
Noninterest expense:
Salaries and employee benefits
34,763
34,468
295
1
%
Other
30,729
27,299
3,430
13
%
Total noninterest expense
65,492
61,767
3,725
6
%
Income from continuing operations before income taxes
2,852
16,113
(13,261
)
(82
)%
Income taxes from continuing operations
(1,766
)
3,170
(4,936
)
(156
)%
Income from continuing operations
4,618
12,943
(8,325
)
(64
)%
Discontinued operations:
Loss from operations of discontinued subsidiary
(340
)
(599
)
259
43
%
Loss on disposal of discontinued subsidiary
(1,071
)
-
(1,071
)
-
%
Income taxes
1,041
(149
)
1,190
799
%
Loss on discontinued operations, net of taxes
(2,452
)
(450
)
(2,002
)
(445
)%
Net income
$
2,166
$
12,493
$
(10,327
)
(83
)%
Preferred stock dividends
$
1,488
$
1,495
$
(7
)
-
%
Taxable-equivalent net interest income
$
72,102
$
79,888
$
(7,786
)
(10
)%
Per common share data:
Basic:
Income from continuing operations
$
0.28
$
1.02
$
(0.74
)
(73
)%
Net income
$
0.06
$
0.98
$
(0.92
)
(94
)%
Diluted:
Income from continuing operations
$
0.28
$
1.02
$
(0.74
)
(73
)%
Net income
$
0.06
$
0.98
$
(0.92
)
(94
)%
Cash dividends declared
$
0.40
$
0.64
$
(0.24
)
(38
)%
Book value
$
13.60
$
14.81
$
(1.21
)
(8
)%
Common shares outstanding:
Weighted average shares – basic
11,303,226
11,191,475
Weighted average shares – diluted
11,333,920
11,239,856
Period end actual
11,333,874
11,249,075
Additional Data (Dollars in thousands, except per share amounts) (Unaudited)
Years ended
December 31,
2005
2004
Performance ratios, annualized:
Return on average assets
0.10
%
0.57
%
Return on average common equity
0.43
%
6.55
%
Common dividend payout ratio
666.67
%
65.31
%
Net interest margin (tax-equivalent)
3.65
%
3.90
%
Efficiency ratio (1)
70.18
%
60.41
%
Asset quality data and ratio:
Net loan charge-offs
$
47,487
$
9,554
Net loan charge-offs to average loans (annualized)
4.27
%
0.74
%
(1)
Ratio excludes operations of discontinued subsidiary.
4
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition (Dollars in thousands) (Unaudited)
December 31,
December 31,
2005
2004
$ Change
% Change
ASSETS
Cash, due from banks and interest-bearing deposits
$
47,258
$
45,249
$
2,009
4
%
Federal funds sold
44,682
806
43,876
5,444
%
Investment securities
833,448
766,515
66,933
9
%
Loans held for sale
1,253
2,648
(1,395
)
(53
)%
Loans
992,321
1,252,405
(260,084
)
(21
)%
Less: Allowance for loan losses
20,231
39,186
(18,955
)
(48
)%
Loans, net
972,090
1,213,219
(241,129
)
(20
)%
Goodwill
37,369
37,369
—
—
%
Other assets
86,292
90,523
(4,231
)
(5
)%
Total assets
$
2,022,392
$
2,156,329
$
(133,937
)
(6
)%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand
$
284,958
$
289,582
$
(4,624
)
(2
)%
Savings, money market, and interest-bearing checking
755,229
789,550
(34,321
)
(4
)%
Certificates of deposit
677,074
739,817
(62,743
)
(8
)%
Total deposits
1,717,261
1,818,949
(101,688
)
(6
)%
Short-term borrowings
35,106
35,554
(448
)
(1
)%
Long-term borrowings
63,391
80,358
(16,967
)
(21
)%
Junior subordinated debentures issued to unconsolidated
subsidiary trust
16,702
16,702
—
—
%
Other liabilities
18,175
20,479
(2,304
)
(11
)%
Total liabilities
1,850,635
1,972,042
(121,407
)
(6
)%
Shareholders’ equity:
Preferred equity
17,634
17,722
(88
)
—
%
Common equity and accumulated other
comprehensive income (loss)
154,123
166,565
(12,442
)
(7
)%
Total shareholders’ equity
171,757
184,287
(12,530
)
(7
)%
Total liabilities and shareholders’ equity
$
2,022,392
$
2,156,329
$
(133,937
)
(6
)%
5
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES Consolidated Average Statements of Financial Condition (Dollars in thousands) (Unaudited)
Three months ended
December 31,
2005
2004
$ Change
% Change
ASSETS
Cash, due from banks and interest-bearing deposits
$
43,640
$
43,843
$
(203
)
—
%
Federal funds sold
68,802
37,109
31,693
85
%
Investment securities
853,287
768,179
85,108
11
%
Loans held for sale
2,038
2,104
(66
)
(3
)%
Loans
1,001,627
1,256,997
(255,370
)
(20
)%
Less: Allowance for loan losses
20,738
31,518
(10,780
)
(34
)%
Loans, net
980,889
1,225,479
(244,590
)
(20
)%
Goodwill
37,369
37,369
—
—
%
Other assets
90,518
84,234
6,284
7
%
Total assets
$
2,076,543
$
2,198,317
$
(121,774
)
(6
)%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand
$
276,472
$
279,590
$
(3,118
)
(1
)%
Savings, money market, and interest-bearing checking
771,566
837,608
(66,042
)
(8
)%
Certificates of deposit
718,283
740,956
(22,673
)
(3
)%
Total deposits
1,766,321
1,858,154
(91,833
)
(5
)%
Short-term borrowings
36,121
36,068
53
—
%
Long-term borrowings
66,386
80,793
(14,407
)
(18
)%
Junior subordinated debentures issued to unconsolidated
subsidiary trust
16,702
16,702
—
—
%
Other liabilities
18,314
16,409
1,905
12
%
Total liabilities
1,903,844
2,008,126
(104,282
)
(5
)%
Shareholders’ equity:
Preferred equity
17,635
17,729
(94
)
(1
)%
Common equity and accumulated other
comprehensive income (loss)
155,064
172,462
(17,398
)
(10
)%
Total shareholders’ equity
172,699
190,191
(17,492
)
(9
)%
Total liabilities and shareholders’ equity
$
2,076,543
$
2,198,317
$
(121,774
)
(6
)%
6
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES Consolidated Average Statements of Financial Condition (Dollars in thousands) (Unaudited)
Years ended
December 31,
2005
2004
$ Change
% Change
ASSETS
Cash, due from banks and interest-bearing deposits
$
43,202
$
44,162
$
(960
)
(2
)%
Federal funds sold
42,841
35,170
7,671
22
%
Investment securities
795,473
725,500
69,973
10
%
Loans held for sale
24,312
2,978
21,334
716
%
Loans
1,111,640
1,292,354
(180,714
)
(14
)%
Less: Allowance for loan losses
29,152
30,600
(1,448
)
(5
)%
Loans, net
1,082,488
1,261,754
(179,266
)
(14
)%
Goodwill
37,369
37,369
—
—
%
Other assets
90,721
83,416
7,305
9
%
Total assets
$
2,116,406
$
2,190,349
$
(73,943
)
(3
)%
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Demand
$
275,069
$
267,721
$
7,348
3
%
Savings, money market, and interest-bearing checking
784,049
820,571
(36,522
)
(4
)%
Certificates of deposit
737,285
760,453
(23,168
)
(3
)%
Total deposits
1,796,403
1,848,745
(52,342
)
(3
)%
Short-term borrowings
33,543
40,156
(6,613
)
(16
)%
Long-term borrowings
73,597
83,527
(9,930
)
(12
)%
Junior subordinated debentures issued to
unconsolidated subsidiary trust
16,702
16,702
—
—
%
Other liabilities
19,023
15,472
3,551
23
%
Total liabilities
1,939,268
2,004,602
(65,334
)
(3
)%
Shareholders’ equity:
Preferred equity
17,658
17,733
(75
)
—
%
Common equity and accumulated other
comprehensive income (loss)
159,480
168,014
(8,534
)
(5
)%
Total shareholders’ equity
177,138
185,747
(8,609
)
(5
)%
Total liabilities and shareholders’ equity
$
2,116,406
$
2,190,349
$
(73,943
)
(3
)%
7
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