Financial Institutions, Inc. Announces Fourth Quarter and Year-End Results; Reports Non-Cash OTTI Charge; Retains “Well-Capitalized” Position
WARSAW, N.Y., January 28, 2009 — Financial Institutions, Inc. (Nasdaq: FISI) (the “Company”), the parent company of Five Star Bank, today reported a net loss of $3.1 million (or $0.33 loss per share) for the quarter ended December 31, 2008, compared to net income of $4.1 million (or $0.34 earnings per diluted share) for the 2007 fourth quarter. For the year ended December 31, 2008, the Company’s net loss totaled $26.2 million (or $2.56 loss per share), compared to net income of $16.4 million (or $1.33 diluted earnings per share) in 2007.
Highlights for the fourth quarter of 2008 include:
•
Core business operations absent the other-than-temporary impairment (“OTTI”) charge continued to improve, driven by net interest income of $17.3 million for the fourth quarter, which increased $567 thousand from the third quarter of 2008 and $2.1 million from the fourth quarter of last year. On a year-to-date basis net interest income increased to $65.3 million in 2008, a $7.3 million or 12% increase compared to 2007. The increases reflect improved net interest margin and growth of the loan portfolio.
•
Incurred a pre-tax non-cash charge of $29.9 million during the fourth quarter and $68.2 million for the year ended December 31, 2008 for OTTI on certain investment securities.
•
Retained a “well-capitalized” equity position with total equity capital of $190.3 million, which includes $37.5 million in preferred equity issued in December 2008 under the U.S. Treasury Department’s Capital Purchase Program. As of December, 31, 2008, the leverage capital ratio was 8.05% and total risk-based capital ratio was 13.08%.
•
During the fourth quarter, loans increased $43.0 million to $1.121 billion at December 31, 2008 compared with $1.078 billion at September 30, 2008. Consumer indirect auto loans accounted for $27.1 million and commercial-related loans accounted for $13.9 million of the fourth quarter increase in loans. Total loans increased $156.9 million or 16% for the one year period ending December 31, 2008. Indirect auto loans increased $120.1 million or 89%, and commercial-related increased $35.5 million or 8% during that same one year period.
•
Net interest margin increased 9 basis points, to 4.07% for the fourth quarter of 2008, compared with 3.98% for the third quarter of 2008. For the year ended December 31, 2008, net interest margin improved to 3.93%, 40 basis points higher than the comparable prior year period. The improved net interest margin resulted principally from lower funding costs and the benefits associated with a higher percentage of earning assets being deployed in higher yielding loan assets.
•
The provision for loan losses for the fourth quarter was $2.6 million, or $1.3 million more than fourth quarter net charge offs of $1.3 million, which represented 0.46% (annualized) of average loans. For the year ended December 31, 2008, the provision for loan losses was $6.6 million and net charge offs were $3.3 million or 0.32% of average loans. The allowance for loan losses at December 31, 2008 was $18.7 million or 1.67% of total loans, as compared to 1.61% of total loans at December 31, 2007.
Peter G. Humphrey, President and CEO of FII, commented, “Our fourth quarter results are reflective of the challenges presented by the disruption in the financial and capital markets. The other-than-temporary impairment charge reflects our recognition of the deterioration of specific securities in our investment portfolio. We are obviously disappointed in our annual results, but remain confident in the strength of our community banking franchise and our opportunities that lie ahead. Our core operations continue to perform well, driven by an expanding net interest margin, solid loan portfolio quality and effective cost controls. We are well positioned to weather this difficult period due to our core banking franchise and core earnings capacity that is built on a foundation of diversified and prudent lending, stable core deposits, and a strong capital position. The Company remains “well capitalized,” and has utilized the U.S. Treasury Department’s Capital Purchase Program as an attractive source of capital to support our marketplace opportunities.”
Included in the fourth quarter 2008 results is a pre-tax non-cash OTTI charge on certain investment securities of $29.9 million, comprised principally of pooled trust preferred securities, and to a lesser extent, privately issued whole loan collateralized mortgage obligations and charges on auction rate preferred equity securities collateralized by preferred stock of Fannie Mae and Freddie Mac. For the year ended December 31, 2008, OTTI charges totaled $68.2 million.
In the third quarter, a tax benefit recognized on the OTTI charge was based on the treatment of a substantial portion of the charge being classified as a capital loss for tax purposes, which significantly limited the tax benefit. Subsequently, on October 3, 2008, the Emergency Economic Stabilization Act was enacted, which included a provision permitting banks, under certain circumstances, to recognize losses relating to Fannie Mae and Freddie Mac preferred stock as an ordinary loss, therefore the fourth quarter results reflect the recognition of a $12.0 million tax benefit associated with the third quarter OTTI charge.
Net Interest Income
Net interest income was $17.3 million for the fourth quarter of 2008, up $567 thousand or 3% from the third quarter of 2008 and $2.1 million or 14% compared with the fourth quarter of 2007. Net interest margin improved to 4.07% in the fourth quarter of 2008, compared with 3.98% in the third quarter of 2008 and 3.75% in the fourth quarter of 2007. For the year ended 2008, net interest income was $65.3 million, compared with $58.1 million for the same period in 2007. Net interest margin improved to 3.93% versus 3.53% on a year to date comparative basis. The improved net interest income and net interest margin resulted principally from lower funding costs and the benefits associated with a higher percentage of earning assets being deployed in higher yielding loan assets.
Noninterest Income (Loss)
Noninterest income (loss) for the fourth quarter of 2008 was $(25.1) million, compared with $(29.3) million and $5.0 million in the third quarter of 2008 and the fourth quarter of 2007, respectively. For the year ended December 31, 2008, noninterest income (loss) was $(48.8) million, compared with $20.7 million for the same period in 2007. The 2008 periods reflect OTTI charges on investment securities totaling $29.9million for the fourth quarter and $68.2 million for the year ended December 31, 2008. Absent the OTTI charges in 2008, noninterest income would have been $4.8 million in the fourth quarter versus $5.2 million in the third quarter of 2008 and $5.0 million in the fourth quarter of 2007. The decrease, exclusive of OTTI charges, is primarily the result of lower service charges on deposits and broker-dealer fees and commissions offset by higher income from company owned life insurance due to a $20.0 million purchase of company owned life insurance made during the third quarter of 2008. For the full year 2008 noninterest income exclusive of OTTI charges was $19.4 million, compared with $20.7 million for full year 2007. The decrease is attributable to lower service charges on deposit accounts and 2007 including proceeds from corporate owned life insurance.
Noninterest Expense
Noninterest expense for the fourth quarter of 2008 was $15.4 million, compared with $14.5 million in the fourth quarter of 2007, respectively. The fourth quarter of 2008 results include a $557 thousand prepayment charge on the early repayment of borrowed funds and also a $259 thousand increase in FDIC insurance expense compared with the fourth quarter of last year. For the year ended December 31, 2008, noninterest expense was $57.5 million compared with $57.4 million for the same period in 2007. Total salaries and benefits cost declined $1.7 million for the full year 2008 compared with 2007, and was offset by a $599 thousand increase in occupancy and equipment expense, a $385 thousand increase in FDIC insurance cost, and the $557 thousand prepayment charge on borrowed finds.
Balance Sheet
Total assets at December 31, 2008 were $1.917 billion, up $59.0 million from $1.858 billion at December 31, 2007. Total loans were $1.121 billion at December 31, 2008, an increase of $156.9 million from $964.2 million at December 31, 2007, principally from a $120.1 million increase in indirect auto loans. Total deposits increased $57.3 million to $1.633 billion at December 31, 2008, versus $1.576 billion at December 31, 2007. Total borrowings, including junior subordinated debentures, increased $2.6 million to $70.8 million at December 31, 2008, up from $68.2 million at December 31, 2007. Total shareholders’ equity at December 31, 2008 was $190.3 million, compared with $195.3 million at December 31, 2007. The Company’s leverage ratio was 8.05% and total risk-based capital ratio was 13.08% at December 31, 2008, which is within the regulatory standard to be deemed a well-capitalized institution.
Asset Quality
The Company recorded a provision for loan losses of $2.6 million for the fourth quarter of 2008, compared with $351 thousand in the fourth quarter of 2007. The increase in the provision for loan losses is primarily due to growth in the loan portfolio and the changing mix of the loan portfolio together with higher net charge offs. Net charge offs of $1.3 million for the fourth quarter of 2008 represented 46 basis points (annualized) of average loans. For the year ended December 31, 2008, net charge-offs were $3.3 million, or 32 basis points of average loans, compared with $1.6 million, or 18 basis points of average loans, for the year ended December 31, 2007. The increase in net charge-offs in 2008 related principally to the commercial mortgage and consumer indirect loan portfolios.
The allowance for loan losses was $18.7 million at December 31, 2008, compared with $15.5 million at December 31, 2007. Non-performing loans were $8.2 million at December 31, 2008, compared with $7.6 million and $8.1 million at September 30, 2008 and December 31, 2007, respectively. The ratio of allowance for loan losses to non-performing loans improved to 229% at December 31, 2008 versus 192% at December 31, 2007.
About Financial Institutions, Inc.
With $1.9 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. The consolidated entity includes approximately 670 employees. 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 the investment portfolio, and general economic and credit market conditions nationally and regionally. The Company undertakes no obligation to revise these statements following the date of this press release.
*****
FINANCIAL INSTITUTIONS, INC. Summary of Quarterly Financial Data (Unaudited)
2008
2007
December 31,
September 30,
June 30,
March 31,
December 31,
SELECTED BALANCE SHEET DATA
(Amounts in thousands)
Cash and cash equivalents
$
55,187
76,704
63,049
102,999
46,673
Investment securities:
Available for sale
547,506
607,357
669,752
688,504
695,241
Held-to-maturity
58,532
64,434
56,508
57,631
59,479
Total investment securities
606,038
671,791
726,260
746,135
754,720
Loans held for sale
1,013
1,008
926
1,099
906
Loans:
Commercial
158,543
156,809
140,745
144,976
136,780
Commercial real estate
262,234
248,267
250,872
245,148
245,797
Agriculture
44,706
46,490
45,231
44,162
47,367
Residential real estate
177,683
173,893
172,396
168,738
166,863
Consumer indirect
255,054
227,971
177,967
142,565
134,977
Consumer direct and home equity
222,859
224,693
223,538
226,855
232,389
Total loans
1,121,079
1,078,123
1,010,749
972,444
964,173
Allowance for loan losses
18,749
17,420
16,038
15,549
15,521
Total loans, net
1,102,330
1,060,703
994,711
956,895
948,652
Total assets
1,916,919
1,945,819
1,895,448
1,912,652
1,857,876
Total interest-earning assets
1,743,141
1,789,499
1,749,808
1,771,676
1,722,122
Deposits:
Noninterest-bearing demand
292,586
293,027
288,258
268,419
286,362
Interest-bearing demand
344,616
376,098
338,290
356,758
335,314
Savings and money market
348,594
383,456
372,317
380,167
346,639
Certificates of deposit
647,467
607,833
596,890
622,628
607,656
Total deposits
1,633,263
1,660,414
1,595,755
1,627,972
1,575,971
Borrowings
70,820
114,684
89,465
70,336
68,210
Total interest-bearing liabilities
1,411,497
1,482,071
1,396,962
1,429,889
1,357,819
Net interest-earning assets
331,644
307,428
352,846
341,787
364,303
Shareholders’ equity
190,300
152,770
188,998
197,364
195,322
Common shareholders’ equity (1)
137,226
135,195
171,417
179,783
177,741
Tangible common shareholders’ equity (2)
99,577
97,468
133,614
141,903
139,786
Securities available for sale – fair value adjustment
included in shareholders’ equity, net of tax
$
3,463
(9,797
)
(5,803
)
944
(500
)
Common shares outstanding
10,798
10,806
10,913
10,992
11,011
Treasury shares
550
542
435
356
337
CAPITAL RATIOS
Leverage ratio
8.05
%
7.37
9.17
9.38
9.35
Tier 1 risk-based capital
11.83
%
11.10
14.58
15.34
15.74
Total risk based capital
13.08
%
12.35
15.83
16.59
16.99
Common equity to assets
7.16
%
6.95
9.04
9.40
9.57
Tangible common equity to tangible assets (2)
5.30
%
5.11
7.19
7.57
7.68
Common book value per share
$
12.71
12.51
15.71
16.36
16.14
Tangible common book value per share (2)
$
9.22
9.02
12.24
12.91
12.69
1
FINANCIAL INSTITUTIONS, INC. Summary of Quarterly Financial Data (Unaudited)
Quarterly Trends
Years ended
2008
2007
December 31,
Fourth
Third
Second
First
Fourth
2008
2007
Quarter
Quarter
Quarter
Quarter
Quarter
SELECTED INCOME STATEMENT DATA
(Dollar amounts in thousands)
Interest income
$
98,948
105,212
24,582
24,558
24,536
25,272
26,397
Interest expense
33,617
47,139
7,269
7,812
8,349
10,187
11,192
Net interest income
65,331
58,073
17,313
16,746
16,187
15,085
15,205
Provision for loan losses
6,551
116
2,586
1,891
1,358
716
351
Net interest income after provision
for loan losses
58,780
57,957
14,727
14,855
14,829
14,369
14,854
Noninterest income (loss):
Service charges on deposits
10,497
10,932
2,685
2,794
2,518
2,500
2,818
ATM and debit card
3,313
2,883
853
852
856
752
805
Broker-dealer fees and commissions
1,458
1,396
235
363
401
459
343
Loan servicing
664
928
134
112
232
186
221
Company owned life insurance
563
1,255
294
223
27
19
116
Net gain on sale of loans held for sale
339
779
35
48
92
164
190
Net gain (loss) on sale of other assets
305
102
51
102
115
37
(58
)
Net gain on investment securities
288
207
56
12
47
173
88
Impairment charge on investment securities
(68,215)
-
(29,870
)
(34,554
)
(3,791
)
-
-
Other
2,010
2,198
421
700
435
454
479
Total noninterest income (loss)
(48,778)
20,680
(25,106
)
(29,348
)
932
4,744
5,002
Noninterest expense:
Salaries and employee benefits
31,437
33,175
7,811
7,021
8,169
8,436
8,240
Occupancy and equipment
10,502
9,903
2,713
2,642
2,567
2,580
2,582
Computer and data processing
2,433
2,126
669
603
580
581
533
Professional services
2,141
2,080
637
467
480
557
533
Supplies and postage
1,800
1,662
447
475
437
441
379
Advertising and promotions
1,453
1,402
548
472
283
150
396
Other
7,695
7,080
2,569
1,729
1,869
1,528
1,880
Total noninterest expense
57,461
57,428
15,394
13,409
14,385
14,273
14,543
(Loss) income before income taxes
(47,459)
21,209
(25,773
)
(27,902
)
1,376
4,840
5,313
Income tax expense (benefit)
(21,301)
4,800
(22,631
)
524
(255
)
1,061
1,215
Net (loss) income
$(26,158)
16,409
(3,142
)
(28,426
)
1,631
3,779
4,098
Preferred stock dividends
1,538
1,483
426
371
370
371
370
Net (loss) income applicable to
common shareholders
$(27,696)
14,926
(3,568
)
(28,797
)
1,261
3,408
3,728
STOCK AND RELATED PER SHARE DATA
Net (loss) income per share – basic
$(2.56)
1.34
(0.33
)
(2.68
)
0.12
0.31
0.34
Net (loss) income per share – diluted
$(2.56)
1.33
(0.33
)
(2.68
)
0.12
0.31
0.34
Cash dividends declared
$
0.54
0.46
0.10
0.15
0.15
0.14
0.13
Common dividend payout ratio (3)
NA%
34.33
NA
NA
125.00
45.16
38.24
Dividend yield (annualized)
3.76
%
2.58
2.77
2.98
3.76
2.97
2.89
Stock price (Nasdaq: FISI):
High
$
22.50
23.71
20.27
22.50
20.00
20.78
19.80
Low
$
10.06
16.18
10.06
14.82
15.25
15.10
16.42
Close
$
14.35
17.82
14.35
20.01
16.06
18.95
17.82
2
FINANCIAL INSTITUTIONS, INC. Summary of Quarterly Financial Data (Unaudited)
Quarterly Trends
Years ended
2008
2007
December 31,
Fourth
Third
Second
First
Fourth
2008
2007
Quarter
Quarter
Quarter
Quarter
Quarter
SELECTED AVERAGE BALANCES
(Amounts in thousands)
Investment securities (4)
$
721,551
811,118
666,917
721,419
744,648
753,823
786,343
Loans (5):
Commercial
149,927
119,823
158,517
150,373
150,380
140,340
129,438
Commercial real estate
247,475
244,357
253,179
246,746
244,688
245,232
242,336
Agriculture
45,035
53,356
44,299
45,965
44,504
45,373
50,448
Residential real estate
171,262
165,226
175,200
173,175
169,925
166,682
167,551
Consumer indirect
185,197
118,152
244,891
200,586
156,728
137,756
132,372
Consumer direct and home equity
224,343
236,910
222,235
222,241
223,906
229,035
232,228
Total loans
1,023,239
937,824
1,098,321
1,039,086
990,131
964,418
954,373
Total interest-earning assets
1,772,179
1,781,468
1,782,938
1,774,201
1,771,801
1,759,635
1,756,169
Total assets
1,905,345
1,907,037
1,924,174
1,908,577
1,897,514
1,890,874
1,884,712
Interest-bearing liabilities:
Interest-bearing demand
347,702
338,326
360,970
342,188
342,463
345,102
337,179
Savings and money market
369,926
346,131
373,034
366,449
378,799
361,425
358,198
Certificates of deposit
617,381
672,239
629,111
591,025
615,950
633,599
635,825
Borrowings
91,715
80,609
105,164
118,023
73,902
69,335
71,092
Total interest-bearing liabilities
1,426,724
1,437,305
1,468,279
1,417,685
1,411,114
1,409,461
1,402,294
Noninterest-bearing demand deposits
280,467
266,239
284,643
294,136
275,570
267,322
276,535
Total deposits
1,615,476
1,622,935
1,647,758
1,593,798
1,612,782
1,607,448
1,607,737
Total liabilities
1,722,440
1,721,510
1,766,239
1,727,473
1,702,211
1,693,300
1,694,297
Net earning assets
345,455
344,163
314,659
356,516
360,687
350,174
353,875
Shareholders’ equity
182,905
185,527
157,935
181,104
195,303
197,574
190,415
Common equity (1)
164,454
167,935
136,887
163,527
177,722
179,993
172,834
Tangible common equity (2)
$
126,643
129,818
99,191
125,754
139,872
142,067
134,832
Common shares outstanding:
Basic
10,818
11,154
10,717
10,738
10,879
10,938
11,022
Diluted
10,818
11,184
10,717
10,738
10,928
10,975
11,043
SELECTED AVERAGE YIELDS/
RATES AND RATIOS
(Tax equivalent basis)
Investment securities
4.84
%
4.90
4.72
4.66
4.92
5.05
5.13
Loans
6.61
%
7.30
6.35
6.52
6.65
6.97
7.25
Total interest-earning assets
5.83
%
6.17
5.69
5.73
5.83
6.05
6.28
Interest-bearing demand
0.93
%
1.70
0.69
0.86
0.89
1.30
1.61
Savings and money market
1.02
%
1.69
0.68
0.93
1.02
1.47
1.70
Certificates of deposit
3.62
%
4.63
3.09
3.33
3.72
4.31
4.54
Borrowings
4.65
%
5.49
4.23
4.30
5.05
5.51
5.63
Total interest-bearing liabilities
2.36
%
3.28
1.97
2.19
2.38
2.91
3.17
Net interest rate spread
3.47
%
2.89
3.72
3.54
3.45
3.14
3.11
Net interest rate margin
3.93
%
3.53
4.07
3.98
3.94
3.73
3.75
Net (loss) income (annualized returns on):
Average assets
-1.37
%
0.86
-0.65
-5.93
0.35
0.80
0.86
Average equity
-14.30
%
8.84
-7.91
-62.44
3.36
7.69
8.54
Average common equity (6)
-16.84
%
8.89
-10.37
-70.06
2.85
7.62
8.56
Average tangible common equity (7)
-21.87
%
11.50
-14.31
-91.10
3.63
9.65
10.97
Efficiency ratio (8)
64.07
%
71.57
66.65
58.10
64.21
67.64
66.84
Equity to assets
9.60
%
9.73
8.21
9.49
10.29
10.45
10.10
Common equity to assets (6)
8.63
%
8.81
7.11
8.57
9.37
9.52
9.17
Tangible common equity to tangible assets (7)
6.78
%
6.95
5.26
6.72
7.52
7.67
7.30
3
FINANCIAL INSTITUTIONS, INC. Summary of Quarterly Financial Data (Unaudited)
Quarterly Trends
Years ended
2008
2007
December 31,
Fourth
Third
Second
First
Fourth
2008
2007
Quarter
Quarter
Quarter
Quarter
Quarter
ASSET QUALITY DATA
(Dollar amounts in thousands)
Nonaccrual loans
$
8,189
8,075
8,189
7,609
6,254
7,353
8,075
Accruing loans past due 90 days or more
7
2
7
32
1
2
2
Total non-performing loans
8,196
8,077
8,196
7,641
6,255
7,355
8,077
Foreclosed assets
1,007
1,421
1,007
1,009
1,235
1,257
1,421
Non-performing investment securities
49
—
49
—
—
—
—
Total non-performing assets
9,252
9,498
9,252
8,650
7,490
8,612
9,498
Net loan charge-offs
$
3,323
1,643
1,257
509
869
687
441
Net charge-offs to average loans (annualized)
0.32
%
0.18
0.46
0.20
0.35
0.29
0.18
Total non-performing loans to total loans
0.73
%
0.84
0.73
0.71
0.62
0.76
0.84
Total non-performing assets to total assets
0.48
%
0.51
0.48
0.44
0.40
0.45
0.51
Allowance for loan losses to total loans
1.67
%
1.61
1.67
1.62
1.59
1.60
1.61
Allowance for loan losses to
non-performing loans
229
%
192
229
228
256
211
192
(1) Excludes preferred shareholders’ equity.
(2) Excludes preferred shareholders’ equity, goodwill and other intangible assets.
(3) Common dividend payout ratio equals dividends declared during the period divided by earnings per share for the equivalent period. There is no ratio shown for periods where the Company both declares a dividend and incurs a loss during the period because the ratio would result in a negative payout since the dividend declared (paid out) will always be greater than 100% of earnings.
(4) Average investment securities shown at amortized cost.
(5) Includes nonaccrual loans.
(6) Net income available to common shareholders divided by average common equity.
(7) Net income available to common shareholders divided by average tangible equity.
(8) Efficiency ratio equals noninterest expense less other real estate expense and amortization of intangible assets as a percentage of net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains and impairment charges on investment securities, proceeds from company owned life insurance included in income and net gain on sale of trust relationships.
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