Profile: Financial Institutions, Inc. (FISI.O)

Financial Institutions, Inc. (FII) is a financial holding company. Through its subsidiaries, including its wholly owned banking subsidiary, Five Star Bank (the Bank), FII provides deposit, lending and other financial services to individuals and businesses in Central and Western New York State. The Company provides a range of consumer and commercial banking and financial services to individuals, municipalities and businesses through a network of 52 offices and over 70 automated teller machines (ATMs) in 14 contiguous counties of Western and Central New York State, including Allegany, Cattaraugus, Cayuga, Chautauqua, Chemung, Erie, Genesee, Livingston, Monroe, Ontario, Seneca, Steuben, Wyoming and Yates Counties. FII merged three of its bank subsidiaries, Wyoming County Bank, National Bank of Geneva and Bath National Bank into its New York State-chartered bank subsidiary, First Tier Bank & Trust, which was renamed Five Star Bank. In addition, its business operations include a 100%-owned broker-dealer subsidiary, Five Star Investment Services, Inc.

Lending Activities

The Bank offers a range of loans, including commercial and agricultural working capital and revolving lines of credit, commercial and agricultural mortgages, equipment loans, crop and livestock loans, residential mortgage loans and home equity loans and lines of credit, home improvement loans, automobile loans and personal loans. The Bank originates commercial loans in its primary market areas and underwrites them based on the borrower’s ability to service the loan from operating income. The Bank offers a range of commercial lending products, including term loans and lines of credit. Short and medium-term commercial loans, primarily collateralized, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion and improvements) and the purchase of equipment. During the year ended December 31, 2008, $46.6 million, or 29.4%, of the aggregate commercial loan portfolio were at fixed rates, while $111.9 million, or 70.6%, were at variable rates.

Agricultural loans are offered for short-term crop production, farm equipment and livestock financing and agricultural real estate financing, including term loans and lines of credit. Short and medium-term agricultural loans, primarily collateralized, are made available for working capital (crops and livestock), business expansion (including acquisition of real estate, expansion and improvement) and the purchase of equipment. As of December 31, 2008, $12.6 million, or 28.3%, of the agricultural loan portfolio were at fixed rates, while $32.1 million, or 71.7%, were at variable rates.

In addition to commercial loans secured by real estate, the Bank makes commercial real estate loans to finance the purchase of real property, which consists of real estate with completed structures. Commercial real estate loans are secured by first liens on the real estate and are amortized over a 10 to 20 year period. As of December 31, 2008, $58 million, or 22.1%, of the aggregate commercial real estate loan portfolio were at fixed rates, while $204.2 million, or 77.9%, were at variable rates.

The Bank offers a variety of loan products to its consumer customers located in Western and Central New York, including home equity loans and lines of credit, automobile loans, secured installment loans and various other types of secured and unsecured personal loans. As of December 31, 2008, outstanding consumer loan balances were concentrated in indirect automobile loans and home equity products. The Company Bank originates, through dealers, consumer indirect automobile loans. The consumer indirect loan portfolio is primarily comprised of new and used automobile loans with terms that range from 36 to 72 months. As of December 31, 2008, the consumer indirect portfolio totaled $255.1 million, all of which were fixed rate automobile loans.

The Bank also originates consumer automobile loans, recreational vehicle loans, boat loans, home improvement loans, closed-end home equity loans, home equity lines of credit, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans range from 12 to 180 months and vary based upon the nature of the collateral and the size of loan. The majority of the consumer lending program is underwritten on a secured basis using the customer’s home or the financed automobile, mobile home, boat or recreational vehicle as collateral. As of December 31, 2008, $134.0 million, or 60.1%, of consumer and home equity loans were at fixed rates, while $88.9 million, or 39.9%, were at variable rates.

The Bank originates fixed and variable rate one-to-four family residential mortgages collateralized by owner-occupied properties located in its market areas. The Bank offers a variety of real estate loan products, which are amortized for periods up to 30 years. The Bank sells certain one-to-four family residential mortgages on the secondary mortgage market and retains the right to service the mortgages. As of December 31, 2008, the residential mortgage servicing portfolio totaled $315.7 million, the majority, of which have been sold to Federal Home Loan Mortgage Corporation (FHLMC). As of December 31, 2008, $138.8 million, or 78.1%, of residential real estate loans retained in portfolio were at fixed rates, while $38.9 million, or 21.9%, were at variable rates.

Investment Activities

The Bank’s investment securities policy is contained within its overall asset-liability management and investment policy. The Company’s policy limits security purchases to the United States treasury securities; United States Government agency securities, which are securities issued by official Federal government bodies (the Government National Mortgage Association (GNMA)); United States Government-sponsored enterprise (GSE) securities, which are securities issued by independent organizations that are in part sponsored by the federal government (the Federal Home Loan Bank (FHLB) system, the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Small Business Administration (SBA)); mortgage-backed securities (MBS) include mortgage-backed pass-through securities (pass-throughs) and collateralized mortgage obligations (CMO) issued by GNMA, FNMA and FHLMC and privately issued whole loan CMOs; other asset-backed securities (ABSs) and other privately issued investment grade quality securities; investment grade municipal securities, including tax, revenue and bond anticipation notes and general obligation bonds; certain creditworthy un-rated securities issued by municipalities, investment grade corporate debt, certificates of deposit and qualified preferred equity securities issued by United States government-sponsored enterprises; equity securities at the holding company level, and limited partnership investments in Small Business Investment Companies (SBIC).

Sources of Funds

The Bank’s primary sources of funds are deposits, borrowed funds and repurchase agreements, scheduled amortization and prepayments of principal from loans and mortgage-backed securities, maturities and calls of investment securities, and funds provided by operations. The Bank offers a variety of deposit account products with a range of interest rates and terms. The deposit accounts consist of non-interest-bearing demand, interest-bearing demand, savings, money market, club accounts and certificates of deposit. It also offers certificates of deposit with balances in excess of $100,000 to local municipalities, businesses, and individuals as well as individual retirement accounts and other qualified plan accounts.

The Bank’s deposits are obtained from the areas, in which its branch offices are located. The Bank had no brokered deposits as of December 31, 2008. Borrowings consist mainly of advances entered into with the FHLB, federal funds purchased and securities sold under repurchase agreements.