Financial Institutions, Inc. (Form: 8-K)

•

Core business operations absent the OTTI charge continued to improve, driven by net interest income of $16.7 million for the third quarter, which increased $559 thousand from the second quarter and

$1.9 million from the third quarter of last year. The increase reflects improved net interest margin and growth of the loan portfolio.

•

Retained a “well-capitalized” equity position with total equity capital of $153 million, a leverage capital ratio of 7.37% and a total risk-based capital ratio of 12.35% at September 30, 2008.

•

Incurred a non-cash charge of $34.6 million for other-than-temporary impairment (“OTTI”) on certain investment securities.

•

Net interest margin increased 4 basis points, to 3.98%, compared with 3.94% for the second quarter of 2008 and has increased 35 basis points from 3.63% for the third quarter of 2007. 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.

•

Loans increased $67 million to $1.078 billion at September 30, 2008 compared with $1.011 billion at

June 30, 2008. Consumer indirect auto loans account for $50 million and commercial-related loans account for $15 million of the third quarter increase in loans.

•

The provision for loan losses was $1.9 million, or $1.4 million more than third quarter net charge offs of $509 thousand, which represented 0.20% of average loans. The allowance for loan losses at

•

Actively considering participation in the U.S. Treasury Department’s Capital Purchase Program as an attractive source of capital.

•

Opened a new branch in Henrietta (metro-Rochester area) with a very strong start; second new branch opening in Greece (also metro-Rochester area) is expected to open in the fourth quarter of 2008.

WARSAW, N.Y., October 29, 2008 — Financial Institutions, Inc. (Nasdaq: FISI), the parent company of Five Star Bank, today reported a net loss of $28.4 million (or $2.68 diluted loss per share) for the quarter ended September 30, 2008, compared to net income of $5.3 million (or $0.44 diluted earnings per share) for the 2007 third quarter. For the nine months ended September 30, 2008, the Company’s net loss totaled $23.0 million (or $2.22 diluted loss per share), compared to net income of $12.3 million (or $1.00 diluted earnings per share) for the comparable 2007 period.

Peter G. Humphrey, President and CEO of FII, commented, “Our third quarter results are reflective of the challenges presented by disruption in the financial and capital markets. The other-than-temporary impairment charge of certain securities in our portfolio reflects our recognition of specific exposures in our investment portfolio and is consistent with the exposures highlighted in our September 10, 2008 press release. We are disappointed in our third quarter 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 we are actively considering participation in the U.S. Treasury Department’s Capital Purchase Program as an attractive source of capital to support our marketplace opportunities.”

Included in the third quarter 2008 results is an other-than-temporary impairment (“OTTI”) non-cash charge on certain investment securities of $34.6 million pre-tax and $33.2 million after-tax (or $3.09 per diluted share) related to auction rate preferred equity securities collateralized by preferred stock of Fannie Mae and Freddie Mac and pooled trust preferred securities issued principally by financial institutions. For the first nine months of 2008, OTTI charges were $38.3 million pre-tax and $35.5 million after-tax (or $3.27 per diluted share). The tax benefit recognized on the OTTI charge was based on the treatment of a substantial portion of the OTTI charge incurred in the third quarter 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 (the “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, potentially increasing the tax benefit to the Company in the fourth quarter. Contingent upon the U.S. Treasury Department favorably interpreting and implementing certain provisions of the Act, the Company anticipates that it will recognize an additional tax benefit of $12.0 million (or $1.12 per diluted share) in the fourth quarter of 2008. Prior to this OTTI charge, impairment was considered temporary and was recorded as an unrealized loss on securities available-for-sale, which resulted in an equity reduction recognized in other comprehensive income (loss).

Net interest income was $16.7 million for the third quarter of 2008, up $559 thousand from the second quarter of 2008 and $1.9 million compared with the third quarter of 2007. Net interest margin improved to 3.98% in the third quarter of 2008 compared with 3.94% in the second quarter of 2008 and 3.63% in the third quarter of 2007. For the first nine months of 2008 net interest income was $48.0 million compared with $42.9 million for the same period in 2007. Net interest margin improved to 3.88% versus 3.45% 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) for the third quarter of 2008 was $(29.3) million, compared with $932 thousand and $6.3 million in the second quarter of 2008 and the third quarter of 2007, respectively. For the nine months ended September 30, 2008 noninterest income (loss) was $(23.7) million compared with $15.7 million for the same period in 2007. The 2008 periods reflect OTTI charges on investment securities totaling $34.6 million and $3.8 million in the third and second quarters, respectively. Absent the OTTI charges in 2008, noninterest income would have been $5.2 million in the third quarter versus $4.7 million in the second quarter. The increase, exclusive of OTTI charges, is primarily the result of higher income from company owned life insurance due to a $20.0 million investment in bank owned life insurance made during the third quarter of 2008, coupled with an increase in service charges on deposits. The higher level of noninterest income in the third quarter of 2007 included $1.1 million in proceeds from company owned life insurance.

Noninterest expense for the third quarter of 2008 was $13.4 million, compared with $14.4 million and $14.6 million in the second quarter of 2008 and the third quarter of 2007, respectively. The third quarter of 2008 includes a $1.0 million reversal of accrued compensation expense that recognized financial results for 2008 will not meet certain annual incentive targets. Absent this reversal, noninterest expense for the third quarter would have been $14.4 million, basically flat in comparison with the second quarter of 2008 and down slightly from the same quarter last year. For the nine months ended September 30, 2008, noninterest expense was $42.1 million compared with $42.9 million for the same period in 2007. The decreases in both the three and nine-month periods of 2008 compared to those in 2007 are primarily due to lower salaries and benefits expense as previously discussed, partially offset by an increase in occupancy and equipment costs.

Total assets at September 30, 2008 were $1.946 billion, up $87.9 million from $1.858 billion at December 31, 2007. Total loans were $1.078 billion at September 30, 2008, an increase of $114.0 million from $964.2 million at December 31, 2007, principally from a $93.0 million increase in indirect auto loans. Total deposits increased $84.4 million to $1.660 billion at September 30, 2008 versus $1.576 billion at December 31, 2007. Total borrowings, including junior subordinated debentures, increased $46.5 million to $114.7 million at September 30, 2008, up from $68.2 million at December 31, 2007. Total shareholders’ equity at September 30, 2008 was $152.8 million compared with $195.3 million at December 31, 2007. The Company’s leverage ratio was 7.37% and total risk-based capital ratio was 12.35% at September 30, 2008 which is within the regulatory standard to be deemed a well-capitalized institution.

The Company recorded a provision for loan losses of $1.9 million for the third quarter of 2008 compared with a credit for loan losses of $82 thousand in the third quarter of 2007. The increase in the provision for loan losses is primarily due to growth and the changing mix of the loan portfolio, partially offset by reduced nonperforming loans from the year ago period. Net charge-offs of $509 thousand for the third quarter of 2008 represented 20 basis points (annualized) of average loans. For the first nine months of 2008 net charge-offs were $2.1 million, or 28 basis points (annualized) of average loans, compared with $1.2 million, or 17 basis points (annualized) of average loans, for the first nine months of 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 $17.4 million at September 30, 2008 compared with $15.5 million December 31, 2007. Nonperforming loans were $7.6 million at September 30, 2008 compared with $6.3 million and $8.1 million at June 30, 2008 and December 31, 2007, respectively. The ratio of allowance for loans losses to nonperforming loans improved to 228% at September 30, 2008 versus 192% at December 31, 2007.

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 51 offices and 71 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.

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, general economic and credit market conditions nationally and regionally, availability of capital under the U.S. Treasury Department’s Capital Purchase Program, final determination of the tax treatment of losses relating to Fannie Mae and Freddie Mac preferred stock 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 INSTITUTIONS, INC.
Summary of Quarterly Financial Data (Unaudited)


							Quarterly Trends
	Nine months ended						2008								2007
	September 30,						Third			Second			First		Fourth			Third
	2008			2007			Quarter			Quarter			Quarter		Quarter			Quarter
SELECTED INCOME STATEMENT DATA
*(Dollar amounts in thousands)*
Interest income	$	74,366			78,816			24,558			24,536			25,272		26,397			26,553
Interest expense		26,348			35,947			7,812			8,349			10,187		11,192			11,692

Net interest income		48,018			42,869			16,746			16,187			15,085		15,205			14,861
Provision (credit) for loan losses		3,965			(235	)		1,891			1,358			716		351			(82	)

Net interest income after provision
(credit) for loan losses		44,053			43,104			14,855			14,829			14,369		14,854			14,943

Noninterest income (loss):
Service charges on deposits		7,812			8,114			2,794			2,518			2,500		2,818			2,778
ATM and debit card		2,460			2,079			852			856			752		805			735
Broker-dealer fees and commissions		1,223			1,053			363			401			459		343			323
Loan servicing		530			707			112			232			186		221			259
Company owned life insurance		269			1,139			223			27			19		116			1,090
Net gain on sale of loans held for sale		304			589			48			92			164		190			313
Net gain (loss) on sale of other assets		254			160			102			115			37		(58	)		59
Net gain on investment securities		232			118			12			47			173		88			67
Impairment charge on investment
securities		(38,345	)		—			(34,554	)		(3,791	)		—		—			—
Other		1,589			1,719			700			435			454		479			710

Total noninterest income (loss)		(23,672	)		15,678			(29,348	)		932			4,744		5,002			6,334

Noninterest expense:
Salaries and employee benefits		23,626			24,935			7,021			8,169			8,436		8,240			8,574
Occupancy and equipment		7,789			7,321			2,642			2,567			2,580		2,582			2,422
Computer and data processing		1,764			1,593			603			580			581		533			547
Professional services		1,504			1,548			467			480			557		533			476
Supplies and postage		1,353			1,283			475			437			441		379			443
Advertising and promotions		905			1,006			472			283			150		396			322
Other		5,126			5,200			1,729			1,869			1,528		1,880			1,825

Total noninterest expense		42,067			42,886			13,409			14,385			14,273		14,543			14,609

(Loss) income before income taxes		(21,686	)		15,896			(27,902	)		1,376			4,840		5,313			6,668
Income tax expense (benefit)		1,330			3,585			524			(255	)		1,061		1,215			1,414

Net (loss) income	$	(23,016	)		12,311			(28,426	)		1,631			3,779		4,098			5,254

Less: Preferred stock dividends		1,112			1,113			371			370			371		370			371
Net (loss) income available to
common shareholders	$	(24,128	)		11,198			(28,797	)		1,261			3,408		3,728			4,883
STOCK AND RELATED PER SHARE DATA
Net (loss) income per share – basic	$	(2.22	)		1.00			(2.68	)		0.12			0.31		0.34			0.44
Net (loss) income per share – diluted	$	(2.22	)		1.00			(2.68	)		0.12			0.31		0.34			0.44
Cash dividends declared	$	0.44			0.33			0.15			0.15			0.14		0.13			0.12
Common dividend payout ratio ⁽⁷⁾	NA%				33.00		NA				125.00			45.16		38.24			27.27
Dividend yield (annualized)		2.94	%		2.46			2.98			3.76			2.97		2.89			2.65
Stock price (Nasdaq: FISI):
High	$	22.50			23.71			22.50			20.00			20.78		19.80			20.46
Low	$	14.82			16.18			14.82			15.25			15.10		16.42			16.18
Close	$	20.01			17.94			20.01			16.06			18.95		17.82			17.94

FINANCIAL INSTITUTIONS, INC.
Summary of Quarterly Financial Data (Unaudited)


						Quarterly Trends
	Nine months ended					2008						2007
	September 30,					Third		Second		First		Fourth		Third
	2008			2007		Quarter		Quarter		Quarter		Quarter		Quarter
SELECTED AVERAGE BALANCES
*(Amounts in thousands)*
Investment securities ⁽¹⁾	$	739,896			819,467		721,419		744,648		753,823		786,343		810,792
Loans ⁽²⁾:
Commercial		147,044			116,582		150,373		150,380		140,340		129,438		121,258
Commercial real estate		245,560			245,038		246,746		244,688		245,232		242,336		243,230
Agriculture		45,283			54,336		45,965		44,504		45,373		50,448		54,017
Residential real estate		169,939			164,443		173,175		169,925		166,682		167,551		166,589
Consumer indirect		165,153			113,360		200,586		156,728		137,756		132,372		122,095
Consumer direct and home equity		225,050			238,488		222,241		223,906		229,035		232,228		235,205

Total loans		998,029			932,247		1,039,086		990,131		964,418		954,373		942,394
Total interest-earning assets		1,768,567			1,789,995		1,774,201		1,771,801		1,759,635		1,756,169		1,766,511
Total assets		1,899,023			1,914,561		1,908,577		1,897,514		1,890,874		1,884,712		1,890,669
Interest-bearing liabilities:
Interest-bearing demand		343,247			338,713		342,188		342,463		345,102		337,179		325,675
Savings and money market		368,882			342,064		366,449		378,799		361,425		358,198		333,895
Certificates of deposit		613,443			684,510		591,025		615,950		633,599		635,825		663,845
Borrowings		87,200			83,817		118,023		73,902		69,335		71,092		90,312

Total interest-bearing liabilities		1,412,772			1,449,104		1,417,685		1,411,114		1,409,461		1,402,294		1,413,727
Noninterest-bearing demand deposits		279,064			262,769		294,136		275,570		267,322		276,535		275,228
Total deposits		1,604,636			1,628,056		1,593,798		1,612,782		1,607,448		1,607,737		1,598,643
Total liabilities		1,707,733			1,730,682		1,727,473		1,702,211		1,693,300		1,694,297		1,706,111
Net earning assets		355,795			340,891		356,516		360,687		350,174		353,875		352,784
Shareholders’ equity		191,290			183,879		181,104		195,303		197,574		190,415		184,558
Common equity ⁽³⁾		173,710			166,284		163,527		177,722		179,993		172,834		166,977
Tangible common equity⁽⁴⁾	$	135,861			128,129		125,754		139,872		142,067		134,832		128,899
Common shares outstanding:
Basic		10,852			11,198		10,738		10,879		10,938		11,022		11,091
Diluted		10,852			11,231		10,738		10,928		10,975		11,043		11,114
SELECTED AVERAGE YIELDS/
RATES AND RATIOS
*(Tax equivalent basis)*
Investment securities		4.87	%		4.83		4.66		4.92		5.05		5.13		4.93
Loans		6.71	%		7.32		6.52		6.65		6.97		7.25		7.40
Total interest-earning assets		5.87	%		6.14		5.73		5.83		6.05		6.28		6.25
Interest-bearing demand		1.02	%		1.73		0.86		0.89		1.30		1.61		1.63
Savings and money market		1.13	%		1.69		0.93		1.02		1.47		1.70		1.60
Certificates of deposit		3.80	%		4.65		3.33		3.72		4.31		4.54		4.63
Borrowings		4.83	%		5.45		4.30		5.05		5.51		5.63		5.57
Total interest-bearing liabilities		2.49	%		3.32		2.19		2.38		2.91		3.17		3.28
Net interest rate spread		3.38	%		2.82		3.54		3.45		3.14		3.11		2.97
Net interest rate margin		3.88	%		3.45		3.98		3.94		3.73		3.75		3.63
Net (loss) income (annualized returns on):
Average assets		-1.62	%		0.86		-5.93		0.35		0.80		0.86		1.10
Average equity		-16.07	%		8.95		-62.44		3.36		7.69		8.54		11.29
Average common equity ⁽⁵⁾		-18.55	%		9.00		-70.06		2.85		7.62		8.56		11.60
Average tangible common equity ⁽⁶⁾		-23.72	%		11.69		-91.10		3.63		9.65		10.97		15.03
Efficiency ratio ⁽⁸⁾		63.17	%		69.41		58.10		64.21		67.64		66.84		67.07
Equity to assets		10.07	%		9.60		9.49		10.29		10.45		10.10		9.76
Common equity to assets ⁽⁵⁾		9.15	%		8.69		8.57		9.37		9.52		9.17		8.83
Tangible common equity to tangible assets ⁽⁶⁾		7.30	%		6.83		6.72		7.52		7.67		7.30		6.96

FINANCIAL INSTITUTIONS, INC.
Summary of Quarterly Financial Data (Unaudited)


	2008								2007
	September 30,			June 30,			March 31,		December 31,			September 30,
SELECTED BALANCE SHEET DATA
*(Amounts in thousands)*
Cash and cash equivalents	$	76,704			63,049			102,999		46,673			58,421
Investment securities:
Available for sale		607,357			669,752			688,504		695,241			742,716
Held-to-maturity		64,434			56,508			57,631		59,479			56,885

Total investment securities		671,791			726,260			746,135		754,720			799,601
Loans held for sale		1,008			926			1,099		906			107
Loans:
Commercial		156,809			140,745			144,976		136,780			123,226
Commercial real estate		248,267			250,872			245,148		245,797			241,981
Agriculture		46,490			45,231			44,162		47,367			53,877
Residential real estate		173,893			172,396			168,738		166,863			167,771
Consumer indirect		227,971			177,967			142,565		134,977			128,016
Consumer direct and home equity		224,693			223,538			226,855		232,389			234,800

Total loans		1,078,123			1,010,749			972,444		964,173			949,671
Allowance for loan losses		17,420			16,038			15,549		15,521			15,611

Total loans, net		1,060,703			994,711			956,895		948,652			934,060
Total assets		1,945,819			1,895,448			1,912,652		1,857,876			1,902,985
Total interest-earning assets		1,789,499			1,749,808			1,771,676		1,722,122			1,757,904
Deposits:
Noninterest-bearing demand		293,027			288,258			268,419		286,362			284,252
Interest-bearing demand		376,098			338,290			356,758		335,314			346,652
Savings and money market		383,456			372,317			380,167		346,639			346,338
Certificates of deposit		607,833			596,890			622,628		607,656			639,020

Total deposits		1,660,414			1,595,755			1,627,972		1,575,971			1,616,262
Borrowings		114,684			89,465			70,336		68,210			79,221
Total interest-bearing liabilities		1,482,071			1,396,962			1,429,889		1,357,819			1,411,231
Net interest-earning assets		307,428			352,846			341,787		364,303			346,673
Shareholders’ equity		152,770			188,998			197,364		195,322			188,324
Common shareholders’ equity ⁽³⁾		135,195			171,417			179,783		177,741			170,743
Tangible common shareholders’ equity ⁽⁴⁾		97,468			133,614			141,903		139,786			132,711
Securities available for sale – fair value adjustment
included in shareholders’ equity	$	(9,797	)		(5,803	)		944		(500	)		(3,581	)
Common shares outstanding		10,806			10,913			10,992		11,011			11,082
Treasury shares		542			435			356		337			266

FINANCIAL INSTITUTIONS, INC.
Summary of Quarterly Financial Data (Unaudited)


	2008							2007
	September 30,			June 30,		March 31,		December 31,		September 30,
CAPITAL RATIOS
Leverage ratio	7.37%			9.17		9.38		9.35		9.23
Tier 1 risk-based capital	11.10%			14.58		15.34		15.74		15.71
Total risk based capital	12.35%			15.83		16.59		16.99		16.96
Common equity to assets	6.95%			9.04		9.40		9.57		8.97
Tangible common equity to tangible assets ⁽⁴⁾	5.11%			7.19		7.57		7.68		7.12
Common book value per share	$12.51			15.71		16.36		16.14		15.41
Tangible common book value per share ⁽⁴⁾	$ 9.02			12.24		12.91		12.69		11.98
ASSET QUALITY DATA
*(Dollar amounts in thousands)*
Nonaccrual loans	$	7,609			6,254		7,353		8,075		8,295
Accruing loans past due 90 days or more		32			1		2		2		—

Total non-performing loans		7,641			6,255		7,355		8,077		8,295
Foreclosed assets		1,009			1,235		1,257		1,421		1,625

Total non-performing assets	$	8,650			7,490		8,612		9,498		9,920

Net loan charge-offs	$	509			869		687		441		829
Net charge-offs to average loans (annualized)		0.20	%		0.35		0.29		0.18		0.35
Total non-performing loans to total loans		0.71	%		0.62		0.76		0.84		0.87
Total non-performing assets to total assets		0.44	%		0.40		0.45		0.51		0.52
Allowance for loan losses to total loans		1.62	%		1.59		1.60		1.61		1.64
Allowance for loan losses to non-performing loans		228	%		256		211		192		188

⁽¹⁾ Average investment securities shown at amortized cost.
⁽²⁾ Includes nonaccrual loans.

⁽⁴⁾ Excludes preferred shareholders’ equity, goodwill and other intangible assets.

⁽⁵⁾ Net income available to common shareholders divided by average common equity.

⁽⁶⁾ Net income available to common shareholders divided by average tangible equity.

⁽⁷⁾ 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.

⁽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.


New York	0-26481	16-0816610
_____________________ (State or other jurisdiction	_____________ (Commission	______________ (I.R.S. Employer
of incorporation)	File Number)	Identification No.)

220 Liberty Street, Warsaw, New York		14569
_________________________________ (Address of principal executive offices)		___________ (Zip Code)


	Financial Institutions, Inc.

October 29, 2008	By:	Ronald A. Miller

		Name: Ronald A. Miller
		Title: Executive Vice President and Chief Financial Officer


Exhibit No.		Description

99.1		Press release issued October 29, 2008


Date of Report (Date of Earliest Event Reported):		October 29, 2008


Registrant’s telephone number, including area code:		585-786-1100