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Press Release

Financial Institutions, Inc. Announces Third Quarter Results

Company Release - 10/29/2020 4:05 PM ET

WARSAW, N.Y., Oct. 29, 2020 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (Nasdaq:FISI) (the “Company” “we” or “us”), parent company of Five Star Bank (the “Bank”), SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”), today reported financial and operational results for the third quarter ended September 30, 2020.

Net income for the quarter was $12.3 million compared to $12.8 million for the third quarter of 2019. After preferred dividends, net income available to common shareholders was $11.9 million for the quarter, or $0.74 per diluted share, compared to $12.5 million, or $0.78 per diluted share, for the third quarter of 2019.

Pre-tax pre-provision income(1) was the highest in Company history at $19.2 million for the quarter, an increase of $283 thousand from the third quarter of 2019.

Third quarter 2020 net income and pre-tax pre-provision income reflect approximately $1.6 million of non-recurring expenses related to the previously announced closure of six bank branches and a staffing reduction.

President and Chief Executive Officer Martin K. Birmingham stated, “The past seven months have tested us, and I am proud to say that my teammates have responded extraordinarily well in continuing to deliver positive results for our customers, communities and shareholders. We generated record pre-tax pre-provision income in the quarter, driven by growth in net interest income, our diversified revenue streams and disciplined expense management.

“We continue to prudently lend and experienced 5.4% growth in our commercial mortgage portfolio, 2.0% growth in residential real estate loans and 1.5% growth in consumer indirect loans. Relationship managers are working closely with customers to assist with their needs and to ensure that we understand trends in our markets across all operating sectors. We continue to benefit from a stable Western New York economy and experienced low net charge-offs in the second and third quarters of 2020. Consistent with our cautiously optimistic outlook, we did increase the allowance for credit losses - loans to total loans ratio by five basis points.

“Re-entry plans are being implemented and we continue to monitor external COVID-19 indicators in our footprint to help guide decisions on future re-entry or closure to keep customers and associates safe. Additional associates are now working in our corporate offices; however, we expect to maintain occupancy levels in these locations at approximately 50% for the foreseeable future.

“I want to thank our associates for their tireless work to help our customers and communities impacted by COVID-19. Despite significant uncertainty and challenges, they continue to adapt and find innovative ways to work more efficiently and effectively. I am incredibly proud of our organization.”

Chief Financial Officer Justin K. Bigham added, “Net interest margin remained relatively constant at 3.22%, down one basis point from the linked quarter, despite a heightened Federal Reserve interest-earning cash balance and the full quarter impact of low-yielding Payroll Protection Program loans.

“We continue to focus on expense discipline. Third quarter expenses include non-recurring severance and real estate related restructuring charges of approximately $1.6 million in connection with the July announcement of branch closures and staffing reductions. Excluding these non-recurring expenses, the efficiency ratio for the quarter was just under 57%.

“Subsequent to quarter-end, we took advantage of the low interest rate environment and issued $35 million of 10-year fixed-to-floating rate subordinated notes. While we were confident that we had appropriate capital levels to effectively run our business, we determined that it would be prudent to access the debt markets at favorable rates to add capital for use in serving our customers, taking advantage of growth opportunities, and strengthening the Bank’s capital ratios. We also deemed it wise to add capital given uncertainty around long-term impacts of the global pandemic.”

Enterprise Standardization Program

The Company’s enterprise standardization program is focused on improving operational efficiency and enhancing future profitability. On July 17, 2020, in connection with the program, Five Star Bank announced changes to adapt to a full-service branch model to streamline retail branches to better align with shifting customer needs and preferences.

The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conducted in partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping service areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and facilitate the long-term sustainability of current and future branches.

The July announcement included the consolidation of eleven branches into five, resulting in six branch closings and a reduction in staffing. The consolidations represent about ten percent of the branch network and impacted approximately six percent of the Company’s total workforce. These actions resulted in one-time expenses related to severance and real estate related charges of approximately $1.6 million in the third quarter of 2020. Expense savings of $2.6 million are anticipated on an annualized basis.

In early October, the Company announced the planned closure of one additional branch in January 2021. This location was not included in the branch consolidations announced in July, as alternative options were being considered and consolidation was not possible given its significant distance from other Five Star Bank branches. This closure is expected to result in one-time expenses related to severance costs and real estate related charges of approximately $130 thousand in the fourth quarter of 2020. Expected expense savings are anticipated at $340 thousand on an annualized basis.

The enterprise standardization program is not yet complete as we continue to evaluate activities and functions across the organization, focusing on ways to improve operational efficiency while enhancing the employee and customer experience.

Subordinated Note Issuance

On October 7, 2020, the Company completed a private placement of $35 million of fixed-to-floating rate subordinated notes due 2030 (the “Notes”) to qualified institutional buyers and accredited institutional investors. The Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then-current three-month secured overnight financing rate (“SOFR”) plus 426.5 basis points, payable quarterly until maturity.

The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after October 15, 2025, and in whole at any time upon certain other specified events. The Company intends to use the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.

In connection with the issuance and sale of the Notes, the Company entered into a registration rights agreement with the purchasers of the Notes pursuant to which the Company has agreed to take certain actions to provide for the exchange of the Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, with substantially the same terms as the Notes.

Net Interest Income and Net Interest Margin

Net interest income was $35.5 million for the quarter, an increase of $1.3 million from the second quarter of 2020 and $3.0 million higher than the third quarter of 2019.

  • Average interest-earning assets for the quarter were $4.41 billion, $140.1 million higher than the second quarter of 2020 and $454.9 million higher than the third quarter of 2019. The increase was primarily the result of heightened Federal Reserve interest-earning cash, $29.7 million higher than the second quarter of 2020 and $102.6 million higher than the third quarter of 2019, and growth in loans, $107.4 million higher than the second quarter of 2020 and $368.2 million higher than the third quarter of 2019. Included in loan growth are Payroll Protection Program (“PPP”) loans which had an average balance of $263.0 million in the third quarter of 2020 and $176.7 million in the second quarter of 2020.
  • Net interest margin was 3.22%, one basis point lower than the second quarter of 2020 and seven basis points lower than the third quarter of 2019. The impact on interest-earning asset yield of heightened Federal Reserve interest-earning cash and PPP loans was approximately two basis points and one basis point, respectively, when compared to the second quarter of 2020 and approximately six basis points and five basis points, respectively, when compared to the third quarter of 2019. 

Noninterest Income

Noninterest income was $12.4 million for the quarter compared to $9.8 million in the second quarter of 2020 and $12.4 million in the third quarter of 2019.

  • Service charges on deposits of $1.3 million was $774 thousand higher than the second quarter of 2020 and $671 thousand lower than the third quarter of 2019. In connection with its 2020 COVID-19 relief initiatives, the Company waived or eliminated fees from March 23rd through July 9th. In addition, insufficient fund fees for the remainder of the quarter were lower than historic levels, likely due to the positive impact of stimulus programs on consumer account balances. ATM access fees were not re-initiated until September 19th.
  • Insurance income of $1.4 million was $538 thousand higher than the second quarter of 2020 due to the timing of commercial renewals and was $82 thousand lower than the third quarter of 2019.  
  • Investment advisory fees of $2.4 million was $192 thousand higher than the second quarter of 2020 and $174 thousand higher than the third quarter of 2019, as a result of the impact of market gains, new customer accounts and increases in existing accounts on assets under management.
  • Investments in limited partnerships generated a loss of $105 thousand in the quarter compared to a loss of $244 thousand in the second quarter of 2020 and income of $116 thousand in the third quarter of 2019. The Company has made several investments in limited partnerships, primarily small business investment companies, and accounts for these investments under the equity method. Income from these investments fluctuates based on the maturity and performance of the underlying investments.
  • Income from derivative instruments, net was $1.9 million, consistent with the second quarter of 2020 and $1.0 million higher than the third quarter of 2019. Income is based on the number and value of interest rate swap transactions and reflects growth and maturity of the Company’s commercial loan business.
  • Net gain on sale of loans held for sale of $1.6 million was $850 thousand higher than the second quarter of 2020 and $1.1 million higher than the third quarter of 2019 due to increased residential real estate loans for sale volume and an increase in margin on these transactions. The low interest rate environment has resulted in a significant increase in mortgage refinancing activity.
  • A net gain on investment securities of $554 thousand was recognized in the quarter compared to a net gain of $674 thousand in the second quarter of 2020 and a net gain of $1.6 million in the third quarter of 2019. The net gain in the current quarter is attributable to the management of premium risk, largely achieved through the sale of $20.0 million of fixed rate mortgage backed securities with higher expected prepayment speeds. Proceeds were reinvested in current coupon bonds, with lower anticipated prepayment behavior.

Noninterest Expense

Noninterest expense was $28.7 million in the quarter compared to $26.7 million in the second quarter of 2020 and $25.9 million in the third quarter of 2019.

  • Salaries and employee benefits expense of $15.1 million was relatively unchanged from the second quarter of 2020 and $674 thousand higher than the third quarter of 2019. Current quarter expense includes $224 thousand of non-recurring severance costs incurred in connection with the previously described branch closings and staff reduction announced in July 2020.
  • Professional services expense of $1.2 million was $338 thousand lower than the second quarter of 2020 and $286 thousand lower than the third quarter of 2019 primarily as a result of the timing of fees for consulting and advisory projects, including the Company’s improvement initiatives. Expenses related to improvement initiatives totaled $56 thousand in the third quarter of 2020, $353 thousand in the second quarter of 2020 and $298 thousand in the third quarter of 2019.
  • Computer and data processing expense of $3.3 million was $551 thousand higher than the second quarter of 2020 and $603 thousand higher than the third quarter of 2019 primarily due to costs related to the Bank’s new online and mobile platform, Five Star Bank Digital Banking, launched in the second quarter of 2020.
  • FDIC assessments were $594 thousand in the quarter compared to $539 in the second quarter of 2020 and $7 thousand in the third quarter of 2019. In 2018, the FDIC minimum reserve ratio was exceeded, resulting in credits used to offset expense in 2019 and the first quarter of 2020.
  • Advertising and promotions expense of $955 thousand was $410 thousand higher than the second quarter of 2020 and $210 thousand higher than the third quarter of 2019. Advertising activity was reduced in March 2020 when the COVID-19 pandemic impacted operations in Western New York. Higher expense in the third quarter of 2020 is attributable to promotional costs for Five Star Bank Digital Banking. The advertising campaign started after the last wave of customers was transitioned to the new platform in mid-June and ended in late August.
  • Third quarter 2020 restructuring charges of $1.4 million represents non-recurring real estate related charges related to the previously described branch closings and staff reduction announced in July 2020.

Income Taxes

Income tax expense was $2.9 million for the quarter compared to $2.4 million for the second quarter of 2020 and $4.3 million for the third quarter of 2019. As a result of the Tax Cuts and Jobs Act, the Company estimated tax benefits and recorded a provisional amount in and for the year ended December 31, 2017. In the third quarter of 2019 an adjustment was made to the provisional amount resulting in incremental expense of approximately $600 thousand.

The effective tax rate was 19.3% for the quarter compared to 18.0% for the second quarter of 2020 and 25.0% for the third quarter of 2019. The Company’s effective tax rates differ from statutory rates because of interest income from tax-exempt securities, earnings on company owned life insurance and the impact of tax credit investments. The higher effective tax rate in the third quarter of 2019 was driven by the incremental expense described above. 

Balance Sheet and Capital Management

Total assets were $4.96 billion at September 30, 2020, up $278.3 million from June 30, 2020, and up $626.5 million from September 30, 2019.

Investment securities were $806.9 million at September 30, 2020, up $27.6 million from June 30, 2020, and up $25.2 million from September 30, 2019. The Company’s 2020 investment strategy has been to reinvest cash flow from the portfolio, coupled with deploying excess liquidity into cash flowing agency mortgage backed securities.

Total loans were $3.57 billion at September 30, 2020, up $82.7 million, or 2.4%, from June 30, 2020, and up $412.1 million, or 13.1%, from September 30, 2019. PPP loans of approximately $2 million and $269 million were funded in the third and second quarters of 2020, respectively. The loans carry a 1% interest rate and the Company recorded net PPP loan origination fees of approximately $7.4 million that are amortized over a 24-month period.

  • Commercial business loans totaled $818.1 million, down $556 thousand from June 30, 2020, and up $243.7 million, or 42.4%, from September 30, 2019. The increase from the third quarter of 2019 was primarily attributable to PPP loans. At September 30, 2020, the PPP loan balance was $264.1 million, net of deferred fees.
  • Commercial mortgage loans totaled $1.20 billion, up $61.7 million, or 5.4%, from June 30, 2020, and up $166.6 million, or 16.1%, from September 30, 2019.
  • Residential real estate loans totaled $596.9 million, up $11.9 million, or 2.0%, from June 30, 2020, and up $38.2 million, or 6.8%, from September 30, 2019.
  • Consumer indirect loans totaled $840.6 million, up $12.5 million, or 1.5%, from June 30, 2020 and down $23.0 million, or 2.7%, from September 30, 2019.

Total deposits were $4.36 billion at September 30, 2020, $370.9 million higher than June 30, 2020, and $778.7 million higher than September 30, 2019. The increase from June 30, 2020, was primarily the result of a seasonal increase in public deposits combined with growth in the reciprocal and brokered deposit portfolios. The Company utilized lower cost brokered deposit balances to pay off a maturing Federal Home Loan Bank term advance of $100 million during the quarter. The increase from September 30, 2019, was primarily due to growth in non-public demand and the reciprocal and brokered deposits portfolios. Public deposit balances represented 23% of total deposits at September 30, 2020, compared to 23% of total deposits at June 30, 2020, and 28% at September 30, 2019.

Short-term borrowings were $5.3 million at September 30, 2020, a decrease of $100.0 million from June 30, 2020 and a decrease of $206.1 million from September 30, 2019. The lower level of short-term borrowings at September 30, 2020, is attributable to growth in brokered deposits, which were utilized as a cost-effective alternative to Federal Home Loan Bank borrowings. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits, which reached a seasonal high point during the third quarter. In February 2020, the Company entered a long-term brokered sweep arrangement as a stable alternative borrowing source to diversify the wholesale borrowing base.

Shareholders’ equity was $456.4 million at September 30, 2020, compared to $448.0 million at June 30, 2020, and $432.6 million at September 30, 2019. Common book value per share was $27.38 at September 30, 2020, an increase of $0.52 or 1.9% from $26.86 at June 30, 2020, and an increase of $1.42 or 5.5% from $25.96 at September 30, 2019. Tangible common book value per share(1) was $22.76 at September 30, 2020, an increase of $0.54 or 2.4% from $22.22 at June 30, 2020, and an increase of $1.50 or 7.1% from $21.26 at September 30, 2019.

During the third quarter of 2020, the Company declared a common stock dividend of $0.26 per common share. The dividend returned 35% of third quarter net income to common shareholders.

The Company’s regulatory capital ratios at September 30, 2020, compared to the prior quarter and prior year:

  • Leverage Ratio was 8.42%, compared to 8.49% and 8.86% at June 30, 2020, and September 30, 2019, respectively.
  • Common Equity Tier 1 Capital Ratio was 10.19%, compared to 10.27% and 10.06% at June 30, 2020, and September 30, 2019, respectively.
  • Tier 1 Capital Ratio was 10.66%, compared to 10.76% and 10.55% at June 30, 2020, and September 30, 2019, respectively.
  • Total Risk-Based Capital Ratio was 12.74%, compared to 12.83% and 12.57% at June 30, 2020, and September 30, 2019, respectively.

Credit Quality

Non-performing loans were $10.9 million at September 30, 2020, compared to $13.2 million at June 30, 2020, and $9.8 million at September 30, 2019. Net charge-offs were $488 thousand in the quarter, $298 thousand lower than the second quarter of 2020 and $4.1 million lower than the third quarter of 2019. The decrease from the prior year period is primarily attributable to the third quarter 2019 $3.0 million partial charge-off of a $5.6 million loan that had been classified as non-performing in the second quarter of 2019.

Foreclosed assets at September 30, 2020, were $3.0 million, an increase of $2.3 million from June 30, 2020, and an increase of $2.9 million from September 30, 2019. The increase as compared to both periods is attributable to one commercial credit that was partially charged off during the first quarter of 2020 and foreclosure occurred in the third quarter.

The ratio of annualized net charge-offs to total average loans was 0.06% in the current quarter, 0.09% in the second quarter of 2020 and 0.58% in the third quarter of 2019.

The Company adopted CECL effective January 1, 2020, which resulted in an increase to the allowance for credit losses - loans of $9.6 million and established a reserve for unfunded commitments of $2.1 million, for a total pre-tax cumulative effect adjustment of $11.7 million.

At September 30, 2020, the allowance for credit losses - loans to total loans ratio was 1.38% compared to 1.33% at June 30, 2020, and 1.00% at September 30, 2019. The PPP loans are fully guaranteed by the Small Business Administration. Excluding PPP loans, the allowance for credit losses - loans to total loans ratio was 1.49% at September 30, 2020, and 1.44% at June 30, 2020.

The provision for credit losses - loans was $3.6 million in the quarter compared to $3.7 million in the second quarter of 2020 and $1.8 million in the third quarter of 2019. Higher provisioning in 2020 reflects deterioration in the economic environment as a result of the impact of COVID-19, which adversely impacted our unemployment forecast, the designated loss driver for our CECL model. Provision for credit losses of $4.0 million in the third quarter of 2020 also includes a $461 thousand increase in the allowance for unfunded commitments.

The Company has remained strategically focused on the importance of credit discipline, allocating what we believe are the necessary resources to credit and risk management functions as the loan portfolio has grown. The total non-performing loans to total loans ratio was 0.31% at September 30, 2020, 0.38% at June 30, 2020, and 0.31% at September 30, 2019. The ratio of allowance for credit losses - loans to non-performing loans was 453% at September 30, 2020, compared to 351% at June 30, 2020, and 324% at September 30, 2019.

Conference Call

The Company will host an earnings conference call and audio webcast on October 30, 2020, at 8:30 a.m. Eastern Time. The call will be hosted by Martin K. Birmingham, President and Chief Executive Officer, and Justin K. Bigham, Chief Financial Officer. The live webcast will be available in listen-only mode on the Company’s website at www.fiiwarsaw.com. Within the United States, listeners may also access the call by dialing 1-888-346-9290 and requesting the Financial Institutions, Inc. call. The webcast replay will be available on the Company’s website for at least 30 days.

About Financial Institutions, Inc.

Financial Institutions, Inc. provides diversified financial services through its subsidiaries Five Star Bank, SDN, Courier Capital and HNP Capital. Five Star Bank provides a wide range of consumer and commercial banking and lending services to individuals, municipalities and businesses through a network of approximately 50 offices throughout Western and Central New York State. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. Financial Institutions, Inc. and its subsidiaries employ approximately 630 individuals. The Company’s stock is listed on the Nasdaq Global Select Market under the symbol FISI. Additional information is available at www.fiiwarsaw.com.

Non-GAAP Financial Information

In addition to results presented in accordance with U.S. generally accepted accounting principles (“GAAP”), this press release contains certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to GAAP measures is included in Appendix A to this document.

The Company believes that providing certain non-GAAP financial measures provides investors with information useful in understanding our financial performance, performance trends and financial position. Our management uses these measures for internal planning and forecasting purposes and we believe that our presentation and discussion, together with the accompanying reconciliations, allows investors, security analysts and other interested parties to view our performance and the factors and trends affecting our business in a manner similar to management. These non-GAAP measures should not be considered a substitute for GAAP measures and we strongly encourage investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure to evaluate the Company. Non-GAAP financial measures have inherent limitations, are not uniformly applied and are not audited. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names.

Safe Harbor Statement

This press release may contain forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “estimate,” “forecast,” “target,” “preliminary,” or “range.” Statements herein are based on certain assumptions and analyses by the Company and factors it believes are appropriate in the circumstances. Actual results could differ materially from those contained in or implied by such statements for a variety of reasons including, but not limited to: the impact of the COVID-19 pandemic on the Company’s customers, business, and results of operations as well as the economy in Western New York and the United States, the Company’s ability to implement its strategic plan, whether the Company experiences greater credit losses than expected, whether the Company experiences breaches of its, or third party, information systems, the attitudes and preferences of the Company’s customers, the Company’s ability to successfully integrate and profitably operate SDN, Courier Capital, HNP Capital and other acquisitions, the competitive environment, fluctuations in the fair value of securities in its investment portfolio, changes in the regulatory environment and the Company’s compliance with regulatory requirements, changes in interest rates, and general economic and credit market conditions nationally and regionally. Consequently, all forward-looking statements made herein are qualified by these cautionary statements and the cautionary language in the Company’s Annual Report on Form 10-K, its Quarterly Reports onForm 10-Qand other documents filed with the SEC. Except as required by law, the Company undertakes no obligation to revise these statements following the date of this press release.

(1) See Appendix A — Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.

For additional information contact:

Shelly J. Doran
Director of Investor and External Relations
585-627-1362
[email protected]


FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands, except per share amounts)

 2020  2019 
 September 30,  June 30,  March 31,  December 31,  September 30, 
SELECTED BALANCE SHEET DATA:                   
Cash and cash equivalents$282,070  $119,610  $152,168  $112,947  $136,815 
Investment securities:                   
Available for sale 515,971   469,413   444,845   417,917   395,441 
Held-to-maturity, net 290,946   309,872   346,239   359,000   386,305 
Total investment securities 806,917   779,285   791,084   776,917   781,746 
Loans held for sale 7,076   6,654   3,822   4,224   6,398 
Loans:                   
Commercial business 818,135   818,691   588,868   572,040   574,455 
Commercial mortgage 1,202,046   1,140,326   1,107,376   1,106,283   1,035,450 
Residential real estate loans 596,902   585,035   579,800   572,350   558,656 
Residential real estate lines 94,017   97,427   102,113   104,118   107,615 
Consumer indirect 840,579   828,105   843,668   850,052   863,614 
Other consumer 16,860   16,237   15,402   16,144   16,630 
Total loans 3,568,539   3,485,821   3,237,227   3,220,987   3,156,420 
Allowance for credit losses - loans 49,395   46,316   43,356   30,482   31,668 
Total loans, net 3,519,144   3,439,505   3,193,871   3,190,505   3,124,752 
Total interest-earning assets 4,577,057   4,314,490   4,116,688   4,058,107   3,979,493 
Goodwill and other intangible assets, net 74,062   74,342   74,629   74,923   75,225 
Total assets 4,959,201   4,680,930   4,471,768   4,384,178   4,332,737 
Deposits:                   
Noninterest-bearing demand 1,013,176   1,008,958   732,917   707,752   755,296 
Interest-bearing demand 786,059   727,676   724,670   627,842   707,153 
Savings and money market 1,724,463   1,368,805   1,270,253   1,039,892   1,011,873 
Time deposits 841,230   888,569   1,059,345   1,180,189   1,111,892 
Total deposits 4,364,928   3,994,008   3,787,185   3,555,675   3,586,214 
Short-term borrowings 5,300   105,300   109,500   275,500   211,400 
Long-term borrowings, net 39,258   39,308   39,291   39,273   39,255 
Total interest-bearing liabilities 3,396,310   3,129,658   3,203,059   3,162,696   3,081,573 
Shareholders’ equity 456,361   448,045   439,393   438,947   432,617 
Common shareholders’ equity 439,033   430,717   422,065   421,619   415,289 
Tangible common equity (1) 364,971   356,375   347,436   346,696   340,064 
Accumulated other comprehensive loss$(209) $(496) $(2,082) $(14,513) $(11,734)
                    
Common shares outstanding 16,038   16,038   16,020   16,003   15,997 
Treasury shares 62   62   80   97   103 
CAPITAL RATIOS AND PER SHARE DATA:                   
Leverage ratio 8.42%  8.49%  8.78%  9.00%  8.86%
Common equity Tier 1 capital ratio 10.19%  10.27%  10.05%  10.31%  10.06%
Tier 1 capital ratio 10.66%  10.76%  10.53%  10.80%  10.55%
Total risk-based capital ratio 12.74%  12.83%  12.54%  12.77%  12.57%
Common equity to assets 8.85%  9.20%  9.44%  9.62%  9.58%
Tangible common equity to tangible assets (1) 7.47%  7.74%  7.90%  8.05%  7.99%
                    
Common book value per share$27.38  $26.86  $26.35  $26.35  $25.96 
Tangible common book value per share (1)$22.76  $22.22  $21.69  $21.66  $21.26 

      

(1)See Appendix A — Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.
  


FINANCIAL INSTITUTIONS, INC.

Selected Financial Information (Unaudited)
(Amounts in thousands, except per share amounts)

 Nine Months Ended  2020  2019 
 September 30,  Third  Second  First  Fourth  Third 
 2020  2019  Quarter  Quarter  Quarter  Quarter  Quarter 
SELECTED INCOME STATEMENT                           
DATA:                           
Interest income$121,131  $126,621  $39,719  $39,759  $41,653  $42,179  $42,459 
Interest expense 18,327   29,882   4,220   5,578   8,529   9,006   9,976 
Net interest income 102,804   96,739   35,499   34,181   33,124   33,173   32,483 
Provision for credit losses 21,689   5,391   4,028   3,746   13,915   2,653   1,844 
Net interest income after provision
for credit losses
 81,115   91,348   31,471   30,435   19,209   30,520   30,639 
Noninterest income:                           
Service charges on deposits 3,321   5,361   1,254   480   1,587   1,880   1,925 
Insurance income 3,525   3,689   1,357   819   1,349   881   1,439 
ATM and debit card 5,321   4,983   1,943   1,776   1,602   1,796   1,801 
Investment advisory 6,940   6,812   2,443   2,251   2,246   2,375   2,269 
Company owned life insurance 1,397   1,293   470   462   465   465   459 
Investments in limited partnerships (136)  492   (105)  (244)  213   (140)  116 
Loan servicing 106   316   49   50   7   116   102 
Income from derivative                           
instruments, net 4,617   1,013   1,931   1,940   746   1,261   890 
Net gain on sale of loans held for sale 2,616   1,028   1,581   731   304   324   439 
Net gain (loss) on investment securities 1,449   1,721   554   674   221   (44)  1,608 
Net gain (loss) on other assets 8   56   (55)  (1)  64   (27)  (2)
Net loss on tax credit investments (120)  -   (40)  (40)  (40)  (528)  - 
Other 3,151   3,950   1,019   934   1,198   1,308   1,315 
Total noninterest income 32,195   30,714   12,401   9,832   9,962   9,667   12,361 
Noninterest expense:                           
Salaries and employee benefits 45,173   41,661   15,085   15,074   15,014   14,669   14,411 
Occupancy and equipment (1) 10,407   10,106   3,263   3,388   3,756   3,446   3,381 
Professional services 4,974   3,618   1,242   1,580   2,152   1,806   1,528 
Computer and data processing (1) 8,622   7,407   3,250   2,699   2,673   2,576   2,647 
Supplies and postage 1,533   1,554   463   517   553   482   522 
FDIC assessments 1,505   1,005   594   539   372   -   7 
Advertising and promotions 2,055   2,351   955   545   555   1,226   745 
Amortization of intangibles 861   948   280   287   294   302   309 
Restructuring charges 1,362   -   1,362   -   -   -   - 
Other 6,583   7,410   2,165   2,065   2,353   2,261   2,336 
Total noninterest expense 83,075   76,060   28,659   26,694   27,722   26,768   25,886 
Income before income taxes 30,235   46,002   15,213   13,573   1,449   13,419   17,114 
Income tax expense 5,703   10,247   2,940   2,441   322   312   4,281 
Net income 24,532   35,755   12,273   11,132   1,127   13,107   12,833 
Preferred stock dividends 1,096   1,096   365   366   365   365   365 
Net income available to common                           
shareholders$23,436  $34,659  $11,908  $10,766  $762  $12,742  $12,468 
FINANCIAL RATIOS:                           
Earnings per share – basic$1.46  $2.17  $0.74  $0.67  $0.05  $0.80  $0.78 
Earnings per share – diluted$1.46  $2.16  $0.74  $0.67  $0.05  $0.79  $0.78 
Cash dividends declared on common stock$0.78  $0.75  $0.26  $0.26  $0.26  $0.25  $0.25 
Common dividend payout ratio 53.42%  34.56%  35.14%  38.81%  520.00%  31.25%  32.05%
Dividend yield (annualized) 6.77%  3.32%  6.72%  5.60%  5.76%  3.09%  3.29%
Return on average assets 0.71%  1.12%  1.02%  0.97%  0.10%  1.21%  1.19%
Return on average equity 7.33%  11.51%  10.72%  10.05%  1.03%  11.88%  11.86%
Return on average common equity 7.28%  11.64%  10.82%  10.11%  0.72%  12.02%  12.00%
Return on average tangible common                           
equity (2) 8.81%  14.38%  13.02%  12.25%  0.88%  14.64%  14.69%
Efficiency ratio (3) 61.89%  60.09%  60.28%  61.26%  64.31%  62.05%  59.52%
Effective tax rate 18.9%  22.3%  19.3%  18.0%  22.2%  2.3%  25.0%

                

(1)Beginning in the first quarter of 2020, software service contracts and software amortization are classified as computer and data processing expense. Previously, they were included in occupancy and equipment expense. Prior periods have been reclassified to conform to the current presentation.
(2)See Appendix A – Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.
(3)The efficiency ratio is calculated by dividing noninterest expense by net revenue, i.e., the sum of net interest income (fully taxable equivalent) and noninterest income before net gains on investment securities. This is a banking industry measure not required by GAAP.
  

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands)

 Nine Months Ended  2020  2019 
 September 30,  Third  Second  First  Fourth  Third 
 2020  2019  Quarter  Quarter  Quarter  Quarter  Quarter 
SELECTED AVERAGE BALANCES:                           
Federal funds sold and interest-earning deposits$91,263  $18,495  $121,929  $92,214  $59,309  $32,494  $19,370 
Investment securities (1) 772,059   838,995   769,673   766,636   779,894   774,520   785,595 
Loans:                           
Commercial business 712,703   570,596   808,582   757,588   570,886   567,998   586,293 
Commercial mortgage 1,138,568   1,003,593   1,180,747   1,133,832   1,100,660   1,073,527   1,021,931 
Residential real estate loans 583,540   541,185   590,483   581,651   578,407   566,256   553,382 
Residential real estate lines 99,156   108,207   95,288   99,543   102,680   106,011   107,290 
Consumer indirect 834,810   890,560   830,647   827,030   846,800   856,823   868,927 
Other consumer 15,691   16,029   16,445   15,155   15,466   16,100   16,141 
Total loans 3,384,468   3,130,170   3,522,192   3,414,799   3,214,899   3,186,715   3,153,964 
Total interest-earning assets 4,247,790   3,987,660   4,413,794   4,273,649   4,054,102   3,993,729   3,958,929 
Goodwill and other intangible assets, net 74,506   75,713   74,220   74,504   74,797   75,093   75,401 
Total assets 4,592,609   4,281,270   4,775,333   4,624,360   4,376,125   4,299,342   4,260,810 
Interest-bearing liabilities:                           
Interest-bearing demand 694,830   653,780   704,550   712,300   667,533   660,738   632,540 
Savings and money market 1,349,931   973,005   1,574,068   1,329,632   1,143,628   1,014,434   956,410 
Time deposits 989,236   1,090,896   867,479   984,832   1,116,736   1,120,823   1,099,212 
Short-term borrowings 112,451   332,922   57,856   110,272   169,827   241,557   328,952 
Long-term borrowings, net 39,297   39,227   39,314   39,297   39,279   39,262   39,244 
Total interest-bearing liabilities 3,185,745   3,089,830   3,243,267   3,176,333   3,137,003   3,076,814   3,056,358 
Noninterest-bearing demand deposits 874,456   719,630   987,908   912,238   721,975   725,590   717,473 
Total deposits 3,908,453   3,437,311   4,134,005   3,939,002   3,649,872   3,521,585   3,405,635 
Total liabilities 4,145,270   3,865,909   4,320,057   4,178,921   3,934,909   3,861,542   3,831,409 
Shareholders’ equity 447,339   415,361   455,276   445,439   441,216   437,800   429,401 
Common equity 430,011   398,033   437,948   428,111   423,888   420,472   412,073 
Tangible common equity (2)$355,505  $322,230  $363,728  $353,607  $349,091  $345,379  $336,672 
Common shares outstanding:                           
Basic 16,018   15,964   16,031   16,018   16,006   15,995   15,991 
Diluted 16,058   16,017   16,058   16,047   16,069   16,072   16,056 
SELECTED AVERAGE YIELDS:
(Tax equivalent basis)
                           
Investment securities 2.40%  2.38%  2.23%  2.49%  2.48%  2.40%  2.40%
Loans 4.25%  4.79%  4.02%  4.14%  4.61%  4.70%  4.77%
Total interest-earning assets 3.83%  4.27%  3.60%  3.76%  4.15%  4.22%  4.29%
Interest-bearing demand 0.16%  0.21%  0.14%  0.14%  0.21%  0.21%  0.22%
Savings and money market 0.37%  0.43%  0.28%  0.31%  0.56%  0.48%  0.44%
Time deposits 1.42%  2.12%  0.92%  1.39%  1.83%  1.94%  2.12%
Short-term borrowings 1.67%  2.64%  1.60%  1.03%  2.11%  2.21%  2.51%
Long-term borrowings, net 6.30%  6.30%  6.31%  6.29%  6.29%  6.29%  6.30%
Total interest-bearing liabilities 0.77%  1.29%  0.52%  0.71%  1.09%  1.16%  1.30%
Net interest rate spread 3.06%  2.98%  3.08%  3.05%  3.06%  3.06%  2.99%
Net interest margin 3.25%  3.27%  3.22%  3.23%  3.31%  3.33%  3.29%

                

(1)Includes investment securities at adjusted amortized cost.
(2)See Appendix A – Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.
  

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands)

 Nine Months Ended  2020  2019 
 September 30,  Third  Second  First  Fourth  Third 
 2020  2019  Quarter  Quarter  Quarter  Quarter  Quarter 
ASSET QUALITY DATA:                           
Allowance for Credit Losses - Loans                           
Beginning balance, prior to adoption of CECL$30,482  $33,914  $46,316  $43,356  $30,482  $31,668  $34,434 
Impact of adopting CECL 9,594   -   -   -   9,594   -   - 
Beginning balance, after adoption of CECL 40,076   33,914   46,316   43,356   40,076   31,668   34,434 
Net loan charge-offs (recoveries):                           
Commercial business 6,637   47   (88)  (1,458)  8,183   1,942   10 
Commercial mortgage 1,675   2,980   603   1,072   -   -   2,994 
Residential real estate loans 75   141   (7)  (6)  88   156   40 
Residential real estate lines (3)  4   -   -   (3)  3   7 
Consumer indirect 2,816   3,897   (115)  1,175   1,756   1,523   1,317 
Other consumer 217   568   95   3   119   215   242 
Total net charge-offs 11,417   7,637   488   786   10,143   3,839   4,610 
Provision for credit losses - loans 20,736   5,391   3,567   3,746   13,423   2,653   1,844 
Ending balance$49,395  $31,668  $49,395  $46,316  $43,356  $30,482  $31,668 
                            
Net charge-offs (recoveries) to average loans (annualized):                           
Commercial business 1.24%  0.01%  -0.04%  -0.77%  5.77%  1.36%  0.01%
Commercial mortgage 0.20%  0.40%  0.20%  0.38%  0.00%  0.00%  1.16%
Residential real estate loans 0.02%  0.03%  0.00%  0.00%  0.06%  0.11%  0.03%
Residential real estate lines 0.00%  0.01%  0.00%  0.00%  -0.01%  0.01%  0.03%
Consumer indirect 0.45%  0.59%  -0.05%  0.57%  0.83%  0.71%  0.60%
Other consumer 1.85%  4.74%  2.31%  0.08%  3.09%  5.30%  5.93%
Total loans 0.45%  0.33%  0.06%  0.09%  1.27%  0.48%  0.58%
                            
Supplemental information (1)                           
Non-performing loans:                           
Commercial business$2,628  $2,884  $2,628  $4,918  $5,507  $1,177  $2,884 
Commercial mortgage 3,372   2,867   3,372   4,140   2,984   3,146   2,867 
Residential real estate loans 3,305   2,526   3,305   2,992   1,971   2,484   2,526 
Residential real estate lines 207   182   207   177   143   102   182 
Consumer indirect 1,244   1,326   1,244   868   1,777   1,725   1,326 
Other consumer 147   3   147   87   2   6   3 
Total non-performing loans 10,903   9,788   10,903   13,182   12,384   8,640   9,788 
Foreclosed assets 2,999   91   2,999   679   749   468   91 
Total non-performing assets$13,902  $9,879  $13,902  $13,861  $13,133  $9,108  $9,879 
                            
Total non-performing loans to total loans 0.31%  0.31%  0.31%  0.38%  0.38%  0.27%  0.31%
Total non-performing assets to total assets 0.28%  0.23%  0.28%  0.30%  0.29%  0.21%  0.23%
Allowance for credit losses - loans to total loans 1.38%  1.00%  1.38%  1.33%  1.34%  0.95%  1.00%
Allowance for credit losses - loans to non-performing loans 453%  324%  453%  351%  350%  353%  324%

                

(1)At period end.
  

FINANCIAL INSTITUTIONS, INC.
Appendix A — Reconciliation to Non-GAAP Financial Measures (Unaudited)
(In thousands, except per share amounts)

 Nine Months Ended  2020  2019 
 September 30,  Third  Second  First  Fourth  Third 
 2020  2019  Quarter  Quarter  Quarter  Quarter  Quarter 
Ending tangible assets:                           
Total assets        $4,959,201  $4,680,930  $4,471,768  $4,384,178  $4,332,737 
Less: Goodwill and other intangible assets, net         74,062   74,342   74,629   74,923   75,225 
Tangible assets        $4,885,139  $4,606,588  $4,397,139  $4,309,255  $4,257,512 
                            
Ending tangible common equity:                           
Common shareholders’ equity        $439,033  $430,717  $422,065  $421,619  $415,289 
Less: Goodwill and other intangible assets, net         74,062   74,342   74,629   74,923   75,225 
Tangible common equity        $364,971  $356,375  $347,436  $346,696  $340,064 
                            
Tangible common equity to tangible assets (1)         7.47%  7.74%  7.90%  8.05%  7.99%
                            
Common shares outstanding         16,038   16,038   16,020   16,003   15,997 
Tangible common book value per share (2)        $22.76  $22.22  $21.69  $21.66  $21.26 
                            
Average tangible assets:                           
Average assets$4,592,609  $4,281,270  $4,775,333  $4,624,360  $4,376,125  $4,299,342  $4,260,810 
Less: Average goodwill and other intangible assets, net 74,506   75,713   74,220   74,504   74,797   75,093   75,401 
Average tangible assets$4,518,103  $4,205,557  $4,701,113  $4,549,856  $4,301,328  $4,224,249  $4,185,409 
                            
Average tangible common equity:                           
Average common equity$430,011  $398,033  $437,948  $428,111  $423,888  $420,472  $412,073 
Less: Average goodwill and other intangible assets, net 74,506   75,713   74,220   74,504   74,797   75,093   75,401 
Average tangible common equity$355,505  $322,320  $363,728  $353,607  $349,091  $345,379  $336,672 
                            
Net income available to common shareholders$23,436  $34,659  $11,908  $10,766  $762  $12,742  $12,468 
Return on average tangible common equity (3) 8.81%  14.38%  13.02%  12.25%  0.88%  14.64%  14.69%
                            
Pre-tax pre-provision income:                           
Net income$24,532  $35,755  $12,273  $11,132  $1,127  $13,107  $12,833 
Add: Income tax expense 5,703   10,247   2,940   2,441   322   312   4,281 
Add: Provision for credit losses 21,689   5,391   4,028   3,746   13,915   2,653   1,844 
Pre-tax pre-provision income$51,924  $51,393  $19,241  $17,319  $15,364  $16,072  $18,958 

                

(1)Tangible common equity divided by tangible assets.
(2)Tangible common equity divided by common shares outstanding.
(3)Net income available to common shareholders (annualized) divided by average tangible common equity.

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Source: Financial Institutions, Inc.