Financial Institutions Inc.

07/29/2021 | Press release | Distributed by Public on 07/29/2021 15:31

FINANCIAL INSTITUTIONS, INC. ANNOUNCES SECOND QUARTER RESULTS (Form 8-K)

FINANCIAL INSTITUTIONS, INC. ANNOUNCES SECOND QUARTER RESULTS

WARSAW, N.Y., July 29, 2021 - 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 second quarter ended June 30, 2021.

Net income for the quarter was $20.2 million compared to $11.1 million in the second quarter of 2020. After preferred dividends, net income available to common shareholders was $19.8 million, or $1.25 per diluted share, compared to $10.8 million, or $0.67 per diluted share, in the second quarter of 2020.

•

The increase in quarterly net income was driven by a $4.6 million benefit for credit losses as compared to a provision of $3.7 million in the second quarter of 2020. Continued improvement in the national unemployment forecast, positive trends in qualitative factors and lower net charge-offs resulted in a release of credit loss reserves and the corresponding benefit for credit losses in the quarter.

Pre-tax pre-provision income(1) for the quarter was $21.0 million, an increase of $3.7 million from the second quarter of 2020.

'Our Company delivered solid performance across all business lines in the quarter with year-over-year growth in net interest income and noninterest income and a quarterly efficiency ratio of 56%,' said President and Chief Executive Officer Martin K. Birmingham. 'Cost savings from our enterprise standardization program are offsetting the cost of important investments we are making in people and technology to improve relationships with our customers and enhance future profitability. Our team continued to do a great job serving our clients across our banking, insurance and investment businesses.

'We once again benefitted from a positive provision in the quarter due to continued improvement in the operating environment. A strengthening economy is also reflected in net loan recoveries.

'We opened two new branches in the City of Buffalo in June. Both branches are in areas undergoing redevelopment and revitalization and we are honored to play an important role. We look forward to delivering our unique style of community banking to our neighbors and helping them improve their financial well-being.'

Chief Financial Officer and Treasurer W. Jack Plants II added, 'Net interest margin ('NIM') was 3.06% for the second quarter, down 23 basis points from 3.29% in the first quarter of 2021. Second quarter NIM was impacted by an increase in our excess liquidity position coupled with a lower level of fee accretion related to Paycheck Protection Program ('PPP') loans in comparison to the first quarter. On a linked quarter basis, our excess liquidity position resulted in an increase in average investment securities and interest-earning deposits of $269 million, partially due to the seasonal inflow of public deposits. This resulted in approximately 12 basis points of NIM compression in the quarter. Second quarter PPP fee accretion was $1.5 million, down from $2.9 million in the prior quarter, negatively impacting second quarter NIM by approximately 11 basis points. Excluding all impacts of PPP loans, NIM was 3.02% for the second quarter as compared to 3.15% for the first quarter of 2021.'

Buffalo Branch Openings

Two new Five Star Bank branches opened in the City of Buffalo in June of 2021, consistent with the Company's long-term strategy to expand in the urban markets of Buffalo and Rochester. The branches are in vibrant commercial corridors at 451 Elmwood Avenue and 2222 Seneca Street, extending the reach of Five Star Bank's distribution system in both northern and southern directions from the existing downtown branch.

The Company is committed to the use of green and energy efficient materials. Materials sourced for the Elmwood Avenue and Seneca Street branches received certifications from Cradle to Cradle, Declare, Forest Stewardship Council, Green Square and GreenGuard. Additionally, materials with a high percentage of recycled content were used when possible.

Net Interest Income and Net Interest Margin

Net interest income was $37.7 million for the quarter, a decrease of $125 thousand from the first quarter of 2021 and an increase of $3.6 million from the second quarter of 2020.

•

Average interest-earning assets for the quarter were $4.97 billion, $302.5 million higher than the first quarter of 2021 and $699.2 million higher than the second quarter of 2020. The increase was the result of an increase in the level of Federal Reserve

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interest-earning cash, $126.3 million higher than the first quarter of 2021 and $157.1 million higher than the second quarter of 2020; an increase in investment securities, $142.3 million higher than the first quarter of 2021 and $290.3 million higher than the second quarter of 2020; and growth in loans, $33.9 million higher than the first quarter of 2021 and $251.8 million higher than the second quarter of 2020. The average balance of PPP loans net of deferred fees was $232.0 million in the second quarter of 2021, $248.5 million in the first quarter of 2021 and $176.7 million in the second quarter of 2020.

Net interest margin was 3.06% as compared to 3.29% in the first quarter of 2021 and 3.23% in the second quarter of 2020. Excluding the impact of lower-yielding PPP loans and related loan origination fees accreted over the term of the loan or upon loan forgiveness, net interest margin was 3.02% in the second quarter of 2021, 3.15% in the first quarter of 2021 and 3.27% in the second quarter of 2020.

•

Our net interest margin has been impacted by the interest rate environment that reflects a flatter yield curve and lower rates. In the first and second quarters of 2021, our excess liquidity position placed further pressure on net interest margin. Excess liquidity has resulted in higher average balances of interest-earning cash and investment securities, albeit at lower comparative yields, based on current market conditions.

Noninterest Income

Noninterest income was $10.2 million for the quarter, a decrease of $2.8 million from the first quarter of 2021 and an increase of $477 thousand from the second quarter of 2020.

•

Service charges on deposits of $1.3 million was relatively unchanged as compared to the first quarter of 2021 and $807 thousand higher than the second quarter of 2020. The increase is the result of the Company's COVID-19 relief initiatives of temporarily waiving or eliminating fees during the second quarter of 2020.

•

Insurance income of $1.1 million was $249 thousand lower than the first quarter of 2021, primarily due to contingent revenue received in the first quarter each year partially offset by the full quarter impact of the February 1, 2021, acquisition of Landmark Group. The increase of $328 thousand from the second quarter of 2020 was primarily the result of the Landmark Group acquisition.

•

Card interchange income of $2.2 million was $236 thousand higher than the first quarter of 2021 and $418 thousand higher than the second quarter of 2020 due to an increase in customer transactions.

•

Investment advisory fees of $2.9 million was $114 thousand higher than the first quarter of 2021 and $635 thousand higher than the second quarter of 2020 due to an increase in assets under management driven by a combination of market gains, new customer accounts and contributions to existing accounts.

•

Income from investments in limited partnerships of $238 thousand was $617 thousand lower than the first quarter of 2021 and $482 thousand higher than the second quarter of 2020. 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 (loss) from derivative instruments, net was a loss of $592 thousand, $2.5 million lower than the first quarter of 2021 and the second quarter of 2020. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed during the quarter combined with the impact of changes in the fair market value of borrower-facing trades. A lower level of interest rate swap transactions was executed during the quarter and fair market values were negatively impacted by the second quarter decrease in longer-term interest rates.

•

A net loss on investment securities of $3 thousand was recognized in the quarter compared to a net gain of $74 thousand in the first quarter of 2021 and a net gain of $674 thousand in the second quarter of 2020. The net gain in the second quarter of 2020 is attributable to the management of premium risk, largely achieved through the sale of $25.9 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 $26.9 million in the quarter compared to $26.7 million in the first quarter of 2021 and $26.6 million in the second quarter of 2020.

•

Salaries and employee benefits expense of $14.5 million was relatively unchanged as compared to the first quarter of 2021 and $555 thousand lower than the second quarter of 2020, reflecting the 2020 streamlining of retail branches to better align with shifting customer needs and preferences, including the closure of seven branches.

•

Professional services expense of $1.6 million was $292 thousand lower than the first quarter of 2021 primarily due to the timing and level of audit fees and fees for consulting and advisory projects. Expense was relatively unchanged as compared to the second quarter of 2020.

•

Computer and data processing expense of $3.5 million was $339 thousand higher than the first quarter of 2021 and $761 thousand higher than the second quarter of 2020 due to investments in technology, including costs related to the Bank's ongoing digital banking initiatives.

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Income Taxes

Income tax expense was $5.4 million for the quarter compared to $5.3 million in the first quarter of 2021 and $2.4 million in the second quarter of 2020. The Company recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the second quarter of 2021, first quarter of 2021, and second quarter of 2020, resulting in income tax expense reductions of approximately $424 thousand, $244 thousand and $196 thousand, respectively.

The effective tax rate was 21.1% for the quarter compared to 20.5% for the first quarter of 2021 and 18.0% for the second quarter of 2020. The year-over-year increase in effective tax rates is the result of higher pre-tax earnings in comparison to the prior year. 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.

Balance Sheet and Capital Management

Total assets were $5.30 billion at June 30, 2021, down $34.0 million from March 31, 2021, and up $614.2 million from June 30, 2020.

Investment securities were $1.12 billion at June 30, 2021, up $112.1 million from March 31, 2021, and up $342.4 million from June 30, 2020. The Company's primary investment strategy for 2020 was to reinvest cash flow from the portfolio; however, the focus was redirected to deploying excess liquidity into cash flowing agency mortgage backed securities given the elevated cash position the Company has continued to experience. Increased purchase activity in the first six months of 2021 resulted from the continued execution of the strategy to reallocate excess Federal Reserve cash balances into collateral eligible agency mortgage backed securities that demonstrated higher yields, on a relative basis.

Total loans were $3.63 billion at June 30, 2021, down $22.2 million, or 0.6%, from March 31, 2021, and up $146.3 million, or 4.2%, from June 30, 2020.

•

Commercial business loans totaled $731.2 million, down $85.7 million, or 10.5%, from March 31, 2021, and down $87.5 million, or 10.7%, from June 30, 2020. PPP loans net of deferred fees were $171.9 million at June 30, 2021, $255.6 million at March 31, 2021, and $261.5 million at June 30, 2020, and are included in commercial business loans. Accordingly, commercial business loans excluding the impact of PPP decreased 0.4% from March 31, 2021 and increased 0.4% from June 30, 2020.

•

Commercial mortgage loans totaled $1.32 billion, up $38.6 million, or 3.0%, from March 31, 2021, and up $175.1 million, or 15.4%, from June 30, 2020.

•

Residential real estate loans totaled $590.3 million, down $11.3 million, or 1.9%, from March 31, 2021, and up $5.3 million, or 0.9%, from June 30, 2020.

•

Consumer indirect loans totaled $899.0 million, up $41.2 million, or 4.8%, from March 31, 2021 and up $70.9 million, or 8.6%, from June 30, 2020.

Total loans, excluding PPP loans net of deferred fees, were $3.46 billion at June 30, 2021, up $61.4 million, or 1.8%, from March 31, 2021, and up $235.9 million, or 7.3%, from June 30, 2020.

Total deposits were $4.66 billion at June 30, 2021, $56.8 million lower than March 31, 2021, and $665.2 million higher than June 30, 2020. The decrease from March 31, 2021, was primarily the result of a seasonal decrease in public deposits partially offset by growth in the non-public and reciprocal deposit portfolios. The increase from June 30, 2020, was due to growth in public, non-public, reciprocal and brokered deposits. Public deposit balances represented 21% of total deposits at June 30, 2021, compared to 24% at March 31, 2021, and 23% at June 30, 2020.

There were no short-term borrowings outstanding at June 30, 2021 or March 31, 2021. The decline from $105.3 million at June 30, 2020, is the result of the Company's decision to utilize brokered deposits 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. In February 2020, the Company entered a long-term brokered sweep arrangement as a stable alternative borrowing source to diversify the wholesale funding base.

Shareholders' equity was $487.1 million at June 30, 2021, compared to $466.3 million at March 31, 2021, and $448.0 million at June 30, 2020. Common book value per share was $29.66 at June 30, 2021, an increase of $1.30 or 4.6% from $28.36 at March 31, 2021, and an increase of $2.80 or 10.4% from $26.86 at June 30, 2020. Tangible common book value per share(1) was $24.97 at June 30, 2021, an increase of $1.31 or 5.5% from $23.66 at March 31, 2021, and an increase of $2.75 or 12.4% from $22.22 at June 30, 2020.

On November 4, 2020, the Company announced a stock repurchase program for up to 801,879 shares of common stock, or approximately 5% of the Company's outstanding common shares. Shares may be repurchased in open market transactions and pursuant to any trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. No shares were repurchased in 2020 or in the second quarter of 2021 under this program. During the first quarter of 2021, the Company repurchased 238,439 shares for an average repurchase price of $24.30 per share, inclusive of transaction costs.

The common equity to assets ratio was 8.87% at June 30, 2021, compared to 8.42% at March 31, 2021, and 9.20% at June 30, 2020. Tangible common equity to tangible assets(1), or the TCE ratio, was 7.58%, 7.13% and 7.74% at June 30, 2021, March 31, 2021, and June 30, 2020, respectively. The primary driver of declines in both ratios compared to the prior year period was the significant increase

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in total assets, specifically the increase in liquidity. The ratios were impacted to a lesser degree by a decrease in accumulated other comprehensive income (loss) associated with unrealized losses in the available for sale securities portfolio and the impact of share repurchases during the first quarter of 2021, partially offset by the positive impact of earnings.During the second quarter of 2021, the Company declared a common stock dividend of $0.27 per common share. The dividend returned 22% of second quarter net income to common shareholders.

The Company's regulatory capital ratios at June 30, 2021, compared to the prior quarter and prior year:

•

Leverage Ratio was 8.16%, compared to 8.35% and 8.49% at March 31, 2021, and June 30, 2020, respectively.

•

Common Equity Tier 1 Capital Ratio was 10.38%, compared to 10.22% and 10.23% at March 31, 2021, and June 30, 2020, respectively.

•

Tier 1 Capital Ratio was 10.81%, compared to 10.66% and 10.71% at March 31, 2021, and June 30, 2020, respectively.

•

Total Risk-Based Capital Ratio was 13.54%, compared to 13.53% and 12.78% at March 31, 2021, and June 30, 2020, respectively.

Credit Quality

Non-performing loans were $6.6 million at June 30, 2021, as compared to $9.7 million at March 31, 2021, and $13.2 million at June 30, 2020. Net recoveries were $394 thousand in the quarter as compared to net charge-offs of $887 thousand in the first quarter of 2021 and $786 thousand in the second quarter of 2020. The ratio of annualized net charge-offs (recoveries) to average loans was (0.04)% in the current quarter, 0.10% in the first quarter of 2021 and 0.09% in the second quarter of 2020.

Foreclosed assets at June 30, 2021, were $646 thousand, a decrease of $2.3 million from March 31, 2021, and a decrease of $33 thousand from June 30, 2020. The decrease during the quarter was the result of the sale of an asset on which foreclosure occurred in the third quarter of 2020.

At June 30, 2021, the allowance for credit losses - loans to total loans ratio was 1.28% compared to 1.36% at March 31, 2021, and 1.33% at June 30, 2020. PPP loans are fully guaranteed by the Small Business Administration. Excluding PPP loans, the June 30, 2021, allowance for credit losses - loans to total loans ratio(1) was 1.34%, a decrease of thirteen basis points from 1.47% at March 31, 2021 and a decrease of ten basis points from 1.44% at June 30, 2020.

Provision (benefit) for credit losses - loans was a $3.9 million benefit in the quarter compared to a benefit of $1.7 million in the first quarter of 2021 and a provision of $3.7 million in the second quarter of 2020. Changes in the allowance for unfunded commitments, also included in provision (benefit) for credit losses, were a $764 thousand decrease in the second quarter of 2021 and a $276 thousand decrease in the first quarter of 2021, compared to an increase of $5 thousand in the second quarter of 2020.

Provision throughout 2020 was driven by the adoption of the current expected credit loss standard ('CECL') and the impact of the COVID-19 pandemic on the economic environment. The designated loss driver for the Company's CECL model is the national unemployment forecast, which spiked in early 2020 at the onset of the pandemic, resulting in a first quarter 2020 provision of $13.9 million and a second quarter provision of $3.7 million. Provision was a benefit in the first and second quarters of 2021 due to continued improvement in the national unemployment forecast and positive trends in qualitative factors, resulting in a release of credit loss reserves.

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 0.18% at June 30, 2021, 0.27% at March 31, 2021, and 0.38% at June 30, 2020. The ratio of allowance for credit losses - loans to non-performing loans was 699% at June 30, 2021, compared to 514% at March 31, 2021, and 351% at June 30, 2020.

Subsequent Events

The Company is required, under generally accepted accounting principles, to evaluate subsequent events through the filing of its consolidated financial statements for the quarter ended June 30, 2021, on Form 10-Q. As a result, the Company will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of June 30, 2021, and will adjust amounts preliminarily reported, if necessary.

Conference Call

The Company will host an earnings conference call and audio webcast on July 30, 2021, at 8:30 a.m. Eastern Time. The call will be hosted by Martin K. Birmingham, President and Chief Executive Officer, and W. Jack Plants II, Chief Financial Officer and Treasurer. 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.

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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 more than 45 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 600 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 Landmark Group 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]

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

2021

2020

June 30,

March 31,

December 31,

September 30,

June 30,

SELECTED BALANCE SHEET DATA:

Cash and cash equivalents

$

206,387

$

344,790

$

93,878

$

282,070

$

119,610

Investment securities:

Available for sale

902,845

753,489

628,059

515,971

469,413

Held-to-maturity, net

218,858

256,127

271,966

290,946

309,872

Total investment securities

1,121,703

1,009,616

900,025

806,917

779,285

Loans held for sale

3,929

5,685

4,305

7,076

6,654

Loans:

Commercial business

731,208

816,936

794,148

818,135

818,691

Commercial mortgage

1,315,404

1,276,841

1,253,901

1,202,046

1,140,326

Residential real estate loans

590,303

601,609

599,800

596,902

585,035

Residential real estate lines

80,781

85,362

89,805

94,017

97,427

Consumer indirect

899,018

857,804

840,421

840,579

828,105

Other consumer

15,454

15,834

17,063

16,860

16,237

Total loans

3,632,168

3,654,386

3,595,138

3,568,539

3,485,821

Allowance for credit losses - loans

46,365

49,828

52,420

49,395

46,316

Total loans, net

3,585,803

3,604,558

3,542,718

3,519,144

3,439,505

Total interest-earning assets

4,906,087

4,963,264

4,520,416

4,577,057

4,314,490

Goodwill and other intangible assets, net

74,262

74,528

73,789

74,062

74,342

Total assets

5,295,102

5,329,056

4,912,306

4,959,201

4,680,930

Deposits:

Noninterest-bearing demand

1,121,827

1,099,608

1,018,549

1,013,176

1,008,958

Interest-bearing demand

799,299

873,390

731,885

786,059

727,676

Savings and money market

1,796,813

1,826,621

1,642,340

1,724,463

1,368,805

Time deposits

941,282

916,395

885,593

841,230

888,569

Total deposits

4,659,221

4,716,014

4,278,367

4,364,928

3,994,008

Short-term borrowings

-

-

5,300

5,300

105,300

Long-term borrowings, net

73,756

73,679

73,623

39,258

39,308

Total interest-bearing liabilities

3,611,150

3,690,085

3,338,741

3,396,310

3,129,658

Shareholders' equity

487,126

466,284

468,363

456,361

448,045

Common shareholders' equity

469,834

448,962

451,035

439,033

430,717

Tangible common equity (1)

395,572

374,434

377,246

364,971

356,375

Accumulated other comprehensive (loss) income

$

(5,934

)

$

(10,572

)

$

2,128

$

(209

)

$

(496

)

Common shares outstanding

15,842

15,829

16,042

16,038

16,038

Treasury shares

258

271

58

62

62

CAPITAL RATIOS AND PER SHARE DATA:

Leverage ratio

8.16

%

8.35

%

8.25

%

8.42

%

8.49

%

Common equity Tier 1 capital ratio

10.38

%

10.22

%

10.14

%

10.15

%

10.23

%

Tier 1 capital ratio

10.81

%

10.66

%

10.59

%

10.61

%

10.71

%

Total risk-based capital ratio

13.54

%

13.53

%

13.56

%

12.68

%

12.78

%

Common equity to assets

8.87

%

8.42

%

9.18

%

8.85

%

9.20

%

Tangible common equity to tangible assets (1)

7.58

%

7.13

%

7.80

%

7.47

%

7.74

%

Common book value per share

$

29.66

$

28.36

$

28.12

$

27.38

$

26.86

Tangible common book value per share (1)

$

24.97

$

23.66

$

23.52

$

22.76

$

22.22

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

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

Six Months Ended

2021

2020

June 30,

Second

First

Fourth

Third

Second

2021

2020

Quarter

Quarter

Quarter

Quarter

Quarter

SELECTED INCOME STATEMENT

DATA:

Interest income

$

82,225

$

81,412

$

40,952

$

41,273

$

40,168

$

39,719

$

39,759

Interest expense

6,636

14,107

3,220

3,416

3,987

4,220

5,578

Net interest income

75,589

67,305

37,732

37,857

36,181

35,499

34,181

Provision (benefit) for credit losses

(6,603

)

17,661

(4,622

)

(1,981

)

5,495

4,028

3,746

Net interest income after provision

for credit losses

82,192

49,644

42,354

39,838

30,686

31,471

30,435

Noninterest income:

Service charges on deposits

2,579

2,067

1,287

1,292

1,489

1,254

480

Insurance income

2,543

2,168

1,147

1,396

878

1,357

819

Card interchange income

4,152

3,378

2,194

1,958

1,960

1,943

1,776

Investment advisory

5,658

4,497

2,886

2,772

2,595

2,443

2,251

Company owned life insurance

1,350

927

693

657

505

470

462

Investments in limited partnerships

1,093

(31

)

238

855

240

(105

)

(244

)

Loan servicing

188

57

91

97

143

49

50

Income (loss) from derivative

instruments, net

1,283

2,686

(592

)

1,875

904

1,931

1,940

Net gain on sale of loans held for sale

1,868

864

790

1,078

1,597

1,397

612

Net gain (loss) on investment securities

71

895

(3

)

74

150

554

674

Net gain (loss) on other assets

148

63

153

(5

)

(69

)

(55

)

(1

)

Net gain (loss) on tax credit investments

191

(80

)

276

(85

)

(155

)

(40

)

(40

)

Other

2,025

2,132

1,030

995

1,099

1,019

934

Total noninterest income

23,149

19,623

10,190

12,959

11,336

12,217

9,713

Noninterest expense:

Salaries and employee benefits

28,984

30,088

14,519

14,465

14,163

15,085

15,074

Occupancy and equipment

6,668

7,144

3,286

3,382

3,248

3,263

3,388

Professional services

3,498

3,732

1,603

1,895

1,352

1,242

1,580

Computer and data processing

6,581

5,372

3,460

3,121

3,023

3,250

2,699

Supplies and postage

914

1,070

430

484

442

463

517

FDIC assessments

1,245

911

480

765

737

594

539

Advertising and promotions

760

1,100

436

324

554

955

545

Amortization of intangibles

537

581

266

271

273

280

287

Restructuring charges

-

-

-

-

130

1,362

-

Other

4,497

4,247

2,464

2,033

2,612

1,981

1,946

Total noninterest expense

53,684

54,245

26,944

26,740

26,534

28,475

26,575

Income before income taxes

51,657

15,022

25,600

26,057

15,488

15,213

13,573

Income tax expense

10,747

2,763

5,400

5,347

1,688

2,940

2,441

Net income

40,910

12,259

20,200

20,710

13,800

12,273

11,132

Preferred stock dividends

731

731

366

365

365

365

366

Net income available to common

shareholders

$

40,179

$

11,528

$

19,834

$

20,345

$

13,435

$

11,908

$

10,766

FINANCIAL RATIOS:

Earnings per share - basic

$

2.53

$

0.72

$

1.25

$

1.28

$

0.84

$

0.74

$

0.67

Earnings per share - diluted

$

2.52

$

0.72

$

1.25

$

1.27

$

0.84

$

0.74

$

0.67

Cash dividends declared on common stock

$

0.54

$

0.52

$

0.27

$

0.27

$

0.26

$

0.26

$

0.26

Common dividend payout ratio

21.34

%

72.22

%

21.60

%

21.09

%

30.95

%

35.14

%

38.81

%

Dividend yield (annualized)

3.63

%

5.62

%

3.61

%

3.62

%

4.60

%

6.72

%

5.60

%

Return on average assets

1.59

%

0.55

%

1.52

%

1.66

%

1.10

%

1.02

%

0.97

%

Return on average equity

17.46

%

5.56

%

17.01

%

17.92

%

11.86

%

10.72

%

10.05

%

Return on average common equity

17.80

%

5.44

%

17.34

%

18.28

%

12.00

%

10.82

%

10.11

%

Return on average tangible common

equity (1)

21.28

%

6.60

%

20.69

%

21.88

%

14.38

%

13.02

%

12.25

%

Efficiency ratio (2)

54.22

%

62.70

%

56.02

%

52.51

%

55.79

%

60.12

%

61.16

%

Effective tax rate

20.8

%

18.4

%

21.1

%

20.5

%

10.9

%

19.3

%

18.0

%

(1)

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

(2)

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.

Page 7

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)

(Amounts in thousands)

Six Months Ended

2021

2020

June 30,

Second

First

Fourth

Third

Second

2021

2020

Quarter

Quarter

Quarter

Quarter

Quarter

SELECTED AVERAGE BALANCES:

Federal funds sold and interest-

earning deposits

$

186,526

$

75,761

$

249,312

$

123,042

$

176,950

$

121,929

$

92,214

Investment securities (1)

986,126

773,265

1,056,898

914,569

862,956

769,673

766,636

Loans:

Commercial business

795,119

664,237

791,412

798,866

803,536

808,582

757,588

Commercial mortgage

1,293,262

1,117,247

1,302,136

1,284,290

1,243,035

1,180,747

1,133,832

Residential real estate loans

599,376

580,029

595,925

602,866

599,773

590,483

581,651

Residential real estate lines

85,290

101,111

82,926

87,681

91,856

95,288

99,543

Consumer indirect

860,978

836,915

878,884

842,873

840,210

830,647

827,030

Other consumer

15,760

15,310

15,356

16,167

16,948

16,445

15,155

Total loans

3,649,785

3,314,849

3,666,639

3,632,743

3,595,358

3,522,192

3,414,799

Total interest-earning assets

4,822,437

4,163,875

4,972,849

4,670,354

4,635,264

4,413,794

4,273,649

Goodwill and other intangible

assets, net

74,313

74,651

74,412

74,214

73,942

74,220

74,504

Total assets

5,193,779

4,500,243

5,340,745

5,045,180

4,992,886

4,775,333

4,624,360

Interest-bearing liabilities:

Interest-bearing demand

817,058

689,917

842,832

790,996

774,688

704,550

712,300

Savings and money market

1,790,983

1,236,630

1,856,659

1,724,577

1,722,938

1,574,068

1,329,632

Time deposits

900,103

1,050,784

935,885

863,924

871,103

867,479

984,832

Short-term borrowings

585

140,049

-

1,178

9,188

57,856

110,272

Long-term borrowings, net

73,673

39,288

73,709

73,636

71,481

39,314

39,297

Total interest-bearing liabilities

3,582,402

3,156,668

3,709,085

3,454,311

3,449,398

3,243,267

3,176,333

Noninterest-bearing demand deposits

1,068,240

817,106

1,091,490

1,044,733

997,607

987,908

912,238

Total deposits

4,576,384

3,794,437

4,726,866

4,424,230

4,366,336

4,134,005

3,939,002

Total liabilities

4,721,347

4,056,915

4,864,559

4,576,545

4,530,043

4,320,057

4,178,921

Shareholders' equity

472,432

443,328

476,186

468,635

462,843

455,276

445,439

Common equity

455,111

426,000

458,868

451,311

445,515

437,948

428,111

Tangible common equity (2)

$

380,798

$

351,349

$

384,456

$

377,097

$

371,573

$

363,728

$

353,607

Common shares outstanding:

Basic

15,857

16,012

15,825

15,889

16,032

16,031

16,018

Diluted

15,943

16,058

15,913

15,972

16,078

16,058

16,047

SELECTED AVERAGE YIELDS:

(Tax equivalent basis)

Investment securities

1.83

%

2.48

%

1.77

%

1.91

%

2.06

%

2.23

%

2.49

%

Loans

4.05

%

4.37

%

3.98

%

4.13

%

3.97

%

4.02

%

4.14

%

Total interest-earning assets

3.45

%

3.95

%

3.31

%

3.59

%

3.46

%

3.60

%

3.76

%

Interest-bearing demand

0.14

%

0.17

%

0.14

%

0.13

%

0.13

%

0.14

%

0.14

%

Savings and money market

0.20

%

0.43

%

0.19

%

0.21

%

0.25

%

0.28

%

0.31

%

Time deposits

0.47

%

1.62

%

0.43

%

0.51

%

0.66

%

0.92

%

1.39

%

Short-term borrowings

41.07

%

1.69

%

0.00

%

41.07

%

8.49

%

1.60

%

1.03

%

Long-term borrowings, net

5.75

%

6.29

%

5.73

%

5.77

%

5.76

%

6.31

%

6.29

%

Total interest-bearing liabilities

0.37

%

0.90

%

0.35

%

0.40

%

0.46

%

0.52

%

0.71

%

Net interest rate spread

3.08

%

3.05

%

2.96

%

3.19

%

3.00

%

3.08

%

3.05

%

Net interest margin

3.17

%

3.27

%

3.06

%

3.29

%

3.13

%

3.22

%

3.23

%

(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.

Page 8

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

Six Months Ended

2021

2020

June 30,

Second

First

Fourth

Third

Second

2021

2020

Quarter

Quarter

Quarter

Quarter

Quarter

ASSET QUALITY DATA:

Allowance for Credit Losses - Loans

Beginning balance, prior to

adoption of CECL

$

52,420

$

30,482

$

49,828

$

52,420

$

49,395

$

46,316

$

43,356

Impact of adopting CECL

-

9,594

-

-

-

-

-

Beginning balance, after

adoption of CECL

52,420

40,076

49,828

52,420

49,395

46,316

43,356

Net loan charge-offs (recoveries):

Commercial business

(439

)

6,725

(287

)

(152

)

747

(88

)

(1,458

)

Commercial mortgage

196

1,072

(7

)

203

80

603

1,072

Residential real estate loans

3

82

(3

)

6

(3

)

(7

)

(6

)

Residential real estate lines

70

(3

)

-

70

-

-

-

Consumer indirect

317

2,931

(426

)

743

1,462

(115

)

1,175

Other consumer

346

122

329

17

112

95

3

Total net charge-offs

(recoveries)

493

10,929

(394

)

887

2,398

488

786

Provision (benefit) for credit losses - loans

(5,562

)

17,169

(3,857

)

(1,705

)

5,423

3,567

3,746

Ending balance

$

46,365

$

46,316

$

46,365

$

49,828

$

52,420

$

49,395

$

46,316

Net charge-offs (recoveries)

to average loans (annualized):

Commercial business

-0.11

%

2.04

%

-0.15

%

-0.08

%

0.37

%

-0.04

%

-0.77

%

Commercial mortgage

0.03

%

0.19

%

0.00

%

0.06

%

0.03

%

0.20

%

0.38

%

Residential real estate loans

0.00

%

0.03

%

0.00

%

0.00

%

0.00

%

0.00

%

0.00

%

Residential real estate lines

0.17

%

-0.01

%

0.00

%

0.32

%

0.00

%

0.00

%

0.00

%

Consumer indirect

0.07

%

0.70

%

-0.19

%

0.36

%

0.69

%

-0.05

%

0.57

%

Other consumer

4.43

%

1.60

%

8.58

%

0.44

%

2.64

%

2.31

%

0.08

%

Total loans

0.03

%

0.66

%

-0.04

%

0.10

%

0.27

%

0.06

%

0.09

%

Supplemental information (1)

Non-performing loans:

Commercial business

$

1,555

$

4,918

$

1,555

$

1,742

$

1,975

$

2,628

$

4,918

Commercial mortgage

885

4,140

885

3,402

2,906

3,372

4,140

Residential real estate loans

2,615

2,992

2,615

2,519

2,587

3,305

2,992

Residential real estate lines

280

177

280

256

323

207

177

Consumer indirect

1,250

868

1,250

1,482

1,495

1,244

868

Other consumer

50

87

50

287

231

147

87

Total non-performing loans

6,635

13,182

6,635

9,688

9,517

10,903

13,182

Foreclosed assets

646

679

646

2,966

2,966

2,999

679

Total non-performing assets

$

7,281

$

13,861

$

7,281

$

12,654

$

12,483

$

13,902

$

13,861

Total non-performing loans

to total loans

0.18

%

0.38

%

0.18

%

0.27

%

0.26

%

0.31

%

0.38

%

Total non-performing assets

to total assets

0.14

%

0.30

%

0.14

%

0.24

%

0.25

%

0.28

%

0.30

%

Allowance for credit losses - loans

to total loans

1.28

%

1.33

%

1.28

%

1.36

%

1.46

%

1.38

%

1.33

%

Allowance for credit losses - loans

to non-performing loans

699

%

351

%

699

%

514

%

551

%

453

%

351

%

(1)

At period end.

Page 9

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

Six Months Ended

2021

2020

June 30,

Second

First

Fourth

Third

Second

2021

2020

Quarter

Quarter

Quarter

Quarter

Quarter

Ending tangible assets:

Total assets

$

5,295,102

$

5,329,056

$

4,912,306

$

4,959,201

$

4,680,930

Less: Goodwill and other intangible

assets, net

74,262

74,528

73,789

74,062

74,342

Tangible assets

$

5,220,840

$

5,254,528

$

4,838,517

$

4,885,139

$

4,606,588

Ending tangible common equity:

Common shareholders' equity

$

469,834

$

448,962

$

451,035

$

439,033

$

430,717

Less: Goodwill and other intangible

assets, net

74,262

74,528

73,789

74,062

74,342

Tangible common equity

$

395,572

$

374,434

$

377,246

$

364,971

$

356,375

Tangible common equity to tangible

assets (1)

7.58

%

7.13

%

7.80

%

7.47

%

7.74

%

Common shares outstanding

15,842

15,829

16,042

16,038

16,038

Tangible common book value per

share (2)

$

24.97

$

23.66

$

23.52

$

22.76

$

22.22

Average tangible assets:

Average assets

$

5,193,779

$

4,500,243

$

5,340,745

$

5,045,180

$

4,992,886

$

4,775,333

$

4,624,360

Less: Average goodwill and other

intangible assets, net

74,313

74,651

74,412

74,214

73,942

74,220

74,504

Average tangible assets

$

5,119,466

$

4,425,592

$

5,266,333

$

4,970,966

$

4,918,944

$

4,701,113

$

4,549,856

Average tangible common equity:

Average common equity

$

455,111

$

426,000

$

458,868

$

451,311

$

445,515

$

437,948

$

428,111

Less: Average goodwill and other

intangible assets, net

74,313

74,651

74,412

74,214

73,942

74,220

74,504

Average tangible common equity

$

380,798

$

351,349

$

384,456

$

377,097

$

371,573

$

363,728

$

353,607

Net income available to

common shareholders

$

40,179

$

11,528

$

19,834

$

20,345

$

13,435

$

11,908

$

10,766

Return on average tangible common

equity (3)

21.28

%

6.60

%

20.69

%

21.88

%

14.38

%

13.02

%

12.25

%

Pre-tax pre-provision income:

Net income

$

40,910

$

12,259

$

20,200

$

20,710

$

13,800

$

12,273

$

11,132

Add: Income tax expense

10,747

2,763

5,400

5,347

1,688

2,940

2,441

Add: Provision (benefit) for credit losses

(6,603

)

17,661

(4,622

)

(1,981

)

5,495

4,028

3,746

Pre-tax pre-provision income

$

45,054

$

32,683

$

20,978

$

24,076

$

20,983

$

19,241

$

17,319

Total loans excluding PPP loans:

Total loans

$

3,632,168

$

3,485,821

$

3,632,168

$

3,654,386

$

3,595,138

$

3,568,539

$

3,485,821

Less: Total PPP loans

171,942

261,468

171,942

255,595

247,951

264,138

261,468

Total loans excluding PPP loans

$

3,460,226

$

3,224,352

$

3,460,226

$

3,398,791

$

3,347,187

$

3,304,401

$

3,224,352

Allowance for credit losses - loans

$

46,365

$

46,316

$

46,365

$

49,828

$

52,420

$

49,395

$

46,316

Allowance for credit losses - loans to

total loans excluding PPP loans (4)

1.34

%

1.44

%

1.34

%

1.47

%

1.57

%

1.49

%

1.44

%

(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.

Page 10

(4)

Allowance for credit losses - loans divided by total loans excluding PPP loans.

Page 11