Financial Institutions, Inc. Announces Fourth Quarter and Full Year 2018 Results

WARSAW, N.Y., Jan. 31, 2019 (GLOBE NEWSWIRE) — Financial Institutions, Inc. (NASDAQ:FISI), today reported financial and operational results for the fourth quarter and year ended December 31, 2018. Financial Institutions, Inc. (the “Company”) is the parent company of Five Star Bank (the “Bank”), SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”).

Net income for the quarter was $7.5 million compared to $11.1 million for the fourth quarter of 2017. After preferred dividends, net income available to common shareholders was $7.1 million for the quarter, or $0.45 per diluted share, compared to $10.7 million, or $0.68 per diluted share, for the fourth quarter of 2017.

  • Results for the fourth quarter of 2018 were negatively impacted by a $2.4 million non-cash goodwill impairment charge related to the acquisition of SDN ($0.15 per diluted share) and $667 thousand of non-recurring expense incurred in connection with employee retirements and severance ($0.03 per diluted share).
  • Results for the fourth quarter of 2017 were positively impacted by a $2.9 million reduction in income tax expense due to the Tax Cuts and Jobs Act (the “TCJ Act”), primarily driven by a revaluation adjustment to the net deferred tax liability.

Net income for the full year 2018 was $39.5 million, $6.0 million higher than $33.5 million for the full year 2017. After preferred dividends, net income available to common shareholders for the full year 2018 was $38.1 million, or $2.39 per diluted share, compared to $32.1 million, or $2.13 per diluted share, for the full year 2017.

Full Year 2018 Highlights:

  • Diluted earnings per share of $2.39 was $0.26, or 12.2%, higher than 2017
  • Net interest income of $122.9 million was $10.2 million, or 9.1%, higher than 2017
  • Total assets, interest-earning assets, loans and deposits reached record-high year-end levels:
    • Total assets increased $206.5 million, or 5.0%, in 2018 to $4.31 billion
    • Total interest-earning assets increased $248.5 million, or 6.6%, in 2018 to $4.03 billion
    • Total loans increased $351.6 million, or 12.9%, in 2018 to $3.09 billion
    • Total deposits increased $156.7 million, or 4.9%, in 2018 to $3.37 billion
  • Dividends of $0.96 per common share were paid in 2018, an increase of 12.9% from 2017
  • The Company continued to execute its strategy to diversify revenue with the second quarter acquisition of HNP Capital, a Rochester-based investment advisory firm

President and Chief Executive Officer Martin K. Birmingham stated, “We generated $32.0 million of net interest income this quarter– by far the highest level in our Company’s history. Net interest income was $2.3 million higher than the year earlier quarter and $1.1 million higher than the third quarter of 2018, driven by strong loan growth and higher yields. Our average loan yield for the quarter was 4.68%, an increase of 39 basis points from the fourth quarter of 2017 and 13 basis points from the third quarter of 2018.

“We delivered strong loan growth in the quarter and for the year while seeking to maintain credit discipline and manage risk effectively. In the fourth quarter, commercial mortgage led the way with 5.9% growth, followed by 3.7% growth in commercial business and 3.3% growth in residential real estate loans. We believe these impressive results were made possible by the investments made in experienced leaders and producers, combined with our ability to deliver personal service with local leadership and decision-making power.

“We also made progress on our initiative to reposition the balance sheet by converting marketable securities into loans, funding approximately $34 million of fourth quarter loans with investment security maturities, sales and payment proceeds. For the full year 2018, we funded approximately $143 million of loans with proceeds from securities.

“Over the past five years, we’ve made significant investments in systems, people and platforms to support our associates, customers and communities. Our franchise is strong, and I believe we are well-positioned to build on the improved profitability achieved in 2018. I look forward to 2019 and a continued execution of our strategic plan.”

Chief Financial Officer Kevin B. Klotzbach added, “We were very pleased to see continued improvement in interest-earning asset mix and the funding of loans with proceeds from investment securities, which supported net interest margin expansion this quarter. 

“Our relationship-based commercial loan and residential real estate loan portfolios continue to experience strong growth while we maintained the consumer indirect loan portfolio relatively flat. As a result, the indirect portfolio at year-end comprised 29.8% of our total loan portfolio, down from 32.0% one year ago.”  

Net Interest Income and Net Interest Margin

Net interest income was $32.0 million for the quarter, $1.1 million higher than the third quarter of 2018 and $2.3 million higher than the fourth quarter of 2017.

  • Average interest-earning assets for the quarter were $4.00 billion, $86.0 million higher than the third quarter of 2018 and $265.3 million higher than the fourth quarter of 2017. The primary driver of the increase was organic loan growth.
  • Fourth quarter 2018 net interest margin was 3.21%, four basis points higher than the third quarter of 2018 and four basis points lower than the fourth quarter of 2017.

Net interest income was $122.9 million for the full year 2018, $10.2 million higher than 2017. The increase was primarily the result of a $295.7 million, or 8.2%, increase in average interest-earning assets for the year, partially offset by a three-basis-point narrowing of the net interest margin to 3.18% from 3.21%.

Noninterest Income

Noninterest income was $9.3 million for the quarter, $468 thousand lower than the third quarter of 2018 and $361 thousand higher than the fourth quarter of 2017.

  • Investment advisory fees were $56 thousand lower than the third quarter of 2018 and $442 thousand higher than the fourth quarter of 2017. The decrease compared to the third quarter of 2018 was primarily the result of the market-wide downturn in December, reducing investment valuations and fees. The increase compared to the fourth quarter of 2017 was primarily the result of the June 1, 2018 acquisition of HNP Capital.
  • Insurance income was $489 thousand lower than the third quarter of 2018 and $202 thousand lower than the fourth quarter of 2017. The decrease compared to the third quarter of 2018 was primarily the result of seasonality in this line of business. The decrease compared to the fourth quarter of 2017 was the result of non-renewals, primarily in one of the agency’s specialty lines of business.
  • Income from investments in limited partnerships was $144 thousand lower than the third quarter of 2018 and $165 thousand higher than the fourth quarter of 2017. 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.
  • Net gain on sale of loans held for sale was $37 thousand lower than the third quarter of 2018 and $160 thousand higher than the fourth quarter of 2017. This income fluctuates based upon the timing of loan and sale closings. 2018 results have been positively impacted by the expansion of our residential mortgage sales team.
  • Income from derivative instruments, net primarily consists of income associated with interest rate swap products offered to commercial loan customers and is based on the number and value of transactions executed in the quarter. The Bank implemented this program in the third quarter of 2017. Fourth quarter income was $47 thousand lower than the third quarter of 2018 and $285 thousand higher than the fourth quarter of 2017.

Noninterest income was $36.5 million for the full year 2018, $1.7 million higher than 2017.

  • Excluding the net (loss) gain on investment securities from both periods, noninterest income was $36.6 million in 2018, $3.1 million higher than $33.5 million in 2017.
  • The increase from 2017 to 2018 was primarily the result of higher investment advisory fees of $2.0 million, income from investments in limited partnerships of $1.1 million and income from derivative instruments, net of $841 thousand, partially offset by a 2017 $1.2 million non-cash fair value adjustment of the contingent consideration liability related to the SDN acquisition.

Noninterest Expense

Noninterest expense was $27.8 million for the quarter, $2.3 million higher than the third quarter of 2018 and $4.6 million higher than the fourth quarter of 2017.

  • Salaries and employee benefits expense of $14.4 million was $403 thousand higher than the third quarter of 2018 and $1.4 million higher than the fourth quarter of 2017. Investments in bank personnel and the 2018 acquisition of HNP Capital contributed to the increase. The number of full-time equivalent employees increased from 640 at December 31, 2017, to 686 at September 30, 2018, and 702 at December 31, 2018. Fourth quarter 2018 expense also includes $667 thousand of non-recurring expense incurred in connection with employee retirements and severance.  
  • Occupancy and equipment expense of $4.4 million was $90 thousand higher than the third quarter of 2018 and $369 thousand higher than the fourth quarter of 2017. The increase compared to the fourth quarter of 2017 was primarily due to higher software, rent and maintenance expense.
  • Professional services expense of $780 thousand was $573 thousand lower than the third quarter of 2018 and $74 thousand lower than the fourth quarter of 2017. The decrease compared to the third quarter of 2018 was primarily due to third quarter professional search expense related to the addition of talent and lower audit fees.
  • A $2.4 million non-cash goodwill impairment charge related to the acquisition of SDN was recognized in the fourth quarter of 2018.

Noninterest expense was $100.9 million for the full year 2018, $10.4 million higher than 2017.

  • Salaries and employee benefits expense of $54.6 million was $6.0 million higher than 2017 primarily as a result of the factors described above and compensation to employees not covered by existing incentive programs.
  • Occupancy and equipment expense of $17.3 million was $1.0 million higher than 2017, primarily due to higher software, rent and maintenance expense.
  • Advertising and promotions expense of $3.6 million was $1.4 million higher than 2017 primarily due to the Five Star Bank brand campaign launched in February 2018.
  • Non-cash goodwill impairment was $775 thousand higher in 2018 than 2017.

Income Taxes

Income tax expense was $2.2 million for the fourth quarter of 2018 compared to $2.6 million for the third quarter of 2018 and $580 thousand for the fourth quarter of 2017. The effective tax rate was 22.7% for the quarter compared to 19.5% for the third quarter of 2018 and 5.0% for the fourth quarter of 2017. 2018 expense and effective tax rates reflect the enactment of the TCJ Act.

  • Fourth quarter 2018 expense and effective tax rate were negatively impacted by the goodwill impairment charge which is not a tax-deductible expense.
  • Fourth quarter 2017 expense and effective tax rate were positively impacted by a $2.9 million reduction in expense due to the TCJ Act, primarily driven by a revaluation adjustment to the net deferred tax liability.

Income tax expense was $10.0 million for the full year 2018, $61 thousand higher than 2017, representing an effective tax rate of 20.2% compared to the 2017 effective tax rate of 22.9% in 2017.

  • Effective tax rates are impacted by items of income and expense not subject to federal or state taxation. The Company’s effective tax rates differ from statutory rates primarily because of interest income from tax-exempt securities, earnings on company owned life insurance, the non-cash fair value adjustment of the contingent consideration liability associated with the SDN acquisition, non-cash goodwill impairment charges related to SDN and the impact of the TCJ Act, as described above.

Balance Sheet and Capital Management

Total assets were $4.31 billion at December 31, 2018, up $53.3 million from $4.26 billion at September 30, 2018, and up $206.5 million from $4.11 billion at December 31, 2017. The increases are primarily due to loan growth which was partially offset by decreases in investment securities.

Investment securities were $892.3 million at December 31, 2018, down $25.7 million from $917.9 million at September 30, 2018, and down $149.2 million from $1.04 billion at December 31, 2017. Approximately $6.4 million of the 2018 decline is attributable to unrealized loss adjustments and the remaining $142.8 million represents maturities, sales and payment proceeds used to fund loan growth.

Total loans were $3.09 billion at December 31, 2018, up $98.3 million, or 3.3%, from September 30, 2018, and up $351.6 million, or 12.9%, from December 31, 2017.

  • Commercial business loans totaled $557.9 million, up $19.9 million, or 3.7%, from September 30, 2018, and up $107.5 million, or 23.9%, from December 31, 2017.
  • Commercial mortgage loans totaled $958.2 million, up $53.2 million, or 5.9%, from September 30, 2018, and up $149.3 million, or 18.5%, from December 31, 2017.
  • Residential real estate loans totaled $524.2 million, up $16.6 million, or 3.3%, from September 30, 2018, and up $58.9 million, or 12.7%, from December 31, 2017.
  • Consumer indirect loans totaled $919.9 million, up $10.5 million, or 1.2%, from September 30, 2018, and up $43.3 million, or 4.9%, from December 31, 2017.

Total deposits were $3.37 billion at December 31, 2018, a decrease of $118.8 million from September 30, 2018, and an increase of $156.7 million from December 31, 2017. The decrease from September 30, 2018, was primarily due to public deposit seasonality. The increase from December 31, 2017 was primarily the result of successful business development efforts. Public deposit balances represented 25% of total deposits at December 31, 2018, compared to 28% at September 30, 2018 and 26% at December 31, 2017.

Short-term borrowings were $469.5 million at December 31, 2018, an increase of $161.3 million from September 30, 2018, and an increase of $23.3 million from December 31, 2017. Short-term borrowings are typically utilized to manage the seasonality of public deposits; however, they were also a funding source for loans in 2018.

Shareholders’ equity was $396.3 million at December 31, 2018, compared to $392.2 million at September 30, 2018, and $381.2 million at December 31, 2017. Common book value per share was $23.79 at December 31, 2018, an increase of $0.25 or 1.1% from $23.54 at September 30, 2018, and an increase of $0.94 or 4.1% from $22.85 at December 31, 2017. Changes in shareholders’ equity and common book value per share are attributable to net income less dividends paid, net of the change in accumulated other comprehensive income (loss).

During the fourth quarter of 2018, the Company declared a common stock dividend of $0.24 per common share. The dividend returned 53% of fourth quarter net income to common shareholders.

The Company’s regulatory capital ratios at December 31, 2018, compared to the prior quarter and prior year:

  • Leverage Ratio was 8.16%, compared to 8.18% and 8.13% at September 30, 2018, and December 31, 2017, respectively.
  • Common Equity Tier 1 Capital Ratio was 9.70%, compared to 9.81% and 10.16% at September 30, 2018, and December 31, 2017, respectively.
  • Tier 1 Capital Ratio was 10.21%, compared to 10.34% and 10.74% at September 30, 2018, and December 31, 2017, respectively.
  • Total Risk-Based Capital Ratio was 12.38%, compared to 12.58% and 13.19% at September 30, 2018, and December 31, 2017, respectively.

Credit Quality

Non-performing loans were $7.1 million at December 31, 2018, compared to $7.9 million at September 30, 2018, and $12.5 million at December 31, 2017. The ratio of non-performing loans to total loans was 0.23% at December 31, 2018, compared to 0.26% at September 30, 2018, and 0.46% at December 31, 2017.

The provision for loan losses for the quarter was $3.9 million, an increase of $1.8 million from the third quarter of 2018 and a decrease of $62 thousand from the fourth quarter of 2017.

  • Net charge-offs were $3.9 million in the quarter, $1.9 million higher than the third quarter of 2018 and $304 thousand higher than the fourth quarter of 2017. The ratio of annualized net charge-offs to total average loans was 0.51% in the quarter, 0.28% in the third quarter of 2018 and 0.54% in the fourth quarter of 2017.

The ratio of allowance for loan losses to total loans was 1.10% at December 31, 2018, 1.14% at September 30, 2018, and 1.27% at December 31, 2017. The decline in 2018 is primarily attributable to a combination of growth in the loan portfolio and the release of reserves due to favorable asset quality trends and qualitative factors.

The ratio of allowance for loan losses to non-performing loans was 475% at December 31, 2018, 433% at September 30, 2018, and 277% at December 31, 2017. The increase in 2018 is the result of a reduction in non-performing loans, consistent with favorable asset quality trends.

Deputy CFO Named

On October 24, 2018, the Company announced that Justin K. Bigham was named Executive Vice President and Deputy Chief Financial Officer. Mr. Bigham most recently served as Director of Financial Planning and Treasury at HealthNow New York. Previously he spent six years in senior positions at First Niagara in both finance and business line capacities, following seven years in the Finance Division at M&T Bank. As previously announced, Kevin B. Klotzbach will step down as Chief Financial Officer effective March 31, 2019, at which time Mr. Bigham will assume the CFO role.

Conference Call

The Company will host an earnings conference call and audio webcast on February 1, 2019 at 9:00 a.m. Eastern Time. The call will be hosted by Martin K. Birmingham, President and Chief Executive Officer, and Kevin B. Klotzbach, 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 more than 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 700 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

This news release contains disclosure regarding tangible assets, tangible common equity, tangible common equity to tangible assets, tangible common book value per share, average tangible assets, average tangible common equity and return on average tangible common equity, which are determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company believes that these non-GAAP measures are useful to our investors as measures of the strength of the Company’s capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide supplemental information that may help investors to analyze our capital position without regard to the effects of intangible assets. Non-GAAP financial measures have inherent limitations and are not uniformly applied by issuers. Therefore, these non-GAAP financial measures should not be considered in isolation, or as a substitute for comparable measures prepared in accordance with GAAP. The comparable GAAP financial measures and reconciliation to the comparable GAAP financial measures can be found in Appendix A to this document.

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 Company’s ability to implement its strategic plan, the Company’s ability to redeploy investment assets into loan assets, 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, 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 on Form 10-Q and 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.

     
For additional information contact:    
Kevin B. Klotzbach   Shelly J. Doran
Chief Financial Officer & Treasurer   Director Investor & External Relations
Phone: 585.786.1130   Phone: 585.627.1362
Email: [email protected]   Email: [email protected]
     
     

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)

(Amounts in thousands, except per share amounts)

    2018     2017  
    December 31,     September 30,     June 30,     March 31,     December 31,  
SELECTED BALANCE SHEET DATA:                                        
Cash and cash equivalents   $ 102,755     $ 117,331     $ 89,094     $ 122,914     $ 99,195  
Investment securities:                                        
Available for sale     445,677       458,310       492,228       510,197       524,973  
Held-to-maturity     446,581       459,623       474,803       501,905       516,466  
Total investment securities     892,258       917,933       967,031       1,012,102       1,041,439  
Loans held for sale     2,868       3,166       2,014       1,523       2,718  
Loans:                                        
Commercial business     557,861       537,942       507,021       464,139       450,326  
Commercial mortgage     958,194       905,011       867,049       821,091       808,908  
Residential real estate loans     524,155       507,598       489,940       477,935       465,283  
Residential real estate lines     109,718       111,204       113,287       115,346       116,309  
Consumer indirect     919,917       909,434       906,237       898,099       876,570  
Other consumer     16,753       17,142       16,678       16,654       17,621  
Total loans     3,086,598       2,988,331       2,900,212       2,793,264       2,735,017  
Allowance for loan losses     33,914       33,955       33,955       35,594       34,672  
Total loans, net     3,052,684       2,954,376       2,866,257       2,757,670       2,700,345  
Total interest-earning assets     4,031,151       3,927,238       3,884,628       3,818,839       3,782,659  
Goodwill and other intangible assets, net     76,173       78,853       79,188       74,415       74,703  
Total assets     4,311,698       4,258,385       4,191,315       4,152,432       4,105,210  
Deposits:                                        
Noninterest-bearing demand     755,460       748,167       719,084       702,900       718,498  
Interest-bearing demand     622,482       711,321       658,107       717,567       634,203  
Savings and money market     968,897       988,486       1,012,972       1,052,270       1,005,317  
Time deposits     1,020,068       1,037,755       872,004       907,272       852,156  
Total deposits     3,366,907       3,485,729       3,262,167       3,380,009       3,210,174  
Short-term borrowings     469,500       308,200       472,800       327,600       446,200  
Long-term borrowings, net     39,202       39,184       39,167       39,149       39,131  
Total interest-bearing liabilities     3,120,149       3,084,946       3,055,050       3,043,858       2,977,007  
Shareholders’ equity     396,293       392,154       386,937       380,302       381,177  
Common shareholders’ equity     378,965       374,825       369,608       362,973       363,848  
Tangible common equity (1)     302,792       295,972       290,420       288,558       289,145  
Accumulated other comprehensive income (loss)   $ (21,281 )   $ (21,820 )   $ (20,296 )   $ (18,163 )   $ (11,916 )
                                         
Common shares outstanding     15,929       15,925       15,924       15,901       15,925  
Treasury shares     127       131       132       155       131  
CAPITAL RATIOS AND PER SHARE DATA:                                        
Leverage ratio     8.16 %     8.18 %     8.10 %     8.11 %     8.13 %
Common equity Tier 1 capital ratio     9.70 %     9.81 %     9.82 %     10.09 %     10.16 %
Tier 1 capital ratio     10.21 %     10.34 %     10.37 %     10.65 %     10.74 %
Total risk-based capital ratio     12.38 %     12.58 %     12.66 %     13.09 %     13.19 %
Common equity to assets     8.79 %     8.80 %     8.82 %     8.74 %     8.86 %
Tangible common equity to tangible assets (1)     7.15 %     7.08 %     7.06 %     7.08 %     7.17 %
                                         
Common book value per share   $ 23.79     $ 23.54     $ 23.21     $ 22.83     $ 22.85  
Tangible common book value per share (1)   $ 19.01     $ 18.59     $ 18.24     $ 18.15     $ 18.16  
Stock price (Nasdaq: FISI):                                        
High   $ 31.55     $ 33.70     $ 34.35     $ 33.00     $ 34.10  
Low   $ 24.49     $ 30.12     $ 28.95     $ 29.50     $ 28.70  
Close   $ 25.70     $ 31.40     $ 32.90     $ 29.60     $ 31.10  

                

(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)

    Year Ended     2018     2017  
    December 31,     Fourth     Third     Second     First     Fourth  
    2018     2017     Quarter     Quarter     Quarter     Quarter     Quarter  
SELECTED INCOME STATEMENT DATA:                                                        
Interest income   $ 152,732     $ 130,110     $ 41,125     $ 39,117     $ 37,013     $ 35,477     $ 34,767  
Interest expense     29,868       17,495       9,096       8,214       6,783       5,775       5,007  
Net interest income     122,864       112,615       32,029       30,903       30,230       29,702       29,760  
Provision for loan losses     8,934       13,361       3,884       2,061       40       2,949       3,946  
Net interest income after provision
  for loan losses
    113,930       99,254       28,145       28,842       30,190       26,753       25,814  
Noninterest income:                                                        
Service charges on deposits     7,120       7,391       1,866       1,813       1,703       1,738       1,905  
Insurance income     4,930       5,266       1,012       1,501       1,018       1,399       1,214  
ATM and debit card     6,152       5,721       1,643       1,557       1,531       1,421       1,491  
Investment advisory     8,123       6,104       2,189       2,245       1,911       1,778       1,747  
Company owned life insurance     1,793       1,781       460       440       443       450       414  
Investments in limited partnerships     1,203       110       184       328       123       568       19  
Loan servicing     441       439       122       96       108       115       91  
Income from derivative instruments, net     972       131       289       336       176       171       4  
Net gain on sale of loans held for sale     796       376       266       303       131       96       106  
Net (loss) gain on investment securities     (127 )     1,260       (39 )     (95 )     7             660  
Net gain on other assets     50       37       1       37       9       3       12  
Contingent consideration liability adjustment           1,200                                
Other     5,025       4,914       1,355       1,255       1,247       1,168       1,324  
Total noninterest income     36,478       34,730       9,348       9,816       8,407       8,907       8,987  
Noninterest expense:                                                        
Salaries and employee benefits     54,643       48,675       14,373       13,970       12,871       13,429       12,972  
Occupancy and equipment     17,338       16,293       4,427       4,337       4,167       4,407       4,058  
Professional services     3,912       4,083       780       1,353       896       883       854  
Computer and data processing     5,122       4,935       1,238       1,291       1,358       1,235       1,244  
Supplies and postage     2,032       2,003       487       485       548       512       507  
FDIC assessments     1,975       1,817       489       498       480       508       451  
Advertising and promotions     3,582       2,171       935       949       721       977       720  
Amortization of intangibles     1,257       1,170       330       334       305       288       294  
Goodwill impairment     2,350       1,575       2,350                          
Other     8,665       7,791       2,394       2,304       2,102       1,865       2,063  
Total noninterest expense     100,876       90,513       27,803       25,521       23,448       24,104       23,163  
Income before income taxes     49,532       43,471       9,690       13,137       15,149       11,556       11,638  
Income tax expense     10,006       9,945       2,199       2,560       2,979       2,268       580  
Net income     39,526       33,526       7,491       10,577       12,170       9,288       11,058  
Preferred stock dividends     1,461       1,462       365       365       366       365       365  
Net income available to common shareholders   $ 38,065     $ 32,064     $ 7,126     $ 10,212     $ 11,804     $ 8,923     $ 10,693  
FINANCIAL RATIOS:                                                        
Earnings per share – basic   $ 2.39     $ 2.13     $ 0.45     $ 0.64     $ 0.74     $ 0.56     $ 0.68  
Earnings per share – diluted   $ 2.39     $ 2.13     $ 0.45     $ 0.64     $ 0.74     $ 0.56     $ 0.68  
Cash dividends declared on common stock   $ 0.96     $ 0.85     $ 0.24     $ 0.24     $ 0.24     $ 0.24     $ 0.22  
Common dividend payout ratio     40.17 %     39.91 %     53.33 %     37.50 %     32.43 %     42.86 %     32.35 %
Dividend yield (annualized)     3.74 %     2.73 %     3.70 %     3.03 %     2.93 %     3.29 %     2.81 %
Return on average assets     0.95 %     0.86 %     0.70 %     1.00 %     1.18 %     0.92 %     1.09 %
Return on average equity     10.18 %     9.62 %     7.50 %     10.71 %     12.70 %     9.89 %     11.72 %
Return on average common equity     10.26 %     9.68 %     7.46 %     10.82 %     12.90 %     9.95 %     11.88 %
Return on average tangible common equity (1)     12.95 %     12.51 %     9.40 %     13.71 %     16.27 %     12.52 %     15.03 %
Efficiency ratio (2)     62.73 %     60.65 %     66.64 %     62.04 %     60.14 %     61.85 %     59.62 %
Effective tax rate     20.2 %     22.9 %     22.7 %     19.5 %     19.7 %     19.6 %     5.0 %

                

(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.

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)

(Amounts in thousands)

    Year Ended     2018     2017  
    December 31,     Fourth     Third     Second     First     Fourth  
    2018     2017     Quarter     Quarter     Quarter     Quarter     Quarter  
SELECTED AVERAGE BALANCES:                                                        
Federal funds sold and interest-
  earning deposits
  $ 24,906     $ 7,060     $ 25,411     $ 17,955     $ 34,357     $ 21,941     $ 1,693  
Investment securities (1)     984,553       1,086,300       937,907       954,027       1,012,846       1,034,831       1,073,170  
Loans:                                                        
Commercial business     498,552       396,319       539,622       519,114       481,045       453,250       429,831  
Commercial mortgage     876,484       727,849       944,476       896,159       842,422       821,311       778,765  
Residential real estate loans     492,165       438,586       515,539       498,371       483,577       470,612       455,641  
Residential real estate lines     112,872       118,797       110,236       111,762       113,948       115,614       116,731  
Consumer indirect     901,066       819,598       914,636       904,480       899,069       885,723       865,735  
Other consumer     16,682       17,111       16,671       16,633       16,449       16,978       17,618  
Total loans     2,897,821       2,518,260       3,041,180       2,946,519       2,836,510       2,763,488       2,664,321  
Total interest-earning assets     3,907,280       3,611,620       4,004,498       3,918,501       3,883,713       3,820,260       3,739,184  
Goodwill and other intangible
  assets, net
    76,990       74,818       78,314       79,047       75,957       74,577       74,866  
Total assets     4,171,972       3,896,071       4,268,809       4,187,538       4,142,735       4,086,633       4,028,063  
Interest-bearing liabilities:                                                        
Interest-bearing demand     665,255       638,295       669,491       642,234       677,582       671,991       655,207  
Savings and money market     1,008,665       1,033,836       1,011,427       978,578       1,032,425       1,012,574       1,051,367  
Time deposits     936,157       801,394       1,032,632       946,499       906,271       857,184       863,770  
Short-term borrowings     394,679       338,392       355,439       430,697       381,043       411,760       316,894  
Long-term borrowings, net     39,165       39,094       39,191       39,174       39,156       39,138       39,121  
Total interest-bearing liabilities     3,043,921       2,851,011       3,108,180       3,037,182       3,036,477       2,992,647       2,926,359  
Noninterest-bearing demand deposits     713,152       674,884       733,717       730,960       699,112       688,123       703,560  
Total deposits     3,323,229       3,148,409       3,447,267       3,298,271       3,315,390       3,229,872       3,273,904  
Total liabilities     3,783,621       3,547,551       3,872,545       3,795,727       3,758,465       3,705,782       3,653,655  
Shareholders’ equity     388,351       348,520       396,264       391,811       384,270       380,851       374,408  
Common equity     371,023       331,184       378,936       374,482       366,942       363,523       357,079  
Tangible common equity (2)   $ 294,033     $ 256,366     $ 300,622     $ 295,435     $ 290,985     $ 288,946     $ 282,213  
Common shares outstanding:                                                        
Basic     15,910       15,044       15,922       15,921       15,906       15,890       15,749  
Diluted     15,956       15,085       15,971       15,964       15,948       15,941       15,793  
SELECTED AVERAGE YIELDS:
(Tax equivalent basis)
                                                       
Investment securities     2.33 %     2.48 %     2.33 %     2.35 %     2.32 %     2.32 %     2.53 %
Loans     4.51 %     4.22 %     4.68 %     4.55 %     4.43 %     4.36 %     4.29 %
Total interest-earning assets     3.94 %     3.69 %     4.11 %     4.00 %     3.86 %     3.79 %     3.78 %
Interest-bearing demand     0.16 %     0.14 %     0.20 %     0.19 %     0.13 %     0.12 %     0.14 %
Savings and money market     0.29 %     0.14 %     0.38 %     0.33 %     0.26 %     0.18 %     0.16 %
Time deposits     1.61 %     1.09 %     1.88 %     1.69 %     1.49 %     1.33 %     1.21 %
Short-term borrowings     2.11 %     1.16 %     2.56 %     2.24 %     2.01 %     1.68 %     1.40 %
Long-term borrowings, net     6.31 %     6.32 %     6.30 %     6.31 %     6.31 %     6.31 %     6.32 %
Total interest-bearing liabilities     0.98 %     0.61 %     1.16 %     1.07 %     0.90 %     0.78 %     0.68 %
Net interest rate spread     2.96 %     3.08 %     2.95 %     2.93 %     2.96 %     3.01 %     3.10 %
Net interest rate margin     3.18 %     3.21 %     3.21 %     3.17 %     3.16 %     3.18 %     3.25 %

                

(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)

    Year Ended     2018     2017  
    December 31,     Fourth     Third     Second     First     Fourth  
    2018     2017     Quarter     Quarter     Quarter     Quarter     Quarter  
ASSET QUALITY DATA:                                                        
Allowance for Loan Losses                                                        
Beginning balance   $ 34,672     $ 30,934     $ 33,955     $ 33,955     $ 35,594     $ 34,672     $ 34,347  
Net loan charge-offs (recoveries):                                                        
Commercial business     1,810       3,198       1,135       431       259       (15 )     1,622  
Commercial mortgage     1,007       (252 )     901       110       (1 )     (3 )     (5 )
Residential real estate loans     (64 )     301       23       16       (53 )     (50 )     88  
Residential real estate lines     122       46       15       21       (5 )     91       40  
Consumer indirect     5,826       5,720       1,599       1,246       1,317       1,664       1,636  
Other consumer     991       610       252       237       162       340       240  
Total net charge-offs     9,692       9,623       3,925       2,061       1,679       2,027       3,621  
Provision for loan losses     8,934       13,361       3,884       2,061       40       2,949       3,946  
Ending balance   $ 33,914     $ 34,672     $ 33,914     $ 33,955     $ 33,955     $ 35,594     $ 34,672  
                                                         
Net charge-offs (recoveries)
  to average loans (annualized):
                                                       
Commercial business     0.36 %     0.81 %     0.83 %     0.33 %     0.22 %     -0.01 %     1.50 %
Commercial mortgage     0.11 %     -0.03 %     0.38 %     0.05 %     0.00 %     0.00 %     0.00 %
Residential real estate loans     -0.01 %     0.07 %     0.02 %     0.01 %     -0.04 %     -0.04 %     0.08 %
Residential real estate lines     0.11 %     0.04 %     0.05 %     0.08 %     -0.02 %     0.32 %     0.14 %
Consumer indirect     0.65 %     0.70 %     0.69 %     0.55 %     0.59 %     0.76 %     0.75 %
Other consumer     5.94 %     3.56 %     6.00 %     5.66 %     3.95 %     8.12 %     5.40 %
Total loans     0.33 %     0.38 %     0.51 %     0.28 %     0.24 %     0.30 %     0.54 %
                                                         
Supplemental information (1)                                                        
Non-performing loans:                                                        
Commercial business   $ 912     $ 5,344     $ 912     $ 2,203     $ 4,026     $ 4,312     $ 5,344  
Commercial mortgage     1,586       2,623       1,586       1,900       2,151       2,310       2,623  
Residential real estate loans     2,391       2,252       2,391       2,057       2,138       2,224       2,252  
Residential real estate lines     255       404       255       297       288       372       404  
Consumer indirect     1,989       1,895       1,989       1,385       1,124       1,467       1,895  
Other consumer     8       13       8       8       4       32       13  
Total non-performing loans     7,141       12,531       7,141       7,850       9,731       10,717       12,531  
Foreclosed assets     230       148       230       290       299       480       148  
Total non-performing assets   $ 7,371     $ 12,679     $ 7,371     $ 8,140     $ 10,030     $ 11,197     $ 12,679  
                                                         
Total non-performing loans
  to total loans
    0.23 %     0.46 %     0.23 %     0.26 %     0.34 %     0.38 %     0.46 %
Total non-performing assets
  to total assets
    0.17 %     0.31 %     0.17 %     0.19 %     0.24 %     0.27 %     0.31 %
Allowance for loan losses
  to total loans
    1.10 %     1.27 %     1.10 %     1.14 %     1.17 %     1.27 %     1.27 %
Allowance for loan losses
  to non-performing loans
    475 %     277 %     475 %     433 %     349 %     322 %     277 %

               

(1) At period end.

FINANCIAL INSTITUTIONS, INC.
Appendix A — Reconciliation to Non-GAAP Financial Measures (Unaudited)

(In thousands, except per share amounts)

    Year Ended     2018     2017  
    December 31,     Fourth     Third     Second     First     Fourth  
    2018     2017     Quarter     Quarter     Quarter     Quarter     Quarter  
Ending tangible assets:                                                        
Total assets                   $ 4,311,698     $ 4,258,385     $ 4,191,315     $ 4,152,432     $ 4,105,210  
Less: Goodwill and other intangible
  assets, net
                    76,173       78,853       79,188       74,415       74,703  
Tangible assets                   $ 4,235,525     $ 4,179,532     $ 4,112,127     $ 4,078,017     $ 4,030,507  
                                                         
Ending tangible common equity:                                                        
Common shareholders’ equity                   $ 378,965     $ 374,825     $ 369,608     $ 362,973     $ 363,848  
Less: Goodwill and other intangible
  assets, net
                    76,173       78,853       79,188       74,415       74,703  
Tangible common equity                   $ 302,792     $ 295,972     $ 290,420     $ 288,558     $ 289,145  
                                                         
Tangible common equity to tangible
  assets (1)
                    7.15 %     7.08 %     7.06 %     7.08 %     7.17 %
                                                         
Common shares outstanding                     15,929       15,925       15,924       15,901       15,925  
Tangible common book value per
   share (2)
                  $ 19.01     $ 18.59     $ 18.24     $ 18.15     $ 18.16  
                                                         
Average tangible assets:                                                        
Average assets   $ 4,171,972     $ 3,896,071     $ 4,268,809     $ 4,187,538     $ 4,142,735     $ 4,086,633     $ 4,028,063  
Less: Average goodwill and other
  intangible assets, net
    76,990       74,818       78,314       79,047       75,957       74,577       74,866  
Average tangible assets   $ 4,094,982     $ 3,821,253     $ 4,190,495     $ 4,108,491     $ 4,066,778     $ 4,012,056     $ 3,953,197  
                                                         
Average tangible common equity:                                                        
Average common equity   $ 371,023     $ 331,184     $ 378,936     $ 374,482     $ 366,942     $ 363,523     $ 357,079  
Less: Average goodwill and other
  intangible assets, net
    76,990       74,818       78,314       79,047       75,957       74,577       74,866  
Average tangible common equity   $ 294,033     $ 256,366     $ 300,622     $ 295,435     $ 290,985     $ 288,946     $ 282,213  
                                                         
Net income available to
  common shareholders
  $ 38,065     $ 32,064     $ 7,126     $ 10,212     $ 11,804     $ 8,923     $ 10,693  
Return on average tangible common
  equity (3)
    12.95 %     12.51 %     9.40 %     13.71 %     16.27 %     12.52 %     15.03 %

                

(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.