• Financial Institutions, Inc. Announces Second Quarter Results

    Source: Nasdaq GlobeNewswire / 28 Jul 2022 16:05:38   America/New_York

    WARSAW, N.Y., July 28, 2022 (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 second quarter ended June 30, 2022.

    Net income for the quarter was $15.6 million compared to $20.2 million in the second quarter of 2021. After preferred dividends, net income available to common shareholders was $15.3 million, or $0.99 per diluted share, compared to $19.8 million, or $1.25 per diluted share, in the second quarter of 2021.

    Primary drivers of the decrease in net income were:

    • A $563 thousand provision for credit losses was recognized in the current quarter compared to a benefit of $4.6 million in the second quarter of 2021. Loan loss provision has returned to a more normalized level in 2022, excluding a $2.0 million commercial loan recovery recognized in the second quarter. The second quarter 2021 benefit was the result of improvement in the national unemployment forecast, positive trends in qualitative factors and lower net charge-offs that resulted in a release of credit loss reserves and corresponding benefit for credit losses.
    • Salaries and employee benefits expense was $2.4 million higher in the current quarter, primarily driven by investments in personnel, higher stock-based compensation expense, and annual merit increases.
    • The Company recorded $1.3 million of non-recurring restructuring charges in the current quarter related to the 2020 closure of five locations.

    Pre-tax pre-provision income(1) for the quarter was $20.1 million, a decrease of $908 thousand from the second quarter of 2021. Excluding non-recurring restructuring charges, adjusted pre-tax pre-provision income(1) was $21.3 million, an increase of $361 thousand from the prior year quarter.

    “We are pleased to report net income of $15.6 million, return on average common equity of 14.6% and return on average tangible common equity of 17.8%(1) for the second quarter of 2022,” said President and Chief Executive Officer Martin K. Birmingham. “We continued to execute on our strategic initiatives to grow across all lines of business with investments in people and technology to better serve our customers. Excluding a non-recurring expense for the adjustment to fair market value of former branch locations, expenses were in line with our expectations.

    “The total loan portfolio increased during the quarter, and our new Mid-Atlantic team is building a strong commercial pipeline. We also benefitted from a continued benign credit environment and a high-quality loan portfolio, as evidenced by net recoveries of $1 million.

    “Economic headwinds are expected as we are experiencing an inflationary period not seen in decades. We remain focused on supporting our customers and communities and we’re leading with our human capital. Challenging economic cycles come and go and we are confident that we will maintain a strong regulatory capital footing to help individuals and companies grow and thrive despite the challenges.”

    Chief Financial Officer and Treasurer W. Jack Plants II added, “It was a strong quarter for net interest income with 5.2% growth over the linked quarter. Net interest margin expanded by nine basis points, excluding the impact of Paycheck Protection Program (“PPP”) loans, primarily as a result of rising interest rates. Our strategic focus on growing non-public deposits resulted in a 2.9% increase from the linked quarter.

    “During the current quarter, we took advantage of the opportunity to sell a $31 million portfolio of indirect loans and recognized a gain of $586 thousand, demonstrating our ability to capture gains within this portfolio by leveraging capital markets relationships to re-mix loan exposures. Excluding the impact of PPP loan forgiveness and the indirect sale, the total loan portfolio increased by 2.3%.”

    Stock Repurchase Program

    On June 13, 2022, the Company announced a stock repurchase program for up to 766,447 shares of its common stock, or approximately 5% of the Company’s then 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. The timing and number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to purchase any shares and it may be extended, modified, or discontinued at any time. No shares have been repurchased to-date under this program.

    During the first quarter of 2022, the Company completed its previous program by repurchasing 461,191 common shares for an average price of $31.99 per share.

    Net Interest Income and Net Interest Margin

    Net interest income was $41.6 million for the quarter, an increase of $2.0 million from the first quarter of 2022 and an increase of $3.9 million from the second quarter of 2021.

    • Average interest-earning assets for the quarter were $5.25 billion, an increase of $79.6 million from the first quarter of 2022 primarily due to a $67.7 million increase in average loans. Average interest-earning assets for the quarter were $273.8 million higher than the second quarter of 2021 due to a $359.2 million increase in the average balance of investment securities and a $103.5 million increase in average loans, partially offset by a $188.9 million decrease in the average balance of Federal Reserve interest-earning cash.

    Net interest margin was 3.19% in the current quarter as compared to 3.11% in the first quarter of 2022 and 3.06% in the second quarter of 2021. Excluding the impact of PPP loans and associated loan origination fees accreted over the term of the loan or upon loan forgiveness, net interest margin was 3.14% in the second quarter of 2022, 3.05% in the first quarter of 2022 and 3.02% in the second quarter of 2021. Our net interest margin has improved primarily due to the impact of 2022 interest rate increases and a decrease in the level of Federal Reserve interest-earning cash in comparison to the prior year.

    Noninterest Income

    Noninterest income was $11.4 million for the quarter, an increase of $38 thousand from the first quarter of 2022 and an increase of $1.2 million from the second quarter of 2021.

    • Insurance income of $1.2 million was $863 thousand lower than the first quarter of 2022 primarily as a result of the timing of contingent revenue received in the first quarter each year. The increase of $87 thousand from the second quarter of 2021 was driven by the 2021 bolt-on acquisition of North Woods Capital Benefits LLC, completed in August 2021.
    • Investment advisory income of $2.9 million was $135 thousand lower than the first quarter of 2022 and relatively unchanged from the second quarter of 2021 primarily due to a market-driven decrease in value of assets under management.
    • Income from investments in limited partnerships of $242 thousand was $553 thousand lower than the first quarter of 2022 and relatively unchanged from the second quarter of 2021. 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 income of $645 thousand in the quarter, $126 thousand higher than the first quarter of 2022. The Company recorded a net loss from derivative instruments of $592 thousand in the second quarter of 2021. 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.
    • Net gain (loss) on sale of loans held for sale was a gain of $828 thousand in the quarter compared to a loss of $91 thousand in the first quarter of 2022 and a gain of $790 thousand in the second quarter of 2021. Included in the current period was a gain of $586 thousand on the sale of a $31.3 million portfolio of indirect loans. Sales volumes and margins for residential loans have moderated in 2022 as compared to 2021. The first quarter 2022 loss was a result of the fair market value of pipeline commitments, negatively impacted by the increase in interest rates.
    • Net (loss) gain on tax credit investments represents the amortization of tax credit investments, partially offset by New York investment tax credits that are refundable and recorded in noninterest income. A net loss of $92 thousand was recognized in the second quarter of 2022 as compared to a net loss of $227 thousand in the first quarter of 2022 and a net gain of $276 thousand in the second quarter of 2021.

    Noninterest Expense

    Noninterest expense was $32.9 million in the quarter compared to $30.1 million in the first quarter of 2022 and $26.9 million in the second quarter of 2021.

    • Salaries and employee benefits expense of $17.0 million was $350 thousand higher than the first quarter of 2022 and $2.4 million higher than the second quarter of 2021 primarily due to investments in personnel, higher stock-based compensation expense, and annual merit increases, along with wage pressures driven by the current competitive labor market.
    • Occupancy and equipment expense of $4.0 million was $259 thousand higher than the first quarter of 2022 and $729 thousand higher than the second quarter of 2021. Laptop computers were purchased in the current quarter to support our flexible work model. The balance of the increase year-over-year was attributable to repairs and maintenance in the branch network.
    • Professional services expense of $1.3 million was $387 thousand lower than the first quarter of 2022 due to the timing of audit fees. Professional services expense was $334 thousand lower than the second quarter of 2021 primarily as a result of higher expense incurred in the prior year period for enterprise standardization expense and miscellaneous consulting fees.
    • Computer and data processing expense of $4.6 million was $594 thousand higher than the first quarter of 2022 and $1.1 million higher than the second quarter of 2021 due to the Company’s strategic investments in technology, including digital banking initiatives, a customer relationship management solution across all lines of business, and Banking as a Service initiatives.
    • Second quarter 2022 restructuring charges of $1.3 million were recognized in connection with the write-down of real estate assets to fair market value based upon existing purchase offers and current market conditions for five locations that were closed in the second half of 2020.
    • Other expense of $3.1 million was $610 thousand higher than the first quarter of 2022 and $586 thousand higher than the second quarter of 2021. This category of expense was impacted by a combination of factors including inflation and the outsourcing of certain functions previously handled internally. Higher expense was also partially attributable to more normalized expense levels post-pandemic in areas including training, conferences, travel and entertainment.

    Income Taxes

    Income tax expense was $3.9 million for the quarter compared to $3.4 million in the first quarter of 2022 and $5.4 million in the second quarter of 2021. The Company recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the second quarter of 2022, first quarter of 2022, and second quarter of 2021, resulting in income tax expense reductions of approximately $426 thousand, $589 thousand, and $424 thousand, respectively.

    The effective tax rate was 19.8% for the second quarter of 2022, 18.7% for the first quarter of 2022 and 21.1% for the second quarter of 2021. The effective tax rate fluctuates on a quarterly basis primarily due to the level of pre-tax earnings. 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 $5.57 billion at June 30, 2022, down $62.3 million from March 31, 2022, and up $273.1 million from June 30, 2021.

    Investment securities were $1.26 billion at June 30, 2022, down $68.6 million from March 31, 2022, and up $140.2 million from June 30, 2021. The decline in the linked quarter portfolio balance was largely driven by a decrease in the market value of the portfolio due to rising interest rates combined with the use of portfolio cash flow to fund loan originations. The increase from June 30, 2021, was the result of the deployment of excess liquidity into cash flowing agency mortgage-backed securities, reallocating excess Federal Reserve cash balances into securities demonstrating higher relative yields.

    Total loans were $3.76 billion at June 30, 2022, up $30.4 million, or 0.8%, from March 31, 2022, and up $131.9 million, or 3.6%, from June 30, 2021.

    • Commercial business loans totaled $611.1 million, down $14.0 million, or 2.2%, from March 31, 2022, and down $120.1 million, or 16.4%, from June 30, 2021. Declines were driven by the forgiveness or repayment of PPP loans. PPP loans net of deferred fees are included in commercial business loans and were $8.9 million at June 30, 2022, $31.4 million at March 31, 2022, and $171.9 million at June 30, 2021. Accordingly, commercial business loans excluding the impact of PPP loans increased 1.4% from March 31, 2022, and increased 7.7% from June 30, 2021.
    • Commercial mortgage loans totaled $1.45 billion, up $13.4 million, or 0.9%, from March 31, 2022, and up $132.7 million, or 10.1%, from June 30, 2021.
    • Residential real estate loans totaled $574.8 million, down $111 thousand from March 31, 2022, and down $15.5 million, or 2.6%, from June 30, 2021.
    • Consumer indirect loans totaled $1.04 billion, up $31.8 million, or 3.2%, from March 31, 2022, and up $140.2 million, or 15.6%, from June 30, 2021.

    Total loans, excluding PPP loans net of deferred fees, were $3.76 billion at June 30, 2022, up $52.9 million, or 1.4%, from March 31, 2022, and up $294.9 million, or 8.5%, from June 30, 2021.

    Total deposits were $4.82 billion at June 30, 2022, $182.4 million lower than March 31, 2022, and $161.3 million higher than June 30, 2021. The decrease from March 31, 2022, was primarily the result of a seasonal decrease in public deposits and a decrease in reciprocal deposits, partially offset by increases in non-public and brokered deposits. The increase from June 30, 2021, was the result of increases in public, non-public and brokered deposits, partially offset by a decrease in reciprocal deposits. Public deposit balances represented 21% of total deposits at June 30, 2022, compared to 26% at March 31, 2022, and 21% at June 30, 2021.

    Short-term borrowings were $109.0 million at June 30, 2022, compared to $0 at both March 31, 2022, and June 30, 2021. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits. $50.0 million of the short-term borrowings balance is designated as a cash-flow hedge, which became effective in April 2022 at a fixed rate of 0.79%.

    Shareholders’ equity was $425.8 million at June 30, 2022, compared to $446.8 million at March 31, 2022, and $487.1 million at June 30, 2021. The decline was primarily the result of an increase in accumulated other comprehensive loss associated with unrealized losses in the available for sale securities portfolio. Management believes the unrealized losses are temporary in nature, as the losses are associated with the increase in interest rates. The securities portfolio continues to generate cash flow and, given the high quality of our agency mortgage-backed securities portfolio, management expects the bonds to ultimately mature at a terminal value equivalent to par.

    Common book value per share was $26.64 at June 30, 2022, a decrease of $1.44, or 5.1%, from $28.08 at March 31, 2022, and a decrease of $3.02, or 10.2%, from $29.66 at June 30, 2021. Tangible common book value per share(1) was $21.82 at June 30, 2022, a decrease of $1.41, or 6.1%, from $23.23 at March 31, 2022, and a decrease $3.15, or 12.6%, from $24.97 at June 30, 2021. The common equity to assets ratio was 7.34% at June 30, 2022, compared to 7.63% at March 31, 2022, and 8.87% at June 30, 2021. Tangible common equity to tangible assets(1), or the TCE ratio, was 6.09%, 6.40% and 7.58% at June 30, 2022, March 31, 2022, and June 30, 2021, respectively. The primary driver of declines in all four measures as compared to prior periods was the previously described increase in accumulated other comprehensive loss.

    During the second quarter of 2022, the Company declared a common stock dividend of $0.29 per common share, consistent with the linked quarter and an increase of 7.4% over the prior year quarter. The dividend returned 29% of second quarter net income to common shareholders.

    The Company’s regulatory capital ratios at June 30, 2022, compared to the prior quarter and prior year second quarter were as follows:

    • Leverage Ratio was 8.20% compared to 8.13% and 8.16% at March 31, 2022, and June 30, 2021, respectively.
    • Common Equity Tier 1 Capital Ratio was 9.91% compared to 9.85% and 10.38% at March 31, 2022, and June 30, 2021, respectively.
    • Tier 1 Capital Ratio was 10.29% compared to 10.24% and 10.81% at March 31, 2022, and June 30, 2021, respectively.
    • Total Risk-Based Capital Ratio was 12.75% compared to 12.72% and 13.54% at March 31, 2022, and June 30, 2021, respectively.

    Credit Quality

    Non-performing loans were $6.5 million, or 0.17% of total loans, at June 30, 2022, as compared to $9.6 million, or 0.26% of total loans, at March 31, 2022, and $6.6 million, or 0.18% of total loans, at June 30, 2021. Net recoveries were $1.0 million in the quarter as compared to net charge-offs of $787 thousand in the first quarter of 2022 and net recoveries of $394 thousand in the second quarter of 2021. The ratio of annualized net charge-offs (recoveries) to average loans was (0.11)% in the current quarter, 0.09% in the first quarter of 2022 and (0.04)% in the second quarter of 2021.

    • During the second quarter of 2022, the Company recovered $2.0 million in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the fourth quarter of 2021.

    At June 30, 2022, the allowance for credit losses on loans to total loans ratio was 1.13% compared to 1.10% at March 31, 2022, and 1.28% at June 30, 2021. PPP loans are fully guaranteed by the Small Business Administration. Excluding PPP loans, the June 30, 2022, allowance for credit losses on loans to total loans ratio(1) was 1.13%, an increase of two basis points from 1.11% at March 31, 2022, and a decrease of 21 basis points from 1.34% at June 30, 2021.

    Provision for credit losses on loans was $446 thousand in the current quarter compared to $2.1 million in the first quarter of 2022 and a benefit of $3.9 million in the second quarter of 2021. Changes in the allowance for unfunded commitments, also included in provision (benefit) for credit losses, were a $119 thousand increase in the second quarter of 2022, a $242 thousand increase in the first quarter of 2022, and a $764 thousand decrease in the second quarter of 2021.

    Provision was a benefit in each quarter of 2021 as a result of continued improvement in the national unemployment forecast, the designated loss driver for the Company’s current expected credit loss standard model, and positive trends in qualitative factors, resulting in the release of credit loss reserves. Loan loss provision has returned to a more normalized level in 2022, excluding the sizable commercial loan recovery recognized this quarter, due to the impact of qualitative factors reflecting economic uncertainty associated with higher interest rates and global political unrest, partially offset by low net charge-offs, national unemployment trends and a reduction in overall specific reserve levels.

    The Company has remained strategically focused on the importance of credit discipline, allocating what it believes are the necessary resources to credit and risk management functions as the loan portfolio has grown. The ratio of allowance for credit losses on loans to non-performing loans was 648% at June 30, 2022, 426% at March 31, 2022, and 699% at June 30, 2021.

    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, 2022, 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, 2022, and will adjust amounts preliminarily reported, if necessary.

    Conference Call

    The Company will host an earnings conference call and audio webcast on July 29, 2022, 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 (844) 200 6205 and providing the access code 647511. 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 45 offices throughout Western and Central New York State and a commercial loan production office in Ellicott City (Baltimore), Maryland. 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 650 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 “believe,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “preliminary,” “should,” or “will.” 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 macroeconomic volatility related to the impact of the COVID-19 pandemic and global political unrest; changes in interest rates; inflation; the Company’s ability to implement its strategic plan, including by expanding its commercial lending footprint and integrating its acquisitions; 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; legal and regulatory proceedings and related matters, such as the action described in our reports filed with the SEC, could adversely affect us and the banking industry in general; 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; 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 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.

    (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
    sjdoran@five-starbank.com

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

     2022  2021 
     June 30,  March 31,  December 31,  September 30,  June 30, 
    SELECTED BALANCE SHEET DATA:              
    Cash and cash equivalents$109,705  $170,404  $79,112  $288,426  $206,387 
    Investment securities:              
    Available for sale 1,057,018   1,119,362   1,178,515   1,097,950   902,845 
    Held-to-maturity, net 204,933   211,173   205,581   218,135   218,858 
    Total investment securities 1,261,951   1,330,535   1,384,096   1,316,085   1,121,703 
    Loans held for sale 4,265   5,544   6,202   5,916   3,929 
    Loans:              
    Commercial business 611,102   625,141   638,293   686,191   731,208 
    Commercial mortgage 1,448,152   1,434,759   1,412,788   1,348,550   1,315,404 
    Residential real estate loans 574,784   574,895   577,299   584,091   590,303 
    Residential real estate lines 76,108   76,860   78,531   79,196   80,781 
    Consumer indirect 1,039,251   1,007,404   958,048   940,537   899,018 
    Other consumer 14,621   14,589   14,477   15,334   15,454 
    Total loans 3,764,018   3,733,648   3,679,436   3,653,899   3,632,168 
    Allowance for credit losses - loans 42,452   40,966   39,676   45,444   46,365 
    Total loans, net 3,721,566   3,692,682   3,639,760   3,608,455   3,585,803 
    Total interest-earning assets 5,206,795   5,266,351   5,105,608   5,189,075   4,906,087 
    Goodwill and other intangible assets, net 73,897   74,146   74,400   74,659   74,262 
    Total assets 5,568,198   5,630,498   5,520,779   5,623,193   5,295,102 
    Deposits:              
    Noninterest-bearing demand 1,114,460   1,079,949   1,107,561   1,144,852   1,121,827 
    Interest-bearing demand 877,661   990,404   864,528   893,976   799,299 
    Savings and money market 1,845,186   2,015,384   1,933,047   2,015,855   1,796,813 
    Time deposits 983,209   917,195   921,954   920,280   941,282 
    Total deposits 4,820,516   5,002,932   4,827,090   4,974,963   4,659,221 
    Short-term borrowings 109,000   -   30,000   -   - 
    Long-term borrowings, net 74,067   73,989   73,911   73,834   73,756 
    Total interest-bearing liabilities 3,889,123   3,996,972   3,823,440   3,903,945   3,611,150 
    Shareholders’ equity 425,801   446,846   505,142   494,013   487,126 
    Common shareholders’ equity 408,509   429,554   487,850   476,721   469,834 
    Tangible common equity (1) 334,612   355,408   413,450   402,062   395,572 
    Accumulated other comprehensive loss$(99,724) $(67,094) $(13,207) $(12,116) $(5,934)
                   
    Common shares outstanding 15,334   15,299   15,746   15,842   15,842 
    Treasury shares 765   800   354   258   258 
    CAPITAL RATIOS AND PER SHARE DATA:              
    Leverage ratio 8.20%  8.13%  8.23%  8.36%  8.16%
    Common equity Tier 1 capital ratio 9.91%  9.85%  10.28%  10.24%  10.38%
    Tier 1 capital ratio 10.29%  10.24%  10.68%  10.66%  10.81%
    Total risk-based capital ratio 12.75%  12.72%  13.12%  13.25%  13.54%
    Common equity to assets 7.34%  7.63%  8.84%  8.48%  8.87%
    Tangible common equity to tangible assets (1) 6.09%  6.40%  7.59%  7.25%  7.58%
                   
    Common book value per share$26.64  $28.08  $30.98  $30.09  $29.66 
    Tangible common book value per share (1)$21.82  $23.23  $26.26  $25.38  $24.97 


    (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)

     Six Months Ended  2022  2021 
     June 30,  Second  First  Fourth  Third  Second 
     2022  2021  Quarter  Quarter  Quarter  Quarter  Quarter 
    SELECTED INCOME STATEMENT                    
    DATA:                    
    Interest income$87,627  $82,225  $45,276  $42,351  $43,753  $41,227  $40,952 
    Interest expense 6,472   6,636   3,679   2,793   2,885   2,954   3,220 
    Net interest income 81,155   75,589   41,597   39,558   40,868   38,273   37,732 
    Provision (benefit) for credit losses 2,882   (6,603)  563   2,319   (1,192)  (541)  (4,622)
    Net interest income after provision
    for credit losses    		 78,273   82,192   41,034   37,239   42,060   38,814   42,354 
    Noninterest income:                    
    Service charges on deposits 2,806   2,579   1,437   1,369   1,490   1,502   1,287 
    Insurance income 3,331   2,543   1,234   2,097   1,343   1,864   1,147 
    Card interchange income 4,055   4,152   2,103   1,952   2,228   2,118   2,194 
    Investment advisory 5,947   5,658   2,906   3,041   3,045   2,969   2,886 
    Company owned life insurance 1,702   1,350   869   833   821   776   693 
    Investments in limited partnerships 1,037   1,093   242   795   294   694   238 
    Loan servicing 244   188   135   109   122   105   91 
    Income (loss) from derivative                    
    instruments, net 1,164   1,283   645   519   1,035   377   (592)
    Net gain (loss) on sale of loans held for sale 737   1,868   828   (91)  482   600   790 
    Net (loss) gain on investment securities (15)  71   (15)  -   -   -   (3)
    Net gain on other assets 7   148   7   -   155   138   153 
    Net (loss) gain on tax credit investments (319)  191   (92)  (227)  (493)  (129)  276 
    Other 1,986   2,025   1,061   925   1,152   1,069   1,030 
    Total noninterest income 22,682   23,149   11,360   11,322   11,674   12,083   10,190 
    Noninterest expense:                    
    Salaries and employee benefits 33,582   28,984   16,966   16,616   16,111   15,798   14,519 
    Occupancy and equipment 7,771   6,668   4,015   3,756   3,869   3,834   3,286 
    Professional services 2,925   3,498   1,269   1,656   1,437   1,600   1,603 
    Computer and data processing 8,552   6,581   4,573   3,979   3,952   3,579   3,460 
    Supplies and postage 1,010   914   469   541   408   447   430 
    FDIC assessments 1,134   1,245   621   513   682   697   480 
    Advertising and promotions 786   760   406   380   470   474   436 
    Amortization of intangibles 503   537   249   254   259   264   266 
    Restructuring charges 1,269   -   1,269   -   111   -   - 
    Other 5,490   4,497   3,050   2,440   2,598   2,476   2,464 
    Total noninterest expense 63,022   53,684   32,887   30,135   29,897   29,169   26,944 
    Income before income taxes 37,933   51,657   19,507   18,426   23,837   21,728   25,600 
    Income tax expense 7,302   10,747   3,859   3,443   4,225   4,553   5,400 
    Net income 30,631   40,910   15,648   14,983   19,612   17,175   20,200 
    Preferred stock dividends 729   731   365   365   365   364   366 
    Net income available to common                    
    shareholders$29,902  $40,179  $15,283  $14,618  $19,247  $16,811  $19,834 
    FINANCIAL RATIOS:                    
    Earnings per share – basic$1.94  $2.53  $1.00  $0.94  $1.22  $1.06  $1.25 
    Earnings per share – diluted$1.93  $2.52  $0.99  $0.93  $1.21  $1.05  $1.25 
    Cash dividends declared on common stock$0.58  $0.54  $0.29  $0.29  $0.27  $0.27  $0.27 
    Common dividend payout ratio 29.90%  21.34%  29.00%  30.85%  22.13%  25.47%  21.60%
    Dividend yield (annualized) 4.50%  3.63%  4.47%  3.90%  3.37%  3.49%  3.61%
    Return on average assets (annualized) 1.11%  1.59%  1.12%  1.09%  1.39%  1.27%  1.52%
    Return on average equity (annualized) 13.32%  17.46%  14.40%  12.35%  15.55%  13.74%  17.01%
    Return on average common equity (annualized) 13.51%  17.80%  14.64%  12.49%  15.81%  13.94%  17.34%
    Return on average tangible common                    
    equity (annualized) (1) 16.20%  21.28%  17.79%  14.81%  18.69%  16.50%  20.69%
    Efficiency ratio (2) 60.51%  54.22%  61.91%  59.06%  56.76%  57.76%  56.02%
    Effective tax rate 19.2%  20.8%  19.8%  18.7%  17.7%  21.0%  21.1%


    (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)

     Six Months Ended  2022  2021 
     June 30,  Second  First  Fourth  Third  Second 
     2022  2021  Quarter  Quarter  Quarter  Quarter  Quarter 
    SELECTED AVERAGE BALANCES:                    
    Federal funds sold and interest-
    earning deposits    		$52,538  $186,526  $60,429  $44,559  $148,293  $157,229  $249,312 
    Investment securities (1) 1,417,996   986,126   1,416,065   1,419,947   1,361,898   1,177,237   1,056,898 
    Loans:                    
    Commercial business 627,241   795,119   626,574   627,915   649,926   700,797   791,412 
    Commercial mortgage 1,430,916   1,293,262   1,429,910   1,431,933   1,392,375   1,331,063   1,302,136 
    Residential real estate loans 578,994   599,376   576,990   581,021   586,358   588,585   595,925 
    Residential real estate lines 77,167   85,290   76,730   77,610   78,594   79,766   82,926 
    Consumer indirect 1,007,791   860,978   1,045,720   969,441   946,551   917,402   878,884 
    Other consumer 14,356   15,760   14,183   14,531   14,997   14,718   15,356 
    Total loans 3,736,465   3,649,785   3,770,107   3,702,451   3,668,801   3,632,331   3,666,639 
    Total interest-earning assets 5,206,999   4,822,437   5,246,601   5,166,957   5,178,992   4,966,797   4,972,849 
    Goodwill and other intangible
    assets, net    		 74,161   74,313   74,037   74,287   74,544   74,470   74,412 
    Total assets 5,579,371   5,193,779   5,598,217   5,560,316   5,582,987   5,368,054   5,340,745 
    Interest-bearing liabilities:                    
    Interest-bearing demand 931,253   817,058   938,995   923,425   880,723   796,371   842,832 
    Savings and money market 1,915,344   1,790,983   1,882,998   1,948,050   1,997,508   1,876,394   1,856,659 
    Time deposits 941,448   900,103   954,862   927,886   923,080   908,351   935,885 
    Short-term borrowings 59,649   585   94,242   24,672   982   -   - 
    Long-term borrowings, net 73,980   73,673   74,019   73,942   73,864   73,786   73,709 
    Total interest-bearing liabilities 3,921,674   3,582,402   3,945,116   3,897,975   3,876,157   3,654,902   3,709,085 
    Noninterest-bearing demand deposits 1,090,835   1,068,240   1,098,084   1,083,506   1,134,100   1,149,120   1,091,490 
    Total deposits 4,878,880   4,576,384   4,874,939   4,882,867   4,935,411   4,730,236   4,726,866 
    Total liabilities 5,115,637   4,721,347   5,162,294   5,068,464   5,082,583   4,872,180   4,864,559 
    Shareholders’ equity 463,734   472,432   435,924   491,852   500,404   495,874   476,186 
    Common equity 446,442   455,111   418,632   474,560   483,112   478,582   458,868 
    Tangible common equity (2)$372,281  $380,798  $344,595  $400,273  $408,568  $404,112  $384,456 
    Common shares outstanding:                    
    Basic 15,440   15,857   15,306   15,577   15,815   15,837   15,825 
    Diluted 15,532   15,943   15,385   15,699   15,928   15,936   15,913 
    SELECTED AVERAGE YIELDS:
    (Tax equivalent basis)    		                    
    Investment securities 1.78%  1.83%  1.82%  1.74%  1.65%  1.72%  1.77%
    Loans 4.05%  4.05%  4.13%  3.97%  4.14%  3.96%  3.98%
    Total interest-earning assets 3.40%  3.45%  3.47%  3.32%  3.37%  3.31%  3.31%
    Interest-bearing demand 0.12%  0.14%  0.12%  0.12%  0.14%  0.15%  0.14%
    Savings and money market 0.20%  0.20%  0.23%  0.16%  0.16%  0.17%  0.19%
    Time deposits 0.35%  0.47%  0.41%  0.28%  0.30%  0.35%  0.43%
    Short-term borrowings 0.95%  41.07%  1.07%  0.45%  0.35%  0.00%  0.00%
    Long-term borrowings, net 5.73%  5.75%  5.73%  5.74%  5.74%  5.75%  5.73%
    Total interest-bearing liabilities 0.33%  0.37%  0.37%  0.29%  0.30%  0.32%  0.35%
    Net interest rate spread 3.07%  3.08%  3.10%  3.03%  3.07%  2.99%  2.96%
    Net interest margin 3.15%  3.17%  3.19%  3.11%  3.15%  3.07%  3.06%


    (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)

     Six Months Ended  2022  2021 
     June 30,  Second  First  Fourth  Third  Second 
     2022  2021  Quarter  Quarter  Quarter  Quarter  Quarter 
    ASSET QUALITY DATA:                    
    Allowance for Credit Losses - Loans                    
    Beginning balance$39,676  $52,420  $40,966  $39,676  $45,444  $46,365  $49,828 
    Net loan charge-offs (recoveries):                    
    Commercial business 53   (439)  90   (37)  177   50   (287)
    Commercial mortgage (2,019)  196   (2,018)  (1)  3,618   -   (7)
    Residential real estate loans 41   3   46   (5)  32   21   (3)
    Residential real estate lines (17)  70   (12)  (5)  11   60   - 
    Consumer indirect 1,197   317   647   550   674   265   (426)
    Other consumer 492   346   207   285   168   191   329 
    Total net (recoveries) charge-offs (253)  493   (1,040)  787   4,680   587   (394)
    Provision (benefit) for credit losses - loans 2,523   (5,562)  446   2,077   (1,088)  (334)  (3,857)
    Ending balance$42,452  $46,365  $42,452  $40,966  $39,676  $45,444  $46,365 
                         
    Net charge-offs (recoveries)
    to average loans (annualized):    		                    
    Commercial business 0.02%  -0.11%  0.06%  -0.02%  0.11%  0.03%  -0.15%
    Commercial mortgage -0.28%  0.03%  -0.57%  0.00%  1.03%  0.00%  0.00%
    Residential real estate loans 0.01%  0.00%  0.03%  0.00%  0.02%  0.01%  0.00%
    Residential real estate lines -0.04%  0.17%  -0.06%  -0.03%  0.05%  0.30%  0.00%
    Consumer indirect 0.24%  0.07%  0.25%  0.23%  0.28%  0.11%  -0.19%
    Other consumer 6.91%  4.43%  5.86%  7.95%  4.43%  5.15%  8.58%
    Total loans -0.01%  0.03%  -0.11%  0.09%  0.51%  0.06%  -0.04%
                         
    Supplemental information (1)                    
    Non-performing loans:                    
    Commercial business$422  $1,555  $422  $990  $1,399  $1,046  $1,555 
    Commercial mortgage 836   885   836   3,838   6,414   874   885 
    Residential real estate loans 2,738   2,615   2,738   2,878   2,373   2,457   2,615 
    Residential real estate lines 160   280   160   128   200   192   280 
    Consumer indirect 2,389   1,250   2,389   1,771   1,780   2,104   1,250 
    Other consumer 3   50   3   12   -   3   50 
    Total non-performing loans 6,548   6,635   6,548   9,617   12,166   6,676   6,635 
    Foreclosed assets -   646   -   -   -   -   646 
    Total non-performing assets$6,548  $7,281  $6,548  $9,617  $12,166  $6,676  $7,281 
                         
    Total non-performing loans
    to total loans    		 0.17%  0.18%  0.17%  0.26%  0.33%  0.18%  0.18%
    Total non-performing assets
    to total assets    		 0.12%  0.14%  0.12%  0.17%  0.22%  0.12%  0.14%
    Allowance for credit losses - loans
    to total loans    		 1.13%  1.28%  1.13%  1.10%  1.08%  1.24%  1.28%
    Allowance for credit losses - loans
    to non-performing loans    		 648%  699%  648%  426%  326%  681%  699%


    (1)At period end.
      

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

     Six Months Ended  2022  2021 
     June 30,  Second  First  Fourth  Third  Second 
     2022  2021  Quarter  Quarter  Quarter  Quarter  Quarter 
    Ending tangible assets:                    
    Total assets      $5,568,198  $5,630,498  $5,520,779  $5,623,193  $5,295,102 
    Less: Goodwill and other intangible
    assets, net    		       73,897   74,146   74,400   74,659   74,262 
    Tangible assets      $5,494,301  $5,556,352  $5,446,379  $5,548,534  $5,220,840 
                         
    Ending tangible common equity:                    
    Common shareholders’ equity      $408,509  $429,554  $487,850  $476,721  $469,834 
    Less: Goodwill and other intangible
    assets, net    		       73,897   74,146   74,400   74,659   74,262 
    Tangible common equity      $334,612  $355,408  $413,450  $402,062  $395,572 
                         
    Tangible common equity to tangible
    assets (1)    		       6.09%  6.40%  7.59%  7.25%  7.58%
                         
    Common shares outstanding       15,334   15,299   15,747   15,842   15,842 
    Tangible common book value per
    share (2)    		      $21.82  $23.23  $26.26  $25.38  $24.97 
                         
    Average tangible assets:                    
    Average assets$5,579,371  $5,193,779  $5,598,217  $5,560,316  $5,582,987  $5,368,054  $5,340,745 
    Less: Average goodwill and other
    intangible assets, net    		 74,161   74,313   74,037   74,287   74,544   74,470   74,412 
    Average tangible assets$5,505,210  $5,119,466  $5,524,180  $5,486,029  $5,508,443  $5,293,584  $5,266,333 
                         
    Average tangible common equity:                    
    Average common equity$446,442  $455,111  $418,632  $474,560  $483,112  $478,582  $458,868 
    Less: Average goodwill and other
    intangible assets, net    		 74,161   74,313   74,037   74,287   74,544   74,470   74,412 
    Average tangible common equity$372,281  $380,798  $344,595  $400,273  $408,568  $404,112  $384,456 
                         
    Net income available to
    common shareholders    		$29,902  $40,179  $15,283  $14,618  $19,247  $16,811  $19,834 
    Return on average tangible common
    equity (3)    		 16.20%  21.28%  17.79%  14.81%  18.69%  16.50%  20.69%
                         
    Pre-tax pre-provision income:                    
    Net income$30,631  $40,910  $15,648  $14,983  $19,612  $17,175  $20,200 
    Add: Income tax expense 7,302   10,747   3,859   3,443   4,225   4,553   5,400 
    Add: Provision (benefit) for credit losses 2,882   (6,603)  563   2,319   (1,192)  (541)  (4,622)
    Pre-tax pre-provision income$40,815  $45,054  $20,070  $20,745  $22,645  $21,187  $20,978 
    Adjustments:                    
    Restructuring charges 1,269      1,269             
    Adjusted pre-tax pre-provision income$42,084     $21,339             
                         
    Total loans excluding PPP loans:                    
    Total loans$3,764,018  $3,632,168  $3,764,018  $3,733,648  $3,679,436  $3,653,899  $3,632,168 
    Less: Total PPP loans 8,910   171,942   8,910   31,399   55,344   116,653   171,942 
    Total loans excluding PPP loans$3,755,108  $3,460,226  $3,755,108  $3,702,249  $3,624,092  $3,537,246  $3,460,226 
                         
    Allowance for credit losses - loans$42,452  $46,365  $42,452  $40,966  $39,676  $45,444  $46,365 
    Allowance for credit losses - loans to
    total loans excluding PPP loans (4)    		 1.13%  1.34%  1.13%  1.11%  1.09%  1.28%  1.34%


    (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.
    (4)Allowance for credit losses – loans divided by total loans excluding PPP loans.
      

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