• Financial Institutions, Inc. Announces Fourth Quarter and Full Year 2022 Results

    Source: Nasdaq GlobeNewswire / 30 Jan 2023 15:05:21   America/Chicago

    WARSAW, N.Y., Jan. 30, 2023 (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 fourth quarter and year ended December 31, 2022.

    Results for the Fourth Quarter of 2022  

    • Net income was $12.1 million compared to $19.6 million in 2021. After preferred dividends, net income available to common shareholders was $11.7 million, or $0.76 per diluted share, compared to $19.2 million, or $1.21 per diluted share, in 2021.
    • Net income reflects the impact of a $6.1 million provision for credit losses as compared to a benefit of $1.2 million in 2021. Loan loss provision returned to a more normalized level in 2022, and increased in the fourth quarter, as a result of a higher national unemployment forecast and qualitative factors reflecting economic uncertainty associated with higher interest rates, inflation, and global political unrest. Provision also increased due to the impact of strong loan growth and higher unfunded loan commitments.
    • Net interest income of $43.1 million was $2.3 million higher than the fourth quarter of 2021 as a result of loan growth and net interest margin expansion, partially offset by a $2.7 million decrease in interest and fee income accretion in connection with Paycheck Protection Program (“PPP”) loans (“revenue related to PPP loans”).
    • Salaries and employee benefits expense included $440 thousand of non-recurring severance expense in the current quarter related to a restructuring that eliminated approximately 20 positions throughout the organization.
    • Non-recurring restructuring charges of $350 thousand were recognized in the current quarter related to the 2020 closure of five locations. The charges related to the write-down of real estate assets to fair market value based upon current market conditions.
    • Pre-tax pre-provision income(1) was $20.6 million, down $2.1 million, or 9.1%, from the fourth quarter of 2021. Excluding restructuring charges and revenue related to PPP loans from both periods of comparison, pre-PPP adjusted pre-tax pre-provision income(1) increased by $865 thousand, or 4.3%, from the fourth quarter of 2021. 
    • Total loans were $4.05 billion at December 31, 2022, an increase of $183.6 million, or 4.7%, from September 30, 2022.
    • The Company continues to report strong credit quality metrics, including non-performing loans to total loans of 0.25% and non-performing assets to total assets of 0.18% as of December 31, 2022.

    Results for the Full Year 2022

    • Net income was $56.6 million compared to $77.7 million in 2021. After preferred dividends, net income available to common shareholders was $55.1 million, or $3.56 per diluted share, compared to $76.2 million, or $4.78 per diluted share, in 2021.
    • 2022 net income reflects the impact of a $13.3 million provision for credit losses as compared to a benefit of $8.3 million in 2021.
    • Net interest income of $167.4 million was $12.6 million higher than 2021 as a result of loan growth and net interest margin expansion, partially offset by a $7.6 million decrease in revenue related to PPP loans.
    • Non-recurring restructuring charges related to the 2020 closure of five locations totaled $1.6 million in 2022 compared to $111 thousand in 2021.
    • Pre-tax pre-provision income(1) was $84.3 million, down $4.6 million, or 5.2%, from 2021. Excluding a third quarter 2022 non-recurring $2.0 million enhancement from the surrender and redeployment of $25.5 million in cash surrender value of company owned life insurance, as well as restructuring charges and revenue related to PPP loans from both periods of comparison, pre-PPP adjusted pre-tax pre-provision income(1) increased by $2.5 million, or 3.2% from 2021. 
    • Total loan growth was $371.0 million, or 10.1%, from December 31, 2021.

    “Our total loan portfolio grew a robust 4.7% in the fourth quarter and 10.1% year-over-year,” said President and Chief Executive Officer Martin K. Birmingham. “The early 2022 addition of our Mid-Atlantic commercial lending team significantly fueled back-end-weighted full year growth, with an increase of approximately $75 million in loans outstanding in this region during the fourth quarter. The fourth quarter also benefitted from a high level of commercial loans in the pipeline awaiting closing at September 30, 2022. Our commercial loan pipeline remains sizable, at $750 million, down slightly from the end of the third quarter. Approximately $200 million of the pipeline is attributable to the Mid-Atlantic region.  

    “Our long-term track record of credit-disciplined loan growth and well-defined strategic and risk frameworks has resulted in a high-quality loan portfolio that is well-positioned for success in a challenging economy. This is exemplified by strong year-end metrics including fourth quarter net charge-offs of 34 basis points, non-performing loans to total loans of 25 basis points, and zero delinquencies in our large commercial loan portfolios.”  

    Chief Financial Officer and Treasurer W. Jack Plants II added, “Net interest margin decreased by five basis points from the linked quarter, primarily as a result of repricing and seasonality within our public deposit portfolio. Managing an appropriate balance between net interest margin and net interest income remains a key consideration for the Company. We are modeling cash flow of approximately $1.0 billion from our loan and securities portfolios in 2023, which will benefit future net interest margin as this liquidity is deployed into new loan originations at market rates.”

    Net Interest Income and Net Interest Margin

    Net interest income was $43.1 million for the fourth quarter of 2022, an increase of $81 thousand from the third quarter of 2022 and an increase of $2.3 million from the fourth quarter of 2021.

    Average interest-earning assets for the current quarter were $5.33 billion, an increase of $99.4 million from the third quarter of 2022 due to a $128.9 million increase in average loans and a $6.9 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $36.4 million decrease in the average balance of investment securities. Average interest-earning assets for the current quarter were $151.2 million higher than the fourth quarter of 2021 due to a $279.6 million increase in average loans, partially offset by a $29.1 million decrease in the average balance of investment securities and a $99.2 million decrease in the average balance of Federal Reserve interest-earning cash.

    Net interest margin was 3.23% in the current quarter as compared to 3.28% in the third quarter of 2022 and 3.15% in the fourth quarter of 2021. Excluding the impact of PPP loans and revenue related to PPP loans, net interest margin was 3.22% in the fourth quarter of 2022, 3.26% in the third quarter of 2022 and 2.98% in the fourth quarter of 2021. Our net interest margin improved from the fourth quarter of 2021 primarily due to the impact of 2022 interest rate increases. Net interest margin decreased from the third quarter of 2022 as we experienced repricing in our public deposit portfolio, coupled with a shift in mix from lower cost transaction deposit accounts to higher cost time deposits.

    Net interest income was $167.4 million for the full year 2022, $12.6 million higher than 2021. Net interest margin was 3.20% for the full year 2022, an increase of six basis points from 2021. Excluding the impact of PPP loans and revenue related to PPP loans, net interest margin was 3.17% for the full year 2022, up 12 basis points from 3.05% in 2021.

    Noninterest Income

    Noninterest income was $10.9 million for the fourth quarter of 2022, a decrease of $1.7 million from the third quarter of 2022 and a decrease of $737 thousand from the fourth quarter of 2021.

    • Company owned life insurance income of $875 thousand was $2.1 million lower than the third quarter of 2022 and $54 thousand higher than the fourth quarter of 2021. The decline from the linked period reflects a non-recurring $2.0 million third quarter 2022 enhancement related to the surrender and redeployment of $25.5 million in cash surrender value of company owned life insurance.
    • Income from derivative instruments, net was $656 thousand in the current quarter, $557 thousand higher than the third quarter of 2022 and $379 thousand lower than the fourth 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.
    • A net loss of $111 thousand on tax credit investments was recognized in the fourth quarter of 2022 as compared to a $385 thousand loss in the third quarter of 2022 and a $493 thousand loss in the fourth quarter of 2021. Net loss 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.

    Noninterest income was $46.3 million for the full year 2022, $635 thousand lower than 2021.

    • Insurance income of $6.4 million was $614 thousand higher than 2021, driven by new business growth within the Company’s markets.
    • Investment advisory income was $11.5 million as compared to $11.7 million in 2021. The positive impact of new and increased client accounts was offset by the impact of the 2022 global stock market decline on the value of assets under management.
    • Company owned life insurance income of $5.5 million was $2.6 million higher than 2021, primarily as a result of the third quarter 2022 transaction previously described.
    • Income from investments in limited partnerships of $1.3 million was $788 thousand lower than 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 as they mature.
    • Income from derivative instruments, net of $1.9 million was $776 thousand lower than 2021 as a result of the number and value of interest rate swap transactions combined with the impact of changes in the fair market value of borrower-facing trades.
    • Net gain on sale of loans held for sale was $1.2 million as compared to $3.0 million in 2021. Sales volumes and margins for residential loans moderated significantly in 2022 primarily as a result of inflation, higher interest rates, and tight housing inventory.

    Noninterest Expense

    Noninterest expense was $33.5 million for the fourth quarter of 2022 compared to $32.8 million in the third quarter of 2022 and $29.9 million in the fourth quarter of 2021.

    • Salaries and employee benefits expense of $18.1 million was $151 thousand higher than the third quarter of 2022 and $2.0 million higher than the fourth quarter of 2021. The increase from the linked quarter was primarily the result of $440 thousand of non-recurring severance expense in the current quarter, partially offset by lower medical claim activity. The increase from the prior year quarter was primarily due to investments in personnel and hourly wage pressures driven by the current competitive labor market.
    • Computer and data processing expense of $4.7 million was $272 thousand higher than the third quarter of 2022 and $727 thousand higher than the fourth quarter of 2021 due to timing of the Company’s strategic investments in technology, including digital banking initiatives, a customer relationship management solution implemented across all lines of business, and Banking-as-a-Service, or BaaS, initiatives.
    • The Company recognized restructuring charges in the fourth quarter of 2022 totaling $350 thousand in connection with five locations that were closed in the second half of 2020. The charges related to the write-down of real estate assets to fair market value based upon current market conditions.
    • Other expense of $3.5 million was relatively unchanged from the third quarter of 2022 and $863 thousand higher than the fourth quarter of 2021. The year-over-year increase was the result of a combination of factors including interest charges related to collateral held for derivative transactions, higher travel and entertainment expense as we exited pandemic business practices, higher insurance costs and the impact of inflationary pressures.

    Noninterest expense was $129.4 million for the full year 2022, $16.6 million higher than 2021.

    • Salaries and employee benefits expense of $69.6 million was $8.7 million higher than 2021. The increase is primarily the result of investments in personnel and wage pressures driven by the current competitive labor market.
    • Professional services expense of $5.6 million was $943 thousand lower than 2021 primarily as a result of higher expense incurred in the prior year for enterprise standardization expense and miscellaneous consulting fees.
    • Computer and data processing expense of $17.6 million was $3.5 million higher than 2021 as a result of the Company’s strategic investments in technology, primarily driven by a new customer relationship management system implemented in the latter part of 2021 and other initiatives.
    • Restructuring charges related to the 2020 closing of five branches totaled $1.6 million in 2022 as compared to $111 thousand in 2021 due to the previously described write-down of real estate assets.
    • Other expense of $12.4 million was $2.8 million higher than 2021, primarily due to interest charges related to collateral held for derivative transactions, higher travel and entertainment expense, higher insurance costs and the impact of inflationary pressures.

    Income Taxes

    Income tax expense was $2.4 million for the fourth quarter of 2022 compared to $4.7 million in the third quarter of 2022 and $4.2 million in the fourth quarter of 2021. Third quarter 2022 income tax expense included approximately $1.5 million of incremental taxes associated with the company owned life insurance surrender and redeployment strategy, partially offset by a $2.0 million non-recurring enhancement recorded as noninterest income.

    The Company recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the fourth quarter of 2022, third quarter of 2022, and fourth quarter of 2021, resulting in income tax expense reductions of approximately $1.4 million, $511 thousand, and $1.7 million, respectively.

    The effective tax rate was 16.4% for the fourth quarter of 2022, 25.4% for the third quarter of 2022 and 17.7% for the fourth quarter of 2021. The effective tax rate fluctuates on a quarterly basis primarily due to the level of pre-tax earnings and, in the third quarter of 2022, was impacted by the company owned life insurance transaction. 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 $5.80 billion at December 31, 2022, up $172.8 million from September 30, 2022, and up $276.5 million from December 31, 2021.

    Investment securities were $1.14 billion at December 31, 2022, down $19.7 million from September 30, 2022, and down $240.8 million from December 31, 2021. The portfolio decline from September 30, 2022, was driven by the use of portfolio cash flow to fund loan originations. The decrease from December 31, 2021, was primarily the result of 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.

    Total loans were $4.05 billion at December 31, 2022, up $183.6 million, or 4.7%, from September 30, 2022, and up $371.0 million, or 10.1%, from December 31, 2021. Total loans, excluding PPP loans net of deferred fees, were $4.05 billion at December 31, 2022, up $185.2 million, or 4.8%, from September 30, 2022, and up $425.2 million, or 11.7%, from December 31, 2021.

    • Commercial business loans totaled $664.2 million, up $30.4 million, or 4.8%, from September 30, 2022, and up $26.0 million, or 4.1%, from December 31, 2021. PPP loans net of deferred fees are included in commercial business loans and were $1.2 million at December 31, 2022, $2.8 million at September 30, 2022, and $55.3 million at December 31, 2021. Accordingly, commercial business loans excluding the impact of PPP loans increased 5.1% from September 30, 2022, and increased 13.7% from December 31, 2021.
    • Commercial mortgage loans totaled $1.68 billion, up $115.3 million, or 7.4%, from September 30, 2022, and up $267.1 million, or 18.9%, from December 31, 2021.
    • Residential real estate loans totaled $590.0 million, up $12.1 million, or 2.1%, from September 30, 2022, and up $12.7 million, or 2.2%, from December 31, 2021.
    • Consumer indirect loans totaled $1.02 billion, up $26.2 million, or 2.6%, from September 30, 2022, and up $65.6 million, or 6.8%, from December 31, 2021.

    Total deposits were $4.93 billion at December 31, 2022, $24.3 million higher than September 30, 2022, and $102.3 million higher than December 31, 2021. The increase for both periods was primarily attributable to growth in brokered deposits. Public deposit balances represented 23% of total deposits at December 31, 2022, September 30, 2022, and December 31, 2021.

    Short-term borrowings were $205.0 million at December 31, 2022, compared to $69.0 million at September 30, 2022, and $30.0 million at December 31, 2021. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits.

    Shareholders’ equity was $405.6 million at December 31, 2022, compared to $394.0 million at September 30, 2022, and $505.1 million at December 31, 2021. Shareholders’ equity has been negatively impacted in 2022 by 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 $25.31 at December 31, 2022, an increase of $0.74, or 3.0%, from $24.57 at September 30, 2022, and a decrease of $5.67, or 18.3%, from $30.98 at December 31, 2021. Tangible common book value per share(1) was $20.53 at December 31, 2022, an increase of $0.76, or 3.9%, from $19.77 at September 30, 2022, and a decrease of $5.73, or 21.8%, from $26.26 at December 31, 2021. The common equity to assets ratio was 6.70% at December 31, 2022, unchanged from September 30, 2022, and 8.84% at December 31, 2021. Tangible common equity to tangible assets(1), or the TCE ratio, was 5.50%, 5.46% and 7.59% at December 31, 2022, September 30, 2022, and December 31, 2021, respectively. The primary driver of declines in all four measures was the previously described increase in accumulated other comprehensive loss.

    During the fourth quarter of 2022, the Company declared a common stock dividend of $0.29 per common share, consistent with the linked quarter and representing an increase of 7.4% over the prior year quarter. The dividend returned 38.2% of fourth quarter net income to common shareholders.

    The Company’s regulatory capital ratios at December 31, 2022, compared to September 30, 2022, and December 31, 2021, were as follows:

    • Leverage Ratio was 8.33% compared to 8.35% and 8.23% at September 30, 2022, and December 31, 2021, respectively.
    • Common Equity Tier 1 Capital Ratio was 9.42% compared to 9.75% and 10.28% at September 30, 2022, and December 31, 2021, respectively.
    • Tier 1 Capital Ratio was 9.78% compared to 10.12% and 10.68% at September 30, 2022, and December 31, 2021, respectively.
    • Total Risk-Based Capital Ratio was 12.13% compared to 12.53% and 13.12% at September 30, 2022, and December 31, 2021, respectively.

    Credit Quality

    Non-performing loans were $10.2 million, or 0.25% of total loans, at December 31, 2022, as compared to $8.5 million, or 0.22% of total loans, at September 30, 2022, and $12.2 million, or 0.33% of total loans, at December 31, 2021. Net charge-offs were $3.3 million in the current quarter as compared to $2.2 million in the third quarter of 2022 and $4.7 million in the fourth quarter of 2021. The ratio of annualized net charge-offs (recoveries) to average loans was 0.34% in the current quarter, 0.22% in the third quarter of 2022 and 0.51% in the fourth quarter of 2021.

    At December 31, 2022, the allowance for credit losses on loans to total loans ratio was 1.12%, compared to 1.14% at September 30, 2022, and 1.08% at December 31, 2021. The allowance for credit losses on loans to total loans ratio excluding PPP loans(1) was 1.12%, compared to 1.14% at September 30, 2022, and 1.09% at December 31, 2021.

    Provision for credit losses on loans was $4.6 million in the current quarter compared to a provision of $3.8 million in the third quarter of 2022 and a benefit of $1.1 million in the fourth quarter of 2021. The allowance for unfunded commitments, also included in provision (benefit) for credit losses as required by the current expected credit loss standard (“CECL”), increased by $1.5 million in the fourth quarter of 2022 and $507 thousand in the third quarter of 2022, and decreased by $105 thousand in the fourth quarter of 2021.

    Provision for credit losses was $13.3 million for the full year 2022 compared to a benefit of $8.3 million in 2021. The Company recorded a benefit for credit losses in each quarter of 2021 as a result of 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 returned to a more normalized level in 2022, excluding a $2.0 million commercial loan recovery recognized in the second quarter, due to the impact of strong loan growth and an increase in the national unemployment forecast and qualitative factors reflecting economic uncertainty associated with higher interest rates, inflation, and global political unrest, partially offset by 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 445% at December 31, 2022, 517% at September 30, 2022, and 326% at December 31, 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 year ended December 31, 2022, in its Annual Report on Form 10-K. As a result, the Company will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of December 31, 2022, and will adjust amounts preliminarily reported, if necessary.

    Conference Call

    The Company will host an earnings conference call and audio webcast on January 31, 2023, 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 502255. The webcast replay will be available on the Company’s website for at least 30 days.

    About Financial Institutions, Inc.

    Financial Institutions, Inc. (NASDAQ: FISI) is an innovative financial holding company with approximately $5.8 billion in assets offering banking, insurance and wealth management products and services through a network of subsidiaries. Its Five Star Bank subsidiary provides consumer and commercial banking and lending services to individuals, municipalities and businesses through its Western and Central New York branch network and its Mid-Atlantic commercial loan production office serving the Baltimore and Washington, D.C. region. SDN Insurance Agency, LLC provides a broad range of insurance services to personal and business clients, while Courier Capital, LLC and HNP Capital, LLC offer customized investment management, consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. Learn more at five-starbank.com and 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,” "continue," “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:

    W. Jack Plants II
    Chief Financial Officer and Treasurer
    (585) 498-2919
    wjplants@five-starbank.com

    Pamela Kennard
    Investor Relations Analyst
    (585) 584-1549
    pakennard@five-starbank.com

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

     2022  2021 
     December 31,  September 30,  June 30,  March 31,  December 31, 
    SELECTED BALANCE SHEET DATA:              
    Cash and cash equivalents$130,466  $118,581  $109,705  $170,404  $79,112 
    Investment securities:              
    Available for sale 954,371   965,531   1,057,018   1,119,362   1,178,515 
    Held-to-maturity, net 188,975   197,538   204,933   211,173   205,581 
    Total investment securities 1,143,346   1,163,069   1,261,951   1,330,535   1,384,096 
    Loans held for sale 550   2,074   4,265   5,544   6,202 
    Loans:              
    Commercial business 664,249   633,894   611,102   625,141   638,293 
    Commercial mortgage 1,679,840   1,564,545   1,448,152   1,434,759   1,412,788 
    Residential real estate loans 589,960   577,821   574,784   574,895   577,299 
    Residential real estate lines 77,670   77,336   76,108   76,860   78,531 
    Consumer indirect 1,023,620   997,423   1,039,251   1,007,404   958,048 
    Other consumer 15,110   15,832   14,621   14,589   14,477 
    Total loans 4,050,449   3,866,851   3,764,018   3,733,648   3,679,436 
    Allowance for credit losses - loans 45,413   44,106   42,452   40,966   39,676 
    Total loans, net 4,005,036   3,822,745   3,721,566   3,692,682   3,639,760 
    Total interest-earning assets 5,428,533   5,073,983   5,206,795   5,266,351   5,105,608 
    Goodwill and other intangible assets, net 73,414   73,653   73,897   74,146   74,400 
    Total assets 5,797,272   5,624,482   5,568,198   5,630,498   5,520,779 
    Deposits:              
    Noninterest-bearing demand 1,139,214   1,135,125   1,114,460   1,079,949   1,107,561 
    Interest-bearing demand 863,822   946,431   877,661   990,404   864,528 
    Savings and money market 1,643,516   1,800,321   1,845,186   2,015,384   1,933,047 
    Time deposits 1,282,872   1,023,277   983,209   917,195   921,954 
    Total deposits 4,929,424   4,905,154   4,820,516   5,002,932   4,827,090 
    Short-term borrowings 205,000   69,000   109,000   -   30,000 
    Long-term borrowings, net 74,222   74,144   74,067   73,989   73,911 
    Total interest-bearing liabilities 4,069,432   3,913,173   3,889,123   3,996,972   3,823,440 
    Shareholders’ equity 405,605   394,048   425,801   446,846   505,142 
    Common shareholders’ equity 388,313   376,756   408,509   429,554   487,850 
    Tangible common equity (1) 314,899   303,103   334,612   355,408   413,450 
    Accumulated other comprehensive loss$(137,487) $(141,183) $(99,724) $(67,094) $(13,207)
                   
    Common shares outstanding 15,340   15,334   15,334   15,299   15,745 
    Treasury shares 760   765   765   800   354 
    CAPITAL RATIOS AND PER SHARE DATA:              
    Leverage ratio 8.33%  8.35%  8.20%  8.13%  8.23%
    Common equity Tier 1 capital ratio 9.42%  9.75%  9.91%  9.85%  10.28%
    Tier 1 capital ratio 9.78%  10.12%  10.29%  10.24%  10.68%
    Total risk-based capital ratio 12.13%  12.53%  12.75%  12.72%  13.12%
    Common equity to assets 6.70%  6.70%  7.34%  7.63%  8.84%
    Tangible common equity to tangible assets (1) 5.50%  5.46%  6.09%  6.40%  7.59%
                   
    Common book value per share$25.31  $24.57  $26.64  $28.08  $30.98 
    Tangible common book value per share (1)$20.53  $19.77  $21.82  $23.23  $26.26 

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

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

     Twelve Months Ended  2022  2021 
     December 31,  Fourth  Third  Second  First  Fourth 
     2022  2021  Quarter  Quarter  Quarter  Quarter  Quarter 
    SELECTED INCOME STATEMENT                    
    DATA:                    
    Interest income$196,107  $167,205  $57,805  $50,675  $45,276  $42,351  $43,753 
    Interest expense 28,735   12,475   14,656   7,607   3,679   2,793   2,885 
    Net interest income 167,372   154,730   43,149   43,068   41,597   39,558   40,868 
    Provision (benefit) for credit losses 13,311   (8,336)  6,115   4,314   563   2,319   (1,192)
    Net interest income after provision
    (benefit) for credit losses    		 154,061   163,066   37,034   38,754   41,034   37,239   42,060 
    Noninterest income:                    
    Service charges on deposits 5,889   5,571   1,486   1,597   1,437   1,369   1,490 
    Insurance income 6,364   5,750   1,462   1,571   1,234   2,097   1,343 
    Card interchange income 8,205   8,498   2,074   2,076   2,103   1,952   2,228 
    Investment advisory 11,493   11,672   2,824   2,722   2,906   3,041   3,045 
    Company owned life insurance 5,542   2,947   875   2,965   869   833   821 
    Investments in limited partnerships 1,293   2,081   191   65   242   795   294 
    Loan servicing 507   415   124   139   135   109   122 
    Income from derivative instruments, net 1,919   2,695   656   99   645   519   1,035 
    Net gain (loss) on sale of loans held for sale 1,227   2,950   182   308   828   (91)  482 
    Net (loss) gain on investment securities (15)  71   -   -   (15)  -   - 
    Net (loss) gain on other assets (16)  441   (1)  (22)  7   -   155 
    Net loss on tax credit investments (815)  (431)  (111)  (385)  (92)  (227)  (493)
    Other 4,678   4,246   1,175   1,517   1,061   925   1,152 
    Total noninterest income 46,271   46,906   10,937   12,652   11,360   11,322   11,674 
    Noninterest expense:                    
    Salaries and employee benefits 69,633   60,893   18,101   17,950   16,966   16,616   16,111 
    Occupancy and equipment 15,103   14,371   3,539   3,793   4,015   3,756   3,869 
    Professional services 5,592   6,535   1,420   1,247   1,269   1,656   1,437 
    Computer and data processing 17,638   14,112   4,679   4,407   4,573   3,979   3,952 
    Supplies and postage 1,943   1,769   493   440   469   541   408 
    FDIC assessments 2,440   2,624   655   651   621   513   682 
    Advertising and promotions 2,013   1,704   576   651   406   380   470 
    Amortization of intangibles 986   1,060   239   244   249   254   259 
    Restructuring charges 1,619   111   350   -   1,269   -   111 
    Other 12,395   9,571   3,461   3,444   3,050   2,440   2,598 
    Total noninterest expense 129,362   112,750   33,513   32,827   32,887   30,135   29,897 
    Income before income taxes 70,970   97,222   14,458   18,579   19,507   18,426   23,837 
    Income tax expense 14,397   19,525   2,370   4,725   3,859   3,443   4,225 
    Net income 56,573   77,697   12,088   13,854   15,648   14,983   19,612 
    Preferred stock dividends 1,459   1,460   364   365   365   365   365 
    Net income available to common                    
    shareholders$55,114  $76,237  $11,724  $13,489  $15,283  $14,618  $19,247 
    FINANCIAL RATIOS:                    
    Earnings per share – basic$3.58  $4.81  $0.76  $0.88  $1.00  $0.94  $1.22 
    Earnings per share – diluted$3.56  $4.78  $0.76  $0.88  $0.99  $0.93  $1.21 
    Cash dividends declared on common stock$1.16  $1.08  $0.29  $0.29  $0.29  $0.29  $0.27 
    Common dividend payout ratio 32.40%  22.45%  38.16%  32.95%  29.00%  30.85%  22.13%
    Dividend yield (annualized) 4.76%  3.40%  4.72%  4.78%  4.47%  3.90%  3.37%
    Return on average assets (annualized) 1.01%  1.46%  0.85%  0.98%  1.12%  1.09%  1.39%
    Return on average equity (annualized) 12.81%  16.01%  11.92%  12.55%  14.40%  12.35%  15.55%
    Return on average common equity (annualized) 12.99%  16.29%  12.08%  12.72%  14.64%  12.49%  15.81%
    Return on average tangible common                    
    equity (annualized) (1) 15.72%  19.37%  14.94%  15.43%  17.79%  14.81%  18.69%
    Efficiency ratio (2) 60.39%  55.76%  61.82%  58.78%  61.91%  59.06%  56.76%
    Effective tax rate 20.3%  20.1%  16.4%  25.4%  19.8%  18.7%  17.7%

    (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)

     Twelve Months Ended  2022  2021 
     December 31,  Fourth  Third  Second  First  Fourth 
     2022  2021  Quarter  Quarter  Quarter  Quarter  Quarter 
    SELECTED AVERAGE BALANCES:                    
    Federal funds sold and interest-
    earning deposits    		$49,055  $169,504  $49,073  $42,183  $60,429  $44,559  $148,293 
    Investment securities (1) 1,384,208   1,129,012   1,332,776   1,369,166   1,416,065   1,419,947   1,361,898 
    Loans:                    
    Commercial business 628,729   734,748   636,470   623,916   626,574   627,915   649,926 
    Commercial mortgage 1,502,904   1,327,772   1,633,298   1,514,138   1,429,910   1,431,933   1,392,375 
    Residential real estate loans 579,362   593,375   582,352   577,094   576,990   581,021   586,358 
    Residential real estate lines 77,132   82,210   77,342   76,853   76,730   77,610   78,594 
    Consumer indirect 1,008,026   896,769   1,003,728   1,012,787   1,045,720   969,441   946,551 
    Other consumer 14,636   15,305   15,175   14,648   14,183   14,531   14,997 
    Total loans 3,810,789   3,650,179   3,948,365   3,819,436   3,770,107   3,702,451   3,668,801 
    Total interest-earning assets 5,244,052   4,948,695   5,330,214   5,230,785   5,246,601   5,166,957   5,178,992 
    Goodwill and other intangible
    assets, net    		 73,913   74,411   73,547   73,791   74,037   74,287   74,544 
    Total assets 5,606,733   5,335,808   5,667,331   5,599,964   5,598,217   5,560,316   5,582,987 
    Interest-bearing liabilities:                    
    Interest-bearing demand 909,799   827,891   923,374   854,015   938,995   923,425   880,723 
    Savings and money market 1,852,571   1,864,567   1,764,230   1,817,413   1,882,998   1,948,050   1,997,508 
    Time deposits 1,008,092   907,973   1,116,135   1,031,162   954,862   927,886   923,080 
    Short-term borrowings 86,139   538   87,783   136,610   94,242   24,672   982 
    Long-term borrowings, net 74,059   73,749   74,175   74,096   74,019   73,942   73,864 
    Total interest-bearing liabilities 3,930,660   3,674,718   3,965,697   3,913,296   3,945,116   3,897,975   3,876,157 
    Noninterest-bearing demand deposits 1,105,281   1,105,227   1,123,223   1,115,759   1,098,084   1,083,506   1,134,100 
    Total deposits 4,875,743   4,705,658   4,926,962   4,818,349   4,874,939   4,882,867   4,935,411 
    Total liabilities 5,165,020   4,850,417   5,265,134   5,162,057   5,162,293   5,068,464   5,082,583 
    Shareholders’ equity 441,713   485,391   402,197   437,907   435,924   491,852   500,404 
    Common equity 424,421   468,085   384,905   420,615   418,632   474,560   483,112 
    Tangible common equity (2)$350,508  $393,674  $311,358  $346,824  $344,595  $400,273  $408,568 
    Common shares outstanding:                    
    Basic 15,384   15,841   15,330   15,329   15,306   15,577   15,815 
    Diluted 15,471   15,937   15,413   15,393   15,385   15,699   15,928 
    SELECTED AVERAGE YIELDS:
    (Tax equivalent basis)    		                    
    Investment securities 1.81%  1.75%  1.88%  1.81%  1.82%  1.74%  1.65%
    Loans 4.48%  4.05%  5.15%  4.62%  4.13%  3.97%  4.14%
    Total interest-earning assets 3.75%  3.39%  4.32%  3.86%  3.47%  3.32%  3.37%
    Interest-bearing demand 0.24%  0.14%  0.52%  0.18%  0.12%  0.12%  0.14%
    Savings and money market 0.53%  0.18%  1.20%  0.56%  0.23%  0.16%  0.16%
    Time deposits 1.09%  0.40%  2.31%  1.12%  0.41%  0.28%  0.30%
    Short-term borrowings 1.74%  22.33%  2.48%  1.95%  1.07%  0.45%  0.35%
    Long-term borrowings, net 5.73%  5.75%  5.72%  5.72%  5.73%  5.74%  5.74%
    Total interest-bearing liabilities 0.73%  0.34%  1.47%  0.77%  0.37%  0.29%  0.30%
    Net interest rate spread 3.02%  3.05%  2.85%  3.09%  3.10%  3.03%  3.07%
    Net interest margin 3.20%  3.14%  3.23%  3.28%  3.19%  3.11%  3.15%

    (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)

     Twelve Months Ended  2022  2021 
     December 31,  Fourth  Third  Second  First  Fourth 
     2022  2021  Quarter  Quarter  Quarter  Quarter  Quarter 
    ASSET QUALITY DATA:                    
    Allowance for Credit Losses - Loans                    
    Beginning balance$39,676  $52,420  $44,106  $42,452  $40,966  $39,676  $45,444 
    Net loan charge-offs (recoveries):                    
    Commercial business (64)  (212)  (21)  (96)  90   (37)  177 
    Commercial mortgage (853)  3,814   1,167   (1)  (2,018)  (1)  3,618 
    Residential real estate loans 279   56   242   (4)  46   (5)  32 
    Residential real estate lines (1)  141   (19)  35   (12)  (5)  11 
    Consumer indirect 4,538   1,256   1,451   1,890   647   550   674 
    Other consumer 1,339   705   518   329   207   285   168 
    Total net (recoveries) charge-offs 5,238   5,760   3,338   2,153   (1,040)  787   4,680 
    Provision (benefit) for credit losses - loans 10,975   (6,984)  4,645   3,807   446   2,077   (1,088)
    Ending balance$45,413  $39,676  $45,413  $44,106  $42,452  $40,966  $39,676 
                         
    Net charge-offs (recoveries)
    to average loans (annualized):    		                    
    Commercial business -0.01%  -0.03%  -0.01%  -0.06%  0.06%  -0.02%  0.11%
    Commercial mortgage -0.06%  0.29%  0.28%  0.00%  -0.57%  0.00%  1.03%
    Residential real estate loans 0.05%  0.01%  0.16%  0.00%  0.03%  0.00%  0.02%
    Residential real estate lines 0.00%  0.17%  -0.10%  0.18%  -0.06%  -0.03%  0.05%
    Consumer indirect 0.45%  0.14%  0.57%  0.74%  0.25%  0.23%  0.28%
    Other consumer 9.15%  4.61%  13.57%  8.90%  5.86%  7.95%  4.43%
    Total loans 0.14%  0.16%  0.34%  0.22%  -0.11%  0.09%  0.51%
                         
    Supplemental information (1)                    
    Non-performing loans:                    
    Commercial business$340  $1,399  $340  $1,358  $422  $990  $1,399 
    Commercial mortgage 2,564   6,414   2,564   843   836   3,838   6,414 
    Residential real estate loans 4,071   2,373   4,071   3,550   2,738   2,878   2,373 
    Residential real estate lines 142   200   142   119   160   128   200 
    Consumer indirect 3,079   1,780   3,079   2,666   2,389   1,771   1,780 
    Other consumer 2   -   2   -   3   12   - 
    Total non-performing loans 10,198   12,166   10,198   8,536   6,548   9,617   12,166 
    Foreclosed assets 19   -   19   -   -   -   - 
    Total non-performing assets$10,217  $12,166  $10,217  $8,536  $6,548  $9,617  $12,166 
                         
    Total non-performing loans
    to total loans    		 0.25%  0.33%  0.25%  0.22%  0.17%  0.26%  0.33%
    Total non-performing assets
    to total assets    		 0.18%  0.22%  0.18%  0.15%  0.12%  0.17%  0.22%
    Allowance for credit losses - loans
    to total loans    		 1.12%  1.08%  1.12%  1.14%  1.13%  1.10%  1.08%
    Allowance for credit losses - loans
    to non-performing loans    		 445%  326%  445%  517%  648%  426%  326%

    (1)   At period end.

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

     Twelve Months Ended  2022  2021 
     December 31,  Fourth  Third  Second  First  Fourth 
     2022  2021  Quarter  Quarter  Quarter  Quarter  Quarter 
    Ending tangible assets:                    
    Total assets      $5,797,272  $5,624,482  $5,568,198  $5,630,498  $5,520,779 
    Less: Goodwill and other intangible
    assets, net    		       73,414   73,653   73,897   74,146   74,400 
    Tangible assets      $5,723,858  $5,550,829  $5,494,301  $5,556,352  $5,446,379 
                         
    Ending tangible common equity:                    
    Common shareholders’ equity      $388,313  $376,756  $408,509  $429,554  $487,850 
    Less: Goodwill and other intangible
    assets, net    		       73,414   73,653   73,897   74,146   74,400 
    Tangible common equity      $314,899  $303,103  $334,612  $355,408  $413,450 
                         
    Tangible common equity to tangible
    assets (1)    		       5.50%  5.46%  6.09%  6.40%  7.59%
                         
    Common shares outstanding       15,340   15,334   15,334   15,299   15,745 
    Tangible common book value per
    share (2)    		      $20.53  $19.77  $21.82  $23.23  $26.26 
                         
    Average tangible assets:                    
    Average assets$5,606,733  $5,335,808  $5,667,331  $5,599,964  $5,598,217  $5,560,316  $5,582,987 
    Less: Average goodwill and other
    intangible assets, net    		 73,913   74,411   73,547   73,791   74,037   74,287   74,544 
    Average tangible assets$5,532,820  $5,261,397  $5,593,784  $5,526,173  $5,524,180  $5,486,029  $5,508,443 
                         
    Average tangible common equity:                    
    Average common equity$424,421  $468,085  $384,905  $420,615  $418,632  $474,560  $483,112 
    Less: Average goodwill and other
    intangible assets, net    		 73,913   74,411   73,547   73,791   74,037   74,287   74,544 
    Average tangible common equity$350,508  $393,674  $311,358  $346,824  $344,595  $400,273  $408,568 
                         
    Net income available to
    common shareholders    		$55,114  $76,237  $11,724  $13,489  $15,283  $14,618  $19,247 
    Return on average tangible common
    equity (3)    		 15.72%  19.37%  14.94%  15.43%  17.79%  14.81%  18.69%
                         
    Pre-tax pre-provision income:                    
    Net income$56,573  $77,697  $12,088  $13,854  $15,648  $14,983  $19,612 
    Add: Income tax expense 14,397   19,525   2,370   4,725   3,859   3,443   4,225 
    Add: Provision (benefit) for credit losses 13,311   (8,336)  6,115   4,314   563   2,319   (1,192)
    Pre-tax pre-provision income$84,281  $88,886  $20,573  $22,893  $20,070  $20,745  $22,645 
    Adjustments:                    
    Restructuring charges 1,619   111   350   -   1,269   -   111 
    Enhancement from COLI surrender and redeployment (1,997)  -   -   (1,997)  -   -   - 
    Adjusted pre-tax pre-provision income$83,903  $88,997  $20,923  $20,896  $21,339  $20,745  $22,756 
    Less: PPP accretion interest income and fees (2,271)  (9,863)  (78)  (312)  (809)  (1,072)  (2,776)
    Pre-PPP adjusted pre-tax pre-provision income$81,632  $79,134  $20,845  $20,584  $20,530  $19,673  $19,980 
                         
    Total loans excluding PPP loans:                    
    Total loans      $4,050,449  $3,866,851  $3,764,018  $3,733,648  $3,679,436 
    Less: Total PPP loans       1,161   2,783   8,910   31,399   55,344 
    Total loans excluding PPP loans      $4,049,288  $3,864,068  $3,755,108  $3,702,249  $3,624,092 
                         
    Allowance for credit losses - loans      $45,413  $44,106  $42,452  $40,966  $39,676 
    Allowance for credit losses - loans to
    total loans excluding PPP loans (4)    		       1.12%  1.14%  1.13%  1.11%  1.09%

    (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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