Financial Institutions, Inc. Announces Fourth Quarter and Full Year 2019 Results

WARSAW, N.Y., Jan. 30, 2020 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (Nasdaq:FISI) (the “Company”), 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, 2019.

Results for the Quarter

• Net income was $13.1 million compared to $7.5 million in 2018. After preferred dividends, net income available to common shareholders was $12.7 million, or $0.79 per diluted share, compared to $7.1 million, or $0.45 per diluted share, in 2018.
• Results for the fourth quarter of 2019 were positively impacted by a reduction in income tax expense of approximately $2.7 million for federal and state tax benefits related to tax credit investments placed in service during the quarter. These tax credit investments also generated a net loss of $528 thousand, recorded in noninterest income, reducing the net positive impact in the quarter to $2.2 million. Results for the fourth quarter of 2018 were negatively impacted by a $2.4 million non-cash goodwill impairment charge related to the Company’s insurance subsidiary and $667 thousand of non-recurring expense incurred in connection with employee retirements and severance.
• Pre-tax pre-provision income⁽¹⁾ was $16.1 million compared to $13.6 million in 2018. 

Results for the Year

• Net income was $48.9 million compared to $39.5 million in 2018. After preferred dividends, net income available to common shareholders was $47.4 million, or $2.96 per diluted share, compared to $38.1 million, or $2.39 per diluted share, in 2018.
• Results for 2019 were positively impacted by $2.2 million due to the tax credit investments described above and negatively impacted by approximately $600 thousand of income tax expense recognized in the third quarter related to an adjustment to a provisional amount recorded in 2017. Results for 2018 were negatively impacted by the $2.4 million non-cash goodwill impairment charge described above and approximately $1.7 million of expenses related to employee retirements and severance, higher contingent incentive compensation related to our wealth management subsidiary and the payment of one-time awards to employees not covered by certain incentive programs.
• Pre-tax pre-provision income was $67.5 million compared to $58.5 million in 2018.

Fourth Quarter Highlights (as compared to fourth quarter 2018 unless otherwise noted):

• Diluted earnings per share of $0.79 was $0.34, or 75.6%, higher than 2018
• Pre-tax pre-provision income increased $2.5 million to $16.1 million  
• Net interest margin (“NIM”) expanded to 3.33% from 3.21% 
• Return on average assets (“ROA”) increased to 1.21% from 0.70%
• Common equity to assets ratio at quarter-end was 9.62% ‒ an increase of four basis points during the quarter and an increase of 83 basis points from December 31, 2018
• Tangible common equity to tangible assets⁽¹⁾, or TCE ratio, was 8.05% at quarter-end ‒ an increase of six basis points during the quarter and an increase of 90 basis points from December 31, 2018
• Strategy to downscale the consumer indirect portfolio continued
  – Portfolio decreased 7.6% from December 31, 2018
  – Portfolio comprised 26.4% of total loan portfolio at December 31, 2019, compared to 29.8% at December 31, 2018

President and Chief Executive Officer Martin K. Birmingham stated, “We are pleased to report strong results in the fourth quarter, capping a solid year of performance for the Company. 2019 was a year of accomplishment with record-breaking net income and strengthening capital ratios. Our efforts to reposition the balance sheet through the rotation of securities into loans and reducing the size of our consumer indirect portfolio were successful and contributed to improved profitability. We also continued to invest in our customers, communities and associates. Community engagement was highlighted by volunteer activities, financial investments and product offerings, including the expansion of our program to provide debt and equity financing for affordable and special needs housing in our markets.   

“We also took steps to position our organization for the future and look forward to the 2020 launch of two new major initiatives. The first relates to the execution of our enterprise standardization program. We have been working with proven advisers who specialize in implementing standardization-based improvements and have identified opportunities to improve Company operations, deliver enhanced customer experience, and improve operational efficiency while enhancing customer and employee experiences. 

“The second is Five Star Bank Digital Banking. We are proud of our commitment to provide education, advice and solutions to improve our customers' financial well-being, and we believe this new platform will allow us to significantly improve the user experience across all devices and offer many new features. This is an important step in the development of our omni channel distribution platform, enhancing capabilities across retail and commercial loan, deposit and cash management services.”

Chief Financial Officer Justin K. Bigham added, “We generated positive operating leverage in the quarter and for the year. NIM was 3.33% for the quarter, an increase of four basis points from the linked quarter. This expansion was primarily the result of the Company’s balance sheet repositioning, as loans became a higher percentage of earning assets, combined with the impact of commercial prepayments received during the quarter. The TCE ratio also increased by six basis points in the quarter, from 7.99% to 8.05%.”

Net Interest Income and Net Interest Margin

Net interest income was $33.2 million for the quarter, $690 thousand higher than the third quarter of 2019 and $1.1 million higher than the fourth quarter of 2018.

• Average interest-earning assets for the quarter were $3.99 billion, $34.8 million higher than the third quarter of 2019, primarily due to organic loan growth. Average interest-earning assets are relatively unchanged from the fourth quarter of 2018 because commercial business, commercial mortgage and residential real estate loan growth was offset by lower investment securities and consumer indirect loan portfolios as a result of the Company’s balance sheet repositioning strategy.
• Fourth quarter 2019 NIM was 3.33%, four basis points higher than the third quarter of 2019 and twelve basis points higher than the fourth quarter of 2018. NIM was positively impacted by the repositioning of the Company’s balance sheet. We benefitted from a change in interest-earning asset mix as loans became a larger percentage of the overall earning asset portfolio.

Net interest income was $129.9 million for the year, $7.0 million higher than 2018. The increase was the result of an $81.9 million, or 2.1%, increase in average interest-earnings assets for the year combined with a ten basis point increase in NIM, to 3.28% from 3.18%.

Noninterest Income

Noninterest income was $9.7 million for the quarter compared to $12.4 million in the third quarter of 2019 and $9.3 million in the fourth quarter of 2018.

• Insurance income was $558 thousand lower than the third quarter of 2019 and $131 thousand lower than the fourth quarter of 2018 primarily due to the loss of commercial accounts. 
• Income from derivative instruments, net was $1.3 million in the fourth quarter of 2019 compared to $890 thousand in the third quarter of 2019 and $289 thousand in the fourth quarter of 2018. Higher fourth quarter 2019 income was driven by an increase in the number and value of interest rate swap transactions executed.
• A net loss on investment securities of $44 thousand was recognized in the quarter compared to a net gain of $1.6 million in the third quarter of 2019 and a net loss of $39 thousand in the fourth quarter of 2018. The Company took advantage of a market opportunity in the third quarter and sold $65 million of investment securities. Proceeds of $65 million were reinvested in investment securities with intermediate durations.
• A net loss on tax credit investments of $528 thousand was recognized in the quarter related to the tax credit investments described above. This loss includes the amortization of the tax credit investments, partially offset by New York investment tax credits that are refundable and recorded in noninterest income.

Noninterest income was $40.4 million for the year, $3.9 million higher than 2018.

• ATM and debit card charges of $6.8 million were $627 thousand higher than 2018, primarily due to an increase in consumer debit card activity.
• Investment advisory fees were $1.1 million higher than 2018. The increase was the result of the combination of strong equity market returns domestically and internationally, the full year impact of the June 1, 2018 acquisition of HNP Capital and new business development.
  
• Income from investments in limited partnerships of $352 thousand was $851 thousand lower than 2018. The Company has made several investments in limited partnerships, primarily small business investment companies, and accounts for these investments under the equity method. Income from these investments fluctuates based on the maturity and performance of the underlying investments.
• Income from derivative instruments, net was $1.3 million higher in 2019 due to an increase in interest rate swap transactions.
• Net gain on investment securities was $1.7 million in 2019 compared to a net loss of $127 thousand in 2018 as a result of the sale of securities previously described.

Noninterest Expense

Noninterest expense was $26.8 million in the quarter compared to $25.9 million in the third quarter of 2019 and $27.8 million in the fourth quarter of 2018.

• Professional services expense of $1.8 million was $278 thousand higher than the third quarter of 2019 and $1.0 million higher than the fourth quarter of 2018. The increase was primarily related to the timing of fees for consulting and advisory projects. Expenses related to the Company’s future improvements initiative totaled $510 thousand in the fourth quarter of 2019 and $298 thousand in the third quarter of 2019, with no expenses incurred in the fourth quarter of 2018.
• FDIC assessments were zero in the quarter compared to $7 thousand in the third quarter of 2019 and $489 thousand in the fourth quarter of 2018. In 2018, the FDIC minimum reserve ratio of 1.35% of estimated insured deposits was exceeded, resulting in credits to institutions for assessments that contributed to growth in the reserve ratio. Credits are applicable to regular assessments for quarters in which the reserve ratio is at least 1.38%. The Bank received credits against its regular assessment of $439 thousand and $482 thousand in the fourth and third quarters of 2019, respectively. A credit of $70 thousand is available for future periods.
• Advertising and promotions expense of $1.2 million was $481 thousand higher than the third quarter of 2019 and $291 thousand higher than the fourth quarter of 2018 as a result of the timing of expenses related to the Five Star Bank branding campaign.
• A $2.4 million non-cash goodwill impairment charge related to the acquisition of SDN was recognized in the fourth quarter of 2018. No impairment charges were recognized in 2019.

Noninterest expense was $102.8 million for the year, $2.0 million higher than 2018.

• Salaries and employee benefits expense totaled $56.3 million in 2019, $1.7 million higher than 2018. The increase was primarily attributable to higher salaries, incentives and pension expense, partially offset by a decrease in severance payments.  
• Professional services expense of $5.4 million was $1.5 million higher than the previous year, primarily as a result of fees for consulting and advisory projects previously described. Expenses related to the future improvements initiative totaled $1.0 million in 2019.
• FDIC assessments for the year were $970 thousand lower than 2018 due to the credits previously described.

Income Taxes

Income tax expense was $312 thousand for the quarter compared to $4.3 million for the third quarter of 2019 and $2.2 million for the fourth quarter of 2018. The following factors impacted expense:

• During the fourth quarter of 2019, the Company recognized federal and state tax benefits related to tax credit investments placed in service during the quarter, resulting in an income tax expense reduction of approximately $2.7 million. 
• During the third quarter of 2019, the Company made an adjustment to the provisional amount included in its consolidated financial statements for the year ended December 31, 2017, resulting in expense of approximately $600 thousand.

The effective tax rate was 2.3% for the fourth quarter compared to 25.0% for the third quarter of 2019 and 22.7% for the fourth quarter of 2018. In addition to the factors described above, the Company’s effective tax rates differ from statutory rates primarily because of interest income from tax-exempt securities and earnings on company owned life insurance. 

Income tax expense was $10.6 million for the year, $553 thousand higher than 2018. The effective tax rate for 2019 was 17.8% compared to 20.2% for 2018.

Balance Sheet and Capital Management

Total assets were $4.38 billion at December 31, 2019, up $51.4 million from September 30, 2019, and up $72.5 million from December 31, 2018.

Investment securities were $776.9 million at December 31, 2019, relatively unchanged from September 30, 2019, and down $115.3 million from December 31, 2018. The decrease from year-end 2018 was primarily the result of the redeployment of assets from investment securities into loans to improve the earning asset mix.

Total loans were $3.22 billion at December 31, 2019, up $64.6 million, or 2.0%, from September 30, 2019, and up $134.4 million, or 4.4%, from December 31, 2018.

• Commercial business loans totaled $572.0 million, down $2.4 million, or 0.4%, from September 30, 2019, and up $14.2 million, or 2.5%, from December 31, 2018.
• Commercial mortgage loans totaled $1.11 billion, up $70.8 million, or 6.8%, from September 30, 2019, and up $148.1 million, or 15.5%, from December 31, 2018.
• Residential real estate loans totaled $572.4 million, up $13.7 million, or 2.5%, from September 30, 2019, and up $48.2 million, or 9.2%, from December 31, 2018.
• Consumer indirect loans totaled $850.1 million, down $13.6 million, or 1.6%, from September 30, 2019, and down $69.9 million, or 7.6%, from December 31, 2018.

Total deposits were $3.56 billion at December 31, 2019, $30.5 million lower than September 30, 2019, and $188.8 million higher than December 31, 2018. The decrease from September 30, 2019, was primarily due to public deposit seasonality, partially offset by growth in the brokered deposit portfolio. Deposit growth from December 31, 2018, was driven by growth in the non-public (excluding certificates of deposits), public, brokered and reciprocal deposit portfolios. Public deposit balances represented 24% of total deposits at December 31, 2019, compared to 28% of total deposits at September 30, 2019, and 25% at December 31, 2018.

Short-term borrowings were $275.5 million at December 31, 2019, an increase of $64.1 million from September 30, 2019, and a decrease of $194.0 million from December 31, 2018. Short-term borrowings are typically utilized to manage the seasonality of public deposits.

Shareholders’ equity was $438.9 million at December 31, 2019, compared to $432.6 million at September 30, 2019, and $396.3 million at December 31, 2018. Common book value per share was $26.35 at December 31, 2019, an increase of $0.39 or 1.5% from $25.96 at September 30, 2019, and an increase of $2.56 or 10.8% from $23.79 at December 31, 2018. Tangible common book value per share⁽¹⁾ was $21.66 at December 31, 2019, an increase of $0.40 or 1.9% from $21.26 at September 30, 2019, and an increase of $2.65 or 13.9% from $19.01 at December 31, 2018.

During the fourth quarter of 2019, the Company declared a common stock dividend of $0.25 per common share. The dividend returned 31% of fourth quarter net income to common shareholders.

The Company’s regulatory capital ratios at December 31, 2019, compared to the prior quarter and prior year:

• Leverage Ratio was 9.00%, compared to 8.86% and 8.16% at September 30, 2019, and December 31, 2018, respectively.
• Common Equity Tier 1 Capital Ratio was 10.31%, compared to 10.06% and 9.70% at September 30, 2019, and December 31, 2018, respectively.
• Tier 1 Capital Ratio was 10.80%, compared to 10.55% and 10.21% at September 30, 2019, and December 31, 2018, respectively.
• Total Risk-Based Capital Ratio was 12.77%, compared to 12.57% and 12.38% at September 30, 2019, and December 31, 2018, respectively.

Credit Quality

Non-performing loans were $8.6 million at December 31, 2019, compared to $9.8 million at September 30, 2019, and $7.1 million at December 31, 2018.

The quarterly provision for loan losses was $2.7 million compared to $1.8 million in the third quarter of 2019 and $3.9 million in the fourth quarter of 2018. Quarterly provision for loan losses varies based primarily on loan growth, charge-offs, collateral values and qualitative factors.

Net charge-offs were $3.8 million in the quarter, $771 thousand lower than the third quarter of 2019 and $86 thousand lower than the fourth quarter of 2018. The ratio of annualized net charge-offs to total average loans was 0.48% in the quarter, 0.58% in the third quarter of 2019 and 0.51% in the fourth quarter of 2018.

The Company has remained strategically focused on the importance of credit discipline, allocating what we believe are the necessary resources to credit and risk management functions as the loan portfolio has grown. The total non-performing loans to total loans ratio was 0.27% at December 31, 2019, compared to 0.31% at September 30, 2019 and 0.23% at December 31, 2018. The ratio of allowance for loan losses to non-performing loans was 353% at December 31, 2019, compared to 324% at September 30, 2019, and 475% at December 31, 2018.

Conference Call

The Company will host an earnings conference call and audio webcast on January 31, 2020, at 8:30 a.m. Eastern Time. The call will be hosted by Martin K. Birmingham, President and Chief Executive Officer, and Justin K. Bigham, Chief Financial Officer. The live webcast will be available in listen-only mode on the Company’s website at www.fiiwarsaw.com. Within the United States, listeners may also access the call by dialing 1-888-346-9290 and requesting the Financial Institutions, Inc. call. The webcast replay will be available on the Company’s website for at least 30 days.

About Financial Institutions, Inc.

Financial Institutions, Inc. provides diversified financial services through its subsidiaries Five Star Bank, SDN, Courier Capital and HNP Capital. Five Star Bank provides a wide range of consumer and commercial banking and lending services to individuals, municipalities and businesses through a network of more than 50 offices throughout Western and Central New York State. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. Financial Institutions, Inc. and its subsidiaries employ approximately 700 individuals. The Company’s stock is listed on the Nasdaq Global Select Market under the symbol FISI. Additional information is available at www.fiiwarsaw.com.

Non-GAAP Financial Information

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

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

Safe Harbor Statement

This press release may contain forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “estimate,” “forecast,” “target,” “preliminary,” or “range.” Statements herein are based on certain assumptions and analyses by the Company and factors it believes are appropriate in the circumstances. Actual results could differ materially from those contained in or implied by such statements for a variety of reasons including, but not limited to: the Company’s ability to implement its strategic plan, whether the Company experiences greater credit losses than expected, whether the Company experiences breaches of its, or third party, information systems, the attitudes and preferences of the Company’s customers, the Company’s ability to successfully integrate and profitably operate SDN, Courier Capital, HNP Capital and other acquisitions, the competitive environment, fluctuations in the fair value of securities in its investment portfolio, changes in the regulatory environment and the Company’s compliance with regulatory requirements, changes in interest rates, and general economic and credit market conditions nationally and regionally. Consequently, all forward-looking statements made herein are qualified by these cautionary statements and the cautionary language in the Company’s Annual Report on Form 10-K, its Quarterly Reports 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
[e-mail]

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

		2019																2018
		December 31,				September 30,				June 30,				March 31,				December 31,
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents		$	112,947			$	136,815			$	108,988			$	79,786			$	102,755
Investment securities:
Available for sale			417,917				395,441				406,509				427,545				445,677
Held-to-maturity			359,000				386,305				398,610				438,984				446,581
Total investment securities			776,917				781,746				805,119				866,529				892,258
Loans held for sale			4,224				6,398				2,045				2,069				2,868
Loans:
Commercial business			572,040				574,455				594,923				553,745				557,861
Commercial mortgage			1,106,283				1,035,450				1,010,071				993,259				958,194
Residential real estate loans			572,350				558,656				546,031				534,691				524,155
Residential real estate lines			104,118				107,615				108,006				108,623				109,718
Consumer indirect			850,052				863,614				876,116				902,762				919,917
Other consumer			16,144				16,630				16,537				16,099				16,753
Total loans			3,220,987				3,156,420				3,151,684				3,109,179				3,086,598
Allowance for loan losses			30,482				31,668				34,434				33,327				33,914
Total loans, net			3,190,505				3,124,752				3,117,250				3,075,852				3,052,684
Total interest-earning assets			4,058,107				3,979,493				4,007,797				4,009,496				4,031,151
Goodwill and other intangible assets, net			74,923				75,225				75,534				75,850				76,173
Total assets			4,384,178				4,332,737				4,313,945				4,302,541				4,311,698
Deposits:
Noninterest-bearing demand			707,752				755,296				719,150				732,631				755,460
Interest-bearing demand			627,842				707,153				677,846				707,430				622,482
Savings and money market			1,039,892				1,011,873				966,509				1,016,666				968,897
Time deposits			1,180,189				1,111,892				1,108,484				1,052,110				1,020,068
Total deposits			3,555,675				3,586,214				3,471,989				3,508,837				3,366,907
Short-term borrowings			275,500				211,400				308,500				287,300				469,500
Long-term borrowings, net			39,273				39,255				39,237				39,220				39,202
Total interest-bearing liabilities			3,162,696				3,081,573				3,100,576				3,102,726				3,120,149
Shareholders’ equity			438,947				432,617				422,354				408,253				396,293
Common shareholders’ equity			421,619				415,289				405,026				390,925				378,965
Tangible common equity (1)			346,696				340,064				329,492				315,075				302,792
Accumulated other comprehensive loss		$	(14,513	)		$	(11,734	)		$	(13,160	)		$	(18,554	)		$	(21,281	)
Common shares outstanding			16,003				15,997				15,995				15,941				15,929
Treasury shares			97				103				105				115				127
CAPITAL RATIOS AND PER SHARE DATA:
Leverage ratio			9.00	%			8.86	%			8.55	%			8.36	%			8.16	%
Common equity Tier 1 capital ratio			10.31	%			10.06	%			9.95	%			9.87	%			9.70	%
Tier 1 capital ratio			10.80	%			10.55	%			10.45	%			10.37	%			10.21	%
Total risk-based capital ratio			12.77	%			12.57	%			12.57	%			12.50	%			12.38	%
Common equity to assets			9.62	%			9.58	%			9.39	%			9.09	%			8.79	%
Tangible common equity to tangible assets (1)			8.05	%			7.99	%			7.77	%			7.45	%			7.15	%
Common book value per share		$	26.35			$	25.96			$	25.32			$	24.52			$	23.79
Tangible common book value per share (1)		$	21.66			$	21.26			$	20.60			$	19.77			$	19.01

                

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

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

		Year Ended								2019																2018
		December 31,								Fourth				Third				Second				First				Fourth
		2019				2018				Quarter				Quarter				Quarter				Quarter				Quarter
SELECTED INCOME STATEMENT
DATA:
Interest income		$	168,800			$	152,732			$	42,179			$	42,459			$	42,648			$	41,514			$	41,125
Interest expense			38,888				29,868				9,006				9,976				10,184				9,722				9,096
Net interest income			129,912				122,864				33,173				32,483				32,464				31,792				32,029
Provision for loan losses			8,044				8,934				2,653				1,844				2,354				1,193				3,884
Net interest income after provision   for loan losses			121,868				113,930				30,520				30,639				30,110				30,599				28,145
Noninterest income:
Service charges on deposits			7,241				7,120				1,880				1,925				1,756				1,680				1,866
Insurance income			4,570				4,930				881				1,439				872				1,378				1,012
ATM and debit card			6,779				6,152				1,796				1,801				1,739				1,443				1,643
Investment advisory			9,187				8,123				2,375				2,269				2,327				2,216				2,189
Company owned life insurance			1,758				1,793				465				459				424				410				460
Investments in limited partnerships			352				1,203				(140	)			116				144				232				184
Loan servicing			432				441				116				102				104				110				122
Income (loss) from derivative
instruments, net			2,274				972				1,261				890				(45	)			168				289
Net gain on sale of loans held for sale			1,352				796				324				439				407				182				266
Net (loss) gain on investment securities			1,677				(127	)			(44	)			1,608				166				(53	)			(39	)
Net gain (loss) on other assets			29				50				(27	)			(2	)			9				49				1
Net loss on tax credit investments			(528	)			-				(528	)			-				-				-				-
Other			5,258				5,025				1,308				1,315				1,330				1,305				1,355
Total noninterest income			40,381				36,478				9,667				12,361				9,233				9,120				9,348
Noninterest expense:
Salaries and employee benefits			56,330				54,643				14,669				14,411				13,249				14,001				14,373
Occupancy and equipment			18,266				17,338				4,704				4,650				4,326				4,586				4,427
Professional services			5,424				3,912				1,806				1,528				932				1,158				780
Computer and data processing			5,269				5,122				1,318				1,378				1,350				1,223				1,238
Supplies and postage			2,036				2,032				482				522				498				534				487
FDIC assessments			1,005				1,975				-				7				486				512				489
Advertising and promotions			3,577				3,582				1,226				745				1,086				520				935
Amortization of intangibles			1,250				1,257				302				309				316				323				330
Goodwill impairment			-				2,350				-				-				-				-				2,350
Other			9,671				8,665				2,261				2,336				2,760				2,314				2,394
Total noninterest expense			102,828				100,876				26,768				25,886				25,003				25,171				27,803
Income before income taxes			59,421				49,532				13,419				17,114				14,340				14,548				9,690
Income tax expense			10,559				10,006				312				4,281				2,939				3,027				2,199
Net income			48,862				39,526				13,107				12,833				11,401				11,521				7,491
Preferred stock dividends			1,461				1,461				365				365				366				365				365
Net income available to common
shareholders		$	47,401			$	38,065			$	12,742			$	12,468			$	11,035			$	11,156			$	7,126
FINANCIAL RATIOS:
Earnings per share – basic		$	2.97			$	2.39			$	0.80			$	0.78			$	0.69			$	0.70			$	0.45
Earnings per share – diluted		$	2.96			$	2.39			$	0.79			$	0.78			$	0.69			$	0.70			$	0.45
Cash dividends declared on common stock		$	1.00			$	0.96			$	0.25			$	0.25			$	0.25			$	0.25			$	0.24
Common dividend payout ratio			33.67	%			40.17	%			31.25	%			32.05	%			36.23	%			35.71	%			53.33	%
Dividend yield (annualized)			3.12	%			3.74	%			3.09	%			3.29	%			3.44	%			3.73	%			3.70	%
Return on average assets			1.14	%			0.95	%			1.21	%			1.19	%			1.06	%			1.09	%			0.70	%
Return on average equity			11.61	%			10.18	%			11.88	%			11.86	%			11.01	%			11.65	%			7.50	%
Return on average common equity			11.74	%			10.26	%			12.02	%			12.00	%			11.12	%			11.79	%			7.46	%
Return on average tangible common
equity (1)			14.45	%			12.95	%			14.64	%			14.69	%			13.73	%			14.71	%			9.40	%
Efficiency ratio (2)			60.59	%			62.73	%			62.05	%			59.52	%			59.79	%			60.99	%			66.64	%
Effective tax rate			17.8	%			20.2	%			2.3	%			25.0	%			20.5	%			20.8	%			22.7	%

                

⁽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)

		Year Ended								2019																2018
		December 31,								Fourth				Third				Second				First				Fourth
		2019				2018				Quarter				Quarter				Quarter				Quarter				Quarter
SELECTED AVERAGE BALANCES:
Federal funds sold and interest-   earning deposits		$	22,023			$	24,906			$	32,494			$	19,370			$	18,145			$	17,955			$	25,411
Investment securities (1)			822,744				984,553				774,520				785,595				845,624				886,878				937,907
Loans:
Commercial business			569,941				498,552				567,998				586,293				577,884				547,182				539,622
Commercial mortgage			1,021,220				876,484				1,073,527				1,021,931				1,010,544				977,818				944,476
Residential real estate loans			547,505				492,165				566,256				553,382				540,390				529,522				515,539
Residential real estate lines			107,654				112,872				106,011				107,290				107,826				109,529				110,236
Consumer indirect			882,056				901,066				856,823				868,927				891,967				911,252				914,636
Other consumer			16,047				16,682				16,100				16,141				15,721				16,226				16,671
Total loans			3,144,423				2,897,821				3,186,715				3,153,964				3,144,332				3,091,529				3,041,180
Total interest-earning assets			3,989,190				3,907,280				3,993,729				3,958,929				4,008,101				3,996,362				4,004,498
Goodwill and other intangible   assets, net			75,557				76,990				75,093				75,401				75,711				76,033				78,314
Total assets			4,285,825				4,171,972				4,299,342				4,260,810				4,300,254				4,282,991				4,268,809
Interest-bearing liabilities:
Interest-bearing demand			655,534				665,255				660,738				632,540				660,747				668,448				669,491
Savings and money market			983,447				1,008,665				1,014,434				956,410				996,878				965,829				1,011,427
Time deposits			1,098,440				936,157				1,120,823				1,099,212				1,096,544				1,076,687				1,032,632
Short-term borrowings			309,893				394,679				241,557				328,952				323,461				346,546				355,439
Long-term borrowings, net			39,235				39,165				39,262				39,244				39,227				39,209				39,191
Total interest-bearing liabilities			3,086,549				3,043,921				3,076,814				3,056,358				3,116,857				3,096,719				3,108,180
Noninterest-bearing demand deposits			721,133				713,152				725,590				717,473				714,205				727,321				733,717
Total deposits			3,458,554				3,323,229				3,521,585				3,405,635				3,468,374				3,438,285				3,447,267
Total liabilities			3,864,808				3,783,621				3,861,542				3,831,409				3,884,843				3,882,033				3,872,545
Shareholders’ equity			421,017				388,351				437,800				429,401				415,411				400,958				396,264
Common equity			403,689				371,023				420,472				412,073				398,083				383,630				378,936
Tangible common equity (2)		$	328,132			$	294,033			$	345,379			$	336,672			$	322,372			$	307,597			$	300,622
Common shares outstanding:
Basic			15,972				15,910				15,995				15,991				15,970				15,930				15,922
Diluted			16,031				15,956				16,072				16,056				16,015				15,978				15,971
SELECTED AVERAGE YIELDS: (Tax equivalent basis)
Investment securities			2.39	%			2.33	%			2.40	%			2.40	%			2.38	%			2.37	%			2.33	%
Loans			4.77	%			4.51	%			4.70	%			4.77	%			4.82	%			4.77	%			4.68	%
Total interest-earning assets			4.26	%			3.94	%			4.22	%			4.29	%			4.29	%			4.23	%			4.11	%
Interest-bearing demand			0.21	%			0.16	%			0.21	%			0.22	%			0.21	%			0.20	%			0.20	%
Savings and money market			0.44	%			0.29	%			0.48	%			0.44	%			0.44	%			0.41	%			0.38	%
Time deposits			2.07	%			1.61	%			1.94	%			2.12	%			2.17	%			2.06	%			1.88	%
Short-term borrowings			2.56	%			2.11	%			2.21	%			2.51	%			2.71	%			2.70	%			2.56	%
Long-term borrowings, net			6.30	%			6.31	%			6.29	%			6.30	%			6.30	%			6.30	%			6.30	%
Total interest-bearing liabilities			1.26	%			0.98	%			1.16	%			1.30	%			1.31	%			1.27	%			1.16	%
Net interest rate spread			3.00	%			2.96	%			3.06	%			2.99	%			2.98	%			2.96	%			2.95	%
Net interest margin			3.28	%			3.18	%			3.33	%			3.29	%			3.28	%			3.24	%			3.21	%

                

⁽¹⁾ Includes investment securities at adjusted amortized cost.

⁽²⁾ See Appendix A – Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.

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

		Year Ended								2019																2018
		December 31,								Fourth				Third				Second				First				Fourth
		2019				2018				Quarter				Quarter				Quarter				Quarter				Quarter
ASSET QUALITY DATA:
Allowance for Loan Losses
Beginning balance		$	33,914			$	34,672			$	31,668			$	34,434			$	33,327			$	33,914			$	33,955
Net loan charge-offs (recoveries):
Commercial business			1,989				1,810				1,942				10				10				27				1,135
Commercial mortgage			2,980				1,007				-				2,994				3				(17	)			901
Residential real estate loans			297				(64	)			156				40				76				25				23
Residential real estate lines			7				122				3				7				(1	)			(2	)			15
Consumer indirect			5,420				5,826				1,523				1,317				1,022				1,558				1,599
Other consumer			783				991				215				242				137				189				252
Total net charge-offs			11,476				9,692				3,839				4,610				1,247				1,780				3,925
Provision for loan losses			8,044				8,934				2,653				1,844				2,354				1,193				3,884
Ending balance		$	30,482			$	33,914			$	30,482			$	31,668			$	34,434			$	33,327			$	33,914
Net charge-offs (recoveries)   to average loans (annualized):
Commercial business			0.35	%			0.36	%			1.36	%			0.01	%			0.01	%			0.02	%			0.83	%
Commercial mortgage			0.29	%			0.11	%			0.00	%			1.16	%			0.00	%			-0.01	%			0.38	%
Residential real estate loans			0.05	%			-0.01	%			0.11	%			0.03	%			0.06	%			0.02	%			0.02	%
Residential real estate lines			0.01	%			0.11	%			0.01	%			0.03	%			-0.01	%			-0.01	%			0.05	%
Consumer indirect			0.61	%			0.65	%			0.71	%			0.60	%			0.46	%			0.69	%			0.69	%
Other consumer			4.88	%			5.94	%			5.30	%			5.93	%			3.51	%			4.73	%			6.00	%
Total loans			0.37	%			0.33	%			0.48	%			0.58	%			0.16	%			0.23	%			0.51	%
Supplemental information (1)
Non-performing loans:
Commercial business		$	1,177			$	912			$	1,177			$	2,884			$	638			$	594			$	912
Commercial mortgage			3,146				1,586				3,146				2,867				6,836				909				1,586
Residential real estate loans			2,484				2,391				2,484				2,526				2,283				2,225				2,391
Residential real estate lines			102				255				102				182				282				252				255
Consumer indirect			1,725				1,989				1,725				1,326				1,399				1,822				1,989
Other consumer			6				8				6				3				25				2				8
Total non-performing loans			8,640				7,141				8,640				9,788				11,463				5,804				7,141
Foreclosed assets			468				230				468				91				37				41				230
Total non-performing assets		$	9,108			$	7,371			$	9,108			$	9,879			$	11,500			$	5,845			$	7,371
Total non-performing loans   to total loans			0.27	%			0.23	%			0.27	%			0.31	%			0.36	%			0.19	%			0.23	%
Total non-performing assets   to total assets			0.21	%			0.17	%			0.21	%			0.23	%			0.27	%			0.14	%			0.17	%
Allowance for loan losses   to total loans			0.95	%			1.10	%			0.95	%			1.00	%			1.09	%			1.07	%			1.10	%
Allowance for loan losses   to non-performing loans			353	%			475	%			353	%			324	%			300	%			574	%			475	%

                
⁽¹⁾ At period end.

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

		Year Ended								2019																2018
		December 31,								Fourth				Third				Second				First				Fourth
		2019				2018				Quarter				Quarter				Quarter				Quarter				Quarter
Ending tangible assets:
Total assets										$	4,384,178			$	4,332,737			$	4,313,945			$	4,302,541			$	4,311,698
Less: Goodwill and other intangible   assets, net											74,923				75,225				75,534				75,850				76,173
Tangible assets										$	4,309,255			$	4,257,512			$	4,238,411			$	4,226,691			$	4,235,525
Ending tangible common equity:
Common shareholders’ equity										$	421,619			$	415,289			$	405,026			$	390,925			$	378,965
Less: Goodwill and other intangible   assets, net											74,923				75,225				75,534				75,850				76,173
Tangible common equity										$	346,696			$	340,064			$	329,492			$	315,075			$	302,792
Tangible common equity to tangible   assets (1)											8.05	%			7.99	%			7.77	%			7.45	%			7.15	%
Common shares outstanding											16,003				15,997				15,995				15,941				15,929
Tangible common book value per    share (2)										$	21.66			$	21.26			$	20.60			$	19.77			$	19.01
Average tangible assets:
Average assets		$	4,285,825			$	4,171,972			$	4,299,342			$	4,260,810			$	4,300,254			$	4,282,991			$	4,268,809
Less: Average goodwill and other   intangible assets, net			75,557				76,990				75,093				75,401				75,711				76,033				78,314
Average tangible assets		$	4,210,268			$	4,094,982			$	4,224,249			$	4,185,409			$	4,224,543			$	4,206,958			$	4,190,495
Average tangible common equity:
Average common equity		$	403,689			$	371,023			$	420,472			$	412,073			$	398,083			$	383,630			$	378,936
Less: Average goodwill and other   intangible assets, net			75,557				76,990				75,093				75,401				75,711				76,033				78,314
Average tangible common equity		$	328,132			$	294,033			$	345,379			$	336,672			$	322,372			$	307,597			$	300,622
Net income available to   common shareholders		$	47,401			$	38,065			$	12,742			$	12,468			$	11,035			$	11,156			$	7,126
Return on average tangible common   equity (3)			14.45	%			12.95	%			14.64	%			14.69	%			13.73	%			14.71	%			9.40	%
Pre-tax pre-provision income:
Net income		$	48,862			$	39,526			$	13,107			$	12,833			$	11,401			$	11,521			$	7,491
Add: Income tax expense			10,559				10,006				312				4,281				2,939				3,027				2,199
Add: Provision for loan losses			8,044				8,934				2,653				1,844				2,354				1,193				3,884
Pre-tax pre-provision income		$	67,465			$	58,466			$	16,072			$	18,958			$	16,694			$	15,741			$	13,574

                
⁽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.