Financial Institutions, Inc. Announces Third Quarter Results

Rhea-AI Summary

Financial Institutions reported its third-quarter results for 2020, with a net income of $12.3 million, a slight decline from $12.8 million in Q3 2019. Earnings per diluted share decreased from $0.78 to $0.74. However, pre-tax pre-provision income reached a record high of $19.2 million. The company experienced growth in its commercial mortgage portfolio (5.4%) and residential real estate loans (2.0%). Total assets rose to $4.96 billion, alongside a significant increase in deposits. The company also issued $35 million in subordinated notes to strengthen capital ratios amidst ongoing economic challenges.

Positive

• Record pre-tax pre-provision income of $19.2 million.
• Net interest income increased by $3 million year-over-year.
• 5.4% growth in commercial mortgage portfolio.
• Total assets increased to $4.96 billion, up $626.5 million from last year.
• Issued $35 million in subordinated notes to enhance capital ratios.

Negative

• Net income decreased from $12.8 million in Q3 2019 to $12.3 million in Q3 2020.
• Earnings per diluted share dropped from $0.78 to $0.74.
• Non-recurring expenses of approximately $1.6 million related to branch closures and staffing reductions.

WARSAW, N.Y., Oct. 29, 2020 (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 third quarter ended September 30, 2020.

Net income for the quarter was $12.3 million compared to $12.8 million for the third quarter of 2019. After preferred dividends, net income available to common shareholders was $11.9 million for the quarter, or $0.74 per diluted share, compared to $12.5 million, or $0.78 per diluted share, for the third quarter of 2019.

Pre-tax pre-provision income⁽¹⁾ was the highest in Company history at $19.2 million for the quarter, an increase of $283 thousand from the third quarter of 2019.

Third quarter 2020 net income and pre-tax pre-provision income reflect approximately $1.6 million of non-recurring expenses related to the previously announced closure of six bank branches and a staffing reduction.

President and Chief Executive Officer Martin K. Birmingham stated, “The past seven months have tested us, and I am proud to say that my teammates have responded extraordinarily well in continuing to deliver positive results for our customers, communities and shareholders. We generated record pre-tax pre-provision income in the quarter, driven by growth in net interest income, our diversified revenue streams and disciplined expense management.

“We continue to prudently lend and experienced 5.4% growth in our commercial mortgage portfolio, 2.0% growth in residential real estate loans and 1.5% growth in consumer indirect loans. Relationship managers are working closely with customers to assist with their needs and to ensure that we understand trends in our markets across all operating sectors. We continue to benefit from a stable Western New York economy and experienced low net charge-offs in the second and third quarters of 2020. Consistent with our cautiously optimistic outlook, we did increase the allowance for credit losses - loans to total loans ratio by five basis points.

“Re-entry plans are being implemented and we continue to monitor external COVID-19 indicators in our footprint to help guide decisions on future re-entry or closure to keep customers and associates safe. Additional associates are now working in our corporate offices; however, we expect to maintain occupancy levels in these locations at approximately 50% for the foreseeable future.

“I want to thank our associates for their tireless work to help our customers and communities impacted by COVID-19. Despite significant uncertainty and challenges, they continue to adapt and find innovative ways to work more efficiently and effectively. I am incredibly proud of our organization.”

Chief Financial Officer Justin K. Bigham added, “Net interest margin remained relatively constant at 3.22%, down one basis point from the linked quarter, despite a heightened Federal Reserve interest-earning cash balance and the full quarter impact of low-yielding Payroll Protection Program loans.

“We continue to focus on expense discipline. Third quarter expenses include non-recurring severance and real estate related restructuring charges of approximately $1.6 million in connection with the July announcement of branch closures and staffing reductions. Excluding these non-recurring expenses, the efficiency ratio for the quarter was just under 57%.

“Subsequent to quarter-end, we took advantage of the low interest rate environment and issued $35 million of 10-year fixed-to-floating rate subordinated notes. While we were confident that we had appropriate capital levels to effectively run our business, we determined that it would be prudent to access the debt markets at favorable rates to add capital for use in serving our customers, taking advantage of growth opportunities, and strengthening the Bank’s capital ratios. We also deemed it wise to add capital given uncertainty around long-term impacts of the global pandemic.”

Enterprise Standardization Program

The Company’s enterprise standardization program is focused on improving operational efficiency and enhancing future profitability. On July 17, 2020, in connection with the program, Five Star Bank announced changes to adapt to a full-service branch model to streamline retail branches to better align with shifting customer needs and preferences.

The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conducted in partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping service areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and facilitate the long-term sustainability of current and future branches.

The July announcement included the consolidation of eleven branches into five, resulting in six branch closings and a reduction in staffing. The consolidations represent about ten percent of the branch network and impacted approximately six percent of the Company’s total workforce. These actions resulted in one-time expenses related to severance and real estate related charges of approximately $1.6 million in the third quarter of 2020. Expense savings of $2.6 million are anticipated on an annualized basis.

In early October, the Company announced the planned closure of one additional branch in January 2021. This location was not included in the branch consolidations announced in July, as alternative options were being considered and consolidation was not possible given its significant distance from other Five Star Bank branches. This closure is expected to result in one-time expenses related to severance costs and real estate related charges of approximately $130 thousand in the fourth quarter of 2020. Expected expense savings are anticipated at $340 thousand on an annualized basis.

The enterprise standardization program is not yet complete as we continue to evaluate activities and functions across the organization, focusing on ways to improve operational efficiency while enhancing the employee and customer experience.

Subordinated Note Issuance

On October 7, 2020, the Company completed a private placement of $35 million of fixed-to-floating rate subordinated notes due 2030 (the “Notes”) to qualified institutional buyers and accredited institutional investors. The Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then-current three-month secured overnight financing rate (“SOFR”) plus 426.5 basis points, payable quarterly until maturity.

The Company is entitled to redeem the Notes, in whole or in part, on any interest payment date on or after October 15, 2025, and in whole at any time upon certain other specified events. The Company intends to use the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank.

In connection with the issuance and sale of the Notes, the Company entered into a registration rights agreement with the purchasers of the Notes pursuant to which the Company has agreed to take certain actions to provide for the exchange of the Notes for subordinated notes that are registered under the Securities Act of 1933, as amended, with substantially the same terms as the Notes.

Net Interest Income and Net Interest Margin

Net interest income was $35.5 million for the quarter, an increase of $1.3 million from the second quarter of 2020 and $3.0 million higher than the third quarter of 2019.

• Average interest-earning assets for the quarter were $4.41 billion, $140.1 million higher than the second quarter of 2020 and $454.9 million higher than the third quarter of 2019. The increase was primarily the result of heightened Federal Reserve interest-earning cash, $29.7 million higher than the second quarter of 2020 and $102.6 million higher than the third quarter of 2019, and growth in loans, $107.4 million higher than the second quarter of 2020 and $368.2 million higher than the third quarter of 2019. Included in loan growth are Payroll Protection Program (“PPP”) loans which had an average balance of $263.0 million in the third quarter of 2020 and $176.7 million in the second quarter of 2020.
• Net interest margin was 3.22%, one basis point lower than the second quarter of 2020 and seven basis points lower than the third quarter of 2019. The impact on interest-earning asset yield of heightened Federal Reserve interest-earning cash and PPP loans was approximately two basis points and one basis point, respectively, when compared to the second quarter of 2020 and approximately six basis points and five basis points, respectively, when compared to the third quarter of 2019. 

Noninterest Income

Noninterest income was $12.4 million for the quarter compared to $9.8 million in the second quarter of 2020 and $12.4 million in the third quarter of 2019.

• Service charges on deposits of $1.3 million was $774 thousand higher than the second quarter of 2020 and $671 thousand lower than the third quarter of 2019. In connection with its 2020 COVID-19 relief initiatives, the Company waived or eliminated fees from March 23^rd through July 9^th. In addition, insufficient fund fees for the remainder of the quarter were lower than historic levels, likely due to the positive impact of stimulus programs on consumer account balances. ATM access fees were not re-initiated until September 19^th.
• Insurance income of $1.4 million was $538 thousand higher than the second quarter of 2020 due to the timing of commercial renewals and was $82 thousand lower than the third quarter of 2019.  
• Investment advisory fees of $2.4 million was $192 thousand higher than the second quarter of 2020 and $174 thousand higher than the third quarter of 2019, as a result of the impact of market gains, new customer accounts and increases in existing accounts on assets under management.
• Investments in limited partnerships generated a loss of $105 thousand in the quarter compared to a loss of $244 thousand in the second quarter of 2020 and income of $116 thousand in the third quarter of 2019. 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 $1.9 million, consistent with the second quarter of 2020 and $1.0 million higher than the third quarter of 2019. Income is based on the number and value of interest rate swap transactions and reflects growth and maturity of the Company’s commercial loan business.
• Net gain on sale of loans held for sale of $1.6 million was $850 thousand higher than the second quarter of 2020 and $1.1 million higher than the third quarter of 2019 due to increased residential real estate loans for sale volume and an increase in margin on these transactions. The low interest rate environment has resulted in a significant increase in mortgage refinancing activity.
• A net gain on investment securities of $554 thousand was recognized in the quarter compared to a net gain of $674 thousand in the second quarter of 2020 and a net gain of $1.6 million in the third quarter of 2019. The net gain in the current quarter is attributable to the management of premium risk, largely achieved through the sale of $20.0 million of fixed rate mortgage backed securities with higher expected prepayment speeds. Proceeds were reinvested in current coupon bonds, with lower anticipated prepayment behavior.
  

Noninterest Expense

Noninterest expense was $28.7 million in the quarter compared to $26.7 million in the second quarter of 2020 and $25.9 million in the third quarter of 2019.

• Salaries and employee benefits expense of $15.1 million was relatively unchanged from the second quarter of 2020 and $674 thousand higher than the third quarter of 2019. Current quarter expense includes $224 thousand of non-recurring severance costs incurred in connection with the previously described branch closings and staff reduction announced in July 2020.
• Professional services expense of $1.2 million was $338 thousand lower than the second quarter of 2020 and $286 thousand lower than the third quarter of 2019 primarily as a result of the timing of fees for consulting and advisory projects, including the Company’s improvement initiatives. Expenses related to improvement initiatives totaled $56 thousand in the third quarter of 2020, $353 thousand in the second quarter of 2020 and $298 thousand in the third quarter of 2019.
• Computer and data processing expense of $3.3 million was $551 thousand higher than the second quarter of 2020 and $603 thousand higher than the third quarter of 2019 primarily due to costs related to the Bank’s new online and mobile platform, Five Star Bank Digital Banking, launched in the second quarter of 2020.
• FDIC assessments were $594 thousand in the quarter compared to $539 in the second quarter of 2020 and $7 thousand in the third quarter of 2019. In 2018, the FDIC minimum reserve ratio was exceeded, resulting in credits used to offset expense in 2019 and the first quarter of 2020.
• Advertising and promotions expense of $955 thousand was $410 thousand higher than the second quarter of 2020 and $210 thousand higher than the third quarter of 2019. Advertising activity was reduced in March 2020 when the COVID-19 pandemic impacted operations in Western New York. Higher expense in the third quarter of 2020 is attributable to promotional costs for Five Star Bank Digital Banking. The advertising campaign started after the last wave of customers was transitioned to the new platform in mid-June and ended in late August.
• Third quarter 2020 restructuring charges of $1.4 million represents non-recurring real estate related charges related to the previously described branch closings and staff reduction announced in July 2020.

Income Taxes

Income tax expense was $2.9 million for the quarter compared to $2.4 million for the second quarter of 2020 and $4.3 million for the third quarter of 2019. As a result of the Tax Cuts and Jobs Act, the Company estimated tax benefits and recorded a provisional amount in and for the year ended December 31, 2017. In the third quarter of 2019 an adjustment was made to the provisional amount resulting in incremental expense of approximately $600 thousand.

The effective tax rate was 19.3% for the quarter compared to 18.0% for the second quarter of 2020 and 25.0% for the third quarter of 2019. 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. The higher effective tax rate in the third quarter of 2019 was driven by the incremental expense described above. 

Balance Sheet and Capital Management

Total assets were $4.96 billion at September 30, 2020, up $278.3 million from June 30, 2020, and up $626.5 million from September 30, 2019.

Investment securities were $806.9 million at September 30, 2020, up $27.6 million from June 30, 2020, and up $25.2 million from September 30, 2019. The Company’s 2020 investment strategy has been to reinvest cash flow from the portfolio, coupled with deploying excess liquidity into cash flowing agency mortgage backed securities.

Total loans were $3.57 billion at September 30, 2020, up $82.7 million, or 2.4%, from June 30, 2020, and up $412.1 million, or 13.1%, from September 30, 2019. PPP loans of approximately $2 million and $269 million were funded in the third and second quarters of 2020, respectively. The loans carry a 1% interest rate and the Company recorded net PPP loan origination fees of approximately $7.4 million that are amortized over a 24-month period.

• Commercial business loans totaled $818.1 million, down $556 thousand from June 30, 2020, and up $243.7 million, or 42.4%, from September 30, 2019. The increase from the third quarter of 2019 was primarily attributable to PPP loans. At September 30, 2020, the PPP loan balance was $264.1 million, net of deferred fees.
• Commercial mortgage loans totaled $1.20 billion, up $61.7 million, or 5.4%, from June 30, 2020, and up $166.6 million, or 16.1%, from September 30, 2019.
• Residential real estate loans totaled $596.9 million, up $11.9 million, or 2.0%, from June 30, 2020, and up $38.2 million, or 6.8%, from September 30, 2019.
• Consumer indirect loans totaled $840.6 million, up $12.5 million, or 1.5%, from June 30, 2020 and down $23.0 million, or 2.7%, from September 30, 2019.

Total deposits were $4.36 billion at September 30, 2020, $370.9 million higher than June 30, 2020, and $778.7 million higher than September 30, 2019. The increase from June 30, 2020, was primarily the result of a seasonal increase in public deposits combined with growth in the reciprocal and brokered deposit portfolios. The Company utilized lower cost brokered deposit balances to pay off a maturing Federal Home Loan Bank term advance of $100 million during the quarter. The increase from September 30, 2019, was primarily due to growth in non-public demand and the reciprocal and brokered deposits portfolios. Public deposit balances represented 23% of total deposits at September 30, 2020, compared to 23% of total deposits at June 30, 2020, and 28% at September 30, 2019.

Short-term borrowings were $5.3 million at September 30, 2020, a decrease of $100.0 million from June 30, 2020 and a decrease of $206.1 million from September 30, 2019. The lower level of short-term borrowings at September 30, 2020, is attributable to growth in brokered deposits, which were utilized as a cost-effective alternative to Federal Home Loan Bank borrowings. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits, which reached a seasonal high point during the third quarter. In February 2020, the Company entered a long-term brokered sweep arrangement as a stable alternative borrowing source to diversify the wholesale borrowing base.

Shareholders’ equity was $456.4 million at September 30, 2020, compared to $448.0 million at June 30, 2020, and $432.6 million at September 30, 2019. Common book value per share was $27.38 at September 30, 2020, an increase of $0.52 or 1.9% from $26.86 at June 30, 2020, and an increase of $1.42 or 5.5% from $25.96 at September 30, 2019. Tangible common book value per share⁽¹⁾ was $22.76 at September 30, 2020, an increase of $0.54 or 2.4% from $22.22 at June 30, 2020, and an increase of $1.50 or 7.1% from $21.26 at September 30, 2019.

During the third quarter of 2020, the Company declared a common stock dividend of $0.26 per common share. The dividend returned 35% of third quarter net income to common shareholders.

The Company’s regulatory capital ratios at September 30, 2020, compared to the prior quarter and prior year:

• Leverage Ratio was 8.42%, compared to 8.49% and 8.86% at June 30, 2020, and September 30, 2019, respectively.
• Common Equity Tier 1 Capital Ratio was 10.19%, compared to 10.27% and 10.06% at June 30, 2020, and September 30, 2019, respectively.
• Tier 1 Capital Ratio was 10.66%, compared to 10.76% and 10.55% at June 30, 2020, and September 30, 2019, respectively.
• Total Risk-Based Capital Ratio was 12.74%, compared to 12.83% and 12.57% at June 30, 2020, and September 30, 2019, respectively.

Credit Quality

Non-performing loans were $10.9 million at September 30, 2020, compared to $13.2 million at June 30, 2020, and $9.8 million at September 30, 2019. Net charge-offs were $488 thousand in the quarter, $298 thousand lower than the second quarter of 2020 and $4.1 million lower than the third quarter of 2019. The decrease from the prior year period is primarily attributable to the third quarter 2019 $3.0 million partial charge-off of a $5.6 million loan that had been classified as non-performing in the second quarter of 2019.

Foreclosed assets at September 30, 2020, were $3.0 million, an increase of $2.3 million from June 30, 2020, and an increase of $2.9 million from September 30, 2019. The increase as compared to both periods is attributable to one commercial credit that was partially charged off during the first quarter of 2020 and foreclosure occurred in the third quarter.

The ratio of annualized net charge-offs to total average loans was 0.06% in the current quarter, 0.09% in the second quarter of 2020 and 0.58% in the third quarter of 2019.

The Company adopted CECL effective January 1, 2020, which resulted in an increase to the allowance for credit losses - loans of $9.6 million and established a reserve for unfunded commitments of $2.1 million, for a total pre-tax cumulative effect adjustment of $11.7 million.

At September 30, 2020, the allowance for credit losses - loans to total loans ratio was 1.38% compared to 1.33% at June 30, 2020, and 1.00% at September 30, 2019. The PPP loans are fully guaranteed by the Small Business Administration. Excluding PPP loans, the allowance for credit losses - loans to total loans ratio was 1.49% at September 30, 2020, and 1.44% at June 30, 2020.

The provision for credit losses - loans was $3.6 million in the quarter compared to $3.7 million in the second quarter of 2020 and $1.8 million in the third quarter of 2019. Higher provisioning in 2020 reflects deterioration in the economic environment as a result of the impact of COVID-19, which adversely impacted our unemployment forecast, the designated loss driver for our CECL model. Provision for credit losses of $4.0 million in the third quarter of 2020 also includes a $461 thousand increase in the allowance for unfunded commitments.

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 0.31% at September 30, 2020, 0.38% at June 30, 2020, and 0.31% at September 30, 2019. The ratio of allowance for credit losses - loans to non-performing loans was 453% at September 30, 2020, compared to 351% at June 30, 2020, and 324% at September 30, 2019.

Conference Call

The Company will host an earnings conference call and audio webcast on October 30, 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 approximately 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 630 individuals. The Company’s stock is listed on the Nasdaq Global Select Market under the symbol FISI. Additional information is available at www.fiiwarsaw.com.

Non-GAAP Financial Information

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

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

Safe Harbor Statement

This press release may contain forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” “will,” “would,” “estimate,” “forecast,” “target,” “preliminary,” or “range.” Statements herein are based on certain assumptions and analyses by the Company and factors it believes are appropriate in the circumstances. Actual results could differ materially from those contained in or implied by such statements for a variety of reasons including, but not limited to: the impact of the COVID-19 pandemic on the Company’s customers, business, and results of operations as well as the economy in Western New York and the United States, the Company’s ability to implement its strategic plan, whether the Company experiences greater credit losses than expected, whether the Company experiences breaches of its, or third party, information systems, the attitudes and preferences of the Company’s customers, the Company’s ability to successfully integrate and profitably operate 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
sjdoran@five-starbank.com

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

	2020												2019
	September 30,				June 30,				March 31,				December 31,				September 30,
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents	$	282,070			$	119,610			$	152,168			$	112,947			$	136,815
Investment securities:
Available for sale		515,971				469,413				444,845				417,917				395,441
Held-to-maturity, net		290,946				309,872				346,239				359,000				386,305
Total investment securities		806,917				779,285				791,084				776,917				781,746
Loans held for sale		7,076				6,654				3,822				4,224				6,398
Loans:
Commercial business		818,135				818,691				588,868				572,040				574,455
Commercial mortgage		1,202,046				1,140,326				1,107,376				1,106,283				1,035,450
Residential real estate loans		596,902				585,035				579,800				572,350				558,656
Residential real estate lines		94,017				97,427				102,113				104,118				107,615
Consumer indirect		840,579				828,105				843,668				850,052				863,614
Other consumer		16,860				16,237				15,402				16,144				16,630
Total loans		3,568,539				3,485,821				3,237,227				3,220,987				3,156,420
Allowance for credit losses - loans		49,395				46,316				43,356				30,482				31,668
Total loans, net		3,519,144				3,439,505				3,193,871				3,190,505				3,124,752
Total interest-earning assets		4,577,057				4,314,490				4,116,688				4,058,107				3,979,493
Goodwill and other intangible assets, net		74,062				74,342				74,629				74,923				75,225
Total assets		4,959,201				4,680,930				4,471,768				4,384,178				4,332,737
Deposits:
Noninterest-bearing demand		1,013,176				1,008,958				732,917				707,752				755,296
Interest-bearing demand		786,059				727,676				724,670				627,842				707,153
Savings and money market		1,724,463				1,368,805				1,270,253				1,039,892				1,011,873
Time deposits		841,230				888,569				1,059,345				1,180,189				1,111,892
Total deposits		4,364,928				3,994,008				3,787,185				3,555,675				3,586,214
Short-term borrowings		5,300				105,300				109,500				275,500				211,400
Long-term borrowings, net		39,258				39,308				39,291				39,273				39,255
Total interest-bearing liabilities		3,396,310				3,129,658				3,203,059				3,162,696				3,081,573
Shareholders’ equity		456,361				448,045				439,393				438,947				432,617
Common shareholders’ equity		439,033				430,717				422,065				421,619				415,289
Tangible common equity (1)		364,971				356,375				347,436				346,696				340,064
Accumulated other comprehensive loss	$	(209	)		$	(496	)		$	(2,082	)		$	(14,513	)		$	(11,734	)
Common shares outstanding		16,038				16,038				16,020				16,003				15,997
Treasury shares		62				62				80				97				103
CAPITAL RATIOS AND PER SHARE DATA:
Leverage ratio		8.42	%			8.49	%			8.78	%			9.00	%			8.86	%
Common equity Tier 1 capital ratio		10.19	%			10.27	%			10.05	%			10.31	%			10.06	%
Tier 1 capital ratio		10.66	%			10.76	%			10.53	%			10.80	%			10.55	%
Total risk-based capital ratio		12.74	%			12.83	%			12.54	%			12.77	%			12.57	%
Common equity to assets		8.85	%			9.20	%			9.44	%			9.62	%			9.58	%
Tangible common equity to tangible assets (1)		7.47	%			7.74	%			7.90	%			8.05	%			7.99	%
Common book value per share	$	27.38			$	26.86			$	26.35			$	26.35			$	25.96
Tangible common book value per share (1)	$	22.76			$	22.22			$	21.69			$	21.66			$	21.26

      

(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)

	Nine Months Ended								2020												2019
	September 30,								Third				Second				First				Fourth				Third
	2020				2019				Quarter				Quarter				Quarter				Quarter				Quarter
SELECTED INCOME STATEMENT
DATA:
Interest income	$	121,131			$	126,621			$	39,719			$	39,759			$	41,653			$	42,179			$	42,459
Interest expense		18,327				29,882				4,220				5,578				8,529				9,006				9,976
Net interest income		102,804				96,739				35,499				34,181				33,124				33,173				32,483
Provision for credit losses		21,689				5,391				4,028				3,746				13,915				2,653				1,844
Net interest income after provision for credit losses		81,115				91,348				31,471				30,435				19,209				30,520				30,639
Noninterest income:
Service charges on deposits		3,321				5,361				1,254				480				1,587				1,880				1,925
Insurance income		3,525				3,689				1,357				819				1,349				881				1,439
ATM and debit card		5,321				4,983				1,943				1,776				1,602				1,796				1,801
Investment advisory		6,940				6,812				2,443				2,251				2,246				2,375				2,269
Company owned life insurance		1,397				1,293				470				462				465				465				459
Investments in limited partnerships		(136	)			492				(105	)			(244	)			213				(140	)			116
Loan servicing		106				316				49				50				7				116				102
Income from derivative
instruments, net		4,617				1,013				1,931				1,940				746				1,261				890
Net gain on sale of loans held for sale		2,616				1,028				1,581				731				304				324				439
Net gain (loss) on investment securities		1,449				1,721				554				674				221				(44	)			1,608
Net gain (loss) on other assets		8				56				(55	)			(1	)			64				(27	)			(2	)
Net loss on tax credit investments		(120	)			-				(40	)			(40	)			(40	)			(528	)			-
Other		3,151				3,950				1,019				934				1,198				1,308				1,315
Total noninterest income		32,195				30,714				12,401				9,832				9,962				9,667				12,361
Noninterest expense:
Salaries and employee benefits		45,173				41,661				15,085				15,074				15,014				14,669				14,411
Occupancy and equipment (1)		10,407				10,106				3,263				3,388				3,756				3,446				3,381
Professional services		4,974				3,618				1,242				1,580				2,152				1,806				1,528
Computer and data processing (1)		8,622				7,407				3,250				2,699				2,673				2,576				2,647
Supplies and postage		1,533				1,554				463				517				553				482				522
FDIC assessments		1,505				1,005				594				539				372				-				7
Advertising and promotions		2,055				2,351				955				545				555				1,226				745
Amortization of intangibles		861				948				280				287				294				302				309
Restructuring charges		1,362				-				1,362				-				-				-				-
Other		6,583				7,410				2,165				2,065				2,353				2,261				2,336
Total noninterest expense		83,075				76,060				28,659				26,694				27,722				26,768				25,886
Income before income taxes		30,235				46,002				15,213				13,573				1,449				13,419				17,114
Income tax expense		5,703				10,247				2,940				2,441				322				312				4,281
Net income		24,532				35,755				12,273				11,132				1,127				13,107				12,833
Preferred stock dividends		1,096				1,096				365				366				365				365				365
Net income available to common
shareholders	$	23,436			$	34,659			$	11,908			$	10,766			$	762			$	12,742			$	12,468
FINANCIAL RATIOS:
Earnings per share – basic	$	1.46			$	2.17			$	0.74			$	0.67			$	0.05			$	0.80			$	0.78
Earnings per share – diluted	$	1.46			$	2.16			$	0.74			$	0.67			$	0.05			$	0.79			$	0.78
Cash dividends declared on common stock	$	0.78			$	0.75			$	0.26			$	0.26			$	0.26			$	0.25			$	0.25
Common dividend payout ratio		53.42	%			34.56	%			35.14	%			38.81	%			520.00	%			31.25	%			32.05	%
Dividend yield (annualized)		6.77	%			3.32	%			6.72	%			5.60	%			5.76	%			3.09	%			3.29	%
Return on average assets		0.71	%			1.12	%			1.02	%			0.97	%			0.10	%			1.21	%			1.19	%
Return on average equity		7.33	%			11.51	%			10.72	%			10.05	%			1.03	%			11.88	%			11.86	%
Return on average common equity		7.28	%			11.64	%			10.82	%			10.11	%			0.72	%			12.02	%			12.00	%
Return on average tangible common
equity (2)		8.81	%			14.38	%			13.02	%			12.25	%			0.88	%			14.64	%			14.69	%
Efficiency ratio (3)		61.89	%			60.09	%			60.28	%			61.26	%			64.31	%			62.05	%			59.52	%
Effective tax rate		18.9	%			22.3	%			19.3	%			18.0	%			22.2	%			2.3	%			25.0	%

                

(1)	Beginning in the first quarter of 2020, software service contracts and software amortization are classified as computer and data processing expense. Previously, they were included in occupancy and equipment expense. Prior periods have been reclassified to conform to the current presentation.
(2)	See Appendix A – Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.
(3)	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)

	Nine Months Ended								2020												2019
	September 30,								Third				Second				First				Fourth				Third
	2020				2019				Quarter				Quarter				Quarter				Quarter				Quarter
SELECTED AVERAGE BALANCES:
Federal funds sold and interest-earning deposits	$	91,263			$	18,495			$	121,929			$	92,214			$	59,309			$	32,494			$	19,370
Investment securities (1)		772,059				838,995				769,673				766,636				779,894				774,520				785,595
Loans:
Commercial business		712,703				570,596				808,582				757,588				570,886				567,998				586,293
Commercial mortgage		1,138,568				1,003,593				1,180,747				1,133,832				1,100,660				1,073,527				1,021,931
Residential real estate loans		583,540				541,185				590,483				581,651				578,407				566,256				553,382
Residential real estate lines		99,156				108,207				95,288				99,543				102,680				106,011				107,290
Consumer indirect		834,810				890,560				830,647				827,030				846,800				856,823				868,927
Other consumer		15,691				16,029				16,445				15,155				15,466				16,100				16,141
Total loans		3,384,468				3,130,170				3,522,192				3,414,799				3,214,899				3,186,715				3,153,964
Total interest-earning assets		4,247,790				3,987,660				4,413,794				4,273,649				4,054,102				3,993,729				3,958,929
Goodwill and other intangible assets, net		74,506				75,713				74,220				74,504				74,797				75,093				75,401
Total assets		4,592,609				4,281,270				4,775,333				4,624,360				4,376,125				4,299,342				4,260,810
Interest-bearing liabilities:
Interest-bearing demand		694,830				653,780				704,550				712,300				667,533				660,738				632,540
Savings and money market		1,349,931				973,005				1,574,068				1,329,632				1,143,628				1,014,434				956,410
Time deposits		989,236				1,090,896				867,479				984,832				1,116,736				1,120,823				1,099,212
Short-term borrowings		112,451				332,922				57,856				110,272				169,827				241,557				328,952
Long-term borrowings, net		39,297				39,227				39,314				39,297				39,279				39,262				39,244
Total interest-bearing liabilities		3,185,745				3,089,830				3,243,267				3,176,333				3,137,003				3,076,814				3,056,358
Noninterest-bearing demand deposits		874,456				719,630				987,908				912,238				721,975				725,590				717,473
Total deposits		3,908,453				3,437,311				4,134,005				3,939,002				3,649,872				3,521,585				3,405,635
Total liabilities		4,145,270				3,865,909				4,320,057				4,178,921				3,934,909				3,861,542				3,831,409
Shareholders’ equity		447,339				415,361				455,276				445,439				441,216				437,800				429,401
Common equity		430,011				398,033				437,948				428,111				423,888				420,472				412,073
Tangible common equity (2)	$	355,505			$	322,230			$	363,728			$	353,607			$	349,091			$	345,379			$	336,672
Common shares outstanding:
Basic		16,018				15,964				16,031				16,018				16,006				15,995				15,991
Diluted		16,058				16,017				16,058				16,047				16,069				16,072				16,056
SELECTED AVERAGE YIELDS: (Tax equivalent basis)
Investment securities		2.40	%			2.38	%			2.23	%			2.49	%			2.48	%			2.40	%			2.40	%
Loans		4.25	%			4.79	%			4.02	%			4.14	%			4.61	%			4.70	%			4.77	%
Total interest-earning assets		3.83	%			4.27	%			3.60	%			3.76	%			4.15	%			4.22	%			4.29	%
Interest-bearing demand		0.16	%			0.21	%			0.14	%			0.14	%			0.21	%			0.21	%			0.22	%
Savings and money market		0.37	%			0.43	%			0.28	%			0.31	%			0.56	%			0.48	%			0.44	%
Time deposits		1.42	%			2.12	%			0.92	%			1.39	%			1.83	%			1.94	%			2.12	%
Short-term borrowings		1.67	%			2.64	%			1.60	%			1.03	%			2.11	%			2.21	%			2.51	%
Long-term borrowings, net		6.30	%			6.30	%			6.31	%			6.29	%			6.29	%			6.29	%			6.30	%
Total interest-bearing liabilities		0.77	%			1.29	%			0.52	%			0.71	%			1.09	%			1.16	%			1.30	%
Net interest rate spread		3.06	%			2.98	%			3.08	%			3.05	%			3.06	%			3.06	%			2.99	%
Net interest margin		3.25	%			3.27	%			3.22	%			3.23	%			3.31	%			3.33	%			3.29	%

                

(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)

	Nine Months Ended								2020												2019
	September 30,								Third				Second				First				Fourth				Third
	2020				2019				Quarter				Quarter				Quarter				Quarter				Quarter
ASSET QUALITY DATA:
Allowance for Credit Losses - Loans
Beginning balance, prior to adoption of CECL	$	30,482			$	33,914			$	46,316			$	43,356			$	30,482			$	31,668			$	34,434
Impact of adopting CECL		9,594				-				-				-				9,594				-				-
Beginning balance, after adoption of CECL		40,076				33,914				46,316				43,356				40,076				31,668				34,434
Net loan charge-offs (recoveries):
Commercial business		6,637				47				(88	)			(1,458	)			8,183				1,942				10
Commercial mortgage		1,675				2,980				603				1,072				-				-				2,994
Residential real estate loans		75				141				(7	)			(6	)			88				156				40
Residential real estate lines		(3	)			4				-				-				(3	)			3				7
Consumer indirect		2,816				3,897				(115	)			1,175				1,756				1,523				1,317
Other consumer		217				568				95				3				119				215				242
Total net charge-offs		11,417				7,637				488				786				10,143				3,839				4,610
Provision for credit losses - loans		20,736				5,391				3,567				3,746				13,423				2,653				1,844
Ending balance	$	49,395			$	31,668			$	49,395			$	46,316			$	43,356			$	30,482			$	31,668
Net charge-offs (recoveries) to average loans (annualized):
Commercial business		1.24	%			0.01	%			-0.04	%			-0.77	%			5.77	%			1.36	%			0.01	%
Commercial mortgage		0.20	%			0.40	%			0.20	%			0.38	%			0.00	%			0.00	%			1.16	%
Residential real estate loans		0.02	%			0.03	%			0.00	%			0.00	%			0.06	%			0.11	%			0.03	%
Residential real estate lines		0.00	%			0.01	%			0.00	%			0.00	%			-0.01	%			0.01	%			0.03	%
Consumer indirect		0.45	%			0.59	%			-0.05	%			0.57	%			0.83	%			0.71	%			0.60	%
Other consumer		1.85	%			4.74	%			2.31	%			0.08	%			3.09	%			5.30	%			5.93	%
Total loans		0.45	%			0.33	%			0.06	%			0.09	%			1.27	%			0.48	%			0.58	%
Supplemental information (1)
Non-performing loans:
Commercial business	$	2,628			$	2,884			$	2,628			$	4,918			$	5,507			$	1,177			$	2,884
Commercial mortgage		3,372				2,867				3,372				4,140				2,984				3,146				2,867
Residential real estate loans		3,305				2,526				3,305				2,992				1,971				2,484				2,526
Residential real estate lines		207				182				207				177				143				102				182
Consumer indirect		1,244				1,326				1,244				868				1,777				1,725				1,326
Other consumer		147				3				147				87				2				6				3
Total non-performing loans		10,903				9,788				10,903				13,182				12,384				8,640				9,788
Foreclosed assets		2,999				91				2,999				679				749				468				91
Total non-performing assets	$	13,902			$	9,879			$	13,902			$	13,861			$	13,133			$	9,108			$	9,879
Total non-performing loans to total loans		0.31	%			0.31	%			0.31	%			0.38	%			0.38	%			0.27	%			0.31	%
Total non-performing assets to total assets		0.28	%			0.23	%			0.28	%			0.30	%			0.29	%			0.21	%			0.23	%
Allowance for credit losses - loans to total loans		1.38	%			1.00	%			1.38	%			1.33	%			1.34	%			0.95	%			1.00	%
Allowance for credit losses - loans to non-performing loans		453	%			324	%			453	%			351	%			350	%			353	%			324	%

                

(1)	At period end.

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

	Nine Months Ended								2020												2019
	September 30,								Third				Second				First				Fourth				Third
	2020				2019				Quarter				Quarter				Quarter				Quarter				Quarter
Ending tangible assets:
Total assets									$	4,959,201			$	4,680,930			$	4,471,768			$	4,384,178			$	4,332,737
Less: Goodwill and other intangible assets, net										74,062				74,342				74,629				74,923				75,225
Tangible assets									$	4,885,139			$	4,606,588			$	4,397,139			$	4,309,255			$	4,257,512
Ending tangible common equity:
Common shareholders’ equity									$	439,033			$	430,717			$	422,065			$	421,619			$	415,289
Less: Goodwill and other intangible assets, net										74,062				74,342				74,629				74,923				75,225
Tangible common equity									$	364,971			$	356,375			$	347,436			$	346,696			$	340,064
Tangible common equity to tangible assets (1)										7.47	%			7.74	%			7.90	%			8.05	%			7.99	%
Common shares outstanding										16,038				16,038				16,020				16,003				15,997
Tangible common book value per share (2)									$	22.76			$	22.22			$	21.69			$	21.66			$	21.26
Average tangible assets:
Average assets	$	4,592,609			$	4,281,270			$	4,775,333			$	4,624,360			$	4,376,125			$	4,299,342			$	4,260,810
Less: Average goodwill and other intangible assets, net		74,506				75,713				74,220				74,504				74,797				75,093				75,401
Average tangible assets	$	4,518,103			$	4,205,557			$	4,701,113			$	4,549,856			$	4,301,328			$	4,224,249			$	4,185,409
Average tangible common equity:
Average common equity	$	430,011			$	398,033			$	437,948			$	428,111			$	423,888			$	420,472			$	412,073
Less: Average goodwill and other intangible assets, net		74,506				75,713				74,220				74,504				74,797				75,093				75,401
Average tangible common equity	$	355,505			$	322,320			$	363,728			$	353,607			$	349,091			$	345,379			$	336,672
Net income available to common shareholders	$	23,436			$	34,659			$	11,908			$	10,766			$	762			$	12,742			$	12,468
Return on average tangible common equity (3)		8.81	%			14.38	%			13.02	%			12.25	%			0.88	%			14.64	%			14.69	%
Pre-tax pre-provision income:
Net income	$	24,532			$	35,755			$	12,273			$	11,132			$	1,127			$	13,107			$	12,833
Add: Income tax expense		5,703				10,247				2,940				2,441				322				312				4,281
Add: Provision for credit losses		21,689				5,391				4,028				3,746				13,915				2,653				1,844
Pre-tax pre-provision income	$	51,924			$	51,393			$	19,241			$	17,319			$	15,364			$	16,072			$	18,958

                

(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.

FAQ

What were the third-quarter financial results for FISI in 2020?

FISI reported a net income of $12.3 million and earnings per diluted share of $0.74 for Q3 2020.

How much did FISI's net interest income change year-over-year?

Net interest income increased by $3 million from Q3 2019.

What was the total asset value for FISI as of September 30, 2020?

Total assets were reported at $4.96 billion.

Did FISI experience any growth in its loan portfolio?

Yes, FISI saw a 5.4% growth in its commercial mortgage portfolio.

What steps did FISI take to strengthen its capital ratios?

FISI issued $35 million in subordinated notes to boost its capital ratios.