Financial Institutions, Inc. Reports Second Quarter 2015 Financial Results

WARSAW, N.Y., July 22, 2015 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (the “Company”) (Nasdaq:FISI), the parent company of Five Star Bank (the “Bank”), today reported financial results for the quarter ended June 30, 2015.  The Company’s financial results for the first and second quarters of 2015 include the results of operations from the acquisition of Scott Danahy Naylon (“SDN”), an insurance agency the Company acquired in August 2014.

Net income for the second quarter 2015 was $6.6 million, compared to $6.8 million for the first quarter 2015, and $7.0 million for the second quarter 2014.  Earnings per diluted common share for the second quarter 2015 was $0.44, compared with $0.46 per share for the first quarter 2015 and $0.48 per share for the second quarter 2014.

The Company’s President and Chief Executive Officer Martin K. Birmingham stated, “The momentum that began toward the end of the first quarter as a result of the implementation of our growth initiatives has carried over into the second quarter.  We are very encouraged by the progress achieved in the second quarter of 2015 that resulted in the Company’s earning assets exceeding $3 billion and total loans growing beyond $2 billion for the first time.  We are benefiting from the confluence of an economic recovery in Western New York and our allocation of increased resources to grow our presence in Rochester and Buffalo, two opportunity rich markets that represent the largest metropolitan areas within our region.”

Second Quarter 2015 Highlights:

  • Balance sheet and credit quality strengthened:
    • Loans of $2.01 billion, up by 4% from March 31, 2015
    • Investment securities of $1.09 billion, up by 16% from March 31, 2015
    • Interest-earning assets of $3.10 billion, up 9% from March 31, 2015
    • Total assets of $3.36 billion, up 5% from March 31, 2015
    • Total deposits of $2.66 billion increased by 8% from a year ago but down by 2% from March 31, 2015 due to seasonal outflows of municipal deposits
    • Non-performing assets decreased 3% from the first quarter of 2015
    • Provision for loan losses for the second quarter of 2015 decreased by 53% from the first quarter and nearly 27% lower than the same period of 2014
  • $40 million subordinated notes offering completed during the second quarter bolsters regulatory capital
  • Growth in commercial sector and indirect lending are the primary drivers for interest income reaching a quarterly record of $26.0 million, an increase of 4% from the prior year
  • Net interest income grew to $23.4 million despite continued net interest margin pressure
  • Noninterest income less net gain on investment securities increased by 15% to $6.5 million from $5.6 million in the prior year period due primarily to the inclusion of insurance income from the SDN acquisition
  • Expenses of $19.2 million in second quarter 2015 increased by $1.4 million from the prior year primarily due to expense attributable to SDN and the hiring of additional personnel associated with the Company’s expansion initiatives
  • Net income available to common shareholders was $6.2 million or $0.44 per diluted share, compared to $6.7 million or $0.48 per share in the same period last year
  • Quarterly cash dividend of $0.20 per common share represented a 3.23% dividend yield as of June 30, 2015 and a return of 45% of second quarter net income to common shareholders

Mr. Birmingham continued, “We have made solid progress in our efforts to increase interest income.  Growth in the commercial sector is the primary driver for interest income reaching a quarterly record of nearly $26 million, an increase of over 4% from the prior year.  Although we are not immune to the industry-wide pressure on net interest margin, net interest income exceeded $23 million this quarter.  While interest expense resulting from the issuance of $40 million in subordinated notes in April resulted in additional margin compression, the sale of the notes enabled us to bolster regulatory capital levels and continue to grow our banking operations.

“Our strategic growth plan involves investments to increase and diversify our revenue streams, which in turn partially mitigates exposure to net interest margin pressures, and broadening of services offered to our customers.  Investments have been made in support of this plan that include the acquisition of a platform insurance agency toward the end of last year and the addition of new loan officers, cross-training of personnel and deployment of new technologies.  Our insurance offerings are now a core business.  Insurance income has increased from a nominal level in the second quarter of last year to approximately 20% of noninterest income on a seasonally adjusted basis.  Noninterest income less net gains on investment securities in the second quarter increased by 15% from a year ago, primarily due to the inclusion of insurance income.

“Overall, we delivered solid results in key metrics supporting our business line expansion and credit quality while managing our expense levels in a new era of growth for Financial Institutions.  Our expenses are running at an ideal level and we look forward to continued growth in our revenue streams and benefiting from the leverage in our business to enhance our profitability.”

Kevin B. Klotzbach, the Company’s Executive Vice President and Chief Financial Officer, commented, “The broadening of our financial services and accompanying increased spending has resulted in a shift in our efficiency ratio as a measure of productivity.  In the past, our efficiency ratio as a community bank was consistently among the best as compared to our publicly traded peers.  Now, as we drive forward with our strategy as a provider of more diversified financial services, our efficiency ratio is expected to be in the low 60% range.  This approach will decrease our sensitivity to traditional banking revenues which are subject to interest rate changes.

“We are making up for some of the net interest margin compression through volume improvements.  Commercial loan production has increased and our loan mix is moving in a positive trajectory.  All major loan portfolios are growing, with commercial lending leading the way. Reflecting our larger base of loan officers, commercial real estate and traditional commercial and industrial lending combined for increases of $72.7 million and $82.6 million in loans from the first quarter 2015 and second quarter 2014, respectively.   With this growth, we have been vigilant in exercising stringent credit controls necessary to maintain our asset quality.  Significant improvements in the second quarter were realized in the reduction of net charge-offs and the provision for loan losses.  This credit quality improvement is complemented by the regulatory capital infusion from our successfully completed subordinated debt offering in the second quarter.”

On April 15, 2015, the Company completed the sale of $40 million in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due 2030 (the “Subordinated Notes”).  The Subordinated Notes qualify as Tier 2 capital for regulatory purposes.  The net proceeds from this offering were intended for general corporate purposes, including but not limited to, contribution of capital to the Bank to support both organic growth as well as opportunistic acquisitions.  During the second quarter, the Company contributed $34.0 million of net proceeds from this offering to the Bank as additional paid-in capital.

Net Interest Income and Net Interest Margin

Net interest income was $23.4 million in the second quarter 2015, compared to $23.1 million in the first quarter 2015 and second quarter 2014.  When comparing the second quarter 2015 to the first quarter 2015, average earning assets increased $174.9 million, including increases of $53.2 million and $121.8 million in loans and investment securities, respectively.  Average earning assets were up $240.8 million, led by a $153.8 million increase in investment securities and an $87.1 million increase in loans in the second quarter 2015 compared to the same quarter in 2014. The growth in earning assets was offset by decreases in net interest margin.  Second quarter 2015 net interest margin was 3.24%, a decrease of 19 basis points from 3.43% reported in the first quarter 2015 and a 23 basis point decrease from 3.47% reported in the second quarter 2014.  The issuance of the Subordinated Notes decreased second quarter 2015 net interest margin by approximately 8 basis points.

Noninterest Income

Noninterest income was $6.5 million for the second quarter 2015 compared to $8.3 million for the first quarter 2015 and $6.6 million in the second quarter 2014.  Included in the prior period totals are gains realized from the sale of investment securities.  Exclusive of those gains, noninterest income was $7.2 million in the first quarter 2015 and $5.6 million in the second quarter 2014.  The main factors contributing to the lower noninterest income during the second quarter of 2015 compared to the first quarter 2015 were decreases in insurance income and investments in limited partnerships.  Insurance income decreased $551 thousand during the second quarter 2015, largely due to lower contingent commissions.  Contingent commissions are commissions SDN receives from various property and casualty insurance carriers based on the overall profit and/or overall volume of business placed with the insurance carrier during a calendar year and is determined after the contract period.  Such commissions are seasonal in nature and are generally received during the first quarter of each year.  In addition, agency and direct bill commissions declined during the second quarter due to the timing of policy renewals.  Income from the Company’s investments in limited partnerships, which are primarily small business investment companies, decreased $419 thousand during the second quarter 2015.  The income from these equity method investments fluctuates based on the performance of the underlying investments.  The higher noninterest income in the second quarter 2015 compared to the second quarter 2014 is primarily a result of a $1.0 million increase in insurance income, reflecting the contributions from SDN, which was acquired during the third quarter 2014 as part of the Company’s strategy to diversify its business lines and increase noninterest income through additional fee-based services.

Noninterest Expense

Noninterest expense was $19.2 million for the second quarter 2015 compared to $19.0 million for the first quarter 2015 and $17.8 million in the second quarter 2014.  Salaries and employee benefits expense increased $1.5 million from the second quarter 2014, primarily reflecting additional personnel as a result of the SDN acquisition and the hiring of additional personnel associated with the Company’s expansion initiatives. Professional services decreased $518 thousand when comparing the second quarter of 2015 to the same period in 2014.  The second quarter 2014 professional services expense included professional services associated with the acquisition of SDN.  Other noninterest expense for the second quarter 2015 included an increase of $151 thousand in intangible asset amortization attributable to the SDN acquisition.

Income Tax Expense

Income tax expense was $2.8 million in the second quarter 2015, compared to $2.9 million in the first quarter 2015 and $3.1 million in the second quarter 2014.  The effective tax rate was 29.5% for the second quarter of 2015, compared with an effective tax rate of 29.8% for the first quarter 2015 and 30.5% in the second quarter 2014.

Balance Sheet and Capital Management

Total assets were $3.36 billion at June 30, 2015, up $162.4 million from $3.20 billion at March 31, 2015 and up $366.2 million from $2.99 billion at June 30, 2014.

Cash and cash equivalents were $52.6 million at June 30, 2015, down $83.4 million from March 31, 2015 and down $12.3 million from June 30, 2014.  Cash and cash equivalents at March 31, 2015 were elevated due to the timing of public deposit inflows at the end of the quarter.

Total loans were $2.01 billion at June 30, 2015, up $86.3 million from March 31, 2015 and up $112.6 million from June 30, 2014.  The increase in loans was attributable to organic growth in commercial, home equity and consumer indirect loans.  Commercial loans increased to $829.4 million at June 30, 2015, up $72.7 million from March 31, 2015 and up $82.6 million from June 30, 2014.  Total investment securities were $1.09 billion at June 30, 2015, up $147.9 million from the end of the prior quarter and up $229.5 million compared with the June 30, 2014.

Total deposits were $2.66 billion at June 30, 2015, a decrease of $48.5 million from March 31, 2015 and an increase of $206.2 million from June 30, 2014.  The decrease during the second quarter of 2015 was mainly due to seasonal outflows of municipal deposits, while the year-over-year increase was due to higher municipal deposits as well as successful business development efforts.  Public deposit balances represented 26% of total deposits at June 30, 2015, compared to 30% at March 31, 2015 and 25% at June 30, 2014.

Short-term borrowings were $350.6 million at June 30, 2015, up $175.0 million from March 31, 2015 and up $95.9 million from June 30, 2014.  Short-term borrowings are often utilized to manage the seasonal outflows of municipal deposits.

Long-term borrowings were $39.0 million at June 30, 2015.  There were no long-term borrowings outstanding at March 31, 2015 or June 30, 2014.  As described above, during the second quarter 2015 the Company issued $40 million of subordinated notes.  Long-term borrowings are shown net of issuance costs, which are capitalized and amortized as a component of interest expense over a period of 15 years.

Shareholders’ equity was $284.4 million at June 30, 2015, compared with $286.7 million at March 31, 2015 and $269.8 million at June 30, 2014.  Common book value per share was $18.83 at June 30, 2015, a decrease of $0.18 from $19.01 at March 31, 2015 and an increase of $0.62 from $18.21 at June 30, 2014.  Tangible common book value per share, a non-GAAP measure, was $14.03 at June 30, 2015, compared to $14.18 at March 31, 2015 and $14.62 at June 30, 2014.

During the second quarter 2015, the Company declared a common stock dividend of $0.20 per common share, consistent with the prior quarter and up by 5%, or $0.01 per share, from the second quarter of 2014.  The second quarter 2015 dividend returned 45% of the quarter’s net income to common shareholders. 

The Company’s leverage ratio was 7.31% at June 30, 2015, compared to 7.53% at March 31, 2015 and 7.64% at June 30, 2014.  The decrease in the leverage ratio was primarily due to an increase in average quarterly assets.  Changes in the Company’s capital ratios from the prior periods were also impacted by goodwill and intangible assets recorded during the third quarter 2014 in conjunction with the acquisition of SDN.  Such goodwill and intangible assets are excluded from regulatory capital under regulatory accounting practices.

As previously discussed, the Company contributed $34.0 million of net proceeds from the Subordinated Notes offering to the Bank as additional paid-in capital.  The Bank’s leverage ratio and total risk-based capital ratio increased to 8.06% and 12.54%, respectively, at June 30, 2015, compared to 7.22% and 11.27%, respectively, at March 31, 2015, all of which exceeded the regulatory thresholds required to be classified as a “well capitalized” institution as established by the Bank’s primary banking regulators.

Credit Quality

Non-performing loans at June 30, 2015 decreased $364 thousand compared to March 31, 2015, primarily due to improvements in the commercial mortgage and indirect portfolios, partially offset by increases in non-performing commercial business and residential real estate loans.  The ratio of non-performing loans to total loans was 0.53% at June 30, 2015 compared with 0.58% at March 31, 2015 and 0.47% at June 30, 2014.

The provision for loans losses for the second quarter 2015 was $1.3 million, a decrease of $1.5 million from the prior quarter and $470 thousand from the second quarter 2014.  The decrease in the provision for loan losses reflects a decrease in net charge-offs during the second quarter of 2015 compared to the prior periods.  Net charge-offs were $979 thousand during the second quarter 2015, a $2.2 million decrease compared to the prior quarter and $765 thousand from the second quarter 2014.  The first quarter 2015 net charge-offs included two commercial loan relationships totaling $1.7 million that had been previously reserved by the Company.  The ratio of annualized net charge-offs to total average loans was 0.20% during the current quarter, compared to 0.68% during the prior quarter and 0.37% during the second quarter 2014.

The ratio of allowance for loans losses to total loans was 1.37% at June 30, 2015, compared with 1.41% at March 31, 2015 and 1.43% at June 30, 2014.  The ratio of the allowance for loan losses to total loans declined in both comparisons, reflecting overall improvement in credit quality.  The ratio of allowance for loans losses to non-performing loans was 257% at June 30, 2015, compared with 246% at March 31, 2015 and 306% at June 30, 2014.

About Financial Institutions, Inc.

Financial Institutions, Inc. provides diversified financial services through its subsidiaries, Five Star Bank and Scott Danahy Naylon.  Five Star Bank provides a wide range of consumer and commercial banking services to individuals, municipalities and businesses through a network of over 50 offices and more than 60 ATMs throughout Western and Central New York State.  Scott Danahy Naylon provides a broad range of insurance services to personal and business clients across 44 states.  Financial Institutions, Inc. and its subsidiaries employ approximately 650 individuals.  The Company’s stock is listed on the Nasdaq Global Select Market under the symbol FISI and is a member of the NASDAQ OMX ABA Community Bank Index.  Additional information is available at the Company’s website: www.fiiwarsaw.com.

Non-GAAP Financial Information

This news release contains financial information, such as tangible common equity, determined by methods other than in accordance with U.S. generally accepted accounting principles ("GAAP").  The Company believes that non-GAAP financial measures provide a meaningful comparison of the underlying operational performance of the Company, and facilitate investors' assessments of its business and performance trends. In addition, the Company believes the exclusion of these non-operating items enables management to perform a more effective evaluation and comparison of the Company's results and to assess performance in relation to the company's ongoing operations. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Where non-GAAP disclosures are used in this news release, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found in Appendix A to this document.

Safe Harbor Statement

This press release may contain forward-looking statements as defined by federal securities laws.  These statements may address issues that involve significant risks, uncertainties, estimates and assumptions made by management.  Actual results could differ materially from current beliefs or projections. There are a number of important factors that could affect the Company’s forward-looking statements, which include its ability to implement its strategic plan, its ability to redeploy investment assets into loan assets, whether it experiences greater credit losses than expected, breaches of its third party information systems, the attitudes and preferences of its customers, its ability to successfully integrate and profitably operate acquired businesses such as the acquisition of SDN, the competitive environment, fluctuations in the fair value of securities in its investment portfolio, changes in the regulatory environment and general economic and credit market conditions nationally and regionally.  For more information about these factors and other factors that could affect the Company’s forward-looking statements, please see the Company’s Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q on file with the SEC. All of these factors should be carefully reviewed, and readers should not place undue reliance on these forward-looking statements.  Except as required by law, the Company undertakes no obligation to revise these statements following the date of this press release.

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

  2015   2014
  June 30,   March 31,   December 31,   September 30,   June 30,
                   
SELECTED BALANCE SHEET DATA:                  
                   
Cash and cash equivalents $ 52,554     135,972   58,151     87,582     64,832
Investment securities:                  
  Available for sale   772,639     639,275   622,494     585,479     601,903
  Held-to-maturity   320,820     306,255   294,438     285,967     262,057
  Total investment securities   1,093,459     945,530   916,932     871,446     863,960
Loans held for sale   448     656   755     1,029     201
Loans:                  
  Commercial business   292,791     277,464   267,409     275,107     277,685
  Commercial mortgage   536,590     479,226   475,092     469,485     469,055
  Residential mortgage   95,162     97,717   100,101     103,044     106,206
  Home equity   398,854     386,961   386,615     382,703     369,578
  Consumer indirect   666,550     662,213   661,673     656,215     652,748
  Other consumer   19,326     19,373   21,112     21,291     21,392
  Total loans   2,009,273     1,922,954   1,912,002     1,907,845     1,896,664
  Allowance for loan losses   27,500     27,191   27,637     27,244     27,166
  Total loans, net   1,981,773     1,895,763   1,884,365     1,880,601     1,869,498
Total interest-earning assets (1) (2)   3,104,631     2,860,605   2,826,488     2,780,940     2,758,779
Goodwill and other intangible assets, net   68,158     68,396   68,639     68,887     49,826
Total assets   3,359,459     3,197,077   3,089,521     3,055,304     2,993,264
Deposits:                  
  Noninterest-bearing demand   602,143     559,646   571,260     571,549     551,229
  Interest-bearing demand   530,861     611,104   490,190     530,783     507,083
  Savings and money market   910,215     922,093   795,835     805,522     766,594
  Certificates of deposit   613,019     611,852   593,242     630,970     625,172
  Total deposits   2,656,238     2,704,695   2,450,527     2,538,824     2,450,078
Short-term borrowings   350,600     175,573   334,804     215,967     254,683
Long-term borrowings, net   38,955     -   -     -     -
Total interest-bearing liabilities   2,443,650     2,320,622   2,214,071     2,183,242     2,153,532
Shareholders’ equity   284,435     286,689   279,532     277,758     269,827
Common shareholders’ equity (3)   267,095     269,349   262,192     260,418     252,487
Tangible common equity (5)   198,937     200,953   193,553     191,531     202,661
Unrealized (loss) gain on investment securities,
  net of tax
$   (924 )   5,241   1,933     (374 )   1,292
                   
Common shares outstanding   14,184     14,167   14,118     14,094     13,863
Treasury shares   214     231   280     304     299
                   
CAPITAL RATIOS AND PER SHARE DATA:                  
                   
Leverage ratio (4)   7.31 %   7.53   7.35     7.34     7.64
Common equity Tier 1 ratio (4)   9.50 %   9.66   n/a     n/a     n/a
Tier 1 risk-based capital (4)   10.25 %   10.45   10.47     10.44     10.95
Total risk-based capital (4)   13.17 %   11.69   11.72     11.69     12.20
Common equity to assets   7.95 %   8.42   8.49     8.52     8.44
Tangible common equity to tangible assets (5)   6.04 %   6.42   6.41     6.41     6.89
                   
Common book value per share $   18.83     19.01   18.57     18.48     18.21
Tangible common book value per share (5)   14.03     14.18   13.71     13.59     14.62

________
(1)       Includes investment securities at adjusted amortized cost and non-performing investment securities.
(2)       Includes nonaccrual loans.
(3)       Excludes preferred shareholders’ equity.
(4)       2015 ratios calculated under Basel III rules, which became effective January 1, 2015.
(5)       See Appendix A – Non-GAAP to GAAP Reconciliation for the computation of this Non-GAAP measure.


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

  Six months ended   2015   2014
  June 30,   Second   First   Fourth   Third   Second
    2015       2014     Quarter   Quarter   Quarter   Quarter   Quarter
                           
SELECTED INCOME STATEMENT DATA:                          
                           
Interest income $   50,956       49,942     25,959   24,997     25,984     25,129   24,883
Interest expense   4,405       3,564     2,555   1,850     1,846     1,871   1,780
  Net interest income   46,551       46,378     23,404   23,147     24,138     23,258   23,103
Provision for loan losses   4,029       3,864     1,288   2,741     1,910     2,015   1,758
  Net interest income after provision                          
  for loan losses   42,522       42,514     22,116   20,406     22,228     21,243   21,345
Noninterest income:                          
  Service charges on deposits   3,843       4,491     1,964   1,879     2,186     2,277   2,241
  Insurance income   2,665       57     1,057   1,608     1,420     922   16
  ATM and debit card   2,476       2,431     1,283   1,193     1,269     1,263   1,257
  Investment advisory   1,028       1,123     541   487     491     524   561
  Investments in limited partnerships   529       707     55   474     209     187   81
  Company owned life insurance   960       828     493   467     504     421   425
  Loan servicing   263       330     96   167     118     120   176
  Net gain on sale of loans held for sale   108       155     39   69     82     76   50
  Net gain on investment securities   1,062       1,262     -   1,062     264     515   949
  Net gain (loss) on sale of other assets   20       (11 )   16   4     8     72   24
  Amortization of tax credit investment   -       -     -   -     (2,323 )   -   -
  Other   1,798       1,561     911   887     927     884   797
  Total noninterest income   14,752       12,934     6,455   8,297     5,155     7,261   6,577
Noninterest expense:                          
  Salaries and employee benefits   20,829       18,319     10,606   10,223     10,551     9,725   9,063
  Occupancy and equipment   7,074       6,374     3,375   3,699     3,324     3,131   3,139
  Professional services   1,834       2,356     866   968     1,428     976   1,384
  Computer and data processing   1,512       1,500     810   702     791     725   777
  Supplies and postage   1,071       1,047     508   563     499     507   535
  FDIC assessments   833       810     415   418     392     390   388
  Advertising and promotions   477       393     238   239     196     216   214
  Other   4,617       4,222     2,418   2,199     2,198     2,285   2,308
  Total noninterest expense   38,247       35,021     19,236   19,011     19,379     17,955   17,808
  Income before income taxes   19,027       20,427     9,335   9,692     8,004     10,549   10,114
Income tax expense   5,641       6,176     2,750   2,891     84     3,365   3,082
  Net income   13,386       14,251     6,585   6,801     7,920     7,184   7,032
Preferred stock dividends   731       731     366   365     365     366   365
Net income available to common shareholders $   12,655       13,520     6,219   6,436     7,555     6,818   6,667
                           
FINANCIAL RATIOS AND STOCK DATA:                          
                           
Earnings per share – basic $ 0.90       0.98     0.44   0.46     0.54     0.49   0.48
Earnings per share – diluted $ 0.90       0.98     0.44   0.46     0.54     0.49   0.48
Cash dividends declared on common stock $   0.40       0.38     0.20   0.20     0.20     0.19   0.19
Common dividend payout ratio (1)   44.44 %     38.78     45.45   43.48     37.04     38.78   39.58
Dividend yield (annualized)   3.25 %     3.27     3.23   3.54     3.15     3.35   3.25
Return on average assets   0.85 %     0.97     0.81   0.89     1.03     0.95   0.95
Return on average equity   9.43 %     10.85     9.19   9.68     11.07     10.41   10.52
Return on average common equity (2)   9.49 %     11.01     9.24   9.75     11.25     10.55   10.66
Efficiency ratio (3)   61.13 %     58.54     62.00   60.27     59.58     57.65   60.15
Stock price (Nasdaq: FISI):                          
  High $ 25.50       25.69     25.50   25.38     27.02     24.94   24.88
  Low $ 21.67       19.72     22.50   21.67     22.45     21.71   22.17
  Close $ 24.84       23.42     24.84   22.93     25.15     22.48   23.42

________
(1)       Common dividend payout ratio equals dividends declared during the period divided by earnings per share for the equivalent period.
(2)       Annualized net income available to common shareholders divided by average common equity.
(3)       Efficiency ratio equals noninterest expense less other real estate expense and amortization of intangible assets as a percentage of net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains on investment securities and amortization of tax credit investment.

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

  Six months ended   2015   2014
  June 30,   Second   First   Fourth   Third   Second
    2015     2014   Quarter   Quarter   Quarter   Quarter   Quarter
                           
SELECTED AVERAGE BALANCES:                              
                               
Federal funds sold and interest-earning deposits $   75     204   26   124   -   51   94
Investment securities (1)   969,091     890,068   1,029,640   907,871   876,932   854,030   875,855
Loans (2):                          
  Commercial business   274,729     270,148   284,535   264,814   265,979   273,239   275,105
  Commercial mortgage   494,095     473,312   509,317   478,705   473,694   473,168   473,883
  Residential mortgage   97,861     110,949   96,474   99,264   101,982   105,255   108,535
  Home equity   388,102     337,922   390,135   386,046   384,138   377,360   346,911
  Consumer indirect   662,982     646,720   664,222   661,727   658,337   653,192   651,150
  Other consumer   19,290     21,455   18,848   19,736   20,630   20,847   20,855
  Total loans   1,937,059     1,860,506   1,963,531   1,910,292   1,904,760   1,903,061   1,876,439
Total interest-earning assets   2,906,225     2,750,778   2,993,197   2,818,287   2,781,692   2,757,142   2,752,388
Goodwill and other intangible assets, net   68,410     49,923   68,294   68,527   68,771   59,306   49,879
Total assets   3,189,721     2,969,591   3,263,111   3,115,516   3,052,499   2,985,920   2,973,735
Interest-bearing liabilities:                          
  Interest-bearing demand   556,564     510,231   561,570   551,503   511,749   486,311   509,398
  Savings and money market   884,709     775,956   929,701   839,218   824,661   758,306   789,956
  Certificates of deposit   609,169     624,068   616,145   602,115   614,654   634,400   629,945
  Short-term borrowings   239,103     249,470   226,577   251,768   232,935   259,995   224,801
  Long-term borrowings, net   16,618     -   33,053   -   -   -   -
  Total interest-bearing liabilities   2,306,163     2,159,725   2,367,046   2,244,604   2,183,999   2,139,012   2,154,100
Noninterest-bearing demand deposits   576,011     531,158   587,396   564,500   564,336   556,485   537,895
Total deposits   2,626,453     2,441,413   2,694,812   2,557,336   2,515,400   2,435,502   2,467,194
Total liabilities   2,903,560     2,704,683   2,975,762   2,830,557   2,768,693   2,712,274   2,705,578
Shareholders’ equity   286,161     264,908   287,349   284,959   283,806   273,646   268,157
Common equity (3)   268,821     247,566   270,009   267,619   266,466   256,306   250,815
Tangible common equity (4) $ 200,411     197,643   201,715   199,092   197,695   197,000   200,936
Common shares outstanding:                          
  Basic   14,071     13,782   14,078   14,063   14,049   13,953   13,791
  Diluted   14,118     13,831   14,121   14,113   14,112   14,007   13,838
                           
SELECTED AVERAGE YIELDS:                          
(Tax equivalent basis)                          
                           
Federal funds sold and interest-earning deposits   0.23 %   0.08   0.39   0.19   -   0.28   0.07
Investment securities   2.46 %   2.44   2.44   2.47   2.48   2.43   2.45
Loans   4.22 %   4.39   4.18   4.27   4.44   4.31   4.32
Total interest-earning assets   3.63 %   3.76   3.58   3.69   3.82   3.73   3.73
Interest-bearing demand   0.13 %   0.12   0.14   0.11   0.11   0.12   0.12
Savings and money market   0.12 %   0.12   0.12   0.10   0.11   0.12   0.12
Certificates of deposit   0.86 %   0.75   0.87   0.84   0.82   0.78   0.76
Short-term borrowings   0.37 %   0.37   0.38   0.37   0.36   0.37   0.36
Long-term borrowings, net   6.20 %   -   6.23   -   -   -   -
Total interest-bearing liabilities   0.38 %   0.33   0.43   0.33   0.34   0.35   0.33
Net interest rate spread   3.25 %   3.43   3.15   3.36   3.48   3.38   3.40
Net interest rate margin   3.33 %   3.49   3.24   3.43   3.56   3.46   3.47

________
(1)       Includes investment securities at adjusted amortized cost.
(2)       Includes nonaccrual loans.
(3)       Excludes preferred shareholders’ equity.
(4)       See Appendix A – Non-GAAP to GAAP Reconciliation for the computation of this Non-GAAP measure.

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

  2015     2014  
  Second   First   Fourth   Third   Second
  Quarter   Quarter   Quarter   Quarter   Quarter
                   
ASSET QUALITY DATA:                  
                   
Allowance for Loan Losses                  
Beginning balance $   27,191     27,637     27,244     27,166     27,152  
Net loan charge-offs (recoveries):                  
  Commercial business   (73 )   1,093     (15 )   44     (65 )
  Commercial mortgage   194     520     (57 )   66     159  
  Residential mortgage   9     22     22     11     61  
  Home equity   145     74     (4 )   66     127  
  Consumer indirect   645     1,317     1,420     1,577     1,336  
  Other consumer   59     161     151     173     126  
  Total net charge-offs   979     3,187     1,517     1,937     1,744  
Provision for loan losses   1,288     2,741     1,910     2,015     1,758  
Ending balance $ 27,500     27,191     27,637     27,244     27,166  
                   
Net charge-offs (recoveries) to average loans (annualized):                  
  Commercial business   -0.10 %   1.67     -0.02     0.06     -0.09  
  Commercial mortgage   0.15 %   0.44     -0.05     0.06     0.13  
  Residential mortgage   0.04 %   0.09     0.09     0.04     0.23  
  Home equity   0.15 %   0.08     0.00     0.07     0.15  
  Consumer indirect   0.39 %   0.81     0.86     0.96     0.82  
  Other consumer   1.26 %   3.31     2.90     3.29     2.42  
  Total loans   0.20 %   0.68     0.32     0.40     0.37  
                   
Supplemental information (1)                  
Non-performing loans:                  
  Commercial business $   4,643     4,587     4,288     3,258     3,589  
  Commercial mortgage   3,070     3,411     3,020     2,460     2,734  
  Residential mortgage   1,628     1,361     1,194     656     758  
  Home equity   619     672     463     464     371  
  Consumer indirect   728     994     1,169     1,300     1,427  
  Other consumer   20     47     19     46     12  
  Total non-performing loans   10,708     11,072     10,153     8,184     8,891  
Foreclosed assets   165     139     194     509     554  
  Total non-performing assets $   10,873     11,211     10,347     8,693     9,445  
                   
Total non-performing loans to total loans   0.53 %   0.58     0.53     0.43     0.47  
Total non-performing assets to total assets   0.32 %   0.35     0.33     0.28     0.32  
Allowance for loan losses to total loans   1.37 %   1.41     1.45     1.43     1.43  
Allowance for loan losses to non-performing loans   257 %   246     272     333     306  

________
(1)       At period end.

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

  Six months ended   2015   2014
  June 30,   Second   First   Fourth   Third   Second
  2015   2014   Quarter   Quarter   Quarter   Quarter   Quarter
Ending tangible assets:                          
Total assets         $ 3,359,459     3,197,077   3,089,521   3,055,304   2,993,264
Less:  Goodwill and other intangible assets, net           68,158     68,396   68,639   68,887   49,826
Tangible assets (non-GAAP)         $ 3,291,301     3,128,681   3,020,882   2,986,417   2,943,438
                           
Ending tangible common equity:                          
Common shareholders’ equity         $   267,095     269,349   262,192   260,418   252,487
Less:  Goodwill and other intangible assets, net           68,158     68,396   68,639   68,887   49,826
Tangible common equity (non-GAAP)         $   198,937     200,953   193,553   191,531   202,661
                           
Tangible common equity to tangible assets (non-GAAP) (1)         6.04 %   6.42   6.41   6.41   6.89
                           
Common shares outstanding           14,184     14,167   14,118   14,094   13,863
Tangible common book value per share (non-GAAP) (2)       $   14.03     14.18   13.71   13.59   14.62
                           
Average tangible common equity:                          
Average common equity $ 268,821     247,566     270,009     267,619   266,466   256,306   250,815
Average goodwill and other intangible assets, net   68,410     49,923     68,294     68,527   68,771   59,306   49,879
Average tangible common equity (non-GAAP) $ 200,411     197,643     201,715     199,092   197,695   197,000   200,936

________
(1)       Tangible common equity divided by tangible assets.
(2)       Tangible common equity divided by common shares outstanding.

 

For additional information contact: Kevin B. Klotzbach Chief Financial Officer & Treasurer Phone: 585.786.1130 Email: KBKlotzbach@five-starbank.com Jordan Darrow Darrow Associates Phone: 631.367.1866 Email: jdarrow@darrowir.com

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