FISI Financial Institutions Inc

Financial Institutions, Inc. (NASDAQ: FISI) (the “Company,” “we” or “us”), parent company of Five Star Bank (the “Bank”), SDN Insurance Agency, LLC (“SDN”) and Courier Capital, LLC (“Courier Capital”), today reported financial and operational results for the second quarter ended June 30, 2023.

Net income was $14.4 million for the second quarter of 2023, compared to $12.1 million in the first quarter of 2023 and $15.6 million in the second quarter of 2022. After preferred dividends, net income available to common shareholders was $14.0 million, or $0.91 per diluted share, in the second quarter of 2023, compared to $11.7 million, or $0.76 per diluted share, in the first quarter of 2023, and $15.3 million, or $0.99 per diluted share, in the second quarter of 2022. The Company recorded a provision for credit losses of $3.2 million in the current quarter, compared to $4.2 million in the linked quarter and $563 thousand in the prior year quarter.

Second Quarter 2023 Highlights:

• Total loans were $4.40 billion at June 30, 2023, reflecting an increase of $154.5 million, or 3.6%, from March 31, 2023 and $633.8 million, or 16.8%, from June 30, 2022.
• Total deposits were $5.03 billion at June 30, 2023, down $106.4 million, or 2.1%, from March 31, 2023, reflective of seasonal outflows in the public deposit portfolio that occur during the second quarter, and up $214.3 million, or 4.4%, from one year prior.
• Net interest income of $42.3 million increased $522 thousand, or 1.2%, and $740 thousand, or 1.8%, from the linked and year-ago quarters, respectively, amid the current rising interest rate environment that has driven higher yields as well as higher funding costs.
• Noninterest income was $11.5 million, up $542 thousand, or 5.0%, from the first quarter of 2023 and up $106 thousand, or 0.9%, from the second quarter of 2022.
• The Company completed the merger of its two wholly-owned SEC-registered investment advisory firm subsidiaries, under which HNP Capital, LLC merged with and into Courier Capital, LLC, now one of the largest registered investment advisory firms headquartered in Western New York with assets under management of $2.75 billion at June 30, 2023.
• The Company continues to report strong credit quality metrics, including annualized net charge-offs to average loans for the current quarter of 0.06%, as well as non-performing loans to total loans of 0.23% and non-performing assets to total assets of 0.16% as of June 30, 2023.
• Results for the second quarter of 2023 were positively impacted by a reduction in income tax expense of approximately $761 thousand for federal and state tax benefits related to tax credit investments placed in service in the current and prior quarters. These tax credit investments also generated a net gain of $489 thousand, recorded in noninterest income, resulting in a net positive impact in the quarter of $1.3 million.

“Our second quarter performance included incremental loan growth, which helped to partially offset ongoing funding cost pressures impacting our industry, as well as the continuation of solid credit quality metrics that reflect our long-term commitment to credit disciplined loan growth,” said President and Chief Executive Officer Martin K. Birmingham. “We continue to believe that 2023 loan growth will be concentrated in the first half of the year, with commercial mortgage originations expected to slow significantly as a result of softer demand given economic conditions and higher liquidity premiums in our pricing models. Our consumer and commercial loan portfolios continue to demonstrate stability and acceptable performance despite the volatility associated with the higher interest rate environment. Credit quality remains very strong, as measured by our ratios of annualized charge-offs to average loans for commercial mortgage loans standing at zero basis points and our consumer indirect charge-off ratio improving to 12 basis points for the quarter.

“During the second quarter, we also took steps to better position our wealth management business for growth by combining our registered investment advisory firms under the Courier Capital name. The merger enhances the size and scale of Courier Capital within our footprint, including in Buffalo, Rochester and across Upstate New York, thereby expanding the spectrum of opportunities where we can compete.  It also streamlines our business development efforts with respect to institutional clients, retirement plan sponsors and high-net-worth individuals and families.  Our wealth business has and will continue to be an important driver of noninterest income and overall revenue diversity.”

Chief Financial Officer and Treasurer W. Jack Plants II added, “Heading into the second half of the year, we are maintaining a strong focus on deposit generation.  We launched a new marketing campaign this week and are beginning to see some of our anticipated Banking-as-a-Service, or BaaS, deposits come on.  While we experienced continued margin compression in the second quarter, it was at a more modest level than during the linked quarter. We have observed a slowing of prepayments across all asset classes; however, we continue to expect loan and investment cash flow of approximately $1 billion over the next 12-months given the pace of loan originations during the first half of 2023.”

Merger of Courier Capital and HNP Capital

On May 1, 2023, the Company announced the completion of the merger of its wholly-owned SEC-registered investment advisory firms, under which HNP Capital merged with and into Courier Capital.  As one of the largest registered investment advisory firms in Western New York, with assets under management of approximately $2.75 billion at June 30, 2023, Courier Capital provides customized investment management, financial planning and consulting services to individuals and families, businesses, institutions, non-profits and retirement plans.

Net Interest Income and Net Interest Margin

Net interest income was $42.3 million for the second quarter of 2023, an increase of $522 thousand from the first quarter of 2023 and an increase of $740 thousand from the second quarter of 2022.

Average interest-earning assets for the current quarter were $5.69 billion, an increase of $205.8 million from the first quarter of 2023 due to a $208.5 million increase in average loans and a $29.6 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $32.3 million decrease in the average balance of investment securities. Average interest-earning assets for the current quarter were $445.3 million higher than the second quarter of 2022 due to a $559.6 million increase in average loans and a $32.5 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $146.9 million decrease in the average balance of investment securities.

Average interest-bearing liabilities for the current quarter were $4.43 billion, an increase of $247.5 million from the first quarter of 2023, primarily due to a $149.4 million increase in average short-term borrowings and a $124.5 million increase in average time deposits, partially offset by a $31.5 million decrease in average interest-bearing demand deposits. Average interest-bearing liabilities for the second quarter of 2023 were $489.5 million higher than the year-ago quarter, primarily due to a $551.7 million increase in average time deposits and a $200.7 million increase in average short-term borrowings, partially offset by a $222.9 million decrease in average savings and money market accounts, and a $90.4 million decrease in average interest-bearing demand deposits.

Net interest margin was 2.99% in the current quarter as compared to 3.09% in the first quarter of 2023 and 3.19% in the second quarter of 2022, primarily as a result of a shift in the deposit mix from lower cost transactional accounts to higher cost time deposits, as customers responded to the rising interest rate environment, as well as seasonality and repricing within the public deposit portfolio, partially offset by an increase in the average yield on interest-earnings assets.

Noninterest Income

Noninterest income was $11.5 million for the second quarter of 2023, an increase of $542 thousand from the first quarter of 2023 and an increase of $106 thousand from the second quarter of 2022.

• Service charges on deposits of $1.2 million reflected a $196 thousand increase from the linked first quarter of 2023, due in part to seasonal consumer spending habits, and a $214 thousand decrease from the year-ago period, due to a reduction in nonsufficient funds fees as a result of January 2023 changes in the Bank’s consumer overdraft program that align with trends in community banking.
• Insurance income of $1.3 million was $759 thousand lower than the first quarter of 2023 and $94 thousand higher than the second quarter of 2022, with the linked quarter change largely due to timing of contingent revenue earned in the first quarter each year.
• Investment advisory income of $2.8 million was $104 thousand lower than the first quarter of 2023 and $87 thousand lower than the second quarter of 2022, primarily due to lower transaction-based fees in the most recent period.
• Income from investments in limited partnerships of $469 thousand was $218 thousand higher than the first quarter of 2023 and $227 thousand higher than the second quarter of 2022. 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.
• Net gain on sale of loans held for sale was $122 thousand in the current quarter compared to $112 thousand in the first quarter of 2023 and $828 thousand in the second quarter of 2022, when the Company recorded a $586 thousand gain related to the sale of a $31.2 million portfolio of indirect loans.
• A net gain on tax credit investments of $489 thousand was recognized in the current quarter related to tax credit investments placed in service in the current and prior quarters. This net gain includes the New York investment tax credits that are refundable, partially offset by amortization of the tax credit investments.

Noninterest Expense

Noninterest expense was $33.8 million in the second quarter of 2023 compared to $33.7 million in the first quarter of 2023 and $32.9 million in the second quarter of 2022.

• Salaries and employee benefits expense of $17.8 million was $379 thousand lower than the first quarter of 2023 and $788 thousand higher than the second quarter of 2022. The linked quarter change was primarily due to lower medical and dental claim activity, while the year-over-year increase was primarily due to annual merit increases.
• Occupancy and equipment expenses of $3.5 million were down $192 thousand and $477 thousand from the linked and year-ago periods, respectively, primarily due to timing of maintenance and repairs.
• Professional services expenses of $1.3 million were $222 thousand lower than the first quarter of 2023, due to the timing of audit fees, and were flat with the second quarter of 2022.
• FDIC assessments expense of $1.2 million reflects increases of $124 thousand and $618 thousand from the linked and year-ago quarters, respectively, due in part to the impact of an increase in base deposit insurance assessment rate schedules by two basis points. 
• Other expense of $4.0 million was $587 thousand higher than the first quarter of 2023 and $1.0 million higher than the second quarter of 2022. The linked quarter variance was driven in part by interest charges related to collateral held for derivative transactions. The year-over-year increase was the result of a combination of factors including interest charges related to collateral held for derivative transactions, the timing of deposit account-related fraud charge-offs, higher insurance costs and the impact of inflationary pressures.
• As previously disclosed, in the second quarter of 2022 the Company recognized restructuring charges of $1.3 million in connection with the write-down of real estate assets to fair market value based upon then-existing purchase offers and current market conditions for five locations that were closed in the second half of 2020. There were no such restructuring charges in the first quarter of 2023 and modest recoveries of $19 thousand in the second quarter of 2023.

Income Taxes

Income tax expense was $2.4 million for the second quarter of 2023 compared to $2.8 million in the first quarter of 2023 and $3.9 million in the second quarter of 2022. The Company recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the second quarter of 2023, first quarter of 2023, and second quarter of 2022, resulting in income tax expense reductions of $761 thousand, $584 thousand, and $426 thousand, respectively.

The effective tax rate was 14.4% for the second quarter of 2023, 18.7% for the first quarter of 2023, and 19.8% for the second quarter of 2022. The effective tax rate fluctuates on a quarterly basis primarily due to the level of pre-tax earnings and may differ from statutory rates because of interest income from tax-exempt securities, earnings on company owned life insurance and the impact of tax credit investments.

Balance Sheet and Capital Management

Total assets were $6.14 billion at June 30, 2023, up $174.3 million from March 31, 2023, and up $573.1 million from June 30, 2022.

Investment securities were $1.07 billion at June 30, 2023, down $53.5 million from March 31, 2023, and down $189.9 million from June 30, 2022. The decline in the linked quarter portfolio balance was driven by the use of portfolio cash flow to fund loan originations. The decrease from June 30, 2022 was primarily the result of a decrease in the market value of the portfolio due to rising interest rates combined with the use of portfolio cash flow to fund loan originations.

Total loans were $4.40 billion at June 30, 2023, up $154.5 million, or 3.6%, from March 31, 2023, and up $633.8 million, or 16.8%, from June 30, 2022.

• Commercial business loans totaled $720.4 million, up $25.3 million, or 3.6%, from March 31, 2023, and up $109.3 million, or 17.9%, from June 30, 2022.
• Commercial mortgage loans totaled $1.96 billion, up $119.7 million, or 6.5%, from March 31, 2023, and up $513.1 million, or 35.4%, from June 30, 2022.
• Residential real estate loans totaled $611.2 million, up $19.4 million, or 3.3%, from March 31, 2023, and up $36.4 million, or 6.3%, from June 30, 2022.
• Consumer indirect loans totaled $1.00 billion, down $21.2 million, or 2.1%, from March 31, 2023, and down $38.3 million, or 3.7%, from June 30, 2022.

Total deposits were $5.03 billion at June 30, 2023, $106.4 million lower than March 31, 2023, and $214.3 million higher than June 30, 2022. The decrease from March 31, 2023 was primarily the result of a seasonal decrease in public deposits. The increase from June 30, 2022 was primarily driven by increases in reciprocal and brokered deposits. Public deposit balances represented 20% of total deposits at June 30, 2023, 23% at March 31, 2023 and 21% at June 30, 2022. 

Short-term borrowings were $374.0 million at June 30, 2023, compared to $116.0 million at March 31, 2023 and $109.0 million at June 30, 2022. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits.

Shareholders’ equity was $425.9 million at June 30, 2023, compared to $422.8 million at March 31, 2023, and $425.8 million at June 30, 2022. Shareholders’ equity has been negatively impacted since 2022 by an increase in accumulated other comprehensive loss associated with unrealized losses in the available for sale securities portfolio. Management believes the unrealized losses are temporary in nature, as they are associated with the increase in interest rates. The securities portfolio continues to generate cash flow and given the high quality of the agency mortgage-backed securities portfolio, management expects the bonds to ultimately mature at a terminal value equivalent to par.

Common book value per share was $26.53 at June 30, 2023, an increase of $0.15, or 0.6%, from $26.38 at March 31, 2023, and a decrease of $0.11, or 0.4%, from $26.64 at June 30, 2022. Tangible common book value per share(1) was $21.79 at June 30, 2023, an increase of $0.18, or 0.8%, from $21.62 at March 31, 2023, and a decrease of $0.03, or 0.1%, from $21.82 at June 30, 2022. The common equity to assets ratio was 6.65% at June 30, 2023, compared to 6.80% at March 31, 2023, and 7.34% at June 30, 2022. Tangible common equity to tangible assets(1), or the TCE ratio, was 5.53%, 5.64% and 6.09% at June 30, 2023, March 31, 2023, and June 30, 2022, respectively. The primary driver of variations in all four measures for the comparable linked and year-ago periods was the previously described changes in accumulated other comprehensive loss.

During the second quarter of 2023, the Company declared a common stock dividend of $0.30 per common share, consistent with the linked quarter and representing an increase of 3.4% over the prior year quarter. The dividend returned 33.0% of second quarter net income to common shareholders.

The Company’s regulatory capital ratios at June 30, 2023 continued to exceed all regulatory capital requirements to be considered well capitalized.

• Leverage Ratio was 8.08% compared to 8.19% and 8.20% at March 31, 2023, and June 30, 2022, respectively.
• Common Equity Tier 1 Capital Ratio was 9.10% compared to 9.21% and 9.91% at March 31, 2023, and June 30, 2022, respectively.
• Tier 1 Capital Ratio was 9.43% compared to 9.55% and 10.29% at March 31, 2023, and June 30, 2022, respectively.
• Total Risk-Based Capital Ratio was 11.77% compared to 11.93% and 12.75% at March 31, 2023, and June 30, 2022, respectively.

Credit Quality

Non-performing loans were $9.9 million, or 0.23% of total loans, at June 30, 2023, as compared to $8.8 million, or 0.21% of total loans, at March 31, 2023, and $6.5 million, or 0.17% of total loans, at June 30, 2022. Net charge-offs were $636 thousand, representing 0.06% of average loans on an annualized basis, for the current quarter, as compared to net charge-offs of $2.1 million, or an annualized 0.21% of average loans, in the first quarter of 2023 and net recoveries of $1.0 million, or an annualized 0.11%, in the second quarter of 2022.  As previously disclosed, during the second quarter of 2022, the Company recovered $2.0 million in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the fourth quarter of 2021.

At June 30, 2023, the allowance for credit losses on loans to total loans ratio was 1.13%, compared to 1.12% at March 31, 2023, and 1.13% at June 30, 2022.

Provision for credit losses on loans was $2.9 million in the current quarter, compared to $4.2 million in the first quarter of 2023 and $446 thousand in the second quarter of 2022. The allowance for unfunded commitments, also included in provision for credit losses as required by the current expected credit loss standard (“CECL”), increased by $287 thousand in the second quarter of 2023, $11 thousand in the first quarter of 2023, and $119 thousand in the second quarter of 2022.  Provision for credit losses for the second quarter of 2023 reflected the impact of strong loan growth and a modest increase in the national unemployment forecast, partially offset by low levels of net charge-offs and a reduction in overall specific reserve levels.  In the second quarter of 2022, the loan loss provision was impacted by the previously mentioned $2.0 million commercial loan recovery.

The Company has remained strategically focused on the importance of credit discipline, allocating what it believes are the necessary resources to credit and risk management functions as the loan portfolio has grown. The ratio of allowance for credit losses on loans to non-performing loans was 503% at June 30, 2023, 540% at March 31, 2023, and 648% at June 30, 2022.

Subsequent Events

The Company is required, under generally accepted accounting principles, to evaluate subsequent events through the filing of its consolidated financial statements for the quarter ended June 30, 2023, on Form 10-Q. As a result, the Company will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of June 30, 2023, and will adjust amounts preliminarily reported, if necessary.

Conference Call

The Company will host an earnings conference call and audio webcast on July 28, 2023 at 8:30 a.m. Eastern Time. The call will be hosted by Martin K. Birmingham, President and Chief Executive Officer, and W. Jack Plants II, Chief Financial Officer and Treasurer. The live webcast will be available in listen-only mode on the Company’s website at www.FISI-investors.com. Within the United States, listeners may also access the call by dialing 1-833-470-1428 and providing the access code 588237. The webcast replay will be available on the Company’s website for at least 30 days.

About Financial Institutions, Inc.

Financial Institutions, Inc. (NASDAQ: FISI) is an innovative financial holding company with approximately $6.1 billion in assets offering banking, insurance and wealth management products and services through a network of subsidiaries. Its Five Star Bank subsidiary provides consumer and commercial banking and lending services to individuals, municipalities and businesses through its Western and Central New York branch network and its Mid-Atlantic commercial loan production office serving the Baltimore and Washington, D.C. region. SDN Insurance Agency, LLC provides a broad range of insurance services to personal and business clients, while Courier Capital, LLC offers customized investment management, consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. Learn more at five-starbank.com and FISI-investors.com.

Non-GAAP Financial Information

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

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

Safe Harbor Statement

This press release may contain forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “believe,” "continue," “estimate,” “expect,” “forecast,” “intend,” “plan,” “preliminary,” “should,” or “will.” Statements herein are based on certain assumptions and analyses by the Company and factors it believes are appropriate in the circumstances. Actual results could differ materially from those contained in or implied by such statements for a variety of reasons including, but not limited to: changes in interest rates; inflation; changes in deposit flows and the cost and availability of funds; the Company’s ability to implement its strategic plan, including by expanding its commercial lending footprint and integrating its acquisitions; whether the Company experiences greater credit losses than expected; whether the Company experiences breaches of its, or third party, information systems; the attitudes and preferences of the Company’s customers; legal and regulatory proceedings and related matters, including any action described in our reports filed with the SEC, could adversely affect us and the banking industry in general; the competitive environment; fluctuations in the fair value of securities in its investment portfolio; changes in the regulatory environment and the Company’s compliance with regulatory requirements; and general economic and credit market conditions nationally and regionally; and the macroeconomic volatility related to the impact of the COVID-19 pandemic or global political unrest. 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 financial measure.

For additional information contact:Kate CroftDirector of Investor and External Relations(716) 817-5159klcroft@five-starbank.com

FINANCIAL INSTITUTIONS, INC. Selected Financial Information (Unaudited) (Amounts in thousands, except per share amounts)
		2023								2022
		June 30,				March 31,				December 31,				September 30,				June 30,
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents		$	180,248			$	139,974			$	130,466			$	118,581			$	109,705
Investment securities:
Available for sale			912,122				945,442				954,371				965,531				1,057,018
Held-to-maturity, net			159,893				180,052				188,975				197,538				204,933
Total investment securities			1,072,015				1,125,494				1,143,346				1,163,069				1,261,951
Loans held for sale			805				682				550				2,074				4,265
Loans:
Commercial business			720,372				695,110				664,249				633,894				611,102
Commercial mortgage			1,961,220				1,841,481				1,679,840				1,564,545				1,448,152
Residential real estate loans			611,199				591,846				589,960				577,821				574,784
Residential real estate lines			75,971				76,086				77,670				77,336				76,108
Consumer indirect			1,000,982				1,022,202				1,023,620				997,423				1,039,251
Other consumer			28,065				16,607				15,110				15,832				14,621
Total loans			4,397,809				4,243,332				4,050,449				3,866,851				3,764,018
Allowance for credit losses - loans			49,836				47,528				45,413				44,106				42,452
Total loans, net			4,347,973				4,195,804				4,005,036				3,822,745				3,721,566
Total interest-earning assets			5,749,015				5,600,786				5,428,533				5,073,983				5,206,795
Goodwill and other intangible assets, net			72,950				73,180				73,414				73,653				73,897
Total assets			6,141,298				5,966,992				5,797,272				5,624,482				5,568,198
Deposits:
Noninterest-bearing demand			1,022,788				1,067,011				1,139,214				1,135,125				1,114,460
Interest-bearing demand			823,983				901,251				863,822				946,431				877,661
Savings and money market			1,641,014				1,701,663				1,643,516				1,800,321				1,845,186
Time deposits			1,547,076				1,471,382				1,282,872				1,023,277				983,209
Total deposits			5,034,861				5,141,307				4,929,424				4,905,154				4,820,516
Short-term borrowings			374,000				116,000				205,000				69,000				109,000
Long-term borrowings, net			124,377				124,299				74,222				74,144				74,067
Total interest-bearing liabilities			4,510,450				4,314,595				4,069,432				3,913,173				3,889,123
Shareholders’ equity			425,873				422,823				405,605				394,048				425,801
Common shareholders’ equity			408,581				405,531				388,313				376,756				408,509
Tangible common equity (1)			335,631				332,351				314,899				303,103				334,612
Accumulated other comprehensive loss		$	(134,472	)		$	(127,372	)		$	(137,487	)		$	(141,183	)		$	(99,724	)
Common shares outstanding			15,402				15,375				15,340				15,334				15,334
Treasury shares			698				724				760				765				765
CAPITAL RATIOS AND PER SHARE DATA:
Leverage ratio			8.08	%			8.19	%			8.33	%			8.35	%			8.20	%
Common equity Tier 1 capital ratio			9.10	%			9.21	%			9.42	%			9.75	%			9.91	%
Tier 1 capital ratio			9.43	%			9.55	%			9.78	%			10.12	%			10.29	%
Total risk-based capital ratio			11.77	%			11.93	%			12.13	%			12.53	%			12.75	%
Common equity to assets			6.65	%			6.80	%			6.70	%			6.70	%			7.34	%
Tangible common equity to tangible assets (1)			5.53	%			5.64	%			5.50	%			5.46	%			6.09	%
Common book value per share		$	26.53			$	26.38			$	25.31			$	24.57			$	26.64
Tangible common book value per share (1)		$	21.79			$	21.62			$	20.53			$	19.77			$	21.82

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

FINANCIAL INSTITUTIONS, INC. Selected Financial Information (Unaudited) (Amounts in thousands, except per share amounts)
		Six Months Ended								2023								2022
		June 30,								Second				First				Fourth				Third				Second
		2023				2022				Quarter				Quarter				Quarter				Quarter				Quarter
SELECTED INCOME STATEMENT DATA:
Interest income		$	134,886			$	87,627			$	71,115			$	63,771			$	57,805			$	50,675			$	45,276
Interest expense			50,734				6,472				28,778				21,956				14,656				7,607				3,679
Net interest income			84,152				81,155				42,337				41,815				43,149				43,068				41,597
Provision for credit losses			7,444				2,882				3,230				4,214				6,115				4,314				563
Net interest income after provision for credit losses			76,708				78,273				39,107				37,601				37,034				38,754				41,034
Noninterest income:
Service charges on deposits			2,250				2,806				1,223				1,027				1,486				1,597				1,437
Insurance income			3,415				3,331				1,328				2,087				1,462				1,571				1,234
Card interchange income			4,046				4,055				2,107				1,939				2,074				2,076				2,103
Investment advisory			5,742				5,947				2,819				2,923				2,824				2,722				2,906
Company owned life insurance			1,947				1,702				953				994				875				2,965				869
Investments in limited partnerships			720				1,037				469				251				191				65				242
Loan servicing			260				244				114				146				124				139				135
Income from derivative instruments, net			1,199				1,164				703				496				656				99				645
Net gain on sale of loans held for sale			234				737				122				112				182				308				828
Net loss on investment securities			-				(15	)			-				-				-				-				(15	)
Net gain (loss) on other assets			32				7				(7	)			39				(1	)			(22	)			7
Net gain (loss) on tax credit investments			288				(319	)			489				(201	)			(111	)			(385	)			(92	)
Other			2,257				1,986				1,146				1,111				1,175				1,517				1,061
Total noninterest income			22,390				22,682				11,466				10,924				10,937				12,652				11,360
Noninterest expense:
Salaries and employee benefits			35,887				33,582				17,754				18,133				18,101				17,950				16,966
Occupancy and equipment			7,268				7,771				3,538				3,730				3,539				3,793				4,015
Professional services			2,768				2,925				1,273				1,495				1,420				1,247				1,269
Computer and data processing			9,441				8,552				4,750				4,691				4,679				4,407				4,573
Supplies and postage			963				1,010				473				490				493				440				469
FDIC assessments			2,354				1,134				1,239				1,115				655				651				621
Advertising and promotions			812				786				498				314				576				651				406
Amortization of intangibles			464				503				230				234				239				244				249
Restructuring (recoveries) charges			(19	)			1,269				(19	)			-				350				-				1,269
Other			7,505				5,490				4,046				3,459				3,461				3,444				3,050
Total noninterest expense			67,443				63,022				33,782				33,661				33,513				32,827				32,887
Income before income taxes			31,655				37,933				16,791				14,864				14,458				18,579				19,507
Income tax expense			5,193				7,302				2,418				2,775				2,370				4,725				3,859
Net income			26,462				30,631				14,373				12,089				12,088				13,854				15,648
Preferred stock dividends			729				729				364				365				364				365				365
Net income available to common shareholders		$	25,733			$	29,902			$	14,009			$	11,724			$	11,724			$	13,489			$	15,283
FINANCIAL RATIOS:
Earnings per share – basic		$	1.68			$	1.94			$	0.91			$	0.76			$	0.76			$	0.88			$	1.00
Earnings per share – diluted		$	1.67			$	1.93			$	0.91			$	0.76			$	0.76			$	0.88			$	0.99
Cash dividends declared on common stock		$	0.60			$	0.58			$	0.30			$	0.30			$	0.29			$	0.29			$	0.29
Common dividend payout ratio			35.71	%			29.90	%			32.97	%			39.47	%			38.16	%			32.95	%			29.00	%
Dividend yield (annualized)			7.69	%			4.50	%			7.64	%			6.31	%			4.72	%			4.78	%			4.47	%
Return on average assets (annualized)			0.90	%			1.11	%			0.95	%			0.84	%			0.85	%			0.98	%			1.12	%
Return on average equity (annualized)			12.60	%			13.32	%			13.43	%			11.73	%			11.92	%			12.55	%			14.40	%
Return on average common equity (annualized)			12.77	%			13.51	%			13.64	%			11.87	%			12.08	%			12.72	%			14.64	%
Return on average tangible common equity (annualized) (1)			15.58	%			16.20	%			16.58	%			14.53	%			14.94	%			15.43	%			17.79	%
Efficiency ratio (2)			63.17	%			60.51	%			62.66	%			63.68	%			61.82	%			58.78	%			61.91	%
Effective tax rate			16.4	%			19.2	%			14.4	%			18.7	%			16.4	%			25.4	%			19.8	%

(1)	See Appendix A – Reconciliation to Non-GAAP Financial Measures for the computation of this non-GAAP financial measure.
(2)	The efficiency ratio is calculated by dividing noninterest expense by net revenue, i.e., the sum of net interest income (fully taxable equivalent) and noninterest income before net gains on investment securities. This is a banking industry measure not required by GAAP.

   

FINANCIAL INSTITUTIONS, INC. Selected Financial Information (Unaudited)(Amounts in thousands)
		Six Months Ended								2023								2022
		June 30,								Second				First				Fourth				Third				Second
		2023				2022				Quarter				Quarter				Quarter				Quarter				Quarter
SELECTED AVERAGE BALANCES:
Federal funds sold and interest-earning deposits		$	78,214			$	52,538			$	92,954			$	63,311			$	49,073			$	42,183			$	60,429
Investment securities (1)			1,285,254				1,417,996				1,269,181				1,301,506				1,332,776				1,369,166				1,416,065
Loans:
Commercial business			690,360				627,241				710,145				670,354				636,470				623,916				626,574
Commercial mortgage			1,828,807				1,430,916				1,911,729				1,744,963				1,633,298				1,514,138				1,429,910
Residential real estate loans			594,217				578,994				598,638				589,747				582,352				577,094				576,990
Residential real estate lines			76,408				77,167				76,191				76,627				77,342				76,853				76,730
Consumer indirect			1,017,814				1,007,791				1,011,338				1,024,362				1,003,728				1,012,787				1,045,720
Other consumer			18,439				14,356				21,686				15,156				15,175				14,648				14,183
Total loans			4,226,045				3,736,465				4,329,727				4,121,209				3,948,365				3,819,436				3,770,107
Total interest-earning assets			5,589,513				5,206,999				5,691,862				5,486,026				5,330,214				5,230,785				5,246,601
Goodwill and other intangible assets, net			73,194				74,161				73,079				73,312				73,547				73,791				74,037
Total assets			5,949,101				5,579,371				6,053,258				5,843,786				5,667,331				5,599,964				5,598,217
Interest-bearing liabilities:
Interest-bearing demand			864,235				931,253				848,552				880,093				923,374				854,015				938,995
Savings and money market			1,662,598				1,915,344				1,660,148				1,665,075				1,764,230				1,817,413				1,882,998
Time deposits			1,444,705				941,448				1,506,592				1,382,131				1,116,135				1,031,162				954,862
Short-term borrowings			220,641				59,649				294,923				145,533				87,783				136,610				94,242
Long-term borrowings, net			119,318				73,980				124,329				114,251				74,175				74,096				74,019
Total interest-bearing liabilities			4,311,497				3,921,674				4,434,544				4,187,083				3,965,697				3,913,296				3,945,116
Noninterest-bearing demand deposits			1,047,121				1,090,835				1,029,681				1,064,754				1,123,223				1,115,759				1,098,084
Total deposits			5,018,659				4,878,880				5,044,973				4,992,053				4,926,962				4,818,349				4,874,939
Total liabilities			5,525,476				5,115,637				5,624,006				5,425,851				5,265,134				5,162,057				5,162,293
Shareholders’ equity			423,625				463,734				429,252				417,935				402,197				437,907				435,924
Common equity			406,333				446,442				411,960				400,643				384,905				420,615				418,632
Tangible common equity (2)		$	333,139			$	372,281			$	338,881			$	327,331			$	311,358			$	346,824			$	344,595
Common shares outstanding:
Basic			15,356				15,440				15,372				15,348				15,330				15,329				15,306
Diluted			15,427				15,532				15,413				15,435				15,413				15,393				15,385
SELECTED AVERAGE YIELDS: (Tax equivalent basis)
Investment securities			1.89	%			1.78	%			1.89	%			1.90	%			1.88	%			1.81	%			1.82	%
Loans			5.78	%			4.05	%			5.93	%			5.61	%			5.15	%			4.62	%			4.13	%
Total interest-earning assets			4.87	%			3.40	%			5.02	%			4.71	%			4.32	%			3.86	%			3.47	%
Interest-bearing demand			0.71	%			0.12	%			0.77	%			0.64	%			0.52	%			0.18	%			0.12	%
Savings and money market			1.80	%			0.20	%			2.00	%			1.60	%			1.20	%			0.56	%			0.23	%
Time deposits			3.56	%			0.35	%			3.76	%			3.33	%			2.31	%			1.12	%			0.41	%
Short-term borrowings			3.99	%			0.95	%			4.30	%			3.35	%			2.48	%			1.95	%			1.07	%
Long-term borrowings, net			5.07	%			5.73	%			5.04	%			5.11	%			5.72	%			5.72	%			5.73	%
Total interest-bearing liabilities			2.37	%			0.33	%			2.60	%			2.12	%			1.47	%			0.77	%			0.37	%
Net interest rate spread			2.50	%			3.07	%			2.42	%			2.59	%			2.85	%			3.09	%			3.10	%
Net interest margin			3.04	%			3.15	%			2.99	%			3.09	%			3.23	%			3.28	%			3.19	%

(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 financial measure.

  

FINANCIAL INSTITUTIONS, INC. Selected Financial Information (Unaudited) (Amounts in thousands)
		Six Months Ended								2023								2022
		June 30,								Second				First				Fourth				Third				Second
		2023				2022				Quarter				Quarter				Quarter				Quarter				Quarter
ASSET QUALITY DATA:
Allowance for Credit Losses - Loans
Beginning balance		$	45,413			$	39,676			$	47,528			$	45,413			$	44,106			$	42,452			$	40,966
Net loan charge-offs (recoveries):
Commercial business			(91	)			53				33				(124	)			(21	)			(96	)			90
Commercial mortgage			14				(2,019	)			16				(2	)			1,167				(1	)			(2,018	)
Residential real estate loans			71				41				13				58				242				(4	)			46
Residential real estate lines			41				(17	)			25				16				(19	)			35				(12	)
Consumer indirect			2,138				1,197				300				1,838				1,451				1,890				647
Other consumer			552				492				249				303				518				329				207
Total net charge-offs (recoveries)			2,725				(253	)			636				2,089				3,338				2,153				(1,040	)
Provision for credit losses - loans			7,148				2,523				2,944				4,204				4,645				3,807				446
Ending balance		$	49,836			$	42,452			$	49,836			$	47,528			$	45,413			$	44,106			$	42,452
Net charge-offs (recoveries) to average loans (annualized):
Commercial business			-0.03	%			0.02	%			0.02	%			-0.08	%			-0.01	%			-0.06	%			0.06	%
Commercial mortgage			0.00	%			-0.28	%			0.00	%			0.00	%			0.28	%			0.00	%			-0.57	%
Residential real estate loans			0.02	%			0.01	%			0.01	%			0.04	%			0.16	%			0.00	%			0.03	%
Residential real estate lines			0.11	%			-0.04	%			0.13	%			0.09	%			-0.10	%			0.18	%			-0.06	%
Consumer indirect			0.42	%			0.24	%			0.12	%			0.73	%			0.57	%			0.74	%			0.25	%
Other consumer			6.04	%			6.91	%			4.62	%			8.10	%			13.57	%			8.90	%			5.86	%
Total loans			0.13	%			-0.01	%			0.06	%			0.21	%			0.34	%			0.22	%			-0.11	%
Supplemental information (1)
Non-performing loans:
Commercial business		$	415			$	422			$	415			$	334			$	340			$	1,358			$	422
Commercial mortgage			2,477				836				2,477				2,550				2,564				843				836
Residential real estate loans			3,820				2,738				3,820				3,267				4,071				3,550				2,738
Residential real estate lines			208				160				208				159				142				119				160
Consumer indirect			2,982				2,389				2,982				2,487				3,079				2,666				2,389
Other consumer			5				3				5				4				2				-				3
Total non-performing loans			9,907				6,548				9,907				8,801				10,198				8,536				6,548
Foreclosed assets			163				-				163				101				19				-				-
Total non-performing assets		$	10,070			$	6,548			$	10,070			$	8,902			$	10,217			$	8,536			$	6,548
Total non-performing loans to total loans			0.23	%			0.17	%			0.23	%			0.21	%			0.25	%			0.22	%			0.17	%
Total non-performing assets to total assets			0.16	%			0.11	%			0.16	%			0.15	%			0.18	%			0.15	%			0.12	%
Allowance for credit losses - loans to total loans			1.13	%			1.13	%			1.13	%			1.12	%			1.12	%			1.14	%			1.13	%
Allowance for credit losses - loans to non-performing loans			503	%			648	%			503	%			540	%			445	%			517	%			648	%

(1)	At period end.

FINANCIAL INSTITUTIONS, INC. Appendix A — Reconciliation to Non-GAAP Financial Measures (Unaudited) (In thousands, except per share amounts)
		Six Months Ended								2023								2022
		June 30,								Second				First				Fourth				Third				Second
		2023				2022				Quarter				Quarter				Quarter				Quarter				Quarter
Ending tangible assets:
Total assets										$	6,141,298			$	5,966,992			$	5,797,272			$	5,624,482			$	5,568,198
Less: Goodwill and other intangible assets, net											72,950				73,180				73,414				73,653				73,897
Tangible assets										$	6,068,348			$	5,893,812			$	5,723,858			$	5,550,829			$	5,494,301
Ending tangible common equity:
Common shareholders’ equity										$	408,581			$	405,531			$	388,313			$	376,756			$	408,509
Less: Goodwill and other intangible assets, net											72,950				73,180				73,414				73,653				73,897
Tangible common equity										$	335,631			$	332,351			$	314,899			$	303,103			$	334,612
Tangible common equity to tangible assets (1)											5.53	%			5.64	%			5.50	%			5.46	%			6.09	%
Common shares outstanding											15,402				15,375				15,340				15,334				15,334
Tangible common book value per share (2)										$	21.79			$	21.62			$	20.53			$	19.77			$	21.82
Average tangible assets:
Average assets		$	5,949,101			$	5,579,371			$	6,053,258			$	5,843,786			$	5,667,331			$	5,599,964			$	5,598,217
Less: Average goodwill and other intangible assets, net			73,194				74,161				73,079				73,312				73,547				73,791				74,037
Average tangible assets		$	5,875,907			$	5,505,210			$	5,980,179			$	5,770,474			$	5,593,784			$	5,526,173			$	5,524,180
Average tangible common equity:
Average common equity		$	406,333			$	446,442			$	411,960			$	400,643			$	384,905			$	420,615			$	418,632
Less: Average goodwill and other intangible assets, net			73,194				74,161				73,079				73,312				73,547				73,791				74,037
Average tangible common equity		$	333,139			$	372,281			$	338,881			$	327,331			$	311,358			$	346,824			$	344,595
Net income available to common shareholders		$	25,733			$	29,902			$	14,009			$	11,724			$	11,724			$	13,489			$	15,283
Return on average tangible common equity (3)			15.58	%			16.20	%			16.58	%			14.53	%			14.94	%			15.43	%			17.79	%
Pre-tax pre-provision income:
Net income		$	26,462			$	30,631			$	14,373			$	12,089			$	12,088			$	13,854			$	15,648
Add: Income tax expense			5,193				7,302				2,418				2,775				2,370				4,725				3,859
Add: Provision for credit losses			7,444				2,882				3,230				4,214				6,115				4,314				563
Pre-tax pre-provision income		$	39,099			$	40,815			$	20,021			$	19,078			$	20,573			$	22,893			$	20,070
Adjustments:
Restructuring (recoveries) charges			(19	)			1,269				(19	)			-				350				-				1,269
Enhancement from COLI surrender and redeployment			-				-				-				-				-				(1,997	)			-
Adjusted pre-tax pre-provision income		$	39,080			$	42,084			$	20,002			$	19,078			$	20,923			$	20,896			$	21,339
Less: Paycheck Protection Program "PPP" accretion interest income and fees			(16	)			(1,881	)			(8	)			(8	)			(78	)			(312	)			(809	)
Pre-PPP adjusted pre-tax pre-provision income		$	39,064			$	40,203			$	19,994			$	19,070			$	20,845			$	20,584			$	20,530
Total loans excluding PPP loans:
Total loans										$	4,397,809			$	4,243,332			$	4,050,449			$	3,866,851			$	3,764,018
Less: Total PPP loans											1,032				1,094				1,161				2,783				8,910
Total loans excluding PPP loans										$	4,396,777			$	4,242,238			$	4,049,288			$	3,864,068			$	3,755,108
Allowance for credit losses - loans										$	49,836			$	47,528			$	45,413			$	44,106			$	42,452
Allowance for credit losses - loans to total loans excluding PPP loans (4)											1.13	%			1.12	%			1.12	%			1.14	%			1.13	%

(1)	Tangible common equity divided by tangible assets.
(2)	Tangible common equity divided by common shares outstanding.
(3)	Net income available to common shareholders (annualized) divided by average tangible common equity.
(4)	Allowance for credit losses – loans divided by total loans excluding PPP loans.