Financial Institutions, Inc. Announces Third Quarter Results

WARSAW, N.Y., Oct. 29, 2019 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. FISI (the "Company"), parent company of Five Star Bank (the "Bank"), SDN Insurance Agency, LLC ("SDN"), Courier Capital, LLC ("Courier Capital") and HNP Capital, LLC ("HNP Capital"), today reported financial and operational results for the quarter ended September 30, 2019.

Net income for the quarter was $12.8 million compared to $10.6 million for the third quarter of 2018. After preferred dividends, net income available to common shareholders was $12.5 million for the quarter, or $0.78 per diluted share, compared to $10.2 million, or $0.64 per diluted share, for the third quarter of 2018.

Pre-tax pre-provision income⁽¹⁾ for the quarter was $19.0 million compared to $15.2 million for the third quarter of 2018. 

Third Quarter 2019 Highlights (as compared to third quarter 2018 unless otherwise noted):

• Net income was the highest in Company history at $12.8 million ‒ an increase of $2.3 million
  
  
• Pre-tax pre-provision income was also highest in Company history at $19.0 million ‒ an increase of $3.8 million
  
  
• Net interest income grew 5.1% to $32.5 million
  
  
• Net interest margin ("NIM") expanded to 3.29% from 3.17%  
  
  
• Return on average assets ("ROA") increased to 1.19% from 1.00%

• Common equity to assets ratio at quarter-end was 9.58% ‒ an increase of 19 basis points during the quarter and an increase of 78 basis points from September 30, 2018
  
  
• Tangible common equity to tangible assets⁽¹⁾, or TCE ratio, was 7.99% at quarter-end ‒ an increase of 22 basis points during the quarter and an increase of 91 basis points from September 30, 2018
  
  
• Completed a repositioning of the balance sheet, redeploying investment securities into higher-yielding loans
  
  - Investment securities comprised 18.0% of total assets at quarter-end, down from 21.6% at September 30, 2018

• Continued strategy to downscale the consumer indirect portfolio
  
  - Portfolio decreased 5.0% from September 30, 2018
  
  - Portfolio comprised 27.4% of total loan portfolio compared to 30.4% at September 30, 2018

President and Chief Executive Officer Martin K. Birmingham stated, "Our teammates delivered another strong quarter of earnings and returns for our shareholders, demonstrating broad-based strength of our business model and successful execution of our strategic initiatives. We generated record-breaking earnings and strengthened our capital ratios while expanding the net interest margin in a challenging interest rate environment.

"Our residential loan portfolio grew 2.3% quarter-over-quarter while the commercial portfolio was relatively flat because of increased loan payoff activity. Commercial loan demand remains stable in our markets and we expect portfolio growth in the fourth quarter. As a result of our continued focus on the profitability of new consumer indirect loan originations, this portfolio decreased by 1.4% quarter-over-quarter while the average portfolio yield increased by nine basis points."   

Chief Financial Officer Justin K. Bigham added, "We once again delivered results in line with our expectations, including continued improvement in our NIM, ROA and TCE ratio. While we did experience an increase in expenses related to strong revenue growth in the quarter, we generated strong earnings per share growth and positive operating leverage."

Net Interest Income and Net Interest Margin

Net interest income was $32.5 million for the quarter, flat as compared to the second quarter of 2019 and $1.6 million higher than the third quarter of 2018.

• Average interest-earning assets for the quarter were $3.96 billion, $49.2 million lower than the second quarter of 2019 and $40.4 million higher than the third quarter of 2018. The decrease compared to the second quarter of 2019 was primarily attributable to a reduction in the investment securities and consumer indirect loan portfolios, partially offset by commercial and residential organic loan growth. The increase compared to the third quarter of 2018 was primarily the result of organic loan growth.
  
  
• Third quarter of 2019 net interest margin was 3.29%, one basis point higher than the second quarter of 2019 and 12 basis points higher than the third quarter of 2018. Net interest margin was positively impacted by the repositioning of the Company's balance sheet. We benefitted from a change in interest-earning asset mix as loans became a larger percentage of the overall earning asset portfolio.

Noninterest Income

Noninterest income was $12.4 million for the quarter, compared to $9.2 million in the second quarter of 2019 and $9.8 million in the third quarter of 2018.

• Insurance income was $567 thousand higher than the second quarter of 2019 and $62 thousand lower than the third quarter of 2018 due to the timing of renewals and business development.
   
• ATM and debit card charges of $1.8 million was $62 thousand higher than the second quarter of 2019 and $244 thousand higher than the third quarter of 2018, primarily due to an increase in consumer debit card activity.
  
  
• Income from investments in limited partnerships was $116 thousand in the third quarter of 2019 compared to $144 thousand in the second quarter of 2019 and $328 thousand in the third quarter of 2018. The Company has made several investments in limited partnerships, primarily small business investment companies, and accounts for these investments under the equity method. Income from these investments fluctuates based on the maturity and performance of the underlying investments.

• Income from derivative instruments was $890 thousand in the third quarter of 2019 compared to a loss of $45 thousand in the second quarter of 2019 and income of $336 thousand in the third quarter of 2018. Higher third quarter 2019 income was driven by an increase in the number and value of interest rate swap transactions executed.
  
  
• The Company took advantage of a market opportunity and sold $65 million of investment securities during the third quarter of 2019, generating a net gain of $1.6 million as compared to a net gain of $166 thousand in the second quarter of 2019 and a net loss of $95 thousand in the third quarter of 2018. Proceeds of $65 million were reinvested into investment securities with intermediate durations.

Noninterest Expense

Noninterest expense was $25.9 million in the third quarter of 2019, compared to $25.0 million in the second quarter of 2019 and $25.5 million in the third quarter of 2018.

• Salaries and employee benefits expense totaled $14.4 million in the third quarter of 2019, $13.2 million in the second quarter of 2019 and $14.0 million in the third quarter of 2018. The increase compared to the second quarter of 2019 was primarily due to investments in bank personnel, higher commissions and higher healthcare claims. The increase compared to the third quarter of 2018 was primarily the result of higher benefits expense.
    
• Professional services expense of $1.5 million was $596 thousand higher than the second quarter of 2019 and $175 thousand higher than the third quarter of 2018. The increase was primarily related to the timing of fees for consulting and advisory projects.
  
  
• FDIC assessments were $7 thousand in the quarter as compared to $486 thousand in the second quarter of 2019 and $498 thousand in the third quarter of 2018. In 2018, the FDIC minimum reserve ratio of 1.35% of estimated insured deposits was exceeded, resulting in credits to institutions for assessments that contributed to growth in the reserve ratio. Credits are applicable to regular assessments for quarters in which the reserve ratio is at least 1.38%. In the third quarter of 2019, the Bank received a credit of $482 thousand against its regular assessment. A credit of $510 thousand is available for future periods.
  
  
• Advertising and promotions expense of $745 thousand was $341 thousand lower than the second quarter of 2019 and $204 thousand lower than the third quarter of 2018 as a result of the timing of expenses related to the Five Star Bank branding campaign.

Income Taxes

Income tax expense was $4.3 million for the quarter compared to $2.9 million for the second quarter of 2019 and $2.6 million for the third quarter of 2018. As a result of the Tax Cuts and Jobs Act (the "TCJ Act") signed into law in December 2017, the Company estimated tax benefits and recorded a provisional amount in the Company's consolidated statement of income for the year ended December 31, 2017. The Company made an adjustment to the provisional amount included in its consolidated financial statements for the year ended December 31, 2017, resulting in an expense of approximately $600 thousand recorded in the third quarter of 2019.

The effective tax rate was 25.0% for the quarter compared to 20.5% for the second quarter of 2019 and 19.5% for the third quarter of 2018. Effective tax rates are typically impacted by items of income and expense not subject to federal or state taxation. The Company's effective tax rates differ from statutory rates primarily because of interest income from tax-exempt securities and earnings on company owned life insurance. The higher effective tax rate in the third quarter was driven by the incremental expense described above.

Balance Sheet and Capital Management

Total assets were $4.33 billion at September 30, 2019, up $18.8 million from June 30, 2019, and up $74.4 million from September 30, 2018.

Investment securities were $781.7 million at September 30, 2019, down $23.4 million from June 30, 2019 and down $136.2 million from September 30, 2018. The decreases are primarily the result of the redeployment of assets from investment securities into loans to improve the earning asset mix. The timing of loan growth in the third quarter of 2019 resulted in the temporary deployment of a portion of investment securities proceeds for other purposes.

Total loans were $3.16 billion at September 30, 2019, up $4.7 million, or 0.2%, from June 30, 2019, and up $168.1 million, or 5.6%, from September 30, 2018.

• Commercial business loans totaled $574.5 million, down $20.5 million, or 3.4%, from June 30, 2019, and up $36.5 million, or 6.8%, from September 30, 2018.
  
  
• Commercial mortgage loans totaled $1.04 billion, up $25.4 million, or 2.5%, from June 30, 2019, and up $130.4 million, or 14.4%, from September 30, 2018.
  
  
• Residential real estate loans totaled $558.7 million, up $12.6 million, or 2.3%, from June 30, 2019, and up $51.1 million, or 10.1%, from September 30, 2018.
  
  
• Consumer indirect loans totaled $863.6 million, down $12.5 million, or 1.4%, from June 30, 2019, and down $45.8 million, or 5.0%, from September 30, 2018.

Total deposits were $3.59 billion at September 30, 2019, $114.2 million higher than June 30, 2019, and $100.5 million higher than September 30, 2018. The increase from June 30, 2019, was primarily due to public deposit seasonality. Deposit growth from September 30, 2018, was driven by business development and growth in the brokered deposit portfolio, partially offset by an approximately $50 million decrease in non-public certificates of deposit. Public deposit balances represented 28% of total deposits at September 30, 2019, compared to 26% of total deposits at June 30, 2019, and 28% at September 30, 2018.

Short-term borrowings were $211.4 million at September 30, 2019, a decrease of $97.1 million from June 30, 2019, and a decrease of $96.8 million from September 30, 2018. Short-term borrowings are typically utilized to manage the seasonality of public deposits.

Shareholders' equity was $432.6 million at September 30, 2019, compared to $422.4 million at June 30, 2019, and $392.2 million at September 30, 2018. Common book value per share was $25.96 at September 30, 2019, an increase of $0.64 or 2.5% from $25.32 at June 30, 2019, and an increase of $2.42 or 10.3% from $23.54 at September 30, 2018. Tangible common book value per share⁽¹⁾ was $21.26 at September 30, 2019, an increase of $0.66 or 3.2% from $20.60 at June 30, 2019, and an increase of $2.67 or 14.4% from $18.59 at September 30, 2018.

During the third quarter of 2019, the Company declared a common stock dividend of $0.25 per common share. The dividend returned 32% of third quarter net income to common shareholders.

The Company's regulatory capital ratios at September 30, 2019, compared to the prior quarter and prior year:

• Leverage Ratio was 8.86%, compared to 8.55% and 8.18% at June 30, 2019, and September 30, 2018, respectively.
  
  
• Common Equity Tier 1 Capital Ratio was 10.06%, compared to 9.95% and 9.81% at June 30, 2019, and September 30, 2018, respectively.
  
  
• Tier 1 Capital Ratio was 10.55%, compared to 10.45% and 10.34% at June 30, 2019, and September 30, 2018, respectively.
  
  
• Total Risk-Based Capital Ratio was 12.57%, compared to 12.57% and 12.58% at June 30, 2019, and September 30, 2018, respectively.

Credit Quality

Non-performing loans were $9.8 million at September 30, 2019, compared to $11.5 million at June 30, 2019, and $7.9 million at September 30, 2018.

The third quarter 2019 provision for loan losses was $1.8 million compared to $2.4 million in the second quarter of 2019 and $2.1 million in the third quarter of 2018. Quarterly provision for loan losses varies based primarily on loan growth, charge-offs, collateral values and qualitative factors.

Net charge-offs were $4.6 million in the quarter, $3.4 million higher than the second quarter of 2019 and $2.5 million higher than the third quarter of 2018. The increase was primarily the result of a $3.0 million partial charge-off of a $5.6 million loan classified as non-performing in the second quarter of 2019. The ratio of annualized net charge-offs to total average loans was 0.58% in the quarter, 0.16% in the second quarter of 2019 and 0.28% in the third quarter of 2018.

The Company has remained strategically focused on the importance of credit discipline, allocating what we believe are the necessary resources to credit and risk management functions as the loan portfolio has grown. The total non-performing loans to total loans ratio was 0.31% at September 30, 2019, compared to 0.36% at June 30, 2019 and 0.26% at September 30, 2018. The ratio of allowance for loan losses to non-performing loans was 324% at September 30, 2019, compared to 300% at June 30, 2019, and 433% at September 30, 2018.

Conference Call

The Company will host an earnings conference call and audio webcast on October 30, 2019, at 8:30 a.m. Eastern Time. The call will be hosted by Martin K. Birmingham, President and Chief Executive Officer, and Justin K. Bigham, Chief Financial Officer. The live webcast will be available in listen-only mode on the Company's website at www.fiiwarsaw.com. Within the United States, listeners may also access the call by dialing 1-888-346-9290 and requesting the Financial Institutions, Inc. call. The webcast replay will be available on the Company's website for at least 30 days.

About Financial Institutions, Inc.

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

Non-GAAP Financial Information

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

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

Safe Harbor Statement

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