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Financial Institutions, Inc. Announces Fourth Quarter and Full Year 2016 Results

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WARSAW, N.Y., Jan. 24, 2017 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (NASDAQ: FISI), today reported financial results for the fourth quarter and year ended December 31, 2016. Financial Institutions, Inc. (the "Company") is the parent company of Five Star Bank (the "Bank"), Scott Danahy Naylon, LLC ("Scott Danahy Naylon" or "SDN") and Courier Capital, LLC ("Courier Capital"). The Company's financial results since January 5, 2016, include the results of operations of Courier Capital, a wealth management subsidiary acquired on that date.

Net income for the quarter was $8.7 million compared to $8.5 million for the third quarter of 2016 and $6.6 million for the fourth quarter of 2015. After preferred dividends, net income available to common shareholders was $8.3 million, or $0.57 per diluted share, compared to $8.1 million, or $0.56 per diluted share, for the third quarter of 2016 and $6.3 million, or $0.44 per diluted share, for the fourth quarter of 2015.

Net income for the full year 2016 was $31.9 million compared to $28.3 million for 2015. Net income available to common shareholders was $30.5 million, or $2.10 per diluted share, compared to $26.9 million, or $1.90 per diluted share, for the full year 2015.

The Company's President and Chief Executive Officer Martin K. Birmingham stated, "2016 was an eventful year for our Company and I am pleased with our performance, as we delivered double digit growth in net income for the full year.

"We also made great progress in our efforts to increase market share in Rochester and Buffalo. In December, we opened our third financial solution center and 52nd branch in downtown Rochester in the recently renamed Five Star Bank Plaza, and over the course of the next two months we will be relocating our regional administrative center and approximately 150 employees to this building. As part of this relocation, we successfully obtained naming and signage rights for the building, resulting in valuable branding for Five Star Bank. Our fourth financial solution center will open in mid-February in the City of Buffalo. We look forward to bringing our style of banking and lending to downtown Buffalo so that we may serve the needs of nearby residents and businesses.

"We invested in talent across all business segments in 2016, fueling organic growth which we believe will drive future revenue. Recent hires have strengthened our commercial lending and mortgage banking business, as well as our regulatory compliance and enterprise risk management areas. During the fourth quarter of 2016, we welcomed Craig Burton as Senior Vice President, Commercial Real Estate Executive for the Bank. Craig's knowledge and experience in commercial real estate across Upstate New York, from Buffalo to Albany, position him to successfully lead our commercial real estate platform.

"Our positive momentum is expected to continue into 2017 and we remain focused on our long-term strategic plan to drive strong shareholder returns."

Fourth Quarter and Full Year 2016 Highlights:

  • Diluted earnings per share ("EPS") for the quarter of $0.57 was $0.13 higher than the fourth quarter of 2015   
    • Diluted earnings per share ("EPS") for the year of $2.10 was $0.20 higher than 2015
  • Net interest income for the quarter of $26.7 million increased $2.1 million, or 8.5%, as compared to the fourth quarter of 2015
    • Net interest income for the year of $102.7 million increased $7.4 million, or 7.7%, as compared to 2015
  • Noninterest income for the quarter of $9.1 million was $508 thousand, or 5.9%, higher than the fourth quarter of 2015
    • Noninterest income for the year of $35.8 million was $5.4 million, or 17.9%, higher than 2015
  • Return on average common equity was 10.81% for the quarter and 10.10% for the year
    • Return on average tangible common equity was 14.37% for the quarter and 13.51% for the year (computation of this non-GAAP measure provided in Appendix A)
       
  • Net interest margin was 3.22% for the quarter and 3.24% for the year
  • Total interest-earning assets, assets, loans and deposits reached record-high year-end levels:
    • Total interest-earning assets increased $314.0 million in 2016 to $3.4 billion
    • Total assets increased $329.3 million in 2016 to $3.7 billion
    • Total loans increased $256.4 million in 2016 to $2.3 billion
    • Total deposits increased $264.7 million in 2016 to $3.0 billion
  • Quarterly cash dividend of $0.21 per common share represented a 2.44% dividend yield as of December 31, 2016, and a return of 36% of fourth quarter net income to common shareholders

The Company's credit quality remains strong with total non-performing loans to total loans of 0.27% at year-end, compared to 0.41% at year-end 2015.

Kevin B. Klotzbach, the Company's Chief Financial Officer added, "Our strategy is to grow loans and deposits and operate with expense discipline and a strong credit culture. We successfully executed this strategy in 2016 as illustrated by loan portfolio growth of 12.3%, total deposit growth of 9.7%, an efficiency ratio of 60.92% for the year, and improvement in portfolio credit quality with non-performing assets to total assets of 0.17% at year-end compared to 0.25% in the prior year.

"We continue to have ample liquidity to execute our growth strategies and take advantage of the current disruption in our markets. This growth will occur through thoughtful, disciplined decisions as we continue to manage capital effectively for the benefit of our shareholders."

Net Interest Income and Net Interest Margin

  • Net interest income was $26.7 million for the fourth quarter of 2016, $672 thousand higher than the third quarter of 2016 and $2.1 million higher than the fourth quarter of 2015.
    • Average interest-earning assets for the quarter were $3.4 billion, $90.4 million higher than the third quarter of 2016 and $309.7 million higher than the fourth quarter of 2015.
    • The primary driver of the increase was loans, which were $66.3 million higher in the fourth quarter of 2016 than the third quarter of 2016 and $265.9 million higher than the fourth quarter of 2015.
    • Fourth quarter 2016 net interest margin was 3.22%, one basis point lower than the third quarter of 2016 and five basis points lower than the fourth quarter of 2015. 
  • Net interest income was $102.7 million for the year 2016, $7.4 million higher than 2015, primarily as a result of a $270.6 million, or 9.0%, increase in average interest-earning assets.  These increases were partially offset by a four-basis-point narrowing of the net interest margin, to 3.24% in 2016 from 3.28% in 2015.

Noninterest Income

Noninterest income was $9.1 million for the fourth quarter of 2016 as compared to $8.5 million in the third quarter of 2016 and $8.6 million in the fourth quarter of 2015. 

  • Excluding the net gain on investment securities from all periods, noninterest income was $8.8 million in the fourth quarter of 2016, $706 thousand higher than $8.1 million in the third quarter of 2016, and $879 thousand higher than $7.9 million in the fourth quarter of 2015. 
  • For the fourth quarter of 2016 as compared to the third quarter of 2016, the increase was primarily the result of a $1.2 million non-cash fair value adjustment of the contingent consideration liability related to the SDN acquisition.
  • Higher noninterest income in the fourth quarter of 2016 as compared to the fourth quarter of 2015 was primarily the result of a $632 thousand increase in investment advisory income, reflecting the contribution from Courier Capital ($1.33 billion in assets under management at December 31, 2016). 

Noninterest income was $35.8 million for the year 2016 as compared to $30.3 million in 2015.

  • Excluding the net gain on investment securities from both periods, noninterest income was $33.0 million in 2016, $4.7 million higher than $28.3 million in 2015.
  • The increase was primarily the result of a $3.0 million increase in investment advisory income, reflecting the contribution from Courier Capital, as well as $911 thousand of death benefit proceeds from company owned life insurance and a $603 thousand increase in ATM and debit card income.

Noninterest Expense

Noninterest expense was $20.7 million for the fourth quarter of 2016 as compared to $20.6 million in the third quarter of 2016 and $21.8 million in the fourth quarter of 2015.

  • Lower noninterest expense in the fourth quarter of 2016 as compared to the fourth quarter of 2015 was primarily the result of $751 thousand of goodwill impairment related to the SDN acquisition and $540 thousand of professional service fees attributable to the acquisition of Courier Capital, both of which were recognized in 2015.

Noninterest expense was $84.7 million for the year, a $5.3 million increase from $79.4 million in 2015.

  • Salaries and employee benefits increased $2.8 million year-over-year, reflecting the impact of the addition of Courier Capital employees and increased staffing associated with the Company's growth initiatives.
  • Professional services increased $1.7 million year-over-year, primarily in connection with the Company's 2016 proxy contest.
  • Also contributing to the increase were higher occupancy and equipment expense, computer and data processing expense, and advertising and promotions expense, partially offset by the previously mentioned goodwill impairment charge in 2015.

Income Taxes

Income tax expense was $3.0 million for the fourth quarter of 2016 as compared to $3.5 million in the third quarter of 2016 and $2.2 million in the fourth quarter of 2015. The effective tax rate was 25.9% for the fourth quarter of 2016, 29.5% in the third quarter of 2016, and 24.5% in the fourth quarter of 2015. The lower effective tax rate in the fourth quarter of 2016 was a result of the $1.2 million non-cash fair value adjustment of the contingent consideration liability related to the SDN acquisition which was a non-taxable adjustment.

Income tax expense for 2016 was $12.2 million, representing an effective tax rate of 27.7% which is comparable to the effective tax rate of 27.1% in 2015. Effective tax rates are impacted by items of income and expense that are not subject to federal or state taxation. Our effective tax rates differ from the statutory rates primarily due to the effect of interest income from tax-exempt securities, earnings on company owned life insurance and the non-cash fair value adjustment of the contingent consideration liability associated with the SDN acquisition.

Balance Sheet and Capital Management

Total assets were $3.7 billion at December 31, 2016, up $23.0 million from $3.7 billion at September 30, 2016, and up $329.3 million from $3.4 billion at December 31, 2015. The increases were largely the result of loan growth funded by deposit growth.

Total loans were $2.3 billion at December 31, 2016, up $56.2 million, or 2.5%, from September 30, 2016, and up $256.4 million, or 12.3%, from December 31, 2015.

  • Commercial mortgage loans totaled $670.1 million, up $33.7 million, or 5.3%, from September 30, 2016, and up $104.0 million, or 18.4%, from December 31, 2015.
  • Commercial business loans totaled $349.5 million, down $1.0 million, or 0.3%, from September 30, 2016, and up $35.8 million, or 11.4%, from December 31, 2015.
  • Residential real estate loans totaled $427.9 million, up $2.1 million, or 0.5%, from September 30, 2016, and up $46.9 million, or 12.3%, from December 31, 2015.
  • Consumer indirect loans totaled $752.4 million, up $22.8 million, or 3.1%, from September 30, 2016, and up $75.5 million, or 11.2%, from December 31, 2015.

Total deposits were $3.0 billion at December 31, 2016, a decrease of $68.1 million from September 30, 2016, and an increase of $264.7 million from December 31, 2015. The decrease from September 30, 2016, was primarily due to public deposit seasonality. The increase from December 31, 2015, was primarily the result of successful business development efforts in both municipal and retail banking. Public deposit balances represented 27% of total deposits at December 31, 2016, compared to 29% at September 30, 2016 and 25% at December 30, 2015.

Short-term borrowings were $331.5 million at December 31, 2016, up $101.3 million from September 30, 2016, and up $38.4 million from December 31, 2015. Short-term borrowings are typically utilized to manage the seasonality of public deposits.

Shareholders' equity was $320.1 million at December 31, 2016, compared to $326.3 million at September 30, 2016, and $293.8 million at December 31, 2015. Common book value per share was $20.82 at December 31, 2016, a decrease of $0.44 or 2.1% from $21.26 at September 30, 2016, and an increase of $1.33 or 6.8% from $19.49 at December 31, 2015. The increases in shareholders' equity and common book value per share as compared to December 31, 2015, are attributable to net income and stock issued for the acquisition of Courier Capital, with a partial offset by net unrealized losses on securities available for sale, a component of accumulated other comprehensive loss.

During the fourth quarter 2016, the Company declared a common stock dividend of $0.21 per common share. The fourth quarter 2016 dividend returned 36% of fourth quarter net income to common shareholders. 

Regulatory capital ratios at December 31, 2016, remained steady with slight downward pressure in comparison to prior year as a result of strong loan growth and higher asset levels:

  • Leverage Ratio was 7.36%, compared to 7.39% and 7.41% at September 30, 2016, and December 31, 2015, respectively.
  • Common Equity Tier 1 Ratio was 9.59%, compared to 9.58% and 9.77% at September 30, 2016, and December 31, 2015, respectively.
  • Tier 1 Risk-Based Capital was 10.26%, compared to 10.27% and 10.50% at September 30, 2016, and December 31, 2015, respectively.
  • Total Risk-Based Capital was 12.97%, compared to 12.98% and 13.35% at September 30, 2016, and December 31, 2015, respectively.

Credit Quality

Non-performing loans were $6.3 million at December 31, 2016, compared to $6.1 million at September 30, 2016, and $8.4 million at December 31, 2015. The $2.1 million decrease from December 31, 2015, was due to lower commercial non-performing loans resulting from pay-downs on two relationships totaling $1.8 million during the second quarter of 2016, as well as improvements in the non-performing residential real estate loan portfolio.

  • The ratio of non-performing loans to total loans was 0.27% at December 31, 2016, compared to 0.27% at September 30, 2016, and 0.41% at December 31, 2015.

The provision for loan losses for the fourth quarter of 2016 was $3.4 million, an increase of $1.4 million from the third quarter of 2016 and an increase of $759 thousand from the fourth quarter of 2015. During the fourth quarter 2016, the Company internally downgraded to substandard status one commercial business credit relationship with unpaid principal balances totaling $3.5 million. The downgrade necessitated a provision and increase in our allowance for losses of approximately $1.1 million. These loans were current with respect to principal and interest payments as of December 31, 2016; however, we continue to monitor this relationship closely.

  • Net charge-offs were $1.8 million during the fourth quarter of 2016, a $637 thousand increase compared to the prior quarter and a $195 thousand decrease from the fourth quarter of 2015. 
  • The ratio of annualized net charge-offs to total average loans was 0.30% in the current quarter, compared to 0.20% in the prior quarter and 0.38% in the fourth quarter of 2015.
  • The ratio of allowance for loan losses to total loans was 1.32% at December 31, 2016, 1.29% at September 30, 2016, and 1.30% at December 31, 2015. 
  • The ratio of allowance for loan losses to non-performing loans was 489% at December 31, 2016, 481% at September 30, 2016, and 321% at December 31, 2015.

About Financial Institutions, Inc.

Financial Institutions, Inc. provides diversified financial services through its subsidiaries Five Star Bank, Scott Danahy Naylon and Courier 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 and 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. Courier Capital provides 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

This news release contains disclosure regarding tangible common equity, tangible common equity to tangible assets, tangible common book value per share, average tangible common equity and return on average tangible common equity, which are determined by methods other than in accordance with U.S. generally accepted accounting principles ("GAAP"). The Company believes that these non-GAAP measures are useful to our investors as measures of the strength of the Company's capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide supplemental information that may help investors to analyze our capital position without regard to the effects of intangible assets. Non-GAAP financial measures have inherent limitations and are not uniformly applied by issuers. Therefore, these non-GAAP financial measures should not be considered in isolation, or as a substitute for comparable measures prepared in accordance with GAAP.  The comparable GAAP financial measures and reconciliation to the comparable GAAP financial measures can be found in Appendix A to this document.

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. Statements herein are based on certain assumptions and analyses by the Company and are 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, the Company's ability to redeploy investment assets into loan assets, 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 Scott Danahy Naylon and Courier Capital, 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.

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands, except per share amounts)
 
    2016      2015 
  December 31,   September 30,   June 30,
    March 31,    December 31,
SELECTED BALANCE SHEET DATA:                    
Cash and cash equivalents $ 71,277       $ 110,721       $ 67,624     $ 110,944     $ 60,121  
Investment securities:                          
Available for sale   539,926       559,495       619,719       610,013       544,395  
Held-to-maturity   543,338       528,708       478,549       476,283       485,717  
Total investment securities   1,083,264       1,088,203       1,098,268       1,086,296       1,030,112  
Loans held for sale   1,050       844       209       609       1,430  
Loans:                    
Commercial business   349,547       350,588       349,432       317,776       313,758  
Commercial mortgage   670,058       636,338       614,141       590,316       566,101  
Residential real estate loans   427,937       425,882       408,367       382,504       381,074  
Residential real estate lines   122,555       123,663       125,054       126,526       127,347  
Consumer indirect   752,421       729,644       696,908       679,846       676,940  
Other consumer   17,643       17,879       17,929       18,066       18,542  
Total loans   2,340,161       2,283,994       2,211,831       2,115,034       2,083,762  
Allowance for loan losses   30,934       29,350       28,525       27,568       27,085  
Total loans, net   2,309,227       2,254,644       2,183,306       2,087,466       2,056,677  
Total interest-earning assets   3,428,541       3,357,609       3,292,528       3,189,582       3,114,530  
Goodwill and other intangible assets, net   75,640       75,943       76,252       76,567       66,946  
Total assets   3,710,340       3,687,365       3,585,589       3,516,572       3,381,024  
Deposits:                    
Noninterest-bearing demand   677,076       657,624       626,240       617,394       641,972  
Interest-bearing demand   581,436       629,413       560,284       622,443       523,366  
Savings and money market   1,034,194       1,052,224       960,325       1,042,910       928,175  
Time deposits   702,516       724,096       711,156       677,430       637,018  
Total deposits   2,995,222       3,063,357       2,858,005       2,960,177       2,730,531  
Short-term borrowings   331,500       230,200       338,300       179,200       293,100  
Long-term borrowings, net   39,061       39,043       39,025       39,008       38,990  
Total interest-bearing liabilities   2,688,707       2,674,976       2,609,090       2,560,991       2,420,649  
Shareholders' equity   320,054       326,271       322,176       313,953       293,844  
Common shareholders' equity   302,714       308,931       304,836       296,613       276,504  
Tangible common equity (1)   227,074       232,988       228,584       220,046       209,558  
Unrealized (loss) gain on investment securities, net of tax $ (2,530 )   $ 9,444     $ 10,886     $ 7,555     $ 443  
                     
Common shares outstanding   14,538       14,528       14,528       14,495       14,191  
Treasury shares   154       164       164       197       207  
CAPITAL RATIOS AND PER SHARE DATA:                  
Leverage ratio   7.36 %     7.39 %     7.39 %     7.46 %     7.41 %
Common equity Tier 1 ratio   9.59 %     9.58 %     9.63 %     9.83 %     9.77 %
Tier 1 risk-based capital   10.26 %     10.27 %     10.33 %     10.56 %     10.50 %
Total risk-based capital   12.97 %     12.98 %     13.08 %     13.39 %     13.35 %
Common equity to assets   8.16 %     8.38 %     8.50 %     8.43 %     8.18 %
Tangible common equity to tangible assets (1)   6.25 %     6.45 %     6.51 %     6.40 %     6.32 %
                   
Common book value per share $ 20.82     $ 21.26     $ 20.98     20.46     $ 19.49  
Tangible common book value per share (1) $ 15.62     $ 16.04     $ 15.73     15.18     $ 14.77  
Stock price (Nasdaq: FISI):                  
High $ 34.55     $ 27.63     $ 29.49     29.53      $ 29.04  
Low $ 25.98     $ 25.16     $ 24.56     25.38     $ 24.05  
Close $ 34.20     $ 27.11     $ 26.07     29.07     $ 28.00  

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

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands, except per share amounts)
 
  Years ended    2016
      2015  
  December 31,   Fourth   Third   Second   First   Fourth
    2016       2015     Quarter   Quarter   Quarter   Quarter   Quarter
SELECTED INCOME STATEMENT DATA:                          
Interest income $ 115,231     $ 105,450     $ 29,990     $ 29,360     $ 28,246     $ 27,635     $ 27,487  
Interest expense   12,541       10,137       3,268       3,310       3,047       2,916       2,856  
Net interest income   102,690       95,313       26,722       26,050       25,199       24,719       24,631  
Provision for loan losses   9,638       7,381       3,357       1,961       1,952       2,368       2,598  
Net interest income after provision for loan losses   93,052       87,932       23,365       24,089       23,247       22,351       22,033  
Noninterest income:                          
Service charges on deposits   7,280       7,742       1,888       1,913       1,755       1,724       1,862  
Insurance income   5,396       5,166       1,134       1,407       1,183       1,672       1,236  
ATM and debit card   5,687       5,084       1,500       1,441       1,421       1,325       1,311  
Investment advisory   5,208       2,193       1,274       1,326       1,365       1,243       642  
Company owned life insurance   2,808       1,962       468       486       486       1,368       514  
Investments in limited partnerships   300       895       47       161       36       56       30  
Loan servicing   436       503       104       104       112       116       87  
Net gain on sale of loans held for sale   240       249       38       46       78       78       88  
Net gain on investment securities   2,695       1,988       269       426       1,387       613       640  
Net gain on other assets   313       27       28       199       82       4       7  
Amortization of tax credit investment   -       (390 )     -       -       -       -       -  
Contingent consideration liability adjustment   1,170       1,093       1,170       -       -       -       1,093  
Other   4,227       3,825       1,168       1,030       1,011       1,018       1,070  
Total noninterest income   35,760       30,337       9,088       8,539       8,916       9,217       8,580  
Noninterest expense:                          
Salaries and employee benefits   45,215       42,439       11,458       11,325       10,818       11,614       11,332  
Occupancy and equipment   14,529       13,856       3,623       3,617       3,664       3,625       3,365  
Professional services   6,184       4,502       948       956       2,833       1,447       1,604  
Computer and data processing   3,402       3,186       853       832       913       804       895  
Supplies and postage   2,047       2,155       499       490       464       594       544  
FDIC assessments   1,735       1,719       452       406       441       436       442  
Advertising and promotions   1,695       1,165       436       302       530       427       358  
Goodwill impairment charge   -       751       -       -       -       -       751  
Other   9,864       9,620       2,446       2,690       2,457       2,271       2,537  
Total noninterest expense   84,671       79,393       20,715       20,618       22,120       21,218       21,828  
Income before income taxes   44,141       38,876       11,738       12,010       10,043       10,350       8,785  
Income tax expense   12,210       10,539       3,045       3,541       2,892       2,732       2,150  
Net income   31,931       28,337       8,693       8,469       7,151       7,618       6,635  
Preferred stock dividends   1,462       1,462       365       366       366       365       365  
Net income available to common shareholders $ 30,469     $ 26,875     $ 8,328     $ 8,103     $ 6,785     $ 7,253     $ 6,270  
FINANCIAL DATA AND RATIOS:                          
Earnings per share – basic $ 2.11     $ 1.91     $ 0.58     $ 0.56     $ 0.47     $ 0.50     $ 0.44  
Earnings per share – diluted $ 2.10     $ 1.90     $ 0.57     $ 0.56     $ 0.47     $ 0.50     $ 0.44  
Cash dividends declared on common stock $ 0.81     $ 0.80     $ 0.21     $ 0.20     $ 0.20     $ 0.20     $ 0.20  
Common dividend payout ratio   38.39 %     41.88 %     36.21 %     35.71 %     42.55 %     40.00 %     45.45 %
Dividend yield (annualized)   2.37 %     2.86 %     2.44 %     2.93 %     3.09 %     2.77 %     2.83 %
Return on average assets   0.90 %     0.87 %     0.94 %     0.94 %     0.82 %     0.90 %     0.78 %
Return on average equity   10.01 %     9.78 %     10.68 %     10.34 %     9.07 %     9.91 %     8.86 %
Return on average common equity   10.10 %     9.87 %     10.81 %     10.45 %     9.10 %     10.00 %     8.89 %
Return on average tangible common equity (1)   13.51 %     13.16 %     14.37 %     13.87 %     12.22 %     13.54 %     11.73 %
Efficiency ratio (2)   60.92 %     61.58 %     58.00 %     58.05 %     65.03 %     62.90 %     64.55 %
Effective tax rate   27.7 %     27.1 %     25.9 %     29.5 %     28.8 %     26.4 %     24.5 %

________
(1)  See Appendix A – Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.
(2)  Efficiency ratio equals noninterest expense less other real estate expense and amortization and impairment of goodwill and other 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, proceeds from company owned life insurance, adjustments to contingent liabilities and amortizations of tax credit investment.
 

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands)
 
  Years ended     2016     2015
  December 31,   Fourth   Third   Second   First   Fourth
    2016       2015     Quarter   Quarter   Quarter
  Quarter   Quarter
SELECTED AVERAGE BALANCES:                            
Federal funds sold and interest-earning deposits   $ 3,116     $ 37     $ 12,011     $ 1     $ 316     $ 70     $ -  
Investment securities (1)   1,063,221       1,014,171       1,080,941       1,068,866       1,075,220       1,027,602       1,049,217  
Loans:                          
Commercial business   336,633       286,019       347,496       352,696       329,901       316,143       297,033  
Commercial mortgage   618,436       522,328       659,713       625,003       606,360       582,142       554,327  
Residential real estate loans   404,456       366,032       425,687       417,854       391,826       382,077       379,189  
Residential real estate lines   124,635       128,525       122,734       123,312       125,212       127,317       127,688  
Consumer indirect   703,975       665,454       741,598       711,948       683,722       678,133       671,888  
Other consumer   17,620       18,969       17,448       17,548       17,562       17,926       18,626  
Total loans   2,205,755       1,987,327       2,314,676       2,248,361       2,154,583       2,103,738       2,048,751  
Total interest-earning assets   3,272,092       3,001,535       3,407,628       3,317,228       3,230,119       3,131,410       3,097,968  
Goodwill and other intangible assets, net   76,170       68,138       75,807       76,116       76,437       76,324       67,692  
Total assets   3,547,105       3,269,890       3,679,569       3,593,672       3,507,760       3,405,451       3,353,702  
Interest-bearing liabilities:                          
Interest-bearing demand   576,046       543,690       604,717       547,545       579,497       572,424       545,602  
Savings and money market   1,010,510       908,614       1,076,884       981,207       1,017,911       965,629       960,768  
Time deposits   697,654       616,747       711,061       722,098       698,505       658,537       628,944  
Short-term borrowings   248,938       262,494       244,796       315,122       213,826       221,326       241,957  
Long-term borrowings, net   39,023       27,886       39,050       39,032       39,015       38,997       38,979  
Total interest-bearing liabilities   2,572,171       2,359,431       2,676,508       2,605,004       2,548,754       2,456,913       2,416,250  
Noninterest-bearing demand deposits   633,416       599,334       655,445       638,417       621,912       617,590       619,423  
Total deposits   2,917,626       2,668,385       3,048,107       2,889,267       2,917,825       2,814,180       2,754,737  
Total liabilities   3,228,099       2,980,183       3,355,894       3,267,808       3,190,589       3,096,263       3,056,541  
Shareholders' equity   319,006       289,707       323,675       325,864       317,171       309,188       297,161  
Common equity   301,666       272,367       306,335       308,524       299,831       291,848       279,821  
Tangible common equity (2) $ 225,496     $ 204,229     $ 230,528     $ 232,408     $ 223,394     $ 215,524     $ 212,129  
Common shares outstanding:                          
Basic   14,436       14,081       14,459       14,456       14,434       14,395       14,095  
Diluted   14,491       14,135       14,511       14,500       14,489       14,465       14,163  
SELECTED AVERAGE YIELDS:                                                      
(Tax equivalent basis)                                                      
Investment securities   2.45 %     2.46 %     2.41 %   2.44 %   2.48 %     2.48 %   2.47 %
Loans   4.18 %     4.21 %     4.17 %   4.18 %   4.17 %     4.21 %   4.22 %
Total interest-earning assets   3.62 %     3.62 %     3.60 %   3.62 %   3.61 %     3.64 %   3.63 %
Interest-bearing demand   0.14 %     0.14 %     0.14 %   0.15 %   0.14 %     0.14 %   0.15 %
Savings and money market   0.13 %     0.13 %     0.13 %   0.14 %   0.13 %     0.13 %   0.14 %
Time deposits   0.90 %     0.87 %     0.93 %   0.91 %   0.89 %     0.88 %   0.88 %
Short-term borrowings   0.65 %     0.41 %     0.70 %   0.63 %   0.65 %     0.62 %   0.49 %
Long-term borrowings, net   6.33 %     6.28 %     6.33 %   6.33 %   6.33 %     6.34 %   6.34 %
Total interest-bearing liabilities   0.49 %     0.43 %     0.49 %   0.51 %   0.48 %     0.48 %   0.47 %
Net interest rate spread   3.13 %     3.19 %     3.11 %   3.11 %   3.13 %     3.16 %   3.16 %
Net interest rate margin   3.24 %     3.28 %     3.22 %   3.23 %   3.23 %     3.27 %   3.27 %

________
(1)       Includes investment securities at adjusted amortized cost.
(2)       See Appendix A – Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands)
 
  Years ended     2016     2015
  December 31,   Fourth   Third
  Second
  First   Fourth
    2016     2015
    Quarter 
  Quarter
  Quarter
  Quarter
  Quarter
ASSET QUALITY DATA:                              
Allowance for Loan Losses                              
Beginning balance $ 27,085     $ 27,637     $ 29,350     $ 28,525     $ 27,568     $ 27,085     $ 26,455  
Net loan charge-offs (recoveries):                        
Commercial business   496       1,221       52       (31 )     (27 )     502       133  
Commercial mortgage   340       749       212       127       2       (1 )     23  
Residential real estate loans   115       283       (1 )     61       34       21       110  
Residential real estate lines   89       168       41       4       44       -       24  
Consumer indirect   4,489       4,956       1,361       896       904       1,328       1,519  
Other consumer   260       556       108       79       38       35       159  
Total net charge-offs   5,789       7,933       1,773       1,136       995       1,885       1,968  
Provision for loan losses   9,638       7,381       3,357       1,961       1,952       2,368       2,598  
Ending balance $ 30,934     $ 27,085     $ 30,934     $ 29,350     $ 28,525     $ 27,568     $ 27,085  
                                                         
Net charge-offs (recoveries) to average loans (annualized):                                                        
Commercial business   0.15 %     0.43 %     0.06 %     -0.03 %     -0.03 %     0.64 %     0.18 %
Commercial mortgage   0.05 %     0.14 %     0.13 %     0.08 %     0.00 %     -0.00 %     0.02 %
Residential real estate loans   0.03 %     0.08 %     -0.00 %     0.06 %     0.03 %     0.02 %     0.12 %
Residential real estate lines   0.07 %     0.13 %     0.13 %     0.01 %     0.14 %     0.00 %     0.07 %
Consumer indirect   0.64 %     0.74 %     0.73 %     0.50 %     0.53 %     0.79 %     0.90 %
Other consumer   1.48 %     2.93 %     2.46 %     1.79 %     0.87 %     0.79 %     3.39 %
Total loans   0.26 %     0.40 %     0.30 %     0.20 %     0.19 %     0.36 %     0.38 %
                                         
Supplemental information (1)                                                        
Non-performing loans:                                                    
Commercial business $ 2,151     $ 3,922     $ 2,151
    $ 2,157     $ 2,312     $ 4,056     $ 3,922  
Commercial mortgage   1,025       947       1,025
    1,345       1,547       1,781       947  
Residential real estate loans   1,236       1,848       1,236
    1,239       1,485       1,601       1,848  
Residential real estate lines   372       235       372
    274       182       165       235  
Consumer indirect   1,526       1,467       1,526
    1,077       1,015       943       1,467  
Other consumer   16       21       16
    9       15       21       21  
Total non-performing loans   6,326       8,440       6,326
      6,101       6,556       8,567       8,440  
Foreclosed assets   107       163       107
      294       281       187       163  
Total non-performing assets $ 6,433     $ 8,603     $ 6,433
    $ 6,395     $ 6,837     $ 8,754     $ 8,603  
                                   
Total non-performing loans to total loans   0.27 %     0.41 %     0.27 %     0.27 %     0.30 %     0.41 %     0.41 %
Total non-performing assets to total assets   0.17 %     0.25 %     0.17 %     0.17 %     0.19 %     0.25 %     0.25 %
Allowance for loan losses to total loans   1.32 %     1.30 %     1.32 %     1.29 %     1.29 %     1.30 %     1.30 %
Allowance for loan losses to non-performing loans   489 %     321 %     489 %     481 %     435 %     322 %     321 %

________
(1)  At period end.

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

  Years ended     2016     2015
  December 31,   Fourth   Third   Second   First   Fourth
    2016       2015     Quarter   Quarter   Quarter   Quarter   Quarter
Ending tangible assets:                          
Total assets         $ 3,710,340     $ 3,687,365     $ 3,585,589     $ 3,516,572     $ 3,381,024  
Less: Goodwill and other intangible assets, net           75,640       75,943       76,252       76,567       66,946  
Tangible assets         $ 3,634,700     $ 3,611,422     $ 3,509,337     $ 3,440,005     $ 3,314,078  
                           
Ending tangible common equity:                          
Common shareholders' equity         $ 302,714     $ 308,931     $ 304,836     $ 296,613     $ 276,504  
Less: Goodwill and other intangible assets, net           75,640       75,943       76,252       76,567       66,946  
Tangible common equity         $ 227,074     $ 232,988     $ 228,584     $ 220,046     $ 209,558  
                           
Tangible common equity to tangible assets (1)           6.25 %     6.45 %     6.51 %     6.40 %     6.32 %
                           
Common shares outstanding           14,538       14,528       14,528       14,495       14,191  
Tangible common book value per share (2)         $ 15.62     $ 16.04     $ 15.73     $ 15.18     $ 14.77  
                           
Average tangible assets:                          
Average assets $ 3,547,105     $ 3,269,890     $ 3,679,569     $ 3,593,672     $ 3,507,760     $ 3,405,451     $ 3,353,702  
Less: Average goodwill and other intangible assets, net     76,170       68,138       75,807       76,116       76,437       76,324       67,692  
Average tangible assets $ 3,470,935     $ 3,201,752     $ 3,603,762     $ 3,517,556     $ 3,431,323     $ 3,329,127     $ 3,286,010  
                           
                           
Average tangible common equity:                          
Average common equity $ 301,666     $ 272,367     $ 306,335     $ 308,524     $ 299,831     $ 291,848     $ 279,821  
Less: Average goodwill and other intangible assets, net   76,170       68,138       75,807       76,116       76,437       76,324       67,692  
Average tangible common equity $ 225,496     $ 204,229     $ 230,528     $ 232,408     $ 223,394     $ 215,524     $ 212,129  
                           
Net income available to common shareholders $ 30,469     $ 26,875     $ 8,328     $ 8,103     $ 6,785     $ 7,253     $ 6,270  
Return on average tangible common equity (3)   13.51 %     13.16 %     14.37 %     13.87 %     12.22 %     13.54 %     11.73 %

________
(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.

For additional information contact:

Kevin B. Klotzbach	
Chief Financial Officer & Treasurer	
Phone:  585.786.1130	
Email:  KBKlotzbach@five-starbank.com 

Shelly J. Doran
Director − Investor & External Relations 
Phone: 585.627.1362
Email:  SJDoran@five-starbank.com 

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