Financial Institutions, Inc. Announces Third Quarter 2015 Financial Results

WARSAW, N.Y., Oct. 27, 2015 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (the “Company”) (Nasdaq:FISI), the parent company of Five Star Bank (the “Bank”), today reported financial results for the quarter ended September 30, 2015.  The Company’s financial results since August 1, 2014 include the results of operations of Scott Danahy Naylon (“SDN”), an insurance agency the Company acquired in August 2014.

Third Quarter 2015 Highlights:

• Net income available to common shareholders was $8.0 million or $0.56 per diluted share, compared to $6.8 million or $0.49 per share in the same quarter last year
• Net interest income grew to $24.1 million despite continued net interest margin pressure
• Provision for loan losses for the third quarter of 2015 decreased by 41% from the second quarter and was 63% lower than the same period of 2014, while maintaining a coverage ratio of 311% at September 30, 2015
• Quarterly cash dividend of $0.20 per common share represented a 3.20% dividend yield as of September 30, 2015 and a return of 36% of third quarter net income to common shareholders
• Balance sheet and credit quality strengthened:
  • Loans totaled $2.04 billion, up by $27.0 million from June 30, 2015 and up $128.4 million from a year ago
  • Average interest-earning assets of $3.09 billion, up $99.4 million or 3% from June 30, 2015
  • Total deposits of $2.75 billion increased by 4% from June 30, 2015 and 8% from a year ago
  • Non-performing assets decreased 19% from the second quarter of 2015
• Tangible book value per share increased to $14.81 at September 30, 2015, up 6% from June 30, 2015

The Company’s President and Chief Executive Officer Martin K. Birmingham stated, “Our third quarter performance reflects our successful execution of strategic priorities for growth through diversification, expense control and credit quality management.  Our earnings per share are up 14% compared to the third quarter of last year, despite ongoing margin compression, and steady loan growth led to new quarterly record levels for average interest earning assets and total loans.”

Mr. Birmingham continued, “We have focused our marketing efforts on expanding our presence in Rochester and Buffalo while continuing to provide value to our longstanding customer base in the markets where we have historically operated.  This focus has led to growth in commercial business loans and commercial mortgages, each reaching record levels.  As a Small Business Administration (“SBA”) lender in Western New York, the Bank approved approximately $14 million in SBA loans through the end of September, which is nearly 50% higher than in the same period of 2014, reflecting our commitment to devote resources to Small Business lending to take advantage of opportunities in the marketplace and gain market share. We believe that the additional loan officers we hired earlier in the year, as well as increased spending on targeted marketing, are bearing considerable fruit.

“We are excited about our growth prospects as we expand in the Rochester area with the November opening of our City Gate branch, a new bank branch concept offering enhanced customer interaction, and as we move forward with the preparations to open a new branch in Brighton for which we recently received regulatory approvals. 

“We have made considerable investments to enhance our presence in the largest markets in our region where we are seeking to increase our market share and to expand our suite of diversified financial services.  Given the opportunities available to us and the progress we have made thus far, we believe the Company is well positioned to continue growing for the foreseeable future.”

Kevin B. Klotzbach, the Company’s Executive Vice President and Chief Financial Officer, commented, “While we reported impressive growth in key operating metrics, we are also pleased with our expense control and credit quality management.

“We have improved credit quality while at the same time growing total loans. Non-performing loans decreased $2.2 million or 21% compared to June 30, 2015, primarily due to the third quarter payoff of a $2.5 million commercial credit relationship.  The Company’s provision for loan losses decreased by 41% from the second quarter and was 63% lower than the third quarter of last year.  We remain well capitalized and have the ability to further increase our loan originations because of the improvement in our capital ratios from the end of the second quarter.

“Our improved operating performance driven by revenue growth and expense management, a strengthened balance sheet, and an unrealized gain on investment securities in the third quarter culminated in a 6% increase in tangible common book value per share at September 30, 2015 as compared to June 30, 2015.  We are pleased that our focused growth and our disciplined expense and credit quality management practices are fortifying our position in the market and adding value for our shareholders.”

Third Quarter 2015 Results:

Net income for the third quarter 2015 was $8.3 million, compared to $6.6 million for the second quarter 2015, and $7.2 million for the third quarter 2014.  Earnings per diluted common share for the third quarter 2015 was $0.56, compared with $0.44 for the second quarter 2015 and $0.49 for the third quarter 2014.

Net Interest Income and Net Interest Margin

Net interest income was $24.1 million in the third quarter 2015, compared to $23.4 million in the second quarter 2015 and $23.3 million in the third quarter 2014.  When comparing the third quarter 2015 to the second quarter 2015, average earning assets increased $99.4 million, including increases of $61.3 million and $38.2 million in loans and investment securities, respectively.  Average earning assets in the third quarter 2015 compared to the same quarter in 2014 were up $335.5 million, led by a $213.8 million increase in investment securities and a $121.7 million increase in loans. The growth in earning assets was offset by decreases in net interest margin.  Third quarter 2015 net interest margin was 3.20%, a decrease of 4 basis points from 3.24% reported in the second quarter 2015 and a 26 basis point decrease from 3.46% reported in the third quarter 2014.

Noninterest Income

Noninterest income was $7.0 million for the third quarter 2015 compared to $6.5 million for the second quarter 2015 and $7.3 million in the third quarter 2014.  Included in third quarter 2015 and 2014 noninterest income are gains realized from the sale of investment securities of $286 thousand and $515 thousand, respectively.  Exclusive of those gains, noninterest income was $6.7 million for the third quarter 2015 compared to $6.5 million for the second quarter 2015 and $6.7 million in the third quarter 2014. 

The main factors contributing to the higher noninterest income during the third quarter 2015 compared to the second quarter 2015 were increases in insurance income and investments in limited partnerships, partially offset by amortization of a historic tax investment in a community-based project.  Insurance income increased $208 thousand during the third quarter 2015, largely due to the variability in commissions associated with the timing of revenues.  Income from the Company’s investments in limited partnerships, which are primarily small business investment companies, increased $281 thousand during the third quarter 2015.  The income from these equity method investments fluctuates based on the performance of the underlying investments.  During the third quarter 2015 the Company recognized $390 thousand of amortization of a historic tax investment as contra-income, included in noninterest income, with an offsetting tax benefit that reduced income tax expense.

Exclusive of the investment securities gains and the tax credit investment amortization described above, noninterest income increased by $363 thousand to $7.1 million for third quarter 2015 compared to $6.7 million for third quarter 2014.  Insurance income and investments in limited partnerships increased by $343 thousand and $149 thousand, respectively, partially offset by a $240 thousand decrease in service charges on deposits due primarily to lower overdraft fees.

Noninterest Expense

Noninterest expense was $19.3 million for the third quarter 2015 compared to $19.2 million for the second quarter 2015 and $18.0 million in the third quarter 2014.  When comparing the third quarter 2015 to the third quarter 2014, the $1.3 million increase in noninterest expense was primarily the result of higher salaries and employee benefits expense, occupancy and equipment expense and other noninterest expense.  Salaries and employee benefits expense increased $553 thousand from the third quarter 2014, primarily reflecting the hiring of additional personnel associated with the Company’s expansion initiatives and higher pension expense.  Occupancy and equipment expense increased $286 thousand from the third quarter 2014 primarily due to higher contractual service and depreciation expense. 

Income Tax Expense

Income tax expense was $2.7 million for the third quarter 2015 compared to $2.8 million in the second quarter 2015 and $3.4 million in the third quarter 2014.  As a result of the historic tax credits discussed above, the effective tax rate was 24.8% for the third quarter of 2015, compared with an effective tax rate of 29.5% for the second quarter of 2015 and 31.9% in the third quarter 2014.

Balance Sheet and Capital Management

Total assets were $3.36 billion at September 30, 2015, consistent with June 30, 2015 and up $302.3 million from $3.06 billion at September 30, 2014.

Total loans were $2.04 billion at September 30, 2015, up $27.0 million from June 30, 2015 and up $128.4 million from September 30, 2014.  The increase in loans was attributable to organic growth in commercial and home equity loans.  Commercial loans increased to $846.4 million at September 30, 2015, up $17.0 million from June 30, 2015 and up $101.8 million from September 30, 2014.  Home equity loans increased to $408.6 million at September 30, 2015, up $9.8 million from June 30, 2015 and up $25.9 million from September 30, 2014. 

Total investment securities were $1.07 billion at September 30, 2015, down $25.3 million from the end of the prior quarter and up $196.7 million compared with September 30, 2014.  Approximately $165 million in available for sale securities were transferred at fair value to held to maturity during the third quarter 2015 as a means of mitigating the fair value fluctuations in the available for sale portfolio and reducing the volatility of tangible common equity. 

Total deposits were $2.75 billion at September 30, 2015, an increase of $97.3 million from June 30, 2015 and an increase of $214.7 million from September 30, 2014.  The increase during the third quarter of 2015 was due in part to seasonal inflows of municipal deposits, while the year-over-year increase was primarily due to successful business development efforts.  Public deposit balances represented 27% of total deposits at September 30, 2015, compared to 26% at June 30, 2015 and 28% at September 30, 2014.

Short-term borrowings were $241.4 million at September 30, 2015, down $109.2 million from June 30, 2015 and up $25.4 million from September 30, 2014.  Short-term borrowings are typically utilized to manage the seasonality of municipal deposits.

Long-term borrowings, net of issuance costs, were $39.0 million at September 30, 2015 and June 30, 2015.  There were no long-term borrowings outstanding at September 30, 2014.  On April 15, 2015, the Company completed the sale of $40 million in aggregate principal amount of 6.00% fixed to floating rate subordinated notes due 2030 (the “Subordinated Notes”).  The Subordinated Notes qualify as Tier 2 capital for regulatory purposes.  The net proceeds from this offering were intended for general corporate purposes, including but not limited to, contribution of capital to the Bank to support both organic growth as well as opportunistic acquisitions. 

Shareholders’ equity was $295.4 million at September 30, 2015, compared with $284.4 million at June 30, 2015 and $277.8 million at September 30, 2014.  Common book value per share was $19.60 at September 30, 2015, an increase of $0.77 or 4% from $18.83 at June 30, 2015 and $1.12 or 6% from $18.48 at September 30, 2014.  Tangible common book value per share, a non-GAAP measure, was $14.81 at September 30, 2015, compared to $14.03 at June 30, 2015 and $13.59 at September 30, 2014.

During the third quarter 2015, the Company declared a common stock dividend of $0.20 per common share, consistent with the prior quarter and up by 5%, or $0.01 per share, from the third quarter of 2014.  The third quarter 2015 dividend returned 36% of the quarter’s net income to common shareholders.

The Company’s leverage ratio was 7.29% at September 30, 2015, compared to 7.31% at June 30, 2015 and 7.34% at September 30, 2014.  The decrease in the leverage ratio was due to an increase in average quarterly assets.  During the second quarter of 2015, the Company contributed $34.0 million of net proceeds from the Subordinated Notes offering to the Bank as additional paid-in capital.  The Bank’s leverage ratio and total risk-based capital ratio were 8.01% and 12.72%, respectively, at September 30, 2015.

Credit Quality

Non-performing loans at September 30, 2015 decreased $2.2 million compared to June 30, 2015, primarily due to improvements in the commercial and residential real estate portfolios, partially offset by increases in non-performing home equity and indirect consumer loans.  The decrease in commercial non-performing loans was primarily driven by the third quarter 2015 payoff of a $2.5 million commercial credit relationship consisting of commercial business and commercial mortgage loans.  Prior to the payoff, the relationship was classified as nonaccrual and had a specific reserve totaling $1.1 million.  The ratio of non-performing loans to total loans was 0.42% at September 30, 2015 compared with 0.53% at June 30, 2015 and 0.43% at September 30, 2014.

The provision for loans losses for the third quarter 2015 was $754 thousand, a decrease of $534 thousand from the prior quarter and $1.3 million from the third quarter 2014.  The decrease in the provision for loan losses reflects the reversal of the $1.1 million specific reserve related to the previously mentioned non-performing $2.5 million commercial credit relationship that paid off during the third quarter 2015.  Net charge-offs were $1.8 million during the third quarter 2015, an $820 thousand increase compared to the prior quarter and a $138 thousand decrease from the third quarter 2014.  The ratio of annualized net charge-offs to total average loans was 0.35% during the current quarter, compared to 0.20% during the prior quarter and 0.40% during the third quarter 2014.

The ratio of allowance for loans losses to total loans was 1.30% at September 30, 2015, compared with 1.37% at June 30, 2015 and 1.43% at September 30, 2014.  The ratio of the allowance for loan losses to total loans declined in both comparisons, reflecting overall improvement in credit quality.  The ratio of allowance for loans losses to non-performing loans was 311% at September 30, 2015, compared with 257% at June 30, 2015 and 333% at September 30, 2014.

About Financial Institutions, Inc.

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

Non-GAAP Financial Information

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

Safe Harbor Statement

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

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

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

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

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

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

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

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

^________
(1)       At period end.

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

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