Financial Institutions, Inc. Announces Second Quarter 2018 Results

WARSAW, N.Y., July 26, 2018 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. FISI, today reported financial and operational results for the second quarter ended June 30, 2018. Financial Institutions, Inc. (the "Company") is the parent company of Five Star Bank (the "Bank"), Scott Danahy Naylon, LLC ("SDN"), Courier Capital, LLC ("Courier Capital") and HNP Capital, LLC ("HNP Capital").

Net income for the quarter was $12.2 million, 95% higher than $6.2 million in the second quarter of 2017. After preferred dividends, net income available to common shareholders was $11.8 million, or $0.74 per diluted share, compared to $5.9 million, or $0.40 per diluted share, in the second quarter of 2017.

President and Chief Executive Officer Martin K. Birmingham stated, "We generated excellent financial results in the quarter by continuing to execute our strategic initiatives to deliver strong incremental Company performance. Total loans grew 3.8% in the quarter with the largest gains in the commercial categories. Our focus on growing our residential mortgage production capabilities resulted in 2.5% growth in the residential loan portfolio in the quarter and 13.4% growth when compared to the second quarter of 2017. We continued to exercise expense discipline as illustrated by an efficiency ratio of 60.1% and reported improved returns on average assets and average equity in the quarter.   

"We also continued to execute our strategy to diversify revenue with the second quarter acquisition of HNP Capital, a Rochester-based investment advisory firm. We are focused on the realization of cost synergies and development of a Company-wide wealth management platform as we integrate HNP Capital. Assets under management at the Company's Courier Capital and HNP Capital subsidiaries now exceed $2 billion."

Chief Financial Officer Kevin B. Klotzbach added, "The provision for loan losses in the quarter was very low because of a combination of factors which include lower historical charge-off experience, an increase in the collateral values supporting impaired loans and improved qualitative factors including the economy, the regulatory environment and favorable trends in nonaccrual and delinquent loans.

"Our disciplined credit culture has resulted in strong credit metrics as demonstrated by lower non-performing loans and lower charge-offs as compared to the first quarter of 2018 and second quarter of 2017.

"We continued to convert a portion of our marketable securities portfolio into loans in the second quarter. Our investment securities portfolio value decreased by $45.1 million, primarily as a result of maturities and payments received on municipal bonds and mortgage-backed securities." 

Second Quarter 2018 Highlights:

• Diluted earnings per share of $0.74 was $0.34, or 85.0%, higher than the second quarter of 2017  
• Net interest income of $30.1 million was $2.7 million, or 9.7%, higher than the second quarter of 2017
• Return on average common equity was 12.90%
  • Return on average tangible common equity was 16.27% ⁽¹⁾
• Total assets, interest-earning assets and loans all reached record-high levels at quarter-end:
  • Total assets increased $38.9 million during the quarter, to $4.19 billion
  • Total interest-earning assets increased $65.8 million during the quarter, to $3.88 billion
  • Total loans increased $106.9 million during the quarter, to $2.90 billion
• The quarterly cash dividend of $0.24 per common share represented a 2.93% annualized yield as of June 30, 2018, and a return of ­­32% of second quarter net income to common shareholders

Acquisition of HNP Capital, LLC

On June 1, 2018, the Company acquired HNP Capital, an SEC-registered investment advisory, wealth management and family office services firm based in the Rochester suburb of Pittsford, New York. HNP Capital offers investment management, retirement plan services, alternative investments, financial planning and family office services to more than 250 clients. HNP Capital will provide coverage of the Rochester MSA (metropolitan statistical area) and beyond to complement Courier Capital's coverage of Buffalo and the western portion of the Company's operating footprint. HNP Capital's principals are expected to remain with the firm and manage their portfolios, which totaled approximately $344 million as of June 30, 2018.

Net Interest Income and Net Interest Margin

Net interest income was $30.1 million in the quarter, $457 thousand higher than the first quarter of 2018 and $2.7 million higher than the second quarter of 2017.

• Average interest-earning assets for the quarter were $3.85 billion, $50.4 million higher than the first quarter of 2018 and $292.5 million higher than the second quarter of 2017. The primary driver of the increase was organic loan growth.

• Second quarter 2018 net interest margin was 3.17%, two basis points lower than the first quarter of 2018 and one basis point lower than the second quarter of 2017. Net interest margin was negatively impacted by a flattening of the yield curve.

Noninterest Income

Noninterest income was $8.5 million in the quarter compared to $9.0 million in the first quarter of 2018 and $9.3 million in the second quarter of 2017. 

• Noninterest income in the second quarter of 2017 included a $1.2 million non-cash fair value adjustment of the contingent consideration liability related to the 2014 acquisition of SDN.

• Investment advisory fees were $133 thousand higher than the first quarter of 2018 and $482 thousand higher than the second quarter of 2017. The increase compared to the first quarter of 2018 was primarily the result of the acquisition of HNP Capital. The increase compared to the second quarter of 2017 was primarily the result of the HNP Capital acquisition, the August 2017 acquisition of an investment advisor based in the Buffalo suburb of Williamsville, New York, and growth in assets under management at Courier Capital.

• Insurance income was $381 thousand lower than the first quarter of 2018 and $115 thousand lower than the second quarter of 2017. The decrease compared to the second quarter of 2017 was primarily the result of non-renewals in one of the agency's specialty lines of business. This negative impact was partially offset by new commercial business generated as a result of successful integration with the Bank. The decrease compared to the first quarter of 2018 was primarily the result of historic seasonality in this line of business combined with impact of non-renewals previously described.

• Income from investments in limited partnerships was $445 thousand lower than the first quarter of 2018 and $12 thousand lower than the second quarter of 2017. The Company has made 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.

Noninterest Expense

Noninterest expense was $23.4 million in the quarter compared to $24.1 million in the first quarter of 2018 and $23.9 million in the second quarter of 2017.

• Noninterest expense in the second quarter of 2017 included a $1.6 million non-cash goodwill impairment charge related to the 2014 acquisition of SDN.

• Salaries and employee benefits expense of $12.9 million was $558 thousand lower than the first quarter of 2018 and $885 thousand higher than the second quarter of 2017. The decrease from the prior quarter was primarily the result of approximately $1.0 million of non-recurring expenses recognized in the first quarter of 2018 related to senior management retirements at our insurance subsidiary, higher contingent incentive compensation related to our Courier Capital subsidiary as a result of an expected earnout payment, and the payment of one-time awards to employees not covered by certain incentive programs, partially offset by expense incurred in connection with our organic growth initiatives.

• Occupancy and equipment expense of $4.2 million was $240 thousand lower than the first quarter of 2018 and $17 thousand lower than the second quarter of 2017. The decrease from the first quarter of 2018 was largely due to lower maintenance expense associated with snow removal.

• Advertising and promotions expense of $721 thousand was $256 thousand lower than the first quarter of 2018 and $76 thousand higher than the second quarter of 2017. The decrease from the previous quarter was the result of expense incurred in the first quarter of 2018 related to the launch of the Five Star Bank brand campaign in February 2018.

Income Taxes

Income tax expense was $3.0 million in the second quarter of 2018 compared to $2.3 million in the first quarter of 2018 and $2.7 million in the second quarter of 2017. The effective tax rate was 19.7% in the second quarter of 2018 compared to 19.6% in the first quarter of 2018 and 30.5% in the second quarter of 2017. 2018 effective tax rates reflect lower federal corporate tax rates as a result of the Tax Cuts and Jobs Act (the "TCJ Act").

Balance Sheet and Capital Management

Total assets were $4.19 billion at June 30, 2018, up $38.9 million from $4.15 billion at March 31, 2018, and up $299.8 million from $3.89 billion at June 30, 2017. The increases were largely the result of loan growth funded by deposit growth, short-term borrowings and net proceeds from a 2017 common equity offering. Between May and November of 2017, the Company sold 1.4 million shares of common stock through an at-the-market offering ("2017 Equity Offering") generating approximately $40.0 million of gross proceeds and $38.3 million of net proceeds.

Total loans were $2.90 billion at June 30, 2018, up $106.9 million, or 3.8%, from March 31, 2018, and up $383.3 million, or 15.2%, from June 30, 2017.

• Commercial business loans totaled $507.0 million, up $42.9 million, or 9.2%, from March 31, 2018, and up $108.7 million, or 27.3%, from June 30, 2017.

• Commercial mortgage loans totaled $867.0 million, up $46.0 million, or 5.6%, from March 31, 2018, and up $143.0 million, or 19.7%, from June 30, 2017.

• Residential real estate loans totaled $489.9 million, up $12.0 million, or 2.5%, from March 31, 2018, and up $57.9 million, or 13.4%, from June 30, 2017.

• Consumer indirect loans totaled $906.2 million, up $8.1 million, or 0.9%, from March 31, 2018, and up $79.5 million, or 9.6%, from June 30, 2017.

Total deposits were $3.26 billion at June 30, 2018, a decrease of $117.8 million from March 31, 2018, and an increase of $129.7 million from June 30, 2017. The decrease from March 31, 2018, was primarily due to public deposit seasonality. The increase from June 30, 2017, was primarily the result of successful business development efforts in both municipal and retail banking. Public deposit balances represented 26% of total deposits at June 30, 2018, compared to 29% at March 31, 2018 and 27% at June 30, 2017.

Short-term borrowings were $472.8 million at June 30, 2018, $145.2 million higher than March 31, 2018, primarily due to the seasonality of municipal deposits, and $125.3 million higher than June 30, 2017, primarily as a result of loan growth.

Shareholders' equity was $386.9 million at June 30, 2018, compared to $380.3 million at March 31, 2018, and $347.6 million at June 30, 2017. Common book value per share was $23.21 at June 30, 2018, an increase of $0.38 or 1.7% from $22.83 at March 31, 2018, and an increase of $1.37 or 6.3% from $21.84 at June 30, 2017. Changes in shareholders' equity and common book value per share are attributable to net income less dividends paid plus proceeds from the 2017 Equity Offering, net of the change in unrealized gain (loss) on investment securities.

During the second quarter of 2018, the Company declared a common stock dividend of $0.24 per common share. The dividend returned 32% of second quarter net income to common shareholders. 

Most of the Company's regulatory capital ratios at June 30, 2018, were lower than the prior quarter and prior year, primarily a result of loan growth and higher asset levels:

• Leverage Ratio was 8.10%, compared to 8.11% and 7.70% at March 31, 2018, and June 30, 2017, respectively.

• Common Equity Tier 1 Capital Ratio was 9.82%, compared to 10.09% and 9.86% at March 31, 2018, and June 30, 2017, respectively.

• Tier 1 Capital Ratio was 10.37%, compared to 10.65% and 10.48% at March 31, 2018, and June 30, 2017, respectively.

• Total Risk-Based Capital Ratio was 12.66%, compared to 13.09% at March 31, 2018, and June 30, 2017. The decrease was driven by the transition of a portion of the marketable securities portfolio into loans.

Credit Quality

Non-performing loans were $9.7 million at June 30, 2018, compared to $10.7 million at March 31, 2018, and $12.6 million at June 30, 2017. The ratio of non-performing loans to total loans was 0.34% at June 30, 2018, compared to 0.38% at March 31, 2018, and 0.50% at June 30, 2017.

The provision for loan losses in the quarter was $40 thousand, compared to $2.9 million in the first quarter of 2018 and $3.8 million in the second quarter of 2017. The significant decrease in provision is the result of a combination of factors which include lower historical net charge-off experience, an increase in the collateral values supporting impaired loans, and improved qualitative factors which include but are not limited to: national and local economic trends and conditions, the regulatory environment and levels and trends in delinquent and non-accruing loans.

• Net charge-offs were $1.7 million during the quarter, $348 thousand lower than the first quarter of 2018 and $75 thousand lower than the second quarter of 2017. The ratio of annualized net charge-offs to total average loans was 0.24% in the quarter, compared to 0.30% in the first quarter of 2018 and 0.29% in the second quarter of 2017.

The ratio of allowance for loan losses to total loans was 1.17% at June 30, 2018, 1.27% at March 31, 2018, and 1.32% at June 30, 2017. 

The ratio of allowance for loan losses to non-performing loans was 349% at June 30, 2018, 332% at March 31, 2018, and 263% at June 30, 2017.

Conference Call

The Company will host an earnings conference call and audio webcast on July 27, 2018 at 9:00 a.m. Eastern Time. The call will be hosted by Martin K. Birmingham, President and Chief Executive Officer, and Kevin B. Klotzbach, 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 across 45 states. 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

This news release contains disclosure regarding tangible assets, tangible common equity, tangible common equity to tangible assets, tangible common book value per share, average tangible assets, 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. 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, 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 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.

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

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(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)

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

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(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.
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(Amounts in thousands)

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(1)       At period end.

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

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(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.