UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended              June 30, 2019            

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number:     000-26481     

(Exact name of registrant as specified in its charter)

NEW YORK	16-0816610
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
220 LIBERTY STREET, WARSAW, NEW YORK	14569
(Address of principal executive offices)	(Zip Code)

(585) 786-1100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.01 per share	FISI	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☑    No  ☐    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐    No   ☑

The registrant had 15,994,697 shares of Common Stock, $0.01 par value, outstanding as of July 31, 2019.

FINANCIAL INSTITUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended June 30, 2019

TABLE OF CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Consolidated Statements of Financial Condition (Unaudited) - at June 30, 2019 and December 31, 2018	3
	Consolidated Statements of Income (Unaudited) - Three and six months ended June 30, 2019 and 2018	4
	Consolidated Statements of Comprehensive Income (Unaudited) - Three and six months ended June 30, 2019 and 2018	5
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three and six months ended June 30, 2019 and 2018	6
	Consolidated Statements of Cash Flows (Unaudited) - Six months ended June 30, 2019 and 2018	8
	Notes to Consolidated Financial Statements (Unaudited)	9
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	57
ITEM 4.	Controls and Procedures	58
PART II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings	59
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
ITEM 6.	Exhibits	59
	Signatures	60

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PART I. FINANCIAL INFORMATION

ITEM 1.      Financial Statements

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)

(Dollars in thousands, except share and per share data)	June 30, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	108,988		$	102,755
Securities available for sale, at fair value		406,509			445,677
Securities held to maturity, at amortized cost (fair value of $401,405 and $439,581, respectively)		398,610			446,581
Loans held for sale		2,045			2,868
Loans (net of allowance for loan losses of $34,434 and $33,914, respectively)		3,117,250			3,052,684
Company owned life insurance		67,974			67,116
Premises and equipment, net		41,957			42,839
Goodwill and other intangible assets, net		75,534			76,173
Other assets		95,078			75,005
Total assets	$	4,313,945		$	4,311,698
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	719,150		$	755,460
Interest-bearing demand		677,846			622,482
Savings and money market		966,509			968,897
Time deposits		1,108,484			1,020,068
Total deposits		3,471,989			3,366,907
Short-term borrowings		308,500			469,500
Long-term borrowings, net of issuance costs of $763 and $798, respectively		39,237			39,202
Other liabilities		71,865			39,796
Total liabilities		3,891,591			3,915,405
Shareholders’ equity:
Series A 3% preferred stock, $100 par value; 1,533 shares authorized;    1,435 shares issued		143			143
Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized;    171,847 shares issued		17,185			17,185
Total preferred equity		17,328			17,328
Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556    and 16,056,178 shares issued, respectively		161			161
Additional paid-in capital		123,980			122,704
Retained earnings		296,151			279,867
Accumulated other comprehensive loss		(13,160	)		(21,281	)
Treasury stock, at cost – 104,859 and 127,580 shares, respectively		(2,106	)		(2,486	)
Total shareholders’ equity		422,354			396,293
Total liabilities and shareholders’ equity	$	4,313,945		$	4,311,698

See accompanying notes to the consolidated financial statements.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(In thousands, except per share amounts)	Three months ended June 30,					Six months ended June 30,
	2019			2018		2019		2018
Interest income:
Interest and fees on loans	$	37,807		$	31,343	$	74,273	$	61,101
Interest and dividends on investment securities		4,752			5,525		9,698		11,166
Other interest income		89			145		191		223
Total interest income		42,648			37,013		84,162		72,490
Interest expense:
Deposits		7,378			4,253		14,177		7,709
Short-term borrowings		2,189			1,912		4,494		3,613
Long-term borrowings		617			618		1,235		1,236
Total interest expense		10,184			6,783		19,906		12,558
Net interest income		32,464			30,230		64,256		59,932
Provision for loan losses		2,354			40		3,547		2,989
Net interest income after provision for loan losses		30,110			30,190		60,709		56,943
Noninterest income:
Service charges on deposits		1,756			1,703		3,436		3,441
Insurance income		872			1,018		2,250		2,417
ATM and debit card		1,739			1,531		3,182		2,952
Investment advisory		2,327			1,911		4,543		3,689
Company owned life insurance		424			443		834		893
Investments in limited partnerships		144			123		376		691
Loan servicing		104			108		214		223
Income (loss) from derivative instruments, net		(45	)		176		123		347
Net gain on sale of loans held for sale		407			131		589		227
Net gain on investment securities		166			7		113		7
Net gain on other assets		9			9		58		12
Other		1,330			1,247		2,635		2,415
Total noninterest income		9,233			8,407		18,353		17,314
Noninterest expense:
Salaries and employee benefits		13,249			12,871		27,250		26,300
Occupancy and equipment		4,326			4,167		8,912		8,574
Professional services		932			896		2,090		1,779
Computer and data processing		1,350			1,358		2,573		2,593
Supplies and postage		498			548		1,032		1,060
FDIC assessments		486			480		998		988
Advertising and promotions		1,086			721		1,606		1,698
Amortization of intangibles		316			305		639		593
Other		2,760			2,102		5,074		3,967
Total noninterest expense		25,003			23,448		50,174		47,552
Income before income taxes		14,340			15,149		28,888		26,705
Income tax expense		2,939			2,979		5,966		5,247
Net income	$	11,401		$	12,170	$	22,922	$	21,458
Preferred stock dividends		366			366		731		731
Net income available to common shareholders	$	11,035		$	11,804	$	22,191	$	20,727
Earnings per common share (Note 3):
Basic	$	0.69		$	0.74	$	1.39	$	1.30
Diluted	$	0.69		$	0.74	$	1.39	$	1.30
Cash dividends declared per common share	$	0.25		$	0.24	$	0.50	$	0.48

See accompanying notes to the consolidated financial statements.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)	Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018
Net income	$	11,401		$	12,170		$	22,922		$	21,458
Other comprehensive income (loss), net of tax:
Securities available for sale and transferred securities		5,239			(2,487	)		10,742			(8,757	)
Hedging derivative instruments		(106	)		227			(360	)		123
Pension and post-retirement obligations		261			127			522			254
Total other comprehensive income (loss), net of tax		5,394			(2,133	)		10,904			(8,380	)
Comprehensive income	$	16,795		$	10,037		$	33,826		$	13,078

See accompanying notes to the consolidated financial statements.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Three and six months ended June 30, 2019 and 2018

(Dollars in thousands, except per share data)	Preferred Equity		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity
Balance at December 31, 2018	$	17,328	$	161	$	122,704		$	279,867		$	(21,281	)	$	(2,486	)	$	396,293
Cumulative-effect adjustment		—		—		—			(710	)		—			—			(710	)
Balance at January 1, 2019	$	17,328	$	161	$	122,704		$	279,157		$	(21,281	)	$	(2,486	)	$	395,583
Comprehensive income:
Net income		—		—		—			11,521			—			—			11,521
Other comprehensive income, net of tax		—		—		—			—			5,510			—			5,510
Reclassification of income tax effects		—		—		—			2,783			(2,783	)		—			—
Purchases of common stock for treasury		—		—		—			—			—			(193	)		(193	)
Share-based compensation plans:
Share-based compensation		—		—		182			—			—			—			182
Restricted stock units released		—		—		(362	)		—			—			362			—
Cash dividends declared:
Series A 3% Preferred-$0.75 per share		—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per    share		—		—		—			(364	)		—			—			(364	)
Common-$0.25 per share		—		—		—			(3,985	)		—			—			(3,985	)
Balance at March 31, 2019	$	17,328	$	161	$	122,524		$	289,111		$	(18,554	)	$	(2,317	)	$	408,253
Comprehensive income:
Net income		—		—		—			11,401			—			—			11,401
Other comprehensive income, net of tax		—		—		—			—			5,394			—			5,394
Common stock issued		—		—		1,151			—			—			—			1,151
Share-based compensation plans:
Share-based compensation		—		—		453			—			—			—			453
Restricted stock awards issued		—		—		(165	)		—			—			165			—
Stock awards		—		—		17			—			—			46			63
Cash dividends declared:
Series A 3% Preferred-$0.75 per share		—		—		—			(1	)		—			—			(1	)
Series B-1 8.48% Preferred-$2.12 per    share		—		—		—			(365	)		—			—			(365	)
Common-$0.25 per share		—		—		—			(3,995	)		—			—			(3,995	)
Balance at June 30, 2019	$	17,328	$	161	$	123,980		$	296,151		$	(13,160	)	$	(2,106	)	$	422,354

Continued on next page

See accompanying notes to the consolidated financial statements.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (Continued)

Three and six months ended June 30, 2019 and 2018

(Dollars in thousands, except per share data)	Preferred Equity		Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Shareholders’ Equity
Balance at December 31, 2017	$	17,329	$	161	$	121,058		$	257,078		$	(11,916	)	$	(2,533	)	$	381,177
Comprehensive income:
Net income		—		—		—			9,288			—			—			9,288
Other comprehensive loss, net of tax		—		—		—			—			(6,247	)		—			(6,247	)
Purchases of common stock for treasury		—		—		—			—			—			(113	)		(113	)
Share-based compensation plans:
Share-based compensation		—		—		302			—			—			—			302
Stock options exercised		—		—		(1	)		—			—			77			76
Restricted stock awards forfeited		—		—		446			—			—			(446	)		—
Cash dividends declared:
Series A 3% Preferred-$0.75 per share		—		—		—			(1	)