FINANCIAL INSTITUTIONS, INC. ANNOUNCES SECOND QUARTER 2024 FINANCIAL RESULTS Form 8 K

FINANCIAL INSTITUTIONS, INC. ANNOUNCES SECOND QUARTER 2024 FINANCIAL RESULTS

WARSAW, N.Y., July 25, 2024 - Financial Institutions, Inc. (NASDAQ: FISI) (the "Company," "we" or "us"), parent company of Five Star Bank (the "Bank") and Courier Capital, LLC ("Courier Capital"), today reported financial and operational results for the second quarter ended June 30, 2024.

Net income was $25.6 million in the second quarter of 2024, compared to $2.1 million in the first quarter of 2024 and $14.4 million in the second quarter of 2023. After preferred dividends, net income available to common shareholders was $25.3 million, or $1.62 per diluted share, in the second quarter of 2024, compared to $1.7 million, or $0.11 per diluted share, in the first quarter of 2024, and $14.0 million, or $0.91 per diluted share, in the second quarter of 2023. Second quarter 2024 financial results benefited from a $13.5 million pre-tax gain associated with the Company's April 1, 2024 sale of the assets of SDN Insurance Agency, LLC, while the linked first quarter results were negatively impacted by the Company's previously disclosed deposit-related fraud event, for which it recorded an $18.4 million pre-tax loss for deposit-related charged-off items and approximately $660 thousand of legal and consulting expenses, recorded in professional services expenses. In the second quarter of 2024, the Company incurred approximately $371 thousand of professional services expenses related to this event. The Bank continues to aggressively pursue its legal rights and seek any and all recovery avenues. In the second quarter of 2024, the Company recorded a small recovery of approximately $143 thousand. The Company recorded a provision for credit losses of $2.0 million in the current quarter, compared to a benefit for credit losses of $5.5 million in the linked quarter and a provision of $3.2 million in the prior year quarter.

Second Quarter 2024 Key Results:

"Our continued focus on liquidity, capital and earnings led to strong second quarter 2024 outcomes. Our results benefited from not only the successful sale of the assets of our insurance subsidiary on April 1, which achieved strong value for shareholders by generating a significant pre-tax gain of $13.5 million, but also reflect solid performance from our core businesses. Quarterly net income available to common shareholders of $25.3 million, benefiting from the SDN sale, was a record. Importantly, net interest margin expansion from the linked quarter, improvement in our stable asset quality metrics as compared to the first quarter of 2024, and meaningful build in our capital ratios were achieved," said President and Chief Executive Officer Martin K. Birmingham.

"Margin expanded by nine basis points and our already strong asset quality metrics further improved in the second quarter, including annualized net charge-offs to average loans of just 10 basis points. We finished the quarter with improved regulatory and tangible capital positions, reporting a common equity tier 1 ratio surpassing 10%, up 60 basis points from March 31, 2024 and

up 93 basis points from June 30, 2023, and growing tangible common book value per share(1) by 9% and 16% from the end of the linked and year-ago quarters, respectively," Mr. Birmingham added.

Chief Financial Officer and Treasurer W. Jack Plants II commented, "We are pleased with our ability to build on the margin stability achieved in the first quarter to drive solid expansion on a linked quarter basis. Having started 2024 with approximately $1.1 billion in anticipated annual cash flow combined from our loan and securities portfolios, we have been able to steadily redeploy cash through the first six months of the year into higher yielding earnings assets while continuing to build our capital position. As of June 30, 2024, we have $1.3 billion in available liquidity and more than $1.0 billion in cash flow anticipated in the next 12 months. While we have vigorously managed the fraud event that we discovered and disclosed in early March and were successful with the strong execution of our insurance subsidiary sale in the second quarter, we are proud that our core business continues to build momentum for sustained incremental improvement in operating performance."

Sale of Insurance Subsidiary Assets

On April 1, 2024, the Company announced and closed the sale of the assets of its wholly-owned subsidiary SDN Insurance Agency, LLC ("SDN") to NFP Property & Casualty Services, Inc. ("NFP"), a privately-held property and casualty broker and benefits consultant. As previously disclosed, the sale generated approximately $27.0 million in proceeds and a pre-tax gain on sale of approximately $13.5 million, inclusive of selling costs and elimination of intangible assets.

Net Interest Income and Net Interest Margin

Net interest income was $41.2 million for the second quarter of 2024, an increase of $1.1 million from the first quarter of 2024 due in part to lower funding costs as a result of the Company's reduction of short term borrowings and brokered deposits that occurred late in the first quarter and a decrease of $1.1 million from the second quarter of 2023 due primarily to higher funding costs on a year-over-year basis.

Average interest-earning assets for the current quarter were $5.77 billion, a decrease of $39.0 million from the first quarter of 2024 due to a $26.9 million decrease in average loans and a $24.0 million decrease in the average balance of Federal Reserve interest-earning cash, partially offset by an $11.8 million increase in the average balance of investment securities. Average interest-earning assets for the current quarter were $74.0 million higher than the second quarter of 2023 due to a $107.2 million increase in average loans and a $41.2 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $74.4 million decrease in the average balance of investment securities.

Average interest-bearing liabilities for the current quarter were $4.55 billion, a decrease of $66.6 million from the first quarter of 2024, primarily due to a $45.0 million decrease in average savings and money market deposits, a $39.6 million decrease in average short-term borrowings, and an $8.5 million decrease in average interest-bearing demand deposits, partially offset by a $26.5 million increase in average time deposits. Average interest-bearing liabilities for the second quarter of 2024 were $113.6 million higher than the year-ago quarter, due to a $376.6 million increase in average savings and money market account deposits, partially offset by a $154.5 million decrease in average short-term borrowings, a $107.5 million decrease in average interest-bearing demand deposits, and a $927 thousand decrease in average time deposits.

Net interest margin was 2.87% in the current quarter, 2.78% in the first quarter of 2024, and 2.99% in the second quarter of 2023. The linked quarter expansion was due to an increase in the average yield on interest-earning assets, coupled with a decline in the average yield of interest-bearing liabilities that in part reflected a reduction and mix shift in borrowings between periods. The year-over-year decline primarily was a result of higher funding costs amid the current high interest rate environment, partially offset by an increase in the average yield on interest-earning assets.

Noninterest Income

Noninterest income was $24.0 million for the second quarter of 2024, an increase of $13.1 million from the first quarter of 2024 and an increase of $12.5 million from the second quarter of 2023.

Noninterest Expense

Noninterest expense was $33.0 million in the second quarter of 2024 compared to $54.0 million in the first quarter of 2024 and $33.8 million in the second quarter of 2023.

Income Taxes

Income tax expense was $4.5 million for the second quarter of 2024 compared to $356 thousand in the first quarter of 2024, and $2.4 million in the second quarter of 2023. The lower level of income tax expense incurred during the first quarter of 2024 was due to a lower level of pre-tax income, reflecting the impact of the previously disclosed fraud event. The Company also recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the second quarter of 2024, first quarter of 2024, and second quarter of 2023, resulting in income tax expense reductions of $1.3 million, $785 thousand, and $761 thousand, respectively.

The effective tax rate was 15.0% for the second quarter of 2024, 14.7% for the first quarter of 2024, and 14.4% for the second quarter of 2023. The effective tax rate fluctuates on a quarterly basis primarily due to the level of pre-tax earnings and may differ from statutory rates because of interest income from tax-exempt securities, earnings on company owned life insurance and the impact of tax credit investments.

Balance Sheet and Capital Management

Total assets were $6.13 billion at June 30, 2024, down $166.8 million from March 31, 2024, and down $9.5 million from June 30, 2023.

Investment securities were $1.00 billion at June 30, 2024, down $67.6 million from March 31, 2024, and down $72.1 million from June 30, 2023.

Total loans were $4.46 billion at June 30, 2024, an increase of $19.4 million, or 0.4%, from March 31, 2024, and an increase of $63.7 million, or 1.4%, from June 30, 2023.

Total deposits were $5.13 billion at June 30, 2024, down $263.4 million, or 4.9%, from March 31, 2024, and up $98.5 million, or 2.0%, from June 30, 2023. The decrease from March 31, 2024 was primarily due to the seasonality of public deposits, coupled with a reduction in brokered CDs. The increase from June 30, 2023 was driven by increases in nonpublic deposits associated with the Company's 2023 money market advertising campaign as well as Banking-as-a-Service, or BaaS, deposits, along with increases in reciprocal and public deposits, which were partially offset by a reduction in brokered deposits between periods. Public deposit balances represented 20% of total deposits at June 30, 2024, 22% at March 31, 2024 and 20% at June 30, 2023.

Short-term borrowings were $202.0 million at June 30, 2024, compared to $133.0 million at March 31, 2024 and $374.0 million at June 30, 2023. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits.

Shareholders' equity was $467.7 million at June 30, 2024, compared to $445.7 million at March 31, 2024, and $425.9 million at June 30, 2023. The increase in shareholders' equity compared to the linked and year-ago period ends was primarily due to higher net income in the current quarter. Shareholders' equity has been negatively impacted since 2022 by an increase in accumulated other comprehensive loss associated with unrealized losses in the available for sale securities portfolio. Management believes the unrealized losses are temporary in nature, as they are associated with the current high interest rate environment. The securities portfolio continues to generate cash flow and, given the high credit quality of the agency mortgage-backed securities portfolio, management expects the bonds to ultimately mature at a terminal value equivalent to par.

Common book value per share was $29.11 at June 30, 2024, an increase of $1.37, or 4.9%, from $27.74 at March 31, 2024, and an increase of $2.58, or 9.7%, from $26.53 at June 30, 2023. Tangible common book value per share(1) was $25.17 at June 30, 2024, an increase of $2.11, or 9.2%, from $23.06 at March 31, 2024, and an increase of $3.38, or 15.5%, from $21.79 at June 30, 2023. The common equity to assets ratio was 7.34% at June 30, 2024, compared to 6.80% at March 31, 2024, and 6.65% at June 30, 2023. Tangible common equity to tangible assets(1), or the TCE ratio, was 6.41%, 5.72% and 5.53% at June 30, 2024, March 31, 2024, and June 30, 2023, respectively. The primary driver of variations in all four measures for the comparable linked and year-ago period ends was the previously described changes in accumulated other comprehensive loss.

During the second quarter of 2024, the Company declared a common stock dividend of $0.30 per common share, consistent with the linked and year-ago quarters.

The Company's regulatory capital ratios at June 30, 2024 continued to exceed all regulatory capital requirements to be considered well capitalized.

The improvement in regulatory capital ratios in the current quarter was primarily driven by the impact of the previously mentioned insurance asset sale that closed April 1, 2024.

Credit Quality

Non-performing loans were $25.2 million, or 0.57% of total loans, at June 30, 2024, as compared to $26.7 million, or 0.60% of total loans, at March 31, 2024 and $9.9 million, or 0.23% of total loans, at June 30, 2023. The year-over-year increase was primarily driven by one commercial loan relationship that was placed on nonaccrual during the fourth quarter of 2023. Net charge-offs were $1.1 million, representing 0.10% of average loans on an annualized basis, for the current quarter, as compared to $3.1 million, or an annualized 0.28% of average loans, in the first quarter of 2024 and $636 thousand, or an annualized 0.06%, in the second quarter of 2023.

At June 30, 2024, the allowance for credit losses on loans to total loans ratio was 0.99%, compared to 0.97% at March 31, 2024 and 1.13% at June 30, 2023.

Provision (benefit) for credit losses was a provision of $2.0 million in the current quarter, compared to a benefit of $5.5 million in the linked quarter and a provision of $3.2 million in the prior year quarter. Provision for credit losses on loans was $2.0 million in the current quarter, compared to a benefit of $4.9 million in the first quarter of 2024 and a provision of $2.9 million in the second quarter of 2023. The allowance for unfunded commitments, also included in provision for credit losses as required by the current expected credit loss standard ("CECL"), totaled a provision of $43 thousand in the second quarter of 2024, a benefit of $570 thousand in the first quarter of 2024, and a provision of $287 thousand in the second quarter of 2023. The provision for credit losses for the second quarter of 2024 was driven by a combination of factors, including a modest increase in consumer indirect delinquencies during the period, which increased the qualitative factor for that portfolio, partially offset by improvement in forecasted losses.

The Company has remained strategically focused on the importance of credit discipline, allocating resources to credit and risk management functions as the loan portfolio has grown. The ratio of allowance for credit losses on loans to non-performing loans was 174% at June 30, 2024, 161% at March 31, 2024, and 503% at June 30, 2023.

Subsequent Events

The Company is required, under generally accepted accounting principles, to evaluate subsequent events through the filing of its consolidated financial statements for the quarter ended June 30, 2024, on Form 10-Q. As a result, the Company will continue to evaluate the impact of any subsequent events on critical accounting assumptions and estimates made as of June 30, 2024, and will adjust amounts preliminarily reported, if necessary.

Conference Call

The Company will host an earnings conference call and audio webcast on July 26, 2024 at 8:30 a.m. Eastern Time. The call will be hosted by Martin K. Birmingham, President and Chief Executive Officer, and W. Jack Plants II, Chief Financial Officer and Treasurer. The live webcast will be available in listen-only mode on the Company's website at www.FISI-Investors.com. Within the United States, listeners may also access the call by dialing 1-833-470-1428 and providing the access code 713156. The webcast replay will be available on the Company's website for at least 30 days.

About Financial Institutions, Inc.

Financial Institutions, Inc. (NASDAQ: FISI) is an innovative financial holding company with approximately $6.1 billion in assets offering banking and wealth management products and services. Its Five Star Bank subsidiary provides consumer and commercial banking and lending services to individuals, municipalities and businesses through banking locations spanning Western and Central New York and a commercial loan production office serving the Mid-Atlantic region. Courier Capital, LLC offers customized investment management, financial planning and consulting services to individuals and families, businesses, institutions, non-profits and retirement plans. Learn more at Five-StarBank.com and FISI-Investors.com.

Non-GAAP Financial Information

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

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

Safe Harbor Statement

This press release may contain forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as "believe," "anticipate," "continue," "estimate," "expect," "focus," "forecast," "intend," "may," "plan," "preliminary," "should," or "will." 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: additional information regarding the deposit fraudulent activity; changes in interest rates; inflation; changes in deposit flows and the cost and availability of funds; the Company's ability to implement its strategic plan, including by expanding its commercial lending footprint and integrating its acquisitions; 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; legal and regulatory proceedings and related matters, including any action described in our reports filed with the SEC, could adversely affect us and the banking industry in general; 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; and general economic and credit market conditions nationally and regionally; and the macroeconomic volatility related to the impact of a pandemic or global political unrest. Consequently, all forward-looking statements made herein are qualified by these cautionary statements and the cautionary language and risk factors included in the Company's Annual Report on Form 10-K, its Quarterly Reports onForm 10-Qand 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 financial measure.

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For additional information contact:

Kate Croft

Director of Investor and External Relations

(716) 817-5159

[email protected]

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