FINANCIAL INSTITUTIONS INC

Financial Institutions, Inc. operates as a financial holding company whose primary business is the operation of its subsidiaries, principally Five Star Bank, a New York-chartered bank providing a full range of banking services to consumer, commercial and municipal customers in Western and Central New York, and commercial loans in the Mid-Atlantic region through a loan production office in Ellicott City, Maryland and the Central New York region through an office in Syracuse, New York, and Courier Capital LLC, an SEC-registered investment advisory and wealth management firm. The Company's market area is economically diversified, serving both rural markets and the larger markets in and around Rochester and Buffalo, New York, which have a combined population of over two million people. The Company faces significant competition in both making loans and attracting deposits, as Western and Central New York have a high density of financial institutions, with competition for loans coming principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, and other financial services companies, and competition for deposits historically coming from commercial banks, savings banks and credit unions, as well as non-traditional FinTech firms and non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies.

The Company's core customers are primarily small- to medium-sized businesses, individuals and community organizations who prefer to build banking and wealth management relationships with a community bank that offers high-quality, competitively priced products and services with personalized service. The Company believes its level of personal service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local communities. The Company's market share for total deposits as of June 30, 2025, includes 10.94% in Allegany County (rank 2), 21.86% in Cattaraugus County (rank 2), 15.85% in Cayuga County (rank 2), 12.11% in Chemung County (rank 3), 0.67% in Erie County (rank 9), 20.89% in Genesee County (rank 2), 37.09% in Livingston County (rank 1), 2.23% in Monroe County (rank 8), 9.33% in Ontario County (rank 4), 27.23% in Orleans County (rank 2), 33.82% in Seneca County (rank 1), 37.25% in Steuben County (rank 1), 67.34% in Wyoming County (rank 1), and 28.79% in Yates County (rank 2).

The Company generates revenue primarily through its banking operations, which include net interest income from lending and investment activities and non-interest income from deposit service charges, wealth management fees, and other fee-based services. The Company's primary source of funding is deposits, which include checking and NOW accounts, savings accounts, and certificates of deposit. The Company also utilizes borrowed funds, including subordinated notes, federal funds purchased, securities sold under agreements to repurchase, brokered deposits, FHLB advances, and borrowings from the discount window of the Federal Reserve Bank. The Company's business strategy focuses on organic growth with the goal of increasing the Bank's market share within existing markets, while also exploring market expansion opportunities and potential acquisitions that complement core competencies and strategic intent.

The Company's lending activities include commercial business loans and lines of credit, commercial mortgage loans, residential real estate loans and lines of credit, and consumer loans. As of December 31, 2025, the commercial business loan portfolio totaled $738.3 million ¹, or 16% of the total loan portfolio, with $165.7 million ² at fixed interest rates and $572.6 million ³ at variable interest rates. The commercial mortgage loan portfolio totaled $2.34 billion ⁴, or 50.3% of the total loan portfolio, with $753.7 million ⁵ at fixed interest rates and $1.59 billion ⁶ at variable interest rates. The residential real estate loan portfolio totaled $657.0 million ⁷, or 14% of the total loan portfolio, with $457.3 million ⁸ at fixed interest rates and $199.8 million ⁹ at variable interest rates, and residential real estate lines totaled $75.1 million ¹⁰, or 2% of the total loan portfolio. The consumer indirect portfolio totaled $807.3 million ¹¹, or 17% of the total loan portfolio. The Company also participates in government loan guarantee programs, with loans having an aggregate principal balance of $40.9 million ¹² covered by guarantees under these programs as of December 31, 2025. The Company's investment securities strategy focuses on providing liquidity, managing credit risks, and maximizing portfolio yield, with policy generally limiting securities purchases to U.S. treasury securities, U.S. government agency securities, mortgage-backed securities, government guaranteed loans, investment grade municipal securities, certificates of deposit, subordinated debt issues for public bank holding companies, equity securities at the holding company level, derivative instruments, and limited partnership investments.

Courier Capital, with $3.60 billion ¹³ in assets under management as of December 31, 2025, offers customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses and institutions, and for the year ended December 31, 2025, had total revenue of $11.6 million ¹⁴. The Company also operates Five Star REIT, Inc., a wholly-owned subsidiary of the Bank that operates as a real estate investment trust primarily holding residential mortgages and commercial real estate loans. The Company's deposit products include checking and NOW accounts, savings accounts, and certificates of deposit, and the Company also participates in reciprocal deposit programs, with reciprocal deposits totaling $829.2 million ¹⁵ at December 31, 2025. The Company's residential mortgage servicing portfolio totaled $293.3 million ¹⁶ as of December 31, 2025, the majority of which has been sold to the FHLMC.

As of December 31, 2025, the Company had 631 ¹⁷ employees situated across the United States, an increase of 33 ¹⁸ employees, or 6% ¹⁹, from December 31, 2024, primarily attributable to investments in personnel and filling of open positions in 2025. Approximately 65% ²⁰ of the workforce was female, 35% ²¹ male, and the average tenure was 6.44 years ²², slightly decreasing from 6.84 years ²³ at December 31, 2024. The Company was Certified by Great Place To Work for the third time in 2025. The Company added an office in Sarasota, Florida in September 2025. The Company did not opt into using the Community Bank Leverage Ratio and determined to comply with the Basel III Rules instead of using the CBLR framework.

For the fiscal year ended December 31, 2025, the Company had consolidated total assets of $6.27 billion ²⁴, deposits of $5.21 billion ²⁵ and shareholders' equity of $628.9 million ²⁶. The Bank represented 99% ²⁷ and Courier Capital represented less than 1% ²⁸ of the consolidated assets of the Company. At December 31, 2025, the Bank had total assets of $6.24 billion ²⁹, investment securities of $1.01 billion ³⁰, net loans of $4.61 billion ³¹, deposits of $5.29 billion ³² and shareholders' equity of $662.3 million ³³.

The Company's primary focus is on organic growth with the goal of increasing the Bank's market share within existing markets. The Company will continue to explore market expansion opportunities that complement current market areas as opportunities arise, including small branch acquisitions, as well as evaluating potential growth opportunities within its non-interest income line of business by acquiring businesses that can be incorporated into existing operations. The Company believes its capital position remains strong enough to support selective merger and acquisition activity in support of expansion of its core financial service businesses, and conversations with potential strategic partners occur on a regular basis. The Company also focuses on technology to provide solutions that fit customer preferences for transacting business, with enhanced digital capabilities complementing a continued focus on a consistent customer experience and engagement across physical and virtual channels, including using branches to create deeper engagement and relationships with customers, balancing customer engagement with efficiency opportunities, and maintaining and expanding customer reach digitally, physically or virtually.

The Company's growth strategy includes deepening existing digital capabilities to capitalize on a shift in customer preferences away from physical branches, and employing digital channels across current products and services to deepen existing relationships and enter new geographies or market segments that would otherwise be prohibitively expensive targets using traditional approaches. The Company prioritizes customer acquisition through cost-effective, high-demand digital, virtual and physical channels, while maintaining a community bank distinctiveness relative to larger banks and digital-only neobanks. The Company leverages the retail branch network and customer contact center to build trust and credibility, provide personal financial education and advice, offer convenience, and bridge digital and physical channels. The Company also anticipates continuing to increase its presence in and around the Rochester and Buffalo metropolitan statistical areas and complementary market areas in the coming years.

The filing does not contain specific margin or cost outlook figures or targets.

The Company's operational outlook includes a focus on technology to provide solutions that fit customer preferences for transacting business, with branches staffed by certified personal bankers trained to meet a broad array of customer needs, and digital banking capabilities and a Customer Contact Center providing additional self-serve and phone options. The Company's human capital strategy includes conducting intentional, strategic hiring to supplement the organization with new skill sets and perspectives, and since 2022, the Company has conducted annual talent calibrations to assess internal talent and identify gaps and development opportunities. The Company's learning management platform, Five Star University, enables professional development, competency training and upskilling for an evolving workforce.

The filing does not contain specific R&D spending levels, capital expenditure plans, share repurchase authorization amounts, or dividend policy figures.

The Company faces significant competition in both making loans and attracting deposits, as Western and Central New York have a high density of financial institutions. The Company also faces additional competition for deposits from non-traditional FinTech firms and non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. The Company's industry frequently experiences merger activity, which affects competition by eliminating some institutions while potentially strengthening the franchises of others.

The Company is subject to extensive regulation under federal and state laws, and a change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on the business, financial condition and results of operations. The Company's business may be adversely affected by conditions in the financial markets and economic conditions generally, including macroeconomic pressures such as inflation, supply chain issues, and geopolitical risks associated with international conflict. The Company also faces risks related to its geographic concentration in its loan portfolio, which may unfavorably impact its operations, and the lack of seasoning in portions of its loan portfolio could increase risk of credit defaults in the future.

The Company faces material credit risk, as its commercial business and commercial mortgage loans increase exposure to credit risks, and if non-performing assets increase, earnings will be adversely affected. The Company's loan portfolio is geographically concentrated in Western and Central New York, which may unfavorably impact operations. The Company is subject to interest rate risk, and fluctuations in market interest rates may affect interest margins and income, demand for products, defaults on loans, loan prepayments and the fair value of financial instruments. The Company faces significant competition from commercial banks, savings banks, credit unions, and non-traditional FinTech firms, which could impact its ability to attract deposits and make loans. The Company is highly regulated, and any adverse regulatory action may result in additional costs, loss of business opportunities, and reputational damage, including risks related to the Community Reinvestment Act and fair lending laws, non-compliance with the USA PATRIOT Act, the Bank Secrecy Act, and OFAC sanction regulations, and potential FDIC insurance premium increases.

Management's message emphasizes the Company's community bank philosophy, focusing on understanding the individualized banking and other financial services needs of individuals, municipalities and businesses in the primary service area, and believes this focus allows the Company to be more responsive to customers' needs and provide a high level of personal service that differentiates it from larger competitors. Key strategic priorities include fostering a community-oriented culture where customers and employees establish long-standing and mutually beneficial relationships, prioritizing customer acquisition through cost-effective, high-demand digital, virtual and physical channels while maintaining a community bank distinctiveness, and focusing on organic growth with the goal of increasing the Bank's market share within existing markets while continuing to explore market expansion opportunities and evaluating acquisition opportunities in support of expansion of core financial service businesses. Management also emphasizes maintaining a diversified revenue stream and a commitment to technology to provide solutions that fit customer preferences for transacting business.