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Financial Institutions, Inc. Announces Second Quarter 2017 Results

WARSAW, N.Y., July 25, 2017 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (NASDAQ:FISI), today reported financial and operational results for the second quarter ended June 30, 2017. Financial Institutions, Inc. (the “Company”) is the parent company of Five Star Bank (the “Bank”), Scott Danahy Naylon, LLC (“Scott Danahy Naylon” or “SDN”) and Courier Capital, LLC (“Courier Capital”).

Net income for the quarter was $6.2 million, compared to $7.9 million for the first quarter of 2017 and $7.2 million for the second quarter of 2016. After preferred dividends, net income available to common shareholders was $5.9 million, or $0.40 per diluted share, compared to $7.6 million, or $0.52 per diluted share for the first quarter of 2017, and $6.8 million, or $0.47 per diluted share, for the second quarter of 2016.

Results for the second quarter of 2017 were negatively impacted by a $925 thousand provision for loan losses in connection with the downgrade of one commercial credit relationship and a $375 thousand net effect of two non-cash valuation adjustments related to the 2014 acquisition of SDN.

President and Chief Executive Officer Martin K. Birmingham stated, “We have continued to take advantage of market disruption to complete strategic hires — adding lenders in nearly all categories and adding credit and compliance professionals to support growth. Growing our residential mortgage lending business is a priority as we believe that our community bank delivery model offers an attractive option to homebuyers. We have completed the build-out of a team of highly-skilled and experienced residential mortgage professionals in Buffalo, including a team of loan officers and back office support personnel. We are pleased with the progress we have made in expanding our lending platforms.   

“Loan and nonpublic deposit growth were strong in the quarter and in-line with our strategic plan. Total loans were 4.8% higher than the end of the first quarter and 13.8% higher than June 30, 2016. Nonpublic deposits were up 4.7% from March 31st and up 9.3% from the year earlier period.  

“Commercial mortgage loans, commercial business loans and consumer indirect loans increased during the quarter by 7.3%, 6.1% and 5.2%, respectively. Consumer indirect lending is a unique core competency for Five Star Bank, based on the foundation of a consistent and disciplined underwriting process and an experienced management team. Our indirect lending business is a prime lending operation that continues to perform very well compared to peers, even through challenging times in the auto finance sector, with low delinquency levels and net charge-offs on the low end of our historic range.

“It is also important to note that our recently opened financial solution centers in downtown Rochester and downtown Buffalo continue to gain traction. These branches are prime locations and we believe they will serve as strong bases for our continued growth in Western New York.”

Chief Financial Officer Kevin B. Klotzbach added, “We believe that our strategy to drive noninterest income is working, in spite of challenges in one line of business. We recently made thoughtful and strategic organizational changes at SDN to increase the focus on growing both commercial and personal insurance revenues and reduce related operating expenses. We remain positive on the strategic contribution of this subsidiary which has supported the diversification of revenue, growth of fee income and strengthening of customer relationships. Growth in noninterest income continues to be a high priority.  

“Our provision for loan losses increased in the quarter, primarily as a result of two factors:  a commercial credit downgrade and growth in our loan portfolio. It is not unusual for banks to experience commercial credit downgrades in the normal course of business and we are focused on maximizing recovery. In addition, the provision increases as a function of total loan portfolio growth. During the first six months of 2017, we grew our loan portfolio by $176.7 million, resulting in an increase in the provision for loan losses of approximately $2.3 million."

Second Quarter 2017 Highlights:

  • Net interest income of $27.4 million increased $2.2 million, or 8.8%, as compared to the second quarter of 2016
  • Noninterest income of $9.3 million was $417 thousand, or 4.7%, higher than the second quarter of 2016
  • Total assets, interest-earning assets and loans all reached record-high levels at quarter-end:
    • Total assets increased $31.7 million during the quarter, to $3.89 billion
    • Total interest-earning assets increased $69.5 million during the quarter, to $3.59 billion
    • Total loans increased $114.2 million during the quarter, to $2.52 billion
  • The quarterly cash dividend of $0.21 per common share represented a 2.83% annualized dividend yield as of June 30, 2017, and a return of 53% of second quarter net income to common shareholders
  • Total risk-based capital was 13.09% at quarter-end, representing a strong capital position to support future growth
  • The Company launched an “at-the-market” equity offering program under which it may sell up to $40 million of its common stock
  • Shareholders elected Donald K. Boswell to the Board of Directors, the fourth new board member added over the course of the past three years

“At-The-Market” Offering of Common Stock

On May 30, 2017, the Company announced an “at-the-market” equity offering program under which it may sell up to $40 million of its common stock. The Company expects to use the net proceeds of this offering to support organic growth and other general corporate purposes, including contributing capital to its banking subsidiary, Five Star Bank. During the quarter ended June 30, 2017, the Company sold 571,597 shares of its common stock under this program at a weighted average price of $30.59, representing gross proceeds of $17.5 million. Net proceeds received were $16.7 million.

Valuation Adjustments Related to Scott Danahy Naylon

The Company completed an evaluation of the contingent earn out liability related to its 2014 acquisition of SDN, resulting in a contingent consideration liability adjustment of $1.2 million. Concurrently, an impairment test of goodwill related to SDN was also performed and it was determined that the carrying value of SDN goodwill exceeded its fair value, resulting in a $1.6 million non-cash goodwill impairment charge.

Net Interest Income and Net Interest Margin

  • Net interest income was $27.4 million for the quarter, $427 thousand higher than the first quarter of 2017 and $2.2 million higher than the second quarter of 2016.
  • Average interest-earning assets for the quarter were $3.56 billion, $78.6 million higher than the first quarter of 2017 and $326.8 million higher than the second quarter of 2016. The primary driver of the increase was loans, which in turn were funded primarily by increased deposits. Net interest margin was negatively impacted by a flattening of the yield curve in the quarter.
  • Second quarter 2017 net interest margin was 3.18%, five basis points lower than the first quarter of 2017 and the second quarter of 2016. Net interest margin was negatively impacted by a flattening of the yield curve in the quarter.

Noninterest Income

Noninterest income was $9.3 million for the quarter as compared to $7.8 million in the first quarter of 2017 and $8.9 million in the second quarter of 2016. 

  • Excluding the net gain on investment securities from all periods, noninterest income was $9.1 million in the second quarter of 2017, $1.5 million higher than $7.6 million in the first quarter of 2017, and $1.6 million higher than $7.5 million in the second quarter of 2016. 
  • A significant component of the increase was the $1.2 million non-cash fair value adjustment of contingent consideration liability previously described.

Noninterest Expense

Noninterest expense was $23.9 million for the quarter as compared to $20.9 million in the first quarter of 2017 and $22.1 million in the second quarter of 2016.

  • The increase in noninterest expense as compared to the first quarter of 2017 was primarily the result of the $1.6 million non-cash goodwill impairment charge combined with higher salaries and employee benefits and occupancy and equipment expenses related to our organic growth initiatives, including the residential mortgage lending expansion. In addition, health care claims were approximately $385 thousand higher in the second quarter of 2017.
  • The increase in noninterest expense as compared to the second quarter of 2016 was due to the same factors described above, partially offset by lower professional services expense in 2017. In addition, late in the first quarter of 2016 the Company implemented several initiatives to reduce operating expenses which were reflected in the second quarter of 2016.

Income Taxes

Income tax expense was $2.7 million for the quarter as compared to $3.2 million in the first quarter of 2017 and $2.9 million in the second quarter of 2016. The effective tax rate was 30.5% for the quarter as compared to 28.5% for the first quarter of 2017 and 28.8% for the second quarter 2016. The higher effective tax rate was a result of the $1.6 million non-cash goodwill impairment charge related to the SDN acquisition, partially offset by the $1.2 million non-cash fair value adjustment of the contingent consideration liability related to the SDN acquisition, both of which were non-taxable adjustments.

Balance Sheet and Capital Management

Total assets were $3.89 billion at June 30, 2017, up $31.7 million from $3.86 billion at March 31, 2017, and up $305.9 million from $3.59 billion at June 30, 2016. The increases were largely the result of loan growth funded primarily by deposit growth.

Total loans were $2.52 billion at June 30, 2017, up $114.2 million, or 4.8%, from March 31, 2017, and up $305.0 million, or 13.8%, from June 30, 2016.

  • Commercial business loans totaled $398.3 million, up $22.8 million, or 6.1%, from March 31, 2017, and up $48.9 million, or 14.0%, from June 30, 2016.
  • Commercial mortgage loans totaled $724.1 million, up $49.1 million, or 7.3%, from March 31, 2017, and up $109.9 million, or 17.9%, from June 30, 2016.
  • Residential real estate loans totaled $432.1 million, up $3.9 million, or 0.9%, from March 31, 2017, and up $23.7 million, or 5.8%, from June 30, 2016.
  • Consumer indirect loans totaled $826.7 million, up $40.6 million, or 5.2%, from March 31, 2017, and up $129.8 million, or 18.6%, from June 30, 2016.

Total deposits were $3.13 billion at June 30, 2017, a decrease of $37.2 million from March 31, 2017, and an increase of $274.5 million from June 30, 2016. The decrease from March 31, 2017, was primarily due to public deposit seasonality, partially offset by the impact of CD and money market campaigns in the second quarter of 2017. The increase from June 30, 2016, was primarily the result of successful business development efforts in both municipal and retail banking, including the second quarter deposit campaigns. Public deposit balances represented 27% of total deposits at June 30, 2017, compared to 31% at March 31, 2017 and 27% at June 30, 2016.

Short-term borrowings were $347.5 million at June 30, 2017, up $44.2 million from March 31, 2017, and up $9.2 million from June 30, 2016.

Shareholders’ equity was $347.6 million at June 30, 2017, compared to $325.7 million at March 31, 2017, and $322.2 million at June 30, 2016. Common book value per share was $21.84 at June 30, 2017, an increase of $0.63 or 3.0% from $21.21 at March 31, 2017, and an increase of $0.86 or 4.1% from $20.98 at June 30, 2016. The increases in shareholders’ equity and common book value per share are attributable to common stock issued through our “at-the-market” stock offering plus net income less dividends paid, net of the change in unrealized gain (loss) on investment securities, a component of accumulated other comprehensive loss.

During the second quarter of 2017, the Company declared a common stock dividend of $0.21 per common share. The second quarter of 2017 dividend returned 53% of second quarter net income to common shareholders. 

Regulatory capital ratios at June 30, 2017, were higher than the prior quarter and prior year due to increased capital as a result of the recent “at-the-market” stock offering:

  • Leverage Ratio was 7.70%, compared to 7.30% and 7.39% at March 31, 2017, and June 30, 2016, respectively.
  • Common Equity Tier 1 Ratio was 9.86%, compared to 9.46% and 9.63% at March 31, 2017, and June 30, 2016, respectively.
  • Tier 1 Risk-Based Capital was 10.48%, compared to 10.11% and 10.33% at March 31, 2017, and June 30, 2016, respectively.
  • Total Risk-Based Capital was 13.09%, compared to 12.75% and 13.08% at March 31, 2017, and June 30, 2016, respectively.

Credit Quality

Non-performing loans were $12.6 million at June 30, 2017, as compared to $8.0 million at March 31, 2017, and $6.6 million at June 30, 2016. The increase was primarily the result of the second quarter internal downgrade of two commercial credit relationships with unpaid principal balances totaling $5.6 million.

  • The ratio of non-performing loans to total loans was 0.50% at June 30, 2017, compared to 0.33% at March 31, 2017, and 0.30% at June 30, 2016.
  • The provision for loan losses for the quarter was $3.8 million, an increase of $1.1 million from the first quarter of 2017 and an increase of $1.9 million from the second quarter of 2016. The increase in provision is primarily attributable to growth in the total loan portfolio combined with the impact of the downgrade of one commercial credit relationship. The downgrade necessitated a provision and increase in allowance for loan losses of approximately $925 thousand. The relationship was 30-59 days past due as of June 30, 2017, and we continue to monitor the situation closely. 
  • The ratio of annualized net charge-offs to total average loans was 0.29% in the current quarter, compared to 0.45% in the prior quarter and 0.19% in the second quarter of 2016.
  • The ratio of allowance for loan losses to total loans was 1.32% at June 30, 2017, 1.29% at March 31, 2017, and 1.29% at June 30, 2016. 
  • The ratio of allowance for loan losses to non-performing loans was 263% at June 30, 2017, 388% at March 31, 2017, and 435% at June 30, 2016.

About Financial Institutions, Inc.

Financial Institutions, Inc. provides diversified financial services through its subsidiaries Five Star Bank, Scott Danahy Naylon and Courier 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 and 70 ATMs throughout Western and Central New York State. Scott Danahy Naylon provides a broad range of insurance services to personal and business clients across 45 states. Courier Capital provides 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 650 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 common equity, tangible common equity to tangible assets, tangible common book value per share, 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. Statements herein are based on certain assumptions and analyses by the Company and are 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 Scott Danahy Naylon and Courier Capital, 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.


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

  2017
  2016
  June 30,   March 31,   December 31,   September 30,   June 30,
SELECTED BALANCE SHEET DATA:                  
Cash and cash equivalents $ 84,537     $ 149,699     $ 71,277     $ 110,721     $ 67,624  
Investment securities:                  
Available for sale   540,575       540,406       539,926       559,495       619,719  
Held-to-maturity   533,471       545,381       543,338       528,708       478,549  
Total investment securities   1,074,046       1,085,787       1,083,264       1,088,203       1,098,268  
Loans held for sale   1,864       2,097       1,050       844       209  
Loans:                  
Commercial business   398,343       375,518       349,547       350,588       349,432  
Commercial mortgage   724,064       675,007       670,058       636,338       614,141  
Residential real estate loans   432,053       428,171       427,937       425,882       408,367  
Residential real estate lines   118,611       120,874       122,555       123,663       125,054  
Consumer indirect   826,708       786,120       752,421       729,644       696,908  
Other consumer   17,093       16,937       17,643       17,879       17,929  
Total loans   2,516,872       2,402,627       2,340,161       2,283,994       2,211,831  
Allowance for loan losses   33,159       31,081       30,934       29,350       28,525  
Total loans, net   2,483,713       2,371,546       2,309,227       2,254,644       2,183,306  
Total interest-earning assets   3,593,106       3,523,613       3,428,541       3,357,609       3,292,528  
Goodwill and other intangible assets, net   73,477       75,343       75,640       75,943       76,252  
Total assets   3,891,538       3,859,865       3,710,340       3,687,365       3,585,589  
Deposits:                  
Noninterest-bearing demand   677,124       666,332       677,076       657,624       626,240  
Interest-bearing demand   631,451       698,962       581,436       629,413       560,284  
Savings and money market   999,125       1,069,901       1,034,194       1,052,224       960,325  
Time deposits   824,786       734,464       702,516       724,096       711,156  
Total deposits   3,132,486       3,169,659       2,995,222       3,063,357       2,858,005  
Short-term borrowings   347,500       303,300       331,500       230,200       338,300  
Long-term borrowings, net   39,096       39,078       39,061       39,043       39,025  
Total interest-bearing liabilities   2,841,958       2,845,705       2,688,707       2,674,976       2,609,090  
Shareholders’ equity   347,641       325,688       320,054       326,271       322,176  
Common shareholders’ equity   330,301       308,348       302,714       308,931       304,836  
Tangible common equity (1)   256,824       233,005       227,074       232,988       228,584  
Unrealized gain (loss) on investment securities,
  net of tax
$ (232 )   $ (1,938 )   $ (2,530 )   $ 9,444     $ 10,886  
                   
Common shares outstanding   15,127       14,536       14,538       14,528       14,528  
Treasury shares   137       156       154       164       164  
CAPITAL RATIOS AND PER SHARE DATA:                  
Leverage ratio   7.70 %     7.30 %     7.36 %     7.39 %     7.39 %
Common equity Tier 1 ratio   9.86 %     9.46 %     9.59 %     9.58 %     9.63 %
Tier 1 risk-based capital   10.48 %     10.11 %     10.26 %     10.27 %     10.33 %
Total risk-based capital   13.09 %     12.75 %     12.97 %     12.98 %     13.08 %
Common equity to assets   8.49 %     7.99 %     8.16 %     8.38 %     8.50 %
Tangible common equity to tangible assets (1)   6.73 %     6.16 %     6.25 %     6.45 %     6.51 %
                   
Common book value per share $ 21.84     $ 21.21     $ 20.82     $ 21.26     $ 20.98  
Tangible common book value per share (1) $ 16.98     $ 16.03     $ 15.62     $ 16.04     $ 15.73  
Stock price (Nasdaq: FISI):                  
High $ 35.35     $ 35.40     $ 34.55     $ 27.63     $ 29.49  
Low $ 29.09     $ 30.50     $ 25.98     $ 25.16     $ 24.56  
Close $ 29.80     $ 32.95     $ 34.20     $ 27.11     $ 26.07  

________
(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)

  Six months ended   2017
  2016
  June 30,   Second   First   Fourth   Third   Second
  2017
  2016
  Quarter   Quarter   Quarter   Quarter   Quarter
SELECTED INCOME STATEMENT DATA:                          
Interest income $ 61,947     $ 55,881     $ 31,409     $ 30,538     $ 29,990     $ 29,360     $ 28,246  
Interest expense   7,530       5,963       3,987       3,543       3,268       3,310       3,047  
Net interest income   54,417       49,918       27,422       26,995       26,722       26,050       25,199  
Provision for loan losses   6,613       4,320       3,832       2,781       3,357       1,961       1,952  
Net interest income after provision                          
for loan losses   47,804       45,598       23,590       24,214       23,365       24,089       23,247  
Noninterest income:                          
Service charges on deposits   3,585       3,479       1,840       1,745       1,888       1,913       1,755  
Insurance income   2,564       2,855       1,133       1,431       1,134       1,407       1,183  
ATM and debit card   2,785       2,746       1,456       1,329       1,500       1,441       1,421  
Investment advisory   2,860       2,608       1,429       1,431       1,274       1,326       1,365  
Company owned life insurance   918       1,854       473       445       468       486       486  
Investments in limited partnerships   105       92       135       (30 )     47       161       36  
Loan servicing   243       228       123       120       104       104       112  
Net gain on sale of loans held for sale   120       156       72       48       38       46       78  
Net gain on investment securities   416       2,000       210       206       269       426       1,387  
Net gain (loss) on other assets   4       86       6       (2 )     28       199       82  
Contingent consideration liability adjustment   1,200       -       1,200       -       1,170       -       -  
Other   2,369       2,029       1,256       1,113       1,168       1,030       1,011  
Total noninterest income   17,169       18,133       9,333       7,836       9,088       8,539       8,916  
Noninterest expense:                          
Salaries and employee benefits   23,355       22,432       11,986       11,369       11,458       11,325       10,818  
Occupancy and equipment   8,148       7,289       4,184       3,964       3,623       3,617       3,664  
Professional services   2,428       4,280       1,229       1,199       948       956       2,833  
Computer and data processing   2,483       2,246       1,312       1,171       1,116       1,089       1,159  
Supplies and postage   1,004       1,058       467       537       499       490       464  
FDIC assessments   926       877       469       457       452       406       441  
Advertising and promotions   751       957       473       278       436       302       530  
Amortization of intangibles   588       637       291       297       303       309       315  
Goodwill impairment charge   1,575       -       1,575       -       -       -       -  
Other   3,625       3,562       1,955       1,670       1,880       2,124       1,896  
Total noninterest expense   44,883       43,338       23,941       20,942       20,715       20,618       22,120  
Income before income taxes   20,090       20,393       8,982       11,108       11,738       12,010       10,043  
Income tax expense   5,901       5,624       2,736       3,165       3,045       3,541       2,892  
Net income   14,189       14,769       6,246       7,943       8,693       8,469       7,151  
Preferred stock dividends   731       731       366       365       365       366       366  
Net income available to common shareholders $ 13,458     $ 14,038     $ 5,880     $ 7,578     $ 8,328     $ 8,103     $ 6,785  
FINANCIAL RATIOS:                          
Earnings per share – basic $ 0.92     $ 0.97     $ 0.40     $ 0.52     $ 0.58     $ 0.56     $ 0.47  
Earnings per share – diluted $ 0.92     $ 0.97     $ 0.40     $ 0.52     $ 0.57     $ 0.56     $ 0.47  
Cash dividends declared on common stock $ 0.42     $ 0.40     $ 0.21     $ 0.21     $ 0.21     $ 0.20     $ 0.20  
Common dividend payout ratio   45.65 %     41.24 %     52.50 %     40.38 %     36.21 %     35.71 %     42.55 %
Dividend yield (annualized)   2.84 %     3.09 %     2.83 %     2.58 %     2.44 %     2.93 %     3.09 %
Return on average assets   0.75 %     0.86 %     0.65 %     0.86 %     0.94 %     0.94 %     0.82 %
Return on average equity   8.66 %     9.48 %     7.44 %     9.94 %     10.68 %     10.34 %     9.07 %
Return on average common equity   8.67 %     9.54 %     7.38 %     10.02 %     10.81 %     10.45 %     9.10 %
Return on average tangible common equity (1)   11.41 %     12.86 %     9.65 %     13.30 %     14.37 %     13.87 %     12.22 %
Efficiency ratio (2)   61.66 %     64.08 %     64.10 %     59.09 %     56.99 %     58.99 %     66.00 %
Effective tax rate   29.4 %     27.6 %     30.5 %     28.5 %     25.9 %     29.5 %     28.8 %

________
(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.
Selected Financial Information (Unaudited)
 (Amounts in thousands)

  Six months ended   2017   2016
  June 30,   Second   First   Fourth   Third   Second
  2017   2016   Quarter   Quarter   Quarter   Quarter   Quarter
SELECTED AVERAGE BALANCES:                          
Federal funds sold and interest-earning deposits $ 13,377     $ 193     $ 16,639     $ 10,078     $ 12,011     $ 1     $ 316  
Investment securities (1)   1,087,854       1,051,411       1,085,670       1,090,063       1,080,941       1,068,866       1,075,220  
Loans:                          
Commercial business   374,715       323,022       385,938       363,367       347,496       352,696       329,901  
Commercial mortgage   689,370       594,251       700,010       678,613       659,713       625,003       606,360  
Residential real estate loans   429,993       386,952       430,237       429,746       425,687       417,854       391,826  
Residential real estate lines   120,457       126,264       119,333       121,594       122,734       123,312       125,212  
Consumer indirect   785,228       680,927       802,379       767,887       741,598       711,948       683,722  
Other consumer   16,818       17,744       16,680       16,956       17,448       17,548       17,562  
Total loans   2,416,581       2,129,160       2,454,577       2,378,163       2,314,676       2,248,361       2,154,583  
Total interest-earning assets   3,517,812       3,180,764       3,556,886       3,478,304       3,407,628       3,317,228       3,230,119  
Goodwill and other intangible assets, net   75,230       76,380       74,954       75,508       75,807       76,116       76,437  
Total assets   3,801,059       3,456,605       3,847,137       3,754,470       3,679,569       3,593,672       3,507,760  
Interest-bearing liabilities:                          
Interest-bearing demand   642,861       575,960       651,485       634,141       604,717       547,545       579,497  
Savings and money market   1,042,748       991,770       1,054,997       1,030,363       1,076,884       981,207       1,017,911  
Time deposits   742,254       678,521       762,874       721,404       711,061       722,098       698,505  
Short-term borrowings   325,368       217,576       323,562       327,195       244,796       315,122       213,826  
Long-term borrowings, net   39,076       39,006       39,085       39,067       39,050       39,032       39,015  
Total interest-bearing liabilities   2,792,307       2,502,833       2,832,003       2,752,170       2,676,508       2,605,004       2,548,754  
Noninterest-bearing demand deposits   658,063       619,751       658,926       657,190       655,445       638,417       621,912  
Total deposits   3,085,926       2,866,002       3,128,282       3,043,098       3,048,107       2,889,267       2,917,825  
Total liabilities   3,470,677       3,143,426       3,510,410       3,430,504       3,355,894       3,267,808       3,190,589  
Shareholders’ equity   330,382       313,179       336,727       323,966       323,675       325,864       317,171  
Common equity   313,042       295,839       319,387       306,626       306,335       308,524       299,831  
Tangible common equity (2) $ 237,812     $ 219,459     $ 244,433     $ 231,118     $ 230,528     $ 232,408     $ 223,394  
Common shares outstanding:                          
Basic   14,572       14,415       14,664       14,479       14,459       14,456       14,434  
Diluted   14,615       14,477       14,702       14,528       14,511       14,500       14,489  
SELECTED AVERAGE YIELDS:                          
(Tax equivalent basis)                          
Investment securities   2.47 %     2.48 %     2.47 %   2.46 %   2.41 %     2.44 %   2.48 %
Loans   4.17 %     4.19 %     4.16 %   4.19 %   4.17 %     4.18 %   4.17 %
Total interest-earning assets   3.63 %     3.63 %     3.63 %   3.64 %   3.60 %     3.62 %   3.61 %
Interest-bearing demand   0.14 %     0.14 %     0.14 %   0.14 %   0.14 %     0.15 %   0.14 %
Savings and money market   0.13 %     0.13 %     0.14 %   0.13 %   0.13 %     0.14 %   0.13 %
Time deposits   0.98 %     0.88 %     1.01 %   0.95 %   0.93 %     0.91 %   0.89 %
Short-term borrowings   0.97 %     0.63 %     1.08 %   0.86 %   0.70 %     0.63 %   0.65 %
Long-term borrowings, net   6.32 %     6.33 %     6.32 %   6.32 %   6.33 %     6.33 %   6.33 %
Total interest-bearing liabilities   0.54 %     0.48 %     0.56 %   0.52 %   0.49 %     0.51 %   0.48 %
Net interest rate spread   3.09 %     3.15 %     3.07 %   3.12 %   3.11 %     3.11 %   3.13 %
Net interest rate margin   3.20 %     3.25 %     3.18 %   3.23 %   3.22 %     3.23 %   3.23 %

________
(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.
Selected Financial Information (Unaudited)
(Amounts in thousands)

  Six months ended   2017
  2016
  June 30,   Second   First   Fourth   Third   Second
  2017
  2016
  Quarter   Quarter   Quarter   Quarter   Quarter
ASSET QUALITY DATA:                          
Allowance for Loan Losses                          
Beginning balance $ 30,934     $ 27,085     $ 31,081     $ 30,934     $ 29,350     $ 28,525     $ 27,568  
Net loan charge-offs (recoveries):                          
Commercial business   1,532       475       568       964       52       (31 )     (27 )
Commercial mortgage   (242 )     1       (38 )     (204 )     212       127       2  
Residential real estate loans   52       55       78       (26 )     (1 )     61       34  
Residential real estate lines   (13 )     44       (46 )     33       41       4       44  
Consumer indirect   2,840       2,232       1,082       1,758       1,361       896       904  
Other consumer   219       73       110       109       108       79       38  
Total net charge-offs   4,388       2,880       1,754       2,634       1,773       1,136       995  
Provision for loan losses   6,613       4,320       3,832       2,781       3,357       1,961       1,952  
Ending balance $ 33,159     $ 28,525     $ 33,159     $ 31,081     $ 30,934     $ 29,350     $ 28,525  
                           
Net charge-offs (recoveries)                          
to average loans (annualized):                          
Commercial business   0.82 %     0.30 %     0.59 %     1.08 %     0.06 %     -0.03 %     -0.03 %
Commercial mortgage   -0.07 %     0.00 %     -0.02 %     -0.12 %     0.13 %     0.08 %     0.00 %
Residential real estate loans   0.02 %     0.03 %     0.07 %     -0.02 %     -0.00 %     0.06 %     0.03 %
Residential real estate lines   -0.02 %     0.07 %     -0.15 %     0.11 %     0.13 %     0.01 %     0.14 %
Consumer indirect   0.73 %     0.66 %     0.54 %     0.93 %     0.73 %     0.50 %     0.53 %
Other consumer   2.63 %     0.82 %     2.65 %     2.61 %     2.46 %     1.79 %     0.87 %
Total loans   0.37 %     0.27 %     0.29 %     0.45 %     0.30 %     0.20 %     0.19 %
                           
Supplemental information (1)                          
Non-performing loans:                          
Commercial business $ 7,312     $ 2,312     $ 7,312     $ 3,753     $ 2,151     $ 2,157     $ 2,312  
Commercial mortgage   2,189       1,547       2,189       1,267       1,025       1,345       1,547  
Residential real estate loans   1,579       1,485       1,579       1,601       1,236       1,239       1,485  
Residential real estate lines   379       182       379       336       372       274       182  
Consumer indirect   1,149       1,015       1,149       1,040       1,526       1,077     1,015  
Other consumer   22       15       22       23       16       9     15  
Total non-performing loans   12,630       6,556       12,630       8,020       6,326       6,101     6,556  
Foreclosed assets   154       281       154       58       107       294     281  
Total non-performing assets $ 12,784     $ 6,837     $ 12,784     $ 8,078     $ 6,433     $ 6,395   $ 6,837  
                           
Total non-performing loans to total loans   0.50 %     0.30 %     0.50 %     0.33 %     0.27 %     0.27 %   0.30 %
Total non-performing assets to total assets   0.33 %     0.19 %     0.33 %     0.21 %     0.17 %     0.17 %   0.19 %
Allowance for loan losses to total loans   1.32 %     1.29 %     1.32 %     1.29 %     1.32 %     1.29 %   1.29 %
Allowance for loan losses                          
to non-performing loans   263 %     435 %     263 %     388 %     489 %     481 %   435 %

________
(1)  At period end.


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

    Six months ended   2017
2016
    June 30,   Second   First   Fourth   Third   Second
    2017
  2016
  Quarter   Quarter   Quarter   Quarter   Quarter
Ending tangible assets:                                                
Total assets           $ 3,891,538     $ 3,859,865     $ 3,710,340     $ 3,687,365     $ 3,585,589  
Less: Goodwill and other intangible assets, net             73,477       75,343       75,640       75,943       76,252  
Tangible assets           $ 3,818,061     $ 3,784,522     $ 3,634,700     $ 3,611,422     $ 3,509,337  
                                                 
Ending tangible common equity:                                                
Common shareholders’ equity           $ 330,301     $ 308,348     $ 302,714     $ 308,931     $ 304,836  
Less: Goodwill and other intangible assets, net             73,477       75,343       75,640       75,943       76,252  
Tangible common equity           $ 256,824     $ 233,005     $ 227,074     $ 232,988     $ 228,584  
                                                 
Tangible common equity to tangible             6.73 %     6.16 %     6.25 %     6.45 %     6.51 %
assets (1)                                                
                                                 
Common shares outstanding             15,127       14,536       14,538       14,528       14,528  
Tangible common book value per share (2)           $ 16.98     $ 16.03     $ 15.62     $ 16.04     $ 15.73  
                                                 
Average tangible assets:                                                        
Average assets   $ 3,801,059     $ 3,456,605     $ 3,847,137     $ 3,754,470     $ 3,679,569     $ 3,593,672     $ 3,507,760  
Less: Average goodwill and other                                                        
intangible assets, net     75,230       76,380       74,954       75,508       75,807       76,116       76,437  
Average tangible assets   $ 3,725,829     $ 3,380,225     $ 3,772,183     $ 3,678,962     $ 3,603,762     $ 3,517,556     $ 3,431,323  
                                                         
Average tangible common equity:                                                        
Average common equity   $ 313,042     $ 295,839     $ 319,387     $ 306,626     $ 306,335     $ 308,524     $ 299,831  
Less: Average goodwill and other intangible assets, net     75,230       76,380       74,954       75,508       75,807       76,116       76,437  
Average tangible common equity   $ 237,812     $ 219,459     $ 244,433     $ 231,118     $ 230,528     $ 232,408     $ 223,394  
                                                         
Net income available to common shareholders   $ 13,458     $ 14,038     $ 5,880     $ 7,578     $ 8,328     $ 8,103     $ 6,785  
Return on average tangible common equity (3)     11.41 %     12.86 %     9.65 %     13.30 %     14.37 %     13.87 %     12.22 %

________
(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.

For additional information contact:

Kevin B. Klotzbach
Chief Financial Officer & Treasurer
Phone:  585.786.1130
Email:  KBKlotzbach@five-starbank.com 

Shelly J. Doran
Director − Investor & External Relations 
Phone: 585.627.1362
Email:  SJDoran@five-starbank.com 

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