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Financial Institutions, Inc. Announces Second Quarter 2018 Results

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WARSAW, N.Y., July 26, 2018 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (NASDAQ: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.

For additional information contact:
Kevin B. Klotzbach   Shelly J. Doran
Chief Financial Officer & Treasurer   Director − Investor & External Relations
Phone: 585.786.1130   Phone: 585.627.1362
Email: KBKlotzbach@five-starbank.com   Email: SJDoran@five-starbank.com
     

(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)

    2018       2017  
  June 30,   March 31,   December 31,   September 30,   June 30,
SELECTED BALANCE SHEET DATA:                  
Cash and cash equivalents $ 89,094     $ 122,914     $ 99,195     $ 97,838     $ 84,537  
Investment securities:                  
Available for sale   492,228       510,197       524,973       551,491       540,575  
Held-to-maturity   474,803       501,905       516,466       538,332       533,471  
Total investment securities   967,031       1,012,102       1,041,439       1,089,823       1,074,046  
Loans held for sale   2,014       1,523       2,718       2,407       1,864  
Loans:                  
Commercial business   507,021       464,139       450,326       419,415       398,343  
Commercial mortgage   867,049       821,091       808,908       757,987       724,064  
Residential real estate loans   489,940       477,935       465,283       446,044       432,053  
Residential real estate lines   113,287       115,346       116,309       117,621       118,611  
Consumer indirect   906,237       898,099       876,570       857,528       826,708  
Other consumer   16,678       16,654       17,621       17,640       17,093  
Total loans   2,900,212       2,793,264       2,735,017       2,616,235       2,516,872  
Allowance for loan losses   33,955       35,594       34,672       34,347       33,159  
Total loans, net   2,866,257       2,757,670       2,700,345       2,581,888       2,483,713  
Total interest-earning assets   3,884,628       3,818,839       3,782,659       3,708,385       3,593,106  
Goodwill and other intangible assets, net   79,188       74,415       74,703       74,997       73,477  
Total assets   4,191,315       4,152,432       4,105,210       4,021,591       3,891,538  
Deposits:                  
Noninterest-bearing demand   719,084       702,900       718,498       710,865       677,124  
Interest-bearing demand   658,107       717,567       634,203       656,703       631,451  
Savings and money market   1,012,972       1,052,270       1,005,317       1,050,487       999,125  
Time deposits   872,004       907,272       852,156       863,453       824,786  
Total deposits   3,262,167       3,380,009       3,210,174       3,281,508       3,132,486  
Short-term borrowings   472,800       327,600       446,200       310,800       347,500  
Long-term borrowings, net   39,167       39,149       39,131       39,114       39,096  
Total interest-bearing liabilities   3,055,050       3,043,858       2,977,007       2,920,557       2,841,958  
Shareholders' equity   386,937       380,302       381,177       366,002       347,641  
Common shareholders' equity   369,608       362,973       363,848       348,668       330,301  
Tangible common equity (1)   290,420       288,558       289,145       273,671       256,824  
Unrealized gain (loss) on investment securities, net of tax $ (11,063)     $ (8,503)     $ (2,173)     $ 17     $ (232)  
                   
Common shares outstanding   15,924       15,901       15,925       15,626       15,127  
Treasury shares   132       155       131       136       137  
CAPITAL RATIOS AND PER SHARE DATA:                  
Leverage ratio   8.10%       8.11%       8.13%       7.91%       7.70%  
Common equity Tier 1 capital ratio   9.82%       10.09%       10.16%       10.09%       9.86%  
Tier 1 capital ratio   10.37%       10.65%       10.74%       10.69%       10.48%  
Total risk-based capital ratio   12.66%       13.09%       13.19%       13.24%       13.09%  
Common equity to assets   8.82%       8.74%       8.86%       8.67%       8.49%  
Tangible common equity to tangible assets (1)   7.06%       7.08%       7.17%       6.93%       6.73%  
                   
Common book value per share $ 23.21     $ 22.83     $ 22.85     $ 22.31     $ 21.84  
Tangible common book value per share (1) $ 18.24     $ 18.15     $ 18.16     $ 17.51     $ 16.98  
Stock price (NASDAQ:FISI):                  
High $ 34.35     $ 33.00     $ 34.10     $ 31.15     $ 35.35  
Low $ 28.95     $ 29.50     $ 28.70     $ 25.65     $ 29.09  
Close $ 32.90     $ 29.60     $ 31.10     $ 28.80     $ 29.80  

________
(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     2018       2017  
  June 30,   Second   First   Fourth   Third   Second
    2018       2017     Quarter   Quarter   Quarter   Quarter   Quarter
SELECTED INCOME STATEMENT DATA:                          
Interest income $ 72,271     $ 61,947     $ 36,868     $ 35,403     $ 34,767     $ 33,396     $ 31,409  
Interest expense   12,558       7,530       6,783       5,775       5,007       4,958       3,987  
Net interest income   59,713       54,417       30,085       29,628       29,760       28,438       27,422  
Provision for loan losses   2,989       6,613       40       2,949       3,946       2,802       3,832  
Net interest income after provision for loan losses   56,724       47,804       30,045       26,679       25,814       25,636       23,590  
Noninterest income:                          
Service charges on deposits   3,441       3,585       1,703       1,738       1,905       1,901       1,840  
Insurance income   2,417       2,564       1,018       1,399       1,214       1,488       1,133  
ATM and debit card   2,952       2,785       1,531       1,421       1,491       1,445       1,456  
Investment advisory   3,689       2,860       1,911       1,778       1,747       1,497       1,429  
Company owned life insurance   893       918       443       450       414       449       473  
Investments in limited partnerships   691       105       123       568       19       (14 )     135  
Loan servicing   318       243       203       115       91       105       123  
Net gain on sale of loans held for sale   227       120       131       96       106       150       72  
Net gain on investment securities   7       416       7       -       660       184       210  
Net gain on derivative instruments   252       -       78       174       4       127       -  
Net gain on other assets   12       4       9       3       12       21       6  
Contingent consideration liability adjustment   -       1,200       -       -       -       -       1,200  
Other   2,634       2,369       1,392       1,242       1,324       1,221       1,256  
Total noninterest income   17,533       17,169       8,549       8,984       8,987       8,574       9,333  
Noninterest expense:                          
Salaries and employee benefits   26,300       23,355       12,871       13,429       12,972       12,348       11,986  
Occupancy and equipment   8,574       8,148       4,167       4,407       4,058       4,087       4,184  
Professional services   1,779       2,072       896       883       854       1,157       1,057  
Computer and data processing   2,593       2,483       1,358       1,235       1,244       1,208       1,312  
Supplies and postage   1,060       1,004       548       512       507       492       467  
FDIC assessments   988       926       480       508       451       440       469  
Advertising and promotions   1,698       1,107       721       977       720       344       645  
Amortization of intangibles   593       588       305       288       294       288       291  
Goodwill impairment   -       1,575       -       -       -       -       1,575  
Other   3,967       3,625       2,099       1,868       2,063       2,103       1,955  
Total noninterest expense   47,552       44,883       23,445       24,107       23,163       22,467       23,941  
Income before income taxes   26,705       20,090       15,149       11,556       11,638       11,743       8,982  
Income tax expense   5,247       5,901       2,979       2,268       580       3,464       2,736  
Net income   21,458       14,189       12,170       9,288       11,058       8,279       6,246  
Preferred stock dividends   731       731       366       365       365       366       366  
Net income available to common shareholders $ 20,727     $ 13,458     $ 11,804     $ 8,923     $ 10,693     $ 7,913     $ 5,880  
FINANCIAL RATIOS:                          
Earnings per share – basic $ 1.30     $ 0.92     $ 0.74     $ 0.56     $ 0.68     $ 0.52     $ 0.40  
Earnings per share – diluted $ 1.30     $ 0.92     $ 0.74     $ 0.56     $ 0.68     $ 0.52     $ 0.40  
Cash dividends declared on common stock $ 0.48     $ 0.42     $ 0.24     $ 0.24     $ 0.22     $ 0.21     $ 0.21  
Common dividend payout ratio   36.92%       45.65%       32.43%       42.86%       32.35%       40.38%       52.50%  
Dividend yield (annualized)   2.94%       2.84%       2.93%       3.29%       2.81%       2.89%       2.83%  
Return on average assets   1.05%       0.75%       1.18%       0.92%       1.09%       0.83%       0.65%  
Return on average equity   11.31%       8.66%       12.70%       9.89%       11.72%       9.17%       7.44%  
Return on average common equity   11.44%       8.67%       12.90%       9.95%       11.88%       9.21%       7.38%  
Return on average tangible common equity (1)   14.41%       11.41%       16.27%       12.52%       15.03%       11.76%       9.65%  
Efficiency ratio (2)   60.99%       61.66%       60.14%       61.85%       59.62%       59.75%       64.10%  
Effective tax rate   19.6%       29.4%       19.7%       19.6%       5.0%       29.5%       30.5%  

________
(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     2018       2017  
  June 30,   Second   First   Fourth   Third   Second
    2018       2017     Quarter   Quarter   Quarter   Quarter   Quarter
SELECTED AVERAGE BALANCES:                          
Federal funds sold and interest-earning deposits $ 332     $ 13,377     $ -     $ 667     $ 1,693     $ -     $ 16,639  
Investment securities (1)   1,023,777       1,087,854       1,012,846       1,034,830       1,073,170       1,096,374       1,085,670  
Loans:                          
Commercial business   467,225       374,715       481,045       453,250       429,831       405,308       385,938  
Commercial mortgage   831,925       689,370       842,422       821,311       778,765       752,634       700,010  
Residential real estate loans   477,130       429,993       483,577       470,612       455,641       438,436       430,237  
Residential real estate lines   114,776       120,457       113,948       115,614       116,731       117,597       119,333  
Consumer indirect   892,433       785,228       899,069       885,723       865,735       841,081       802,379  
Other consumer   16,712       16,818       16,449       16,978       17,618       17,184       16,680  
Total loans   2,800,201       2,416,581       2,836,510       2,763,488       2,664,321       2,572,240       2,454,577  
Total interest-earning assets   3,824,310       3,517,812       3,849,356       3,798,985       3,739,184       3,668,614       3,556,886  
Goodwill and other intangible assets, net   75,271       75,230       75,957       74,577       74,866       73,960       74,954  
Total assets   4,114,839       3,801,059       4,142,735       4,086,633       4,028,063       3,951,002       3,847,137  
Interest-bearing liabilities:                          
Interest-bearing demand   674,802       642,861       677,582       671,991       655,207       612,401       651,485  
Savings and money market   1,022,554       1,042,748       1,032,425       1,012,574       1,051,367       998,769       1,054,997  
Time deposits   881,863       742,254       906,271       857,184       863,770       855,371       762,874  
Short-term borrowings   396,317       325,368       381,043       411,760       316,894       385,512       323,562  
Long-term borrowings, net   39,147       39,076       39,156       39,138       39,121       39,103       39,085  
Total interest-bearing liabilities   3,014,683       2,792,307       3,036,477       2,992,647       2,926,359       2,891,156       2,832,003  
Noninterest-bearing demand deposits   693,648       658,063       699,112       688,123       703,560       679,303       658,926  
Total deposits   3,272,867       3,085,926       3,315,390       3,229,872       3,273,904       3,145,844       3,128,282  
Total liabilities   3,732,269       3,470,677       3,758,465       3,705,782       3,653,655       3,592,685       3,510,410  
Shareholders' equity   382,570       330,382       384,270       380,851       374,408       358,317       336,727  
Common equity   365,242       313,042       366,942       363,523       357,079       340,981       319,387  
Tangible common equity (2) $ 289,971     $ 237,812     $ 290,985     $ 288,946     $ 282,213     $ 267,021     $ 244,433  
Common shares outstanding:                          
Basic   15,898       14,572       15,906       15,890       15,749       15,268       14,664  
Diluted   15,945       14,615       15,948       15,941       15,793       15,302       14,702  
SELECTED AVERAGE YIELDS:                          
(Tax equivalent basis)                          
Investment securities   2.32%       2.47%       2.32%     2.32%     2.53%       2.45%     2.47%  
Loans   4.39%       4.17%       4.43%     4.36%     4.29%       4.24%     4.16%  
Total interest-earning assets   3.84%       3.63%       3.88%     3.80%     3.78%       3.71%     3.63%  
Interest-bearing demand   0.13%       0.14%       0.13%     0.12%     0.14%       0.14%     0.14%  
Savings and money market   0.22%       0.13%       0.26%     0.18%     0.16%       0.15%     0.14%  
Time deposits   1.41%       0.98%       1.49%     1.33%     1.21%       1.15%     1.01%  
Short-term borrowings   1.84%       0.97%       2.01%     1.68%     1.40%       1.29%     1.08%  
Long-term borrowings, net   6.31%       6.32%       6.31%     6.31%     6.32%       6.32%     6.32%  
Total interest-bearing liabilities   0.84%       0.54%       0.90%     0.78%     0.68%       0.68%     0.56%  
Net interest rate spread   3.00%       3.09%       2.98%     3.02%     3.10%       3.03%     3.07%  
Net interest rate margin   3.18%       3.20%       3.17%     3.19%     3.25%       3.17%     3.18%  

________
(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     2018       2017  
  June 30,   Second   First   Fourth   Third   Second  
    2018       2017     Quarter   Quarter   Quarter   Quarter   Quarter  
ASSET QUALITY DATA:                            
Allowance for Loan Losses                            
Beginning balance $ 34,672     $ 30,934     $ 35,594     $ 34,672     $ 34,347     $ 33,159     $ 31,081  
Net loan charge-offs (recoveries):                            
Commercial business   244       1,532       259       (15)       1,622       44       568  
Commercial mortgage   (4)       (242)       (1)       (3)       (5)       (5)       (38)  
Residential real estate loans   (103)       52       (53)       (50)       88       161       78  
Residential real estate lines   86       (13)       (5)       91       40       19       (46)  
Consumer indirect   2,981       2,840       1,317       1,664       1,636       1,244       1,082  
Other consumer   502       219       162       340       240       151       110  
Total net charge-offs   3,706       4,388       1,679       2,027       3,621       1,614       1,754  
Provision for loan losses   2,989       6,613       40       2,949       3,946       2,802       3,832  
Ending balance $ 33,955     $ 33,159     $ 33,955     $ 35,594     $ 34,672     $ 34,347     $ 33,159  
                             
Net charge-offs (recoveries) to average loans (annualized):                            
Commercial business   0.11%       0.82%       0.22%       -0.01%       1.50%       0.04%       0.59%  
Commercial mortgage   -0.00%       -0.07%       -0.00%       -0.00%       -0.00%       -0.00%       -0.02%  
Residential real estate loans   -0.04%       0.02%       -0.04%       -0.04%       0.08%       0.15%       0.07%  
Residential real estate lines   0.15%       -0.02%       -0.02%       0.32%       0.14%       0.06%       -0.15%  
Consumer indirect   0.67%       0.73%       0.59%       0.76%       0.75%       0.59%       0.54%  
Other consumer   6.06%       2.63%       3.95%       8.12%       5.40%       3.49%       2.65%  
Total loans   0.27%       0.37%       0.24%       0.30%       0.54%       0.25%       0.29%  
                             
Supplemental information (1)                            
Non-performing loans:                            
Commercial business $ 4,026     $ 7,312     $ 4,026     $ 4,312     $ 5,344     $ 7,182     $ 7,312  
Commercial mortgage   2,151       2,189       2,151       2,310       2,623       2,539       2,189  
Residential real estate loans   2,138       1,579       2,138       2,224       2,252       1,263       1,579  
Residential real estate lines   288       379       288       372       404       325       379  
Consumer indirect   1,124       1,149       1,124       1,467       1,895       1,250       1,149  
Other consumer   4       22       4       32       13       26       22  
Total non-performing loans   9,731       12,630       9,731       10,717       12,531       12,585       12,630  
Foreclosed assets   299       154       299       480       148       281       154  
Total non-performing assets $ 10,030     $ 12,784     $ 10,030     $ 11,197     $ 12,679     $ 12,866   $   12,784  
                           
Total non-performing loans to total loans   0.34%       0.50%       0.34%       0.38%       0.46%       0.48%       0.50%  
Total non-performing assets to total assets   0.24%       0.33%       0.24%       0.27%       0.31%       0.32%       0.33%  
Allowance for loan losses to total loans   1.17%       1.32%       1.17%       1.27%       1.27%       1.31%       1.32%  
Allowance for loan losses to non-performing loans   349%       263%       349%       332%       277%       273%       263%  

________
(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     2018   2017  
  June 30,   Second   First   Fourth   Third   Second  
    2018     2017   Quarter   Quarter   Quarter   Quarter   Quarter  
Ending tangible assets:                            
Total assets         $ 4,191,315   $ 4,152,432   $ 4,105,210   $ 4,021,591   $ 3,891,538  
Less: Goodwill and other intangible assets, net           79,188     74,415     74,703     74,997     73,477  
Tangible assets         $ 4,112,127   $ 4,078,017   $ 4,030,507   $ 3,946,594   $ 3,818,061  
                             
Ending tangible common equity:                            
Common shareholders' equity         $ 369,608   $ 362,973   $ 363,848   $ 348,668   $ 330,301  
Less: Goodwill and other intangible assets, net           79,188     74,415     74,703     74,997     73,477  
Tangible common equity         $ 290,420   $ 288,558   $ 289,145   $ 273,671   $ 256,824  
                             
Tangible common equity to tangible assets (1)           7.06%     7.08%     7.17%     6.93%     6.73%  
                             
Common shares outstanding           15,924     15,901     15,925     15,626     15,127  
Tangible common book value per share (2)         $ 18.24   $ 18.15   $ 18.16   $ 17.51   $ 16.98  
                             
Average tangible assets:                            
Average assets $ 4,114,839     $ 3,801,059     $ 4,142,735     $ 4,086,633     $ 4,028,063     $ 3,951,002     $ 3,847,137  
Less: Average goodwill and other intangible assets, net   75,271       75,230       75,957       74,577       74,866       73,960       74,954  
Average tangible assets $ 4,039,568     $ 3,725,829     $ 4,066,778     $ 4,012,056     $ 3,953,197     $ 3,877,042     $ 3,772,183  
                           
Average tangible common equity:                          
Average common equity $ 365,242     $ 313,042     $ 366,942     $ 363,523     $ 357,079     $ 340,981     $ 319,387  
Less: Average goodwill and other intangible assets, net   75,271       75,230       75,957       74,577       74,866       73,960       74,954  
Average tangible common equity $ 289,971     $ 237,812     $ 290,985     $ 288,946     $ 282,213     $ 267,021     $ 244,433  
                           
Net income available to common shareholders $ 20,727     $ 13,458     $ 11,804     $ 8,923     $ 10,693     $ 7,913     $ 5,880  
Return on average tangible common equity (3)   14.41%       11.41%       16.27%       12.52%       15.03%       11.76%       9.65%  

________
(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.

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