FINANCIAL INSTITUTIONS INC - FORM 8-K - EX-99.1

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8-K - 8-K - FINANCIAL INSTITUTIONS INC	fisi-8k_20180930.htm

Exhibit 99.1

Financial Institutions, Inc.


NEWS RELEASE		220 Liberty Street
For Immediate Release		Warsaw, NY 14569

FINANCIAL INSTITUTIONS, INC. ANNOUNCES THIRD QUARTER 2018 RESULTS

WARSAW, N.Y., October 25, 2018 – Financial Institutions, Inc. (Nasdaq: FISI), today reported financial and operational results for the third quarter ended September 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 $10.6 million, 28% higher than $8.3 million in the third quarter of 2017. After preferred dividends, net income available to common shareholders was $10.2 million, or $0.64 per diluted share, compared to $7.9 million, or $0.52 per diluted share, in the third quarter of 2017.

President and Chief Executive Officer Martin K. Birmingham stated, “Strong results this quarter were driven by loan growth, asset quality and a lower tax rate. Investments in experienced producers and leaders over the past 24 months contributed to total loan growth of 3% in the quarter, with especially strong growth in commercial loans. A commitment to our credit culture and responsible lending practices are reflected in the ratio of non-performing loans to total loans of 0.26%, a 10-year low for our Company.

“It was also an excellent quarter for growth in noninterest income, driven by strategic initiatives and investments including the acquisition of wealth management firms, limited partnership investments, expanded residential mortgage lending and a derivative financial instrument program. We also benefitted from the strength of our deposit franchise and deep roots in the rural towns and villages of Western and Central New York.

“We remain committed to executing our strategic plan, which we believe will result in the delivery of responsible and sustainable growth and strong returns for our shareholders.”

Chief Financial Officer Kevin B. Klotzbach added, “Our investment securities portfolio decreased by $49.1 million during the quarter, primarily due to maturities, sales and payments received on municipal bonds and mortgage-backed securities. Cash received was used to fund loans in continuation of our strategy to convert marketable securities into loans.

“As a result of the success and positive momentum of our relationship-based commercial and residential lending businesses, the consumer indirect loan portfolio now comprises 30% of total loans – down from a high of 35% at the end of 2013.

“In early October, we exceeded two important thresholds. For the first time in the history of the Company our total loan portfolio exceeded $3 billion and municipal deposits exceeded $1 billion. We view the municipal business as a profitable core competency for the Bank and are pleased with our progress in growing the portfolio.”

Third Quarter 2018 Highlights:

•

Diluted earnings per share of $0.64 was $0.12, or 23.1%, higher than the third quarter of 2017

•

Net interest income of $30.8 million was $2.4 million, or 8.4%, higher than the third quarter of 2017

•

Return on average assets was 1.0%

•

Return on average common equity was 10.8%

Return on average tangible common equity was 13.7% ⁽¹⁾

•

Total assets, interest-earning assets, loans and deposits all reached record-high levels at quarter-end:

Total assets increased $67.1 million during the quarter, to $4.26 billion

Total interest-earning assets increased $42.6 million during the quarter, to $3.93 billion

Total loans increased $88.1 million during the quarter, to $2.99 billion

Total deposits increased $223.6 million during the quarter, to $3.49 billion

•

The quarterly cash dividend of $0.24 per common share represented a 3.0% annualized yield as of September 30, 2018, and a return of 37.5% of third quarter net income to common shareholders

Page 1

Registration Statement

In August 2018, the Company filed a shelf registration statement for up to $100 million of securities and the Securities and Exchange Commission declared it effective. The Company’s previous shelf registration statement, for the same amount and with similar terms, expired earlier this year.

Net Interest Income and Net Interest Margin

Net interest income was $30.8 million in the quarter, $736 thousand higher than the second quarter of 2018 and $2.4 million higher than the third quarter of 2017.

•

Average interest-earning assets for the quarter were $3.9 billion, $51.2 million higher than the second quarter of 2018 and $231.9 million higher than the third quarter of 2017. The primary driver of the increase was organic loan growth.

•

Third quarter 2018 net interest margin was 3.18%, one basis point higher than the second quarter of 2018 and the third quarter of 2017.

Noninterest Income

Noninterest income was $9.9 million in the quarter compared to $8.5 million in the second quarter of 2018 and $8.6 million in the third quarter of 2017.

•

Investment advisory fees were $334 thousand higher than the second quarter of 2018 and $748 thousand higher than the third quarter of 2017. The increase compared to the second quarter of 2018 was primarily the result of the June 1, 2018 acquisition of Rochester-based investment advisory firm HNP Capital. The increase compared to the third 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 $483 thousand higher than the second quarter of 2018 and $13 thousand higher than the third quarter of 2017. The increase compared to the second quarter of 2018 was primarily the result of seasonality in this line of business combined with non-renewals in one of the agency’s specialty lines of business that negatively impacted second quarter income.

•

Income from investments in limited partnerships was $205 thousand higher than the second quarter of 2018 and $342 thousand higher than the third quarter of 2017. The Company has made several 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.

•

Net gain on sale of loans held for sale was $172 thousand higher than the second quarter of 2018 and $153 thousand higher than the third quarter of 2017, driven by an increase in residential mortgage lending originations as a result of our investments in this line of business.

•

Net gain on derivative instruments primarily consists of income associated with interest rate swap products offered to commercial loan customers. The program was implemented in the third quarter of 2017. The gain this quarter was $276 thousand higher than the second quarter of 2018 and $227 thousand higher than the third quarter of 2017 as a result of an increase in the number and value of transactions executed in the quarter.

Noninterest Expense

Noninterest expense was $25.5 million in the quarter compared to $23.4 million in the second quarter of 2018 and $22.5 million in the third quarter of 2017.

•

Salaries and employee benefits expense of $14.0 million was $1.1 million higher than the second quarter of 2018 and $1.6 million higher than the third quarter of 2017. Higher expense is primarily the result of investments in Bank personnel and the two wealth management subsidiary acquisitions. The average number of full-time equivalent employees increased from 627 in the third quarter of 2017 to 661 in the second quarter of 2018 and 681 in the third quarter of 2018.

•

Occupancy and equipment expense of $4.3 million was $170 thousand higher than the second quarter of 2018 and $250 thousand higher than the third quarter of 2017. The increase as compared to the second quarter of 2018 was primarily due to seasonality of expenses related to landscaping and repairs. The increase as compared to the third quarter of 2017 was primarily the result of investments in software and facilities.

•

Professional services expense of $1.4 million was $457 thousand higher than the second quarter of 2018 and $196 thousand higher than the third quarter of 2017 primarily due to third quarter expenses related to the August 16th registration statement and professional search services related to the addition of talent.

Page 2

•

Advertising and promotions expense of $949 thousand was $228 thousand higher than the second quarter of 2018 and $605 thousand higher than the third quarter of 2017. In February 2018, a Five Star Bank brand campaign was launched resulting in higher year-over-year expenses and quarterly fluctuations in expense due to timing of various aspects of the campaign.

Income Taxes

Income tax expense was $2.6 million in the third quarter of 2018 compared to $3.0 million in the second quarter of 2018 and $3.5 million in the third quarter of 2017. The effective tax rate was 19.5% in the third quarter of 2018 compared to 19.7% in the second quarter of 2018 and 29.5% in the third quarter of 2017. The decrease in 2018 compared to 2017 reflects the enactment of the Tax Cuts and Jobs Act (the “TCJ Act”).

Balance Sheet and Capital Management

Total assets were $4.26 billion at September 30, 2018, up $67.1 million from $4.19 billion at June 30, 2018, and up $236.8 million from $4.02 billion at September 30, 2017. The increases were largely the result of loan growth.

Total loans were $2.99 billion at September 30, 2018, up $88.1 million, or 3.0%, from June 30, 2018, and up $372.1 million, or 14.2%, from September 30, 2017.

•

Commercial business loans totaled $537.9 million, up $30.9 million, or 6.1%, from June 30, 2018, and up $118.5 million, or 28.3%, from September 30, 2017.

•

Commercial mortgage loans totaled $905.0 million, up $38.0 million, or 4.4%, from June 30, 2018, and up $147.0 million, or 19.4%, from September 30, 2017.

•

Residential real estate loans totaled $507.6 million, up $17.7 million, or 3.6%, from June 30, 2018, and up $61.6 million, or 13.8%, from September 30, 2017.

•

Consumer indirect loans totaled $909.4 million, up $3.2 million, or 0.4%, from June 30, 2018, and up $51.9 million, or 6.1%, from September 30, 2017.

Total deposits were $3.49 billion at September 30, 2018, an increase of $223.6 million from June 30, 2018, and an increase of $204.2 million from September 30, 2017. Business development efforts in municipal and retail banking contributed to increases for both periods. The remaining portion of the increase from June 30, 2018, was the result of public deposit seasonality. Public deposit balances represented 28% of total deposits at September 30, 2018, compared to 26% at June 30, 2018 and 28% at September 30, 2017.

Short-term borrowings were $308.2 million at September 30, 2018, a decrease of $164.6 million from June 30, 2018, and a decrease of $2.6 million from September 30, 2017. The decrease from June 30, 2018, was associated with the seasonality of municipal deposits.

Shareholders’ equity was $392.2 million at September 30, 2018, compared to $386.9 million at June 30, 2018, and $366.0 million at September 30, 2017. Common book value per share was $23.54 at September 30, 2018, an increase of $0.33 or 1.4% from $23.21 at June 30, 2018, and an increase of $1.23 or 5.5% from $22.31 at September 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 third quarter of 2018, the Company declared a common stock dividend of $0.24 per common share. The dividend returned 37.5% of third quarter net income to common shareholders.

The Company’s regulatory capital ratios at September 30, 2018, remained stable as compared to the prior quarter and prior year:

•

Leverage Ratio was 8.18%, compared to 8.10% and 7.91% at June 30, 2018, and September 30, 2017, respectively.

•

Common Equity Tier 1 Capital Ratio was 9.81%, compared to 9.82% and 10.09% at June 30, 2018, and September 30, 2017, respectively.

•

Tier 1 Capital Ratio was 10.34%, compared to 10.37% and 10.69% at June 30, 2018, and September 30, 2017, respectively.

•

Total Risk-Based Capital Ratio was 12.58%, compared to 12.66% and 13.24% at June 30, 2018, and September 30, 2017, respectively.

Page 3

Credit Quality

Non-performing loans were $7.9 million at September 30, 2018, compared to $9.7 million at June 30, 2018, and $12.6 million at September 30, 2017. The ratio of non-performing loans to total loans was 0.26% at September 30, 2018, compared to 0.34% at June 30, 2018, and 0.48% at September 30, 2017.

The provision for loan losses in the quarter was $2.1 million, compared to $40 thousand in the second quarter of 2018 and $2.8 million in the third quarter of 2017. The second quarter 2018 provision was unusually low as a 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.

The ratio of allowance for loan losses to total loans was 1.14% at September 30, 2018, 1.17% at June 30, 2018, and 1.31% at September 30, 2017. The decline in 2018 is primarily attributable to a combination of growth in the loan portfolio and the release of reserves due to favorable asset quality trends and qualitative factors.

The ratio of allowance for loan losses to non-performing loans was 433% at September 30, 2018, 349% at June 30, 2018, and 273% at September 30, 2017. The increase in 2018 is the result of a reduction in non-performing loans, consistent with favorable asset quality trends.

Conference Call

The Company will host an earnings conference call and audio webcast on October 26, 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.

Page 4

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.

⁽¹⁾ See Appendix A — Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.

*****


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

Page 5

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

	2018									2017
	September 30,			June 30,			March 31,			December 31,			September 30,
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents	$	117,331		$	89,094		$	122,914		$	99,195		$	97,838
Investment securities:
Available for sale		458,310			492,228			510,197			524,973			551,491
Held-to-maturity		459,623			474,803			501,905			516,466			538,332
Total investment securities		917,933			967,031			1,012,102			1,041,439			1,089,823
Loans held for sale		3,166			2,014			1,523			2,718			2,407
Loans:
Commercial business		537,942			507,021			464,139			450,326			419,415
Commercial mortgage		905,011			867,049			821,091			808,908			757,987
Residential real estate loans		507,598			489,940			477,935			465,283			446,044
Residential real estate lines		111,204			113,287			115,346			116,309			117,621
Consumer indirect		909,434			906,237			898,099			876,570			857,528
Other consumer		17,142			16,678			16,654			17,621			17,640
Total loans		2,988,331			2,900,212			2,793,264			2,735,017			2,616,235
Allowance for loan losses		33,955			33,955			35,594			34,672			34,347
Total loans, net		2,954,376			2,866,257			2,757,670			2,700,345			2,581,888
Total interest-earning assets		3,927,238			3,884,628			3,818,839			3,782,659			3,708,385
Goodwill and other intangible assets, net		78,853			79,188			74,415			74,703			74,997
Total assets		4,258,385			4,191,315			4,152,432			4,105,210			4,021,591
Deposits:
Noninterest-bearing demand		748,167			719,084			702,900			718,498			710,865
Interest-bearing demand		711,321			658,107			717,567			634,203			656,703
Savings and money market		988,486			1,012,972			1,052,270			1,005,317			1,050,487
Time deposits		1,037,755			872,004			907,272			852,156			863,453
Total deposits		3,485,729			3,262,167			3,380,009			3,210,174			3,281,508
Short-term borrowings		308,200			472,800			327,600			446,200			310,800
Long-term borrowings, net		39,184			39,167			39,149			39,131			39,114
Total interest-bearing liabilities		3,084,946			3,055,050			3,043,858			2,977,007			2,920,557
Shareholders’ equity		392,154			386,937			380,302			381,177			366,002
Common shareholders’ equity		374,825			369,608			362,973			363,848			348,668
Tangible common equity ⁽¹⁾		295,972			290,420			288,558			289,145			273,671
Unrealized gain (loss) on investment securities, net of tax	$	(12,885	)	$	(11,063	)	$	(8,503	)	$	(2,173	)	$	17

Common shares outstanding		15,925			15,924			15,901			15,925			15,626
Treasury shares		131			132			155			131			136
CAPITAL RATIOS AND PER SHARE DATA:
Leverage ratio		8.18	%		8.10	%		8.11	%		8.13	%		7.91	%
Common equity Tier 1 capital ratio		9.81	%		9.82	%		10.09	%		10.16	%		10.09	%
Tier 1 capital ratio		10.34	%		10.37	%		10.65	%		10.74	%		10.69	%
Total risk-based capital ratio		12.58	%		12.66	%		13.09	%		13.19	%		13.24	%
Common equity to assets		8.80	%		8.82	%		8.74	%		8.86	%		8.67	%
Tangible common equity to tangible assets ⁽¹⁾		7.08	%		7.06	%		7.08	%		7.17	%		6.93	%

Common book value per share	$	23.54		$	23.21		$	22.83		$	22.85		$	22.31
Tangible common book value per share ⁽¹⁾	$	18.59		$	18.24		$	18.15		$	18.16		$	17.51
Stock price (Nasdaq: FISI):
High	$	33.70		$	34.35		$	33.00		$	34.10		$	31.15
Low	$	30.12		$	28.95		$	29.50		$	28.70		$	25.65
Close	$	31.40		$	32.90		$	29.60		$	31.10		$	28.80

⁽¹⁾ See Appendix A — Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.

Page 6

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

	Nine Months Ended						2018									2017
	September 30,						Third			Second			First			Fourth			Third
	2018			2017			Quarter			Quarter			Quarter			Quarter			Quarter
SELECTED INCOME STATEMENT DATA:
Interest income	$	111,306		$	95,343		$	39,035		$	36,868		$	35,403		$	34,767		$	33,396
Interest expense		20,772			12,488			8,214			6,783			5,775			5,007			4,958
Net interest income		90,534			82,855			30,821			30,085			29,628			29,760			28,438
Provision for loan losses		5,050			9,415			2,061			40			2,949			3,946			2,802
Net interest income after provision for loan losses		85,484			73,440			28,760			30,045			26,679			25,814			25,636
Noninterest income:
Service charges on deposits		5,254			5,486			1,813			1,703			1,738			1,905			1,901
Insurance income		3,918			4,052			1,501			1,018			1,399			1,214			1,488
ATM and debit card		4,509			4,230			1,557			1,531			1,421			1,491			1,445
Investment advisory		5,934			4,357			2,245			1,911			1,778			1,747			1,497
Company owned life insurance		1,333			1,367			440			443			450			414			449
Investments in limited partnerships		1,019			91			328			123			568			19			(14	)
Loan servicing		396			348			78			203			115			91			105
Net gain on sale of loans held for sale		530			270			303			131			96			106			150
Net (loss) gain on investment securities		(88	)		600			(95	)		7			-			660			184
Net gain on derivative instruments		606			127			354			78			174			4			127
Net gain on other assets		49			25			37			9			3			12			21
Contingent consideration liability adjustment		-			1,200			-			-			-			-			-
Other		3,971			3,590			1,337			1,392			1,242			1,324			1,221
Total noninterest income		27,431			25,743			9,898			8,549			8,984			8,987			8,574
Noninterest expense:
Salaries and employee benefits		40,270			35,703			13,970			12,871			13,429			12,972			12,348
Occupancy and equipment		12,911			12,235			4,337			4,167			4,407			4,058			4,087
Professional services		3,132			3,229			1,353			896			883			854			1,157
Computer and data processing		3,884			3,691			1,291			1,358			1,235			1,244			1,208
Supplies and postage		1,545			1,496			485			548			512			507			492
FDIC assessments		1,486			1,366			498			480			508			451			440
Advertising and promotions		2,647			1,451			949			721			977			720			344
Amortization of intangibles		927			876			334			305			288			294			288
Goodwill impairment		-			1,575			-			-			-			-			-
Other		6,271			5,728			2,304			2,099			1,868			2,063			2,103
Total noninterest expense		73,073			67,350			25,521			23,445			24,107			23,163			22,467
Income before income taxes		39,842			31,833			13,137			15,149			11,556			11,638			11,743
Income tax expense		7,807			9,365			2,560			2,979			2,268			580			3,464
Net income		32,035			22,468			10,577			12,170			9,288			11,058			8,279
Preferred stock dividends		1,096			1,097			365			366			365			365			366
Net income available to common shareholders	$	30,939		$	21,371		$	10,212		$	11,804		$	8,923		$	10,693		$	7,913
FINANCIAL RATIOS:
Earnings per share – basic	$	1.95		$	1.44		$	0.64		$	0.74		$	0.56		$	0.68		$	0.52
Earnings per share – diluted	$	1.94		$	1.44		$	0.64		$	0.74		$	0.56		$	0.68		$	0.52
Cash dividends declared on common stock	$	0.72		$	0.63		$	0.24		$	0.24		$	0.24		$	0.22		$	0.21
Common dividend payout ratio		36.92	%		43.75	%		37.50	%		32.43	%		42.86	%		32.35	%		40.38	%
Dividend yield (annualized)		3.07	%		2.92	%		3.03	%		2.93	%		3.29	%		2.81	%		2.89	%
Return on average assets		1.03	%		0.78	%		1.00	%		1.18	%		0.92	%		1.09	%		0.83	%
Return on average equity		11.11	%		8.84	%		10.71	%		12.70	%		9.89	%		11.72	%		9.17	%
Return on average common equity		11.23	%		8.86	%		10.82	%		12.90	%		9.95	%		11.88	%		9.21	%
Return on average tangible common equity ⁽¹⁾		14.18	%		11.54	%		13.71	%		16.27	%		12.52	%		15.03	%		11.76	%
Efficiency ratio ⁽²⁾		61.36	%		61.01	%		62.04	%		60.14	%		61.85	%		59.62	%		59.75	%
Effective tax rate		19.6	%		29.4	%		19.7	%		19.7	%		19.6	%		5.0	%		29.5	%

⁽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.

Page 7

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)

(Amounts in thousands)

	Nine Months Ended						2018									2017
	September 30,						Third			Second			First			Fourth			Third
	2018			2017			Quarter			Quarter			Quarter			Quarter			Quarter
SELECTED AVERAGE BALANCES:
Federal funds sold and interest- earning deposits	$	220		$	8,869		$	-		$	-		$	667		$	1,693		$	-
Investment securities ⁽¹⁾		1,000,272			1,090,725			954,027			1,012,846			1,034,830			1,073,170			1,096,374
Loans:
Commercial business		484,711			385,025			519,114			481,045			453,250			429,831			405,308
Commercial mortgage		853,571			710,690			896,159			842,422			821,311			778,765			752,634
Residential real estate loans		484,288			432,838			498,371			483,577			470,612			455,641			438,436
Residential real estate lines		113,761			119,493			111,762			113,948			115,614			116,731			117,597
Consumer indirect		896,493			804,051			904,480			899,069			885,723			865,735			841,081
Other consumer		16,685			16,941			16,633			16,449			16,978			17,618			17,184
Total loans		2,849,509			2,469,038			2,946,519			2,836,510			2,763,488			2,664,321			2,572,240
Total interest-earning assets		3,850,001			3,568,632			3,900,546			3,849,356			3,798,985			3,739,184			3,668,614
Goodwill and other intangible assets, net		76,544			74,802			79,047			75,957			74,577			74,866			73,960
Total assets		4,139,338			3,851,590			4,187,538			4,142,735			4,086,633			4,028,063			3,951,002
Interest-bearing liabilities:
Interest-bearing demand		663,827			632,596			642,234			677,582			671,991			655,207			612,401
Savings and money market		1,007,734			1,027,927			978,578			1,032,425			1,012,574			1,051,367			998,769
Time deposits		903,645			780,374			946,499			906,271			857,184			863,770			855,371
Short-term borrowings		407,903			345,637			430,697			381,043			411,760			316,894			385,512
Long-term borrowings, net		39,156			39,085			39,174			39,156			39,138			39,121			39,103
Total interest-bearing liabilities		3,022,265			2,825,619			3,037,182			3,036,477			2,992,647			2,926,359			2,891,156
Noninterest-bearing demand deposits		706,222			665,221			730,960			699,112			688,123			703,560			679,303
Total deposits		3,281,428			3,106,118			3,298,271			3,315,390			3,229,872			3,273,904			3,145,844
Total liabilities		3,753,654			3,511,794			3,795,727			3,758,465			3,705,782			3,653,655			3,592,685
Shareholders’ equity		385,684			339,796			391,811			384,270			380,851			374,408			358,317
Common equity		368,356			322,457			374,482			366,942			363,523			357,079			340,981
Tangible common equity ⁽²⁾	$	291,812		$	247,655		$	295,435		$	290,985		$	288,946		$	282,213		$	267,021
Common shares outstanding:
Basic		15,906			14,806			15,921			15,906			15,890			15,749			15,268
Diluted		15,951			14,847			15,964			15,948			15,941			15,793			15,302
SELECTED AVERAGE YIELDS: (Tax equivalent basis)
Investment securities		2.33	%		2.46	%		2.35	%		2.32	%		2.32	%		2.53	%		2.45	%
Loans		4.45	%		4.20	%		4.55	%		4.43	%		4.36	%		4.29	%		4.24	%
Total interest-earning assets		3.90	%		3.66	%		4.01	%		3.88	%		3.80	%		3.78	%		3.71	%
Interest-bearing demand		0.15	%		0.14	%		0.19	%		0.13	%		0.12	%		0.14	%		0.14	%
Savings and money market		0.26	%		0.14	%		0.33	%		0.26	%		0.18	%		0.16	%		0.15	%
Time deposits		1.51	%		1.04	%		1.69	%		1.49	%		1.33	%		1.21	%		1.15	%
Short-term borrowings		1.98	%		1.09	%		2.24	%		2.01	%		1.68	%		1.40	%		1.29	%
Long-term borrowings, net		6.31	%		6.32	%		6.31	%		6.31	%		6.31	%		6.32	%		6.32	%
Total interest-bearing liabilities		0.92	%		0.59	%		1.07	%		0.90	%		0.78	%		0.68	%		0.68	%
Net interest rate spread		2.98	%		3.07	%		2.94	%		2.98	%		3.02	%		3.10	%		3.03	%
Net interest rate margin		3.18	%		3.19	%		3.18	%		3.17	%		3.19	%		3.25	%		3.17	%

(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.

Page 8

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands)

	Nine Months Ended						2018									2017
	September 30,						Third			Second			First			Fourth			Third
	2018			2017			Quarter			Quarter			Quarter			Quarter			Quarter
ASSET QUALITY DATA:
Allowance for Loan Losses
Beginning balance	$	34,672		$	30,934		$	33,955		$	35,594		$	34,672		$	34,347		$	33,159
Net loan charge-offs (recoveries):
Commercial business		675			1,576			431			259			(15	)		1,622			44
Commercial mortgage		106			(247	)		110			(1	)		(3	)		(5	)		(5	)
Residential real estate loans		(87	)		213			16			(53	)		(50	)		88			161
Residential real estate lines		107			6			21			(5	)		91			40			19
Consumer indirect		4,227			4,084			1,246			1,317			1,664			1,636			1,244
Other consumer		739			370			237			162			340			240			151
Total net charge-offs		5,767			6,002			2,061			1,679			2,027			3,621			1,614
Provision for loan losses		5,050			9,415			2,061			40			2,949			3,946			2,802
Ending balance	$	33,955		$	34,347		$	33,955		$	33,955		$	35,594		$	34,672		$	34,347

Net charge-offs (recoveries) to average loans (annualized):
Commercial business		0.19	%		0.55	%		0.33	%		0.22	%		-0.01	%		1.50	%		0.04	%
Commercial mortgage		0.02	%		-0.05	%		0.05	%		0.00	%		0.00	%		0.00	%		0.00	%
Residential real estate loans		-0.02	%		0.07	%		0.01	%		-0.04	%		-0.04	%		0.08	%		0.15	%
Residential real estate lines		0.13	%		0.01	%		0.08	%		-0.02	%		0.32	%		0.14	%		0.06	%
Consumer indirect		0.63	%		0.68	%		0.55	%		0.59	%		0.76	%		0.75	%		0.59	%
Other consumer		5.92	%		2.92	%		5.66	%		3.95	%		8.12	%		5.40	%		3.49	%
Total loans		0.27	%		0.33	%		0.28	%		0.24	%		0.30	%		0.54	%		0.25	%

Supplemental information ⁽¹⁾
Non-performing loans:
Commercial business	$	2,203		$	7,182		$	2,203		$	4,026		$	4,312		$	5,344		$	7,182
Commercial mortgage		1,900			2,539			1,900			2,151			2,310			2,623			2,539
Residential real estate loans		2,057			1,263			2,057			2,138			2,224			2,252			1,263
Residential real estate lines		297			325			297			288			372			404			325
Consumer indirect		1,385			1,250			1,385			1,124			1,467			1,895			1,250
Other consumer		8			26			8			4			32			13			26
Total non-performing loans		7,850			12,585			7,850			9,731			10,717			12,531			12,585
Foreclosed assets		290			281			290			299			480			148			281
Total non-performing assets	$	8,140		$	12,866		$	8,140		$	10,030		$	11,197		$	12,679		$	12,866

Total non-performing loans to total loans		0.26	%		0.48	%		0.26	%		0.34	%		0.38	%		0.46	%		0.48	%
Total non-performing assets to total assets		0.19	%		0.32	%		0.19	%		0.24	%		0.27	%		0.31	%		0.32	%
Allowance for loan losses to total loans		1.14	%		1.31	%		1.14	%		1.17	%		1.27	%		1.27	%		1.31	%
Allowance for loan losses to non-performing loans		433	%		273	%		433	%		349	%		322	%		277	%		273	%

(1)

At period end.

Page 9

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

	Nine Months Ended						2018									2017
	September 30,						Third			Second			First			Fourth			Third
	2018			2017			Quarter			Quarter			Quarter			Quarter			Quarter
Ending tangible assets:
Total assets							$	4,258,385		$	4,191,315		$	4,152,432		$	4,105,210		$	4,021,591
Less: Goodwill and other intangible assets, net								78,853			79,188			74,415			74,703			74,997
Tangible assets							$	4,179,532		$	4,112,127		$	4,078,017		$	4,030,507		$	3,946,594

Ending tangible common equity:
Common shareholders’ equity							$	374,825		$	369,608		$	362,973		$	363,848		$	348,668
Less: Goodwill and other intangible assets, net								78,853			79,188			74,415			74,703			74,997
Tangible common equity							$	295,972		$	290,420		$	288,558		$	289,145		$	273,671

Tangible common equity to tangible assets ⁽¹⁾								7.08	%		7.06	%		7.08	%		7.17	%		6.93	%

Common shares outstanding								15,925			15,924			15,901			15,925			15,626
Tangible common book value per share ⁽²⁾							$	18.59		$	18.24		$	18.15		$	18.16		$	17.51

Average tangible assets:
Average assets	$	4,139,338		$	3,851,590		$	4,187,538		$	4,142,735		$	4,086,633		$	4,028,063		$	3,951,002
Less: Average goodwill and other intangible assets, net		76,544			74,802			79,047			75,957			74,577			74,866			73,960
Average tangible assets	$	4,062,794		$	3,776,788		$	4,108,491		$	4,066,778		$	4,012,056		$	3,953,197		$	3,877,042

Average tangible common equity:
Average common equity	$	368,356		$	322,457		$	374,482		$	366,942		$	363,523		$	357,079		$	340,981
Less: Average goodwill and other intangible assets, net		76,544			74,802			79,047			75,957			74,577			74,866			73,960
Average tangible common equity	$	291,812		$	247,655		$	295,435		$	290,985		$	288,946		$	282,213		$	267,021

Net income available to common shareholders	$	30,939		$	21,371		$	10,212		$	11,804		$	8,923		$	10,693		$	7,913
Return on average tangible common equity ⁽³⁾		14.18	%		11.54	%		13.71	%		16.27	%		12.52	%		15.03	%		11.76	%

(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.

Page 10

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