Financial Institutions (FISI) 8-K Financial Institutions, Inc. Announces Second Quarter 2017 Results

Exhibit 99.1

Financial Institutions, Inc.

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

FINANCIAL INSTITUTIONS, INC. ANNOUNCES SECOND QUARTER 2017 RESULTS

WARSAW, N.Y., July 25, 2017– 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 31^st 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.”

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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.

2

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.

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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 atwww.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 onForm 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

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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.

5

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.

6

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.

7

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 assets (1)										6.73	%			6.16	%			6.25	%			6.45	%			6.51	%
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.

8