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Financial Institutions, Inc. Announces Fourth Quarter and Full Year 2016 Results

WARSAW, N.Y., Jan. 24, 2017 (GLOBE NEWSWIRE) -- Financial Institutions, Inc. (NASDAQ:FISI), today reported financial results for the fourth quarter and year ended December 31, 2016. 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”). The Company’s financial results since January 5, 2016, include the results of operations of Courier Capital, a wealth management subsidiary acquired on that date.

Net income for the quarter was $8.7 million compared to $8.5 million for the third quarter of 2016 and $6.6 million for the fourth quarter of 2015. After preferred dividends, net income available to common shareholders was $8.3 million, or $0.57 per diluted share, compared to $8.1 million, or $0.56 per diluted share, for the third quarter of 2016 and $6.3 million, or $0.44 per diluted share, for the fourth quarter of 2015.

Net income for the full year 2016 was $31.9 million compared to $28.3 million for 2015. Net income available to common shareholders was $30.5 million, or $2.10 per diluted share, compared to $26.9 million, or $1.90 per diluted share, for the full year 2015.

The Company’s President and Chief Executive Officer Martin K. Birmingham stated, “2016 was an eventful year for our Company and I am pleased with our performance, as we delivered double digit growth in net income for the full year.

“We also made great progress in our efforts to increase market share in Rochester and Buffalo. In December, we opened our third financial solution center and 52nd branch in downtown Rochester in the recently renamed Five Star Bank Plaza, and over the course of the next two months we will be relocating our regional administrative center and approximately 150 employees to this building. As part of this relocation, we successfully obtained naming and signage rights for the building, resulting in valuable branding for Five Star Bank. Our fourth financial solution center will open in mid-February in the City of Buffalo. We look forward to bringing our style of banking and lending to downtown Buffalo so that we may serve the needs of nearby residents and businesses.

“We invested in talent across all business segments in 2016, fueling organic growth which we believe will drive future revenue. Recent hires have strengthened our commercial lending and mortgage banking business, as well as our regulatory compliance and enterprise risk management areas. During the fourth quarter of 2016, we welcomed Craig Burton as Senior Vice President, Commercial Real Estate Executive for the Bank. Craig’s knowledge and experience in commercial real estate across Upstate New York, from Buffalo to Albany, position him to successfully lead our commercial real estate platform.

“Our positive momentum is expected to continue into 2017 and we remain focused on our long-term strategic plan to drive strong shareholder returns.”

Fourth Quarter and Full Year 2016 Highlights:

  • Diluted earnings per share (“EPS”) for the quarter of $0.57 was $0.13 higher than the fourth quarter of 2015
    • Diluted earnings per share (“EPS”) for the year of $2.10 was $0.20 higher than 2015
  • Net interest income for the quarter of $26.7 million increased $2.1 million, or 8.5%, as compared to the fourth quarter of 2015
    • Net interest income for the year of $102.7 million increased $7.4 million, or 7.7%, as compared to 2015
  • Noninterest income for the quarter of $9.1 million was $508 thousand, or 5.9%, higher than the fourth quarter of 2015
    • Noninterest income for the year of $35.8 million was $5.4 million, or 17.9%, higher than 2015
  • Return on average common equity was 10.81% for the quarter and 10.10% for the year
    • Return on average tangible common equity was 14.37% for the quarter and 13.51% for the year (computation of this non-GAAP measure provided in Appendix A)
  • Net interest margin was 3.22% for the quarter and 3.24% for the year
  • Total interest-earning assets, assets, loans and deposits reached record-high year-end levels:
    • Total interest-earning assets increased $314.0 million in 2016 to $3.4 billion
    • Total assets increased $329.3 million in 2016 to $3.7 billion
    • Total loans increased $256.4 million in 2016 to $2.3 billion
    • Total deposits increased $264.7 million in 2016 to $3.0 billion
  • Quarterly cash dividend of $0.21 per common share represented a 2.44% dividend yield as of December 31, 2016, and a return of 36% of fourth quarter net income to common shareholders

The Company’s credit quality remains strong with total non-performing loans to total loans of 0.27% at year-end, compared to 0.41% at year-end 2015.

Kevin B. Klotzbach, the Company’s Chief Financial Officer added, “Our strategy is to grow loans and deposits and operate with expense discipline and a strong credit culture. We successfully executed this strategy in 2016 as illustrated by loan portfolio growth of 12.3%, total deposit growth of 9.7%, an efficiency ratio of 60.92% for the year, and improvement in portfolio credit quality with non-performing assets to total assets of 0.17% at year-end compared to 0.25% in the prior year.

“We continue to have ample liquidity to execute our growth strategies and take advantage of the current disruption in our markets. This growth will occur through thoughtful, disciplined decisions as we continue to manage capital effectively for the benefit of our shareholders.”

Net Interest Income and Net Interest Margin

  • Net interest income was $26.7 million for the fourth quarter of 2016, $672 thousand higher than the third quarter of 2016 and $2.1 million higher than the fourth quarter of 2015.
    • Average interest-earning assets for the quarter were $3.4 billion, $90.4 million higher than the third quarter of 2016 and $309.7 million higher than the fourth quarter of 2015.
    • The primary driver of the increase was loans, which were $66.3 million higher in the fourth quarter of 2016 than the third quarter of 2016 and $265.9 million higher than the fourth quarter of 2015.
    • Fourth quarter 2016 net interest margin was 3.22%, one basis point lower than the third quarter of 2016 and five basis points lower than the fourth quarter of 2015.
  • Net interest income was $102.7 million for the year 2016, $7.4 million higher than 2015, primarily as a result of a $270.6 million, or 9.0%, increase in average interest-earning assets. These increases were partially offset by a four-basis-point narrowing of the net interest margin, to 3.24% in 2016 from 3.28% in 2015.

Noninterest Income

Noninterest income was $9.1 million for the fourth quarter of 2016 as compared to $8.5 million in the third quarter of 2016 and $8.6 million in the fourth quarter of 2015.

  • Excluding the net gain on investment securities from all periods, noninterest income was $8.8 million in the fourth quarter of 2016, $706 thousand higher than $8.1 million in the third quarter of 2016, and $879 thousand higher than $7.9 million in the fourth quarter of 2015.
  • For the fourth quarter of 2016 as compared to the third quarter of 2016, the increase was primarily the result of a $1.2 million non-cash fair value adjustment of the contingent consideration liability related to the SDN acquisition.
  • Higher noninterest income in the fourth quarter of 2016 as compared to the fourth quarter of 2015 was primarily the result of a $632 thousand increase in investment advisory income, reflecting the contribution from Courier Capital ($1.33 billion in assets under management at December 31, 2016).

Noninterest income was $35.8 million for the year 2016 as compared to $30.3 million in 2015.

  • Excluding the net gain on investment securities from both periods, noninterest income was $33.0 million in 2016, $4.7 million higher than $28.3 million in 2015.
  • The increase was primarily the result of a $3.0 million increase in investment advisory income, reflecting the contribution from Courier Capital, as well as $911 thousand of death benefit proceeds from company owned life insurance and a $603 thousand increase in ATM and debit card income.

Noninterest Expense

Noninterest expense was $20.7 million for the fourth quarter of 2016 as compared to $20.6 million in the third quarter of 2016 and $21.8 million in the fourth quarter of 2015.

  • Lower noninterest expense in the fourth quarter of 2016 as compared to the fourth quarter of 2015 was primarily the result of $751 thousand of goodwill impairment related to the SDN acquisition and $540 thousand of professional service fees attributable to the acquisition of Courier Capital, both of which were recognized in 2015.

Noninterest expense was $84.7 million for the year, a $5.3 million increase from $79.4 million in 2015.

  • Salaries and employee benefits increased $2.8 million year-over-year, reflecting the impact of the addition of Courier Capital employees and increased staffing associated with the Company’s growth initiatives.
  • Professional services increased $1.7 million year-over-year, primarily in connection with the Company’s 2016 proxy contest.
  • Also contributing to the increase were higher occupancy and equipment expense, computer and data processing expense, and advertising and promotions expense, partially offset by the previously mentioned goodwill impairment charge in 2015.

Income Taxes

Income tax expense was $3.0 million for the fourth quarter of 2016 as compared to $3.5 million in the third quarter of 2016 and $2.2 million in the fourth quarter of 2015. The effective tax rate was 25.9% for the fourth quarter of 2016, 29.5% in the third quarter of 2016, and 24.5% in the fourth quarter of 2015. The lower effective tax rate in the fourth quarter of 2016 was a result of the $1.2 million non-cash fair value adjustment of the contingent consideration liability related to the SDN acquisition which was a non-taxable adjustment.

Income tax expense for 2016 was $12.2 million, representing an effective tax rate of 27.7% which is comparable to the effective tax rate of 27.1% in 2015. Effective tax rates are impacted by items of income and expense that are not subject to federal or state taxation. Our effective tax rates differ from the statutory rates primarily due to the effect of interest income from tax-exempt securities, earnings on company owned life insurance and the non-cash fair value adjustment of the contingent consideration liability associated with the SDN acquisition.

Balance Sheet and Capital Management

Total assets were $3.7 billion at December 31, 2016, up $23.0 million from $3.7 billion at September 30, 2016, and up $329.3 million from $3.4 billion at December 31, 2015. The increases were largely the result of loan growth funded by deposit growth.

Total loans were $2.3 billion at December 31, 2016, up $56.2 million, or 2.5%, from September 30, 2016, and up $256.4 million, or 12.3%, from December 31, 2015.

  • Commercial mortgage loans totaled $670.1 million, up $33.7 million, or 5.3%, from September 30, 2016, and up $104.0 million, or 18.4%, from December 31, 2015.
  • Commercial business loans totaled $349.5 million, down $1.0 million, or 0.3%, from September 30, 2016, and up $35.8 million, or 11.4%, from December 31, 2015.
  • Residential real estate loans totaled $427.9 million, up $2.1 million, or 0.5%, from September 30, 2016, and up $46.9 million, or 12.3%, from December 31, 2015.
  • Consumer indirect loans totaled $752.4 million, up $22.8 million, or 3.1%, from September 30, 2016, and up $75.5 million, or 11.2%, from December 31, 2015.

Total deposits were $3.0 billion at December 31, 2016, a decrease of $68.1 million from September 30, 2016, and an increase of $264.7 million from December 31, 2015. The decrease from September 30, 2016, was primarily due to public deposit seasonality. The increase from December 31, 2015, was primarily the result of successful business development efforts in both municipal and retail banking. Public deposit balances represented 27% of total deposits at December 31, 2016, compared to 29% at September 30, 2016 and 25% at December 30, 2015.

Short-term borrowings were $331.5 million at December 31, 2016, up $101.3 million from September 30, 2016, and up $38.4 million from December 31, 2015. Short-term borrowings are typically utilized to manage the seasonality of public deposits.

Shareholders’ equity was $320.1 million at December 31, 2016, compared to $326.3 million at September 30, 2016, and $293.8 million at December 31, 2015. Common book value per share was $20.82 at December 31, 2016, a decrease of $0.44 or 2.1% from $21.26 at September 30, 2016, and an increase of $1.33 or 6.8% from $19.49 at December 31, 2015. The increases in shareholders’ equity and common book value per share as compared to December 31, 2015, are attributable to net income and stock issued for the acquisition of Courier Capital, with a partial offset by net unrealized losses on securities available for sale, a component of accumulated other comprehensive loss.

During the fourth quarter 2016, the Company declared a common stock dividend of $0.21 per common share. The fourth quarter 2016 dividend returned 36% of fourth quarter net income to common shareholders.

Regulatory capital ratios at December 31, 2016, remained steady with slight downward pressure in comparison to prior year as a result of strong loan growth and higher asset levels:

  • Leverage Ratio was 7.36%, compared to 7.39% and 7.41% at September 30, 2016, and December 31, 2015, respectively.
  • Common Equity Tier 1 Ratio was 9.59%, compared to 9.58% and 9.77% at September 30, 2016, and December 31, 2015, respectively.
  • Tier 1 Risk-Based Capital was 10.26%, compared to 10.27% and 10.50% at September 30, 2016, and December 31, 2015, respectively.
  • Total Risk-Based Capital was 12.97%, compared to 12.98% and 13.35% at September 30, 2016, and December 31, 2015, respectively.

Credit Quality

Non-performing loans were $6.3 million at December 31, 2016, compared to $6.1 million at September 30, 2016, and $8.4 million at December 31, 2015. The $2.1 million decrease from December 31, 2015, was due to lower commercial non-performing loans resulting from pay-downs on two relationships totaling $1.8 million during the second quarter of 2016, as well as improvements in the non-performing residential real estate loan portfolio.

  • The ratio of non-performing loans to total loans was 0.27% at December 31, 2016, compared to 0.27% at September 30, 2016, and 0.41% at December 31, 2015.

The provision for loan losses for the fourth quarter of 2016 was $3.4 million, an increase of $1.4 million from the third quarter of 2016 and an increase of $759 thousand from the fourth quarter of 2015. During the fourth quarter 2016, the Company internally downgraded to substandard status one commercial business credit relationship with unpaid principal balances totaling $3.5 million. The downgrade necessitated a provision and increase in our allowance for losses of approximately $1.1 million. These loans were current with respect to principal and interest payments as of December 31, 2016; however, we continue to monitor this relationship closely.

  • Net charge-offs were $1.8 million during the fourth quarter of 2016, a $637 thousand increase compared to the prior quarter and a $195 thousand decrease from the fourth quarter of 2015.
  • The ratio of annualized net charge-offs to total average loans was 0.30% in the current quarter, compared to 0.20% in the prior quarter and 0.38% in the fourth quarter of 2015.
  • The ratio of allowance for loan losses to total loans was 1.32% at December 31, 2016, 1.29% at September 30, 2016, and 1.30% at December 31, 2015.
  • The ratio of allowance for loan losses to non-performing loans was 489% at December 31, 2016, 481% at September 30, 2016, and 321% at December 31, 2015.

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 60 ATMs throughout Western and Central New York State. Scott Danahy Naylon provides a broad range of insurance services to personal and business clients across 44 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 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 common equity, tangible common equity to tangible assets, tangible common book value per share, average tangible common equity and return on average tangible common equity, which are determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company believes that these non-GAAP measures are useful to our investors as measures of the strength of the Company’s capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide supplemental information that may help investors to analyze our capital position without regard to the effects of intangible assets. Non-GAAP financial measures have inherent limitations and are not uniformly applied by issuers. Therefore, these non-GAAP financial measures should not be considered in isolation, or as a substitute for comparable measures prepared in accordance with GAAP. The comparable GAAP financial measures and reconciliation to the comparable GAAP financial measures can be found in Appendix A to this document.

Safe Harbor Statement

This press release may contain forward-looking statements as defined by Section 21E of the Securities Exchange Act of 1934, as amended, that involve significant risks and uncertainties. Statements herein are based on certain assumptions and analyses by the Company and are factors it believes are appropriate in the circumstances. Actual results could differ materially from those contained in or implied by such statements for a variety of reasons including, but not limited to: the Company’s ability to implement its strategic plan, the Company’s ability to redeploy investment assets into loan assets, whether the Company experiences greater credit losses than expected, whether the Company experiences breaches of its, or third party, information systems, the attitudes and preferences of the Company’s customers, the Company’s ability to successfully integrate and profitably operate Scott Danahy Naylon and Courier Capital, the competitive environment, fluctuations in the fair value of securities in its investment portfolio, changes in the regulatory environment and the Company’s compliance with regulatory requirements, changes in interest rates, general economic and credit market conditions nationally and regionally. Consequently, all forward-looking statements made herein are qualified by these cautionary statements and the cautionary language in the Company’s Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and other documents filed with the SEC. Except as required by law, the Company undertakes no obligation to revise these statements following the date of this press release.

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands, except per share amounts)
2016 2015
December 31, September 30, June 30,
March 31, December 31,
SELECTED BALANCE SHEET DATA:
Cash and cash equivalents$71,277 $110,721 $67,624 $110,944 $60,121
Investment securities:
Available for sale 539,926 559,495 619,719 610,013 544,395
Held-to-maturity 543,338 528,708 478,549 476,283 485,717
Total investment securities 1,083,264 1,088,203 1,098,268 1,086,296 1,030,112
Loans held for sale 1,050 844 209 609 1,430
Loans:
Commercial business 349,547 350,588 349,432 317,776 313,758
Commercial mortgage 670,058 636,338 614,141 590,316 566,101
Residential real estate loans 427,937 425,882 408,367 382,504 381,074
Residential real estate lines 122,555 123,663 125,054 126,526 127,347
Consumer indirect 752,421 729,644 696,908 679,846 676,940
Other consumer 17,643 17,879 17,929 18,066 18,542
Total loans 2,340,161 2,283,994 2,211,831 2,115,034 2,083,762
Allowance for loan losses 30,934 29,350 28,525 27,568 27,085
Total loans, net 2,309,227 2,254,644 2,183,306 2,087,466 2,056,677
Total interest-earning assets 3,428,541 3,357,609 3,292,528 3,189,582 3,114,530
Goodwill and other intangible assets, net 75,640 75,943 76,252 76,567 66,946
Total assets 3,710,340 3,687,365 3,585,589 3,516,572 3,381,024
Deposits:
Noninterest-bearing demand 677,076 657,624 626,240 617,394 641,972
Interest-bearing demand 581,436 629,413 560,284 622,443 523,366
Savings and money market 1,034,194 1,052,224 960,325 1,042,910 928,175
Time deposits 702,516 724,096 711,156 677,430 637,018
Total deposits 2,995,222 3,063,357 2,858,005 2,960,177 2,730,531
Short-term borrowings 331,500 230,200 338,300 179,200 293,100
Long-term borrowings, net 39,061 39,043 39,025 39,008 38,990
Total interest-bearing liabilities 2,688,707 2,674,976 2,609,090 2,560,991 2,420,649
Shareholders’ equity 320,054 326,271 322,176 313,953 293,844
Common shareholders’ equity 302,714 308,931 304,836 296,613 276,504
Tangible common equity (1) 227,074 232,988 228,584 220,046 209,558
Unrealized (loss) gain on investment securities, net of tax$(2,530) $9,444 $10,886 $7,555 $443
Common shares outstanding 14,538 14,528 14,528 14,495 14,191
Treasury shares 154 164 164 197 207
CAPITAL RATIOS AND PER SHARE DATA:
Leverage ratio 7.36% 7.39% 7.39% 7.46% 7.41%
Common equity Tier 1 ratio 9.59% 9.58% 9.63% 9.83% 9.77%
Tier 1 risk-based capital 10.26% 10.27% 10.33% 10.56% 10.50%
Total risk-based capital 12.97% 12.98% 13.08% 13.39% 13.35%
Common equity to assets 8.16% 8.38% 8.50% 8.43% 8.18%
Tangible common equity to tangible assets (1) 6.25% 6.45% 6.51% 6.40% 6.32%
Common book value per share$20.82 $21.26 $20.98 $ 20.46 $19.49
Tangible common book value per share (1)$15.62 $16.04 $15.73 $ 15.18 $14.77
Stock price (Nasdaq: FISI):
High$34.55 $27.63 $29.49 $ 29.53 $29.04
Low$25.98 $25.16 $24.56 $ 25.38 $24.05
Close$34.20 $27.11 $26.07 $ 29.07 $28.00

________
(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)
Years ended 2016
2015
December 31, Fourth Third Second First Fourth
2016 2015 Quarter Quarter Quarter Quarter Quarter
SELECTED INCOME STATEMENT DATA:
Interest income$115,231 $105,450 $29,990 $29,360 $28,246 $27,635 $27,487
Interest expense 12,541 10,137 3,268 3,310 3,047 2,916 2,856
Net interest income 102,690 95,313 26,722 26,050 25,199 24,719 24,631
Provision for loan losses 9,638 7,381 3,357 1,961 1,952 2,368 2,598
Net interest income after provision for loan losses 93,052 87,932 23,365 24,089 23,247 22,351 22,033
Noninterest income:
Service charges on deposits 7,280 7,742 1,888 1,913 1,755 1,724 1,862
Insurance income 5,396 5,166 1,134 1,407 1,183 1,672 1,236
ATM and debit card 5,687 5,084 1,500 1,441 1,421 1,325 1,311
Investment advisory 5,208 2,193 1,274 1,326 1,365 1,243 642
Company owned life insurance 2,808 1,962 468 486 486 1,368 514
Investments in limited partnerships 300 895 47 161 36 56 30
Loan servicing 436 503 104 104 112 116 87
Net gain on sale of loans held for sale 240 249 38 46 78 78 88
Net gain on investment securities 2,695 1,988 269 426 1,387 613 640
Net gain on other assets 313 27 28 199 82 4 7
Amortization of tax credit investment - (390) - - - - -
Contingent consideration liability adjustment 1,170 1,093 1,170 - - - 1,093
Other 4,227 3,825 1,168 1,030 1,011 1,018 1,070
Total noninterest income 35,760 30,337 9,088 8,539 8,916 9,217 8,580
Noninterest expense:
Salaries and employee benefits 45,215 42,439 11,458 11,325 10,818 11,614 11,332
Occupancy and equipment 14,529 13,856 3,623 3,617 3,664 3,625 3,365
Professional services 6,184 4,502 948 956 2,833 1,447 1,604
Computer and data processing 3,402 3,186 853 832 913 804 895
Supplies and postage 2,047 2,155 499 490 464 594 544
FDIC assessments 1,735 1,719 452 406 441 436 442
Advertising and promotions 1,695 1,165 436 302 530 427 358
Goodwill impairment charge - 751 - - - - 751
Other 9,864 9,620 2,446 2,690 2,457 2,271 2,537
Total noninterest expense 84,671 79,393 20,715 20,618 22,120 21,218 21,828
Income before income taxes 44,141 38,876 11,738 12,010 10,043 10,350 8,785
Income tax expense 12,210 10,539 3,045 3,541 2,892 2,732 2,150
Net income 31,931 28,337 8,693 8,469 7,151 7,618 6,635
Preferred stock dividends 1,462 1,462 365 366 366 365 365
Net income available to common shareholders$30,469 $26,875 $8,328 $8,103 $6,785 $7,253 $6,270
FINANCIAL DATA AND RATIOS:
Earnings per share – basic$2.11 $1.91 $0.58 $0.56 $0.47 $0.50 $0.44
Earnings per share – diluted$2.10 $1.90 $0.57 $0.56 $0.47 $0.50 $0.44
Cash dividends declared on common stock$0.81 $0.80 $0.21 $0.20 $0.20 $0.20 $0.20
Common dividend payout ratio 38.39% 41.88% 36.21% 35.71% 42.55% 40.00% 45.45%
Dividend yield (annualized) 2.37% 2.86% 2.44% 2.93% 3.09% 2.77% 2.83%
Return on average assets 0.90% 0.87% 0.94% 0.94% 0.82% 0.90% 0.78%
Return on average equity 10.01% 9.78% 10.68% 10.34% 9.07% 9.91% 8.86%
Return on average common equity 10.10% 9.87% 10.81% 10.45% 9.10% 10.00% 8.89%
Return on average tangible common equity (1) 13.51% 13.16% 14.37% 13.87% 12.22% 13.54% 11.73%
Efficiency ratio (2) 60.92% 61.58% 58.00% 58.05% 65.03% 62.90% 64.55%
Effective tax rate 27.7% 27.1% 25.9% 29.5% 28.8% 26.4% 24.5%

________
(1) See Appendix A – Reconciliation to Non-GAAP Financial Measures for the computation of this Non-GAAP measure.
(2) Efficiency ratio equals noninterest expense less other real estate expense and amortization and impairment of goodwill and other intangible assets as a percentage of net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains on investment securities, proceeds from company owned life insurance, adjustments to contingent liabilities and amortizations of tax credit investment.

FINANCIAL INSTITUTIONS, INC.
Selected Financial Information (Unaudited)
(Amounts in thousands)
Years ended 2016 2015
December 31, Fourth Third Second First Fourth
2016 2015 Quarter Quarter Quarter
Quarter Quarter
SELECTED AVERAGE BALANCES:
Federal funds sold and interest-earning deposits $3,116 $37 $12,011 $1 $316 $70 $-
Investment securities (1) 1,063,221 1,014,171 1,080,941 1,068,866 1,075,220 1,027,602 1,049,217
Loans:
Commercial business 336,633 286,019 347,496 352,696 329,901 316,143 297,033
Commercial mortgage 618,436 522,328 659,713 625,003 606,360 582,142 554,327
Residential real estate loans 404,456 366,032 425,687 417,854 391,826 382,077 379,189
Residential real estate lines 124,635 128,525 122,734 123,312 125,212 127,317 127,688
Consumer indirect 703,975 665,454 741,598 711,948 683,722 678,133 671,888
Other consumer 17,620 18,969 17,448 17,548 17,562 17,926 18,626
Total loans 2,205,755 1,987,327 2,314,676 2,248,361 2,154,583 2,103,738 2,048,751
Total interest-earning assets 3,272,092 3,001,535 3,407,628 3,317,228 3,230,119 3,131,410 3,097,968
Goodwill and other intangible assets, net 76,170 68,138 75,807 76,116 76,437 76,324 67,692
Total assets 3,547,105 3,269,890 3,679,569 3,593,672 3,507,760 3,405,451 3,353,702
Interest-bearing liabilities:
Interest-bearing demand 576,046 543,690 604,717 547,545 579,497 572,424 545,602
Savings and money market 1,010,510 908,614 1,076,884 981,207 1,017,911 965,629 960,768
Time deposits 697,654 616,747 711,061 722,098 698,505 658,537 628,944
Short-term borrowings 248,938 262,494 244,796 315,122 213,826 221,326 241,957
Long-term borrowings, net 39,023 27,886 39,050 39,032 39,015 38,997 38,979
Total interest-bearing liabilities 2,572,171 2,359,431 2,676,508 2,605,004 2,548,754 2,456,913 2,416,250
Noninterest-bearing demand deposits 633,416 599,334 655,445 638,417 621,912 617,590 619,423
Total deposits 2,917,626 2,668,385 3,048,107 2,889,267 2,917,825 2,814,180 2,754,737
Total liabilities 3,228,099 2,980,183 3,355,894 3,267,808 3,190,589 3,096,263 3,056,541
Shareholders’ equity 319,006 289,707 323,675 325,864 317,171 309,188 297,161
Common equity 301,666 272,367 306,335 308,524 299,831 291,848 279,821
Tangible common equity (2)$225,496 $204,229 $230,528 $232,408 $223,394 $215,524 $212,129
Common shares outstanding:
Basic 14,436 14,081 14,459 14,456 14,434 14,395 14,095
Diluted 14,491 14,135 14,511 14,500 14,489 14,465 14,163
SELECTED AVERAGE YIELDS:
(Tax equivalent basis)
Investment securities 2.45% 2.46% 2.41% 2.44% 2.48% 2.48% 2.47%
Loans 4.18% 4.21% 4.17% 4.18% 4.17% 4.21% 4.22%
Total interest-earning assets 3.62% 3.62% 3.60% 3.62% 3.61% 3.64% 3.63%
Interest-bearing demand 0.14% 0.14% 0.14% 0.15% 0.14% 0.14% 0.15%
Savings and money market 0.13% 0.13% 0.13% 0.14% 0.13% 0.13% 0.14%
Time deposits 0.90% 0.87% 0.93% 0.91% 0.89% 0.88% 0.88%
Short-term borrowings 0.65% 0.41% 0.70% 0.63% 0.65% 0.62% 0.49%
Long-term borrowings, net 6.33% 6.28% 6.33% 6.33% 6.33% 6.34% 6.34%
Total interest-bearing liabilities 0.49% 0.43% 0.49% 0.51% 0.48% 0.48% 0.47%
Net interest rate spread 3.13% 3.19% 3.11% 3.11% 3.13% 3.16% 3.16%
Net interest rate margin 3.24% 3.28% 3.22% 3.23% 3.23% 3.27% 3.27%

________
(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)
Years ended 2016 2015
December 31, Fourth Third
Second
First Fourth
2016 2015
Quarter
Quarter
Quarter
Quarter
Quarter
ASSET QUALITY DATA:
Allowance for Loan Losses
Beginning balance$27,085 $27,637 $29,350 $28,525 $27,568 $27,085 $26,455
Net loan charge-offs (recoveries):
Commercial business 496 1,221 52 (31) (27) 502 133
Commercial mortgage 340 749 212 127 2 (1) 23
Residential real estate loans 115 283 (1) 61 34 21 110
Residential real estate lines 89 168 41 4 44 - 24
Consumer indirect 4,489 4,956 1,361 896 904 1,328 1,519
Other consumer 260 556 108 79 38 35 159
Total net charge-offs 5,789 7,933 1,773 1,136 995 1,885 1,968
Provision for loan losses 9,638 7,381 3,357 1,961 1,952 2,368 2,598
Ending balance$30,934 $27,085 $30,934 $29,350 $28,525 $27,568 $27,085
Net charge-offs (recoveries) to average loans (annualized):
Commercial business 0.15% 0.43% 0.06% -0.03% -0.03% 0.64% 0.18%
Commercial mortgage 0.05% 0.14% 0.13% 0.08% 0.00% -0.00% 0.02%
Residential real estate loans 0.03% 0.08% -0.00% 0.06% 0.03% 0.02% 0.12%
Residential real estate lines 0.07% 0.13% 0.13% 0.01% 0.14% 0.00% 0.07%
Consumer indirect 0.64% 0.74% 0.73% 0.50% 0.53% 0.79% 0.90%
Other consumer 1.48% 2.93% 2.46% 1.79% 0.87% 0.79% 3.39%
Total loans 0.26% 0.40% 0.30% 0.20% 0.19% 0.36% 0.38%
Supplemental information (1)
Non-performing loans:
Commercial business$2,151 $3,922 $2,151
$2,157 $2,312 $4,056 $3,922
Commercial mortgage 1,025 947 1,025
1,345 1,547 1,781 947
Residential real estate loans 1,236 1,848 1,236
1,239 1,485 1,601 1,848
Residential real estate lines 372 235 372
274 182 165 235
Consumer indirect 1,526 1,467 1,526
1,077 1,015 943 1,467
Other consumer 16 21 16
9 15 21 21
Total non-performing loans 6,326 8,440 6,326
6,101 6,556 8,567 8,440
Foreclosed assets 107 163 107
294 281 187 163
Total non-performing assets$6,433 $8,603 $6,433
$6,395 $6,837 $8,754 $8,603
Total non-performing loans to total loans 0.27% 0.41% 0.27% 0.27% 0.30% 0.41% 0.41%
Total non-performing assets to total assets 0.17% 0.25% 0.17% 0.17% 0.19% 0.25% 0.25%
Allowance for loan losses to total loans 1.32% 1.30% 1.32% 1.29% 1.29% 1.30% 1.30%
Allowance for loan losses to non-performing loans 489% 321% 489% 481% 435% 322% 321%

________
(1) At period end.

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

Years ended 2016 2015
December 31, Fourth Third Second First Fourth
2016 2015 Quarter Quarter Quarter Quarter Quarter
Ending tangible assets:
Total assets $3,710,340 $3,687,365 $3,585,589 $3,516,572 $3,381,024
Less: Goodwill and other intangible assets, net 75,640 75,943 76,252 76,567 66,946
Tangible assets $3,634,700 $3,611,422 $3,509,337 $3,440,005 $3,314,078
Ending tangible common equity:
Common shareholders’ equity $302,714 $308,931 $304,836 $296,613 $276,504
Less: Goodwill and other intangible assets, net 75,640 75,943 76,252 76,567 66,946
Tangible common equity $227,074 $232,988 $228,584 $220,046 $209,558
Tangible common equity to tangible assets (1) 6.25% 6.45% 6.51% 6.40% 6.32%
Common shares outstanding 14,538 14,528 14,528 14,495 14,191
Tangible common book value per share (2) $15.62 $16.04 $15.73 $15.18 $14.77
Average tangible assets:
Average assets$3,547,105 $3,269,890 $3,679,569 $3,593,672 $3,507,760 $3,405,451 $3,353,702
Less: Average goodwill and other intangible assets, net 76,170 68,138 75,807 76,116 76,437 76,324 67,692
Average tangible assets$3,470,935 $3,201,752 $3,603,762 $3,517,556 $3,431,323 $3,329,127 $3,286,010
Average tangible common equity:
Average common equity$301,666 $272,367 $306,335 $308,524 $299,831 $291,848 $279,821
Less: Average goodwill and other intangible assets, net 76,170 68,138 75,807 76,116 76,437 76,324 67,692
Average tangible common equity$225,496 $204,229 $230,528 $232,408 $223,394 $215,524 $212,129
Net income available to common shareholders$30,469 $26,875 $8,328 $8,103 $6,785 $7,253 $6,270
Return on average tangible common equity (3) 13.51% 13.16% 14.37% 13.87% 12.22% 13.54% 11.73%

________
(1) Tangible common equity divided by tangible assets.
(2) Tangible common equity divided by common shares outstanding.
(3) Net income available to common shareholders (annualized) divided by average tangible common equity.

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

Source:Financial Institutions, Inc.