FINANCIAL INSTITUTIONS, INC. ANNOUNCES FIRST QUARTER 2016 RESULTS

WARSAW, N.Y., April 26, 2016 – Financial Institutions, Inc. (Nasdaq: FISI), today reported financial results for the first quarter ended March 31, 2016. Financial Institutions, Inc. (the “Company”) is the parent company of Five Star Bank, Scott Danahy Naylon Insurance, LLC (“Scott Danahy Naylon”) and Courier Capital, LLC (“Courier Capital”). The Company’s financial results since January 5, 2016 include the results of operations of Courier Capital, our wealth management subsidiary whose business we acquired from Courier Capital Corporation in January 2016.

First Quarter 2016 Highlights:

Increased net interest income to a record $24.7 million in the first quarter

Increased noninterest income to $9.2 million in the first quarter

Strong performance resulted in return on average tangible common equity of 13.54% for the quarter

Growth strategy drives increase in fee-based services income and market share, leading to record level of earnings assets and deposits

Total assets increased to over $3.5 billion, up $319.5 million or 10% from a year ago

Grew total loans $192.1 million or 10% from a year ago

Increased total deposits by $255.5 million or 9% from a year ago

Quarterly cash dividend of $0.20 per common share represented a 2.77% dividend yield as of March 31, 2016 and a return of 40% of first quarter net income to common shareholders

Common and tangible common book value per share increased to $20.46 and $15.18, respectively, at March 31, 2016

Total risk-based capital increased to 13.39%, strengthening the Company’s capital position to support future growth

Completed the acquisition of Courier Capital, a prominent SEC-registered investment advisory and wealth management firm with offices in Buffalo and Jamestown

Opened our second “Made For You” financial solution center in Rochester; a unique customer service experience offered in one of the Company’s targeted growth markets

Net income for the first quarter 2016 was $7.6 million, compared to $6.6 million for the fourth quarter 2015, and $6.8 million for the first quarter 2015. After preferred dividends, first quarter 2016 net income available to common shareholders was $7.3 million or $0.50 per diluted share, compared with $6.3 million or $0.44 per diluted share for the fourth quarter 2015, and $6.4 million or $0.46 per diluted share for the first quarter 2015.

The Company’s President and Chief Executive Officer Martin K. Birmingham stated, “Continued strength in banking operations, successful implementation of our revenue diversification strategy and diligent management of operating expenses were key drivers of our core earnings growth this quarter. Consolidated revenues of $33.9 million in the first quarter of 2016 reached the highest level in the Company’s history. We remain focused on expense control and implemented several initiatives designed to reduce operating expenses late in the first quarter of 2016. We expect those savings to be reflected beginning in the second quarter.

“We continue to deliver balanced growth in our banking operations. Deposits increased 8% from the fourth quarter of 2015 of this year, which we believe partially reflects the retrenchment of larger competitors operating in the regions in which we operate. In particular, the progress of our two new bank branches in Rochester, one of the largest metro areas in our operating region, is very encouraging. Our first branch office in Rochester, the CityGate Financial Solution Center, opened in November and ended the first quarter with $32 million in total deposits. We are optimistic about further market share gains given the opening of our Brighton office in late March 2016.

“The January 2016 acquisition of Courier Capital, our wealth management platform, coupled with 4% growth in insurance revenues through our Scott Danahy Naylon insurance subsidiary, contributed to the growth in our noninterest income. Noninterest income comprised 34% of total revenues in the quarter, up from 31% in the first quarter of 2015. These new business lines combined with our core community bank which has a 200 year tradition, positions us as a leading western New York diversified financial services provider. We believe this platform and our independence as a community bank to respond to market needs in our region are key to our continued growth.”

Kevin B. Klotzbach, the Company’s Chief Financial Officer added, “We continue to deploy capital in a strategic manner that is delivering results, while only beginning to benefit from the leverage in our expanding platform. We ended the quarter with record levels in a number of key business areas, including interest income, noninterest income, total loans, total assets and total deposits. Interest-earning assets reached a record at $3.2 billion, as loan growth remained robust with demand from both consumer and business customers, while rates on loan production and net interest margin have held up well. We have also been able to effectively control our cost of funds which has stabilized our margin. Net interest margin has now increased for two consecutive quarters. Meanwhile, our credit quality remained steady in the first quarter and we have ample liquidity and a strong balance sheet to further execute our growth strategies.

“The Company’s tangible common equity also ended the quarter at a record level. Our return on tangible common equity of 13.54% increased by 15% compared to last quarter due to earnings growth. Contributing to our returns are the benefits from Company owned life insurance policies which added $1.4 million to noninterest income in the quarter. With over 60 policies remaining in force, we expect continued contributions for many years, although the timing and amounts will vary.

“Our strong first quarter performance led to tangible common book value reaching $15.18 per share, an increase of nearly 3% since the beginning of the year and up 7% in the last 12 months. For the three months ended March 31, 2016, total shareholder return of 4.6% far outpaced our peer group and the broader bank indexes, many of which have experienced negative returns. We are gratified that our operating strategies and financial results achieved have enabled us to contribute to the communities we serve while delivering value for our shareholders.”

Net Interest Income and Net Interest Margin

Net interest income was $24.7 million in the first quarter 2016 compared to $24.6 million in the fourth quarter 2015 and $23.1 million in the first quarter 2015. Average earning assets were up $33.4 million, led by a $55.0 million increase in loans in the first quarter of 2016 compared to the fourth quarter of 2015. When comparing the first quarter 2016 to the same quarter in 2015, average earning assets increased $313.1 million, including increases of $119.7 million and $193.4 million in investment securities and loans, respectively. First quarter 2016 net interest margin was 3.27%, up slightly from 3.26% for the fourth quarter of 2015 and down 16 basis points from 3.43% for the first quarter of 2015.

Noninterest Income

Noninterest income was $9.2 million for the first quarter 2016 compared to $8.6 million for the fourth quarter 2015 and $8.3 million in the first quarter 2015. Included in company owned life insurance income for the first quarter 2016 is $911 thousand of death benefit proceeds. Included in fourth quarter 2015 other noninterest income is $1.1 million related to the reduction in the Company’s estimate of the fair value of the contingent consideration liability recorded for Scott Danahy Naylon. Exclusive of those items and gains realized from the sale of investment securities, noninterest income was $7.7 million in the first quarter 2016, $6.8 million in the fourth quarter 2015 and $7.2 million in the first quarter 2015. The main factors contributing to the higher noninterest income during the first quarter 2016 compared to the fourth quarter 2015 were increases in insurance income and investment advisory income. Insurance income increased $436 thousand and investment advisory income increased $601 thousand, reflecting the contribution from Courier Capital which was acquired during the first quarter 2016 as part of our strategy to diversify our business lines and increase noninterest income through additional fee-based services. The increase in insurance income was largely due to contingent commission revenue from Scott Danahy Naylon. Such commissions are seasonal in nature and are generally received during the first quarter of each year. The higher noninterest income in the first quarter 2016 compared to the first quarter 2015 was primarily the result of a $756 thousand increase in investment advisory income, reflecting the contribution from Courier Capital, which was partially offset by a $418 thousand decrease in limited partnership income. Income from the Company’s equity method investments in limited partnerships, which are primarily small business investment companies, fluctuates based on the performance of the underlying investments.

Noninterest Expense

Noninterest expense was $21.2 million for the first quarter 2016 compared to $21.8 million for the fourth quarter 2015 and $19.0 million for the first quarter 2015. The decrease in noninterest expense in first quarter 2016 compared to fourth quarter 2015 was primarily due to the $751 thousand of goodwill impairment recognized in the fourth quarter 2015.

The increase in noninterest expense during the first quarter 2016 compared to the first quarter 2015 was largely due to higher salaries and employee benefits coupled with an increase in professional services expense. Salaries and employee benefits expense increased $1.4 million from the first quarter 2015, reflecting the addition of Courier Capital and a combination of additional personnel to support organic growth as part of the Company’s expansion initiatives and higher medical expense as the level of medical claims in the first quarter of 2015 were unusually low. Professional services increased $479 thousand when comparing the first quarter of 2016 to the same period in 2015. The first quarter 2016 professional services expense included approximately $360 thousand of professional services associated with responding to the demands of an activist shareholder.

Income Taxes

Income tax expense was $2.7 million in the first quarter 2016, compared to $2.2 million in the fourth quarter 2015 and $2.9 million in the first quarter 2015. Higher income tax expense during the first quarter 2016 compared to the fourth quarter 2015 was primarily driven by higher pre-tax income. The effective tax rate was 26.4% for the first quarter 2016, compared with an effective tax rate of 24.5% for the fourth quarter of 2015 and 29.8% in the first quarter 2015. The lower effective tax rate in 2016 compared to the same quarter a year ago is a result of the non-taxable life insurance proceeds received in 2016.

Balance Sheet and Capital Management

Total assets were $3.52 billion at March 31, 2016, up $135.5 million from $3.38 billion at December 31, 2015 and up $319.5 million from $3.20 billion at March 31, 2015. The increases were attributable to loan growth and higher investment security balances funded by deposit growth.

Total loans were $2.12 billion at March 31, 2016, up $31.5 million from December 31, 2015 and up $192.4 million from March 31, 2015. The increases in loans are primarily attributable to organic commercial loan growth. Commercial loans totaled $908.1 million as of March 31, 2016, an increase of $28.2 million or 3% from December 31, 2015 and an increase of $151.4 million or 20% from March 31, 2015. Total investment securities were $1.09 billion at March 31, 2016, up $56.2 million or 5% from the end of the prior quarter and up $140.8 million or 15% from March 31, 2015.

Total deposits were $2.96 billion at March 31, 2016, an increase of $229.6 million from December 31, 2015 and an increase of $255.5 million from March 31, 2015. The increase during the first quarter of 2016 was mainly due to seasonal inflows of municipal deposits, while the year-over-year increase was due to higher municipal deposits and successful business development efforts in retail banking. Public deposit balances represented 30% of total deposits at March 31, 2016 and 2015, compared to 25% at December 31, 2015.

Short-term borrowings were $179.2 million at March 31, 2016, down $113.9 million from December 31, 2015 and up $3.6 million from March 31, 2015. Short-term borrowings are typically utilized to manage the seasonality of municipal deposits.

Shareholders’ equity was $314.0 million at March 31, 2016, compared with $293.8 million at December 31, 2015 and $286.7 million at March 31, 2015. Common book value per share was $20.46 at March 31, 2016, an increase of $0.97 or 5% from $19.49 at December 31, 2015 and $1.45 or 8% from $19.01 at March 31, 2015. Tangible common book value per share was $15.18 at March 31, 2016, compared to $14.77 at December 31, 2015 and $14.18 at March 31, 2015. The increases in shareholders’ equity and the book value per share amounts are attributable to net income, stock issued for the acquisition of Courier Capital and to higher net unrealized gains on securities available for sale, a component of accumulated other comprehensive income.

During the first quarter 2016, the Company declared a common stock dividend of $0.20 per common share. The first quarter 2016 dividend returned 40% of first quarter net income to common shareholders.

The Company’s leverage ratio was 7.46% at March 31, 2016, compared to 7.41% at December 31, 2015 and 7.53% at March 31, 2015. The increase in the leverage ratio from December 31, 2015 was due to higher regulatory capital, which excludes changes in accumulated other comprehensive income. The decrease in the leverage ratio from March 31, 2015 was primarily due to an increase in average quarterly assets.

Credit Quality

Non-performing loans were $8.6 million at March 31, 2016, compared to $8.4 million at December 31, 2015 and $11.1 million at March 31, 2015. The $2.5 million decrease from the first quarter 2015 was due to across the board improvement in each of the loan portfolios. The ratio of non-performing loans to total loans was 0.41% at March 31, 2016 and December 31, 2015, and 0.58% at March 31, 2015.

The provision for loans losses for the first quarter 2016 was $2.4 million, a decrease of $230 thousand from the prior quarter and $373 thousand from the first quarter 2015. Net charge-offs were $1.9 million during the first quarter 2016, an $83 thousand decrease compared to the prior quarter and $1.3 million decrease from the first quarter 2015. The ratio of annualized net charge-offs to total average loans was 0.36% during the current quarter, compared to 0.38% during the prior quarter and 0.68% during the first quarter 2015.

The ratio of allowance for loans losses to total loans was 1.30% at March 31, 2016 and December 31, 2015, and 1.41% at March 31, 2015. The ratio of allowance for loans losses to non-performing loans was 322% at March 31, 2016, compared with 321% at December 31, 2015 and 246% at March 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 services to individuals, municipalities and businesses through a network of over 50 offices and more than 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 and is a member of the NASDAQ OMX ABA Community Bank Index. Additional information is available at the Company’s website: www.fiiwarsaw.com.

Non-GAAP Financial Information

This news release contains financial information, such as tangible common equity, determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). The Company believes that non-GAAP financial measures provide a meaningful comparison of the underlying operational performance of the Company, and facilitate investors’ assessments of its business and performance trends. In addition, the Company believes the exclusion of these non-operating items enables management to perform a more effective evaluation and comparison of the Company’s results and to assess performance in relation to the Company’s ongoing operations. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. Where non-GAAP disclosures are used in this news release, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, 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, and costs associated with responding to the current proxy contest. 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.

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