FINANCIAL INSTITUTIONS, INC. ANNOUNCES A 47% EARNINGS INCREASE FOR 2010

WARSAW, N.Y., January 27, 2011 — Financial Institutions, Inc. (Nasdaq: FISI) (the “Company”), the parent company of Five Star Bank, today announced financial results for the fourth quarter and year ended December 31, 2010. Net income was $5.1 million for the fourth quarter of 2010 compared with $5.4 million for the fourth quarter of 2009, bringing the Company’s net income for the full year 2010 to $21.3 million compared to $14.4 million in 2009. After preferred dividends, fourth quarter diluted earnings per share was $0.38 compared with $0.42 per share for the fourth quarter of 2009. On a year to date basis, diluted earnings per share increased $0.62 to $1.61 per share as compared to $0.99 per share for the same period last year.

Highlights for the fourth quarter of 2010 were as follows:

“I am very pleased with our 2010 results as our back-to-basics banking approach is truly paying off. We continue to be active lenders in our market place, which is driving our revenue growth, while maintaining solid asset quality. We have also been very focused on expense control. The combination of these initiatives has resulted in a 60% efficiency ratio for 2010,” stated Peter G. Humphrey, President and Chief Executive Officer.

The Company’s 2010 achievements included being named to the Sandler O’Neill Sm-All Stars list of the top performing publicly-traded small-cap banks and thrifts in the nation. Of the 503 banks and thrifts with a market cap of less than $2 billion, Financial Institutions, Inc. was one of only 32 selected for the 2010 Sm-All Stars list. Selection for the Sandler O’Neill list is based on growth, profitability, credit quality, and capital strength.

“We are proud to be named to this elite list of high performing small-cap banks and thrifts,” said Humphrey. “Receiving this distinct honor is a testament to our commitment to deliver long-term value to our customers, communities and shareholders.”

Net Interest Income and Net Interest Margin

Net interest income totaled $20.1 million for the three months ended December 31, 2010, an increase of $853 thousand or 4% over the fourth quarter of 2009 and up $275 thousand or 1% compared with the third quarter of 2010. The increase in net interest income compared to the fourth quarter of 2009 resulted primarily from lower funding costs. Average earning assets increased $102.2 million or 5% in the fourth quarter of 2010 compared with the fourth quarter last year, with most of the growth in the investment securities portfolio, and the indirect consumer and commercial mortgage loan portfolios. The increase in average indirect consumer loans reflected the Company’s continued expansion of its dealer network into the Capital District of New York State.

The net interest margin on a tax-equivalent basis was 4.01% in the fourth quarter of 2010, compared with 4.06% in the fourth quarter of 2009 and the third quarter of 2010. The Company’s yield on earning-assets decreased 29 basis points in the fourth quarter of 2010 compared with the same quarter last year. This was due to the effect of reinvesting cash flows in the low interest rate environment and a substantial portion of earning asset growth being concentrated in lower yielding mortgage-backed securities. The cost of interest-bearing liabilities decreased 27 basis points compared with the fourth quarter of 2009 due to continued downward changes in the Company’s interest-bearing deposit rates, a result of the continued re-pricing of the Company’s certificates of deposit.

Net interest income for the year ended December 31, 2010 totaled $78.8 million, an increase of $6.5 million or 9% compared with $72.3 million for the same period last year. Average earning assets increased $124.3 million during 2010 compared with last year, while the tax-equivalent net interest margin increased 3 basis points to 4.07% during the year ended December 31, 2010. A decrease of 26 basis points in the Company’s tax-equivalent earning-assets yield during 2010 was offset by a decrease of 36 basis points in the cost of interest-bearing liabilities.

Noninterest Income

Noninterest income totaled $5.3 million for the fourth quarter of 2010, compared to $5.2 million in the fourth quarter of 2009 and $5.1 million for the third quarter of 2010. Noninterest income totaled $19.5 million for the year ended December 31, 2010, compared to $18.8 million for the same period last year. The Company recognized net gains on the sale of investment securities of $169 thousand during 2010, compared to $3.4 million during 2009. Other than temporary impairment (“OTTI”) charges on investment securities totaled $594 thousand and $4.7 million for the years ended December 31, 2010 and 2009, respectively. Adjusted for the effect of net gains on sales and OTTI charges on investment securities, noninterest income for the full year 2010 decreased slightly by $153 thousand from the full year 2009.

Noninterest Expense

Noninterest expense was $16.4 million for the fourth quarter of 2010, an increase of $1.3 million or 8% from the fourth quarter of 2009 and up $1.4 million from the third quarter of 2010. During the fourth quarter of 2010 the Company recorded losses of approximately $1.0 million relating to irregular instances of fraudulent debit card activity. The Company took appropriate action to limit its exposure to the fraudulent activity and does not expect to incur further losses relating to these specific incidents.

For the full year 2010 noninterest expense was $60.9 million, a decrease of $1.9 million or 3% over the full year 2009. Salaries and employee benefits decreased $823 thousand or 2% compared with 2009, primarily from lower incentive compensation and pension benefit costs. FDIC assessments decreased $1.1 million or 31% compared with 2009 primarily due to a special assessment on all FDIC-insured banks in 2009. The special assessment for the Company was $923 thousand during the second quarter of 2009.

Balance Sheet

Total loans were $1.349 billion at December 31, 2010, up $22.7 million or 2% from September 30, 2010 and up $84.7 million or 7% from December 31, 2009. Total investment securities were $694.5 million at December 31, 2010, down $25.1 million or 3% from September 30, 2010 and up $74.5 million or 12% from December 31, 2009.

Deposits were $1.883 billion at December 31, 2010, a decrease of $63.5 million from the end of the third quarter and up $139.9 million compared with the end of 2009. The Company’s deposit mix remains favorably weighted in lower cost demand, savings and money market accounts, which comprised 60.7% of total deposits at the end of 2010.

“Our continued focus on meeting the financial needs of the communities we serve, through one of the most challenging periods in recent banking history, was rewarded with solid balance sheet growth in both loans and deposits, said Humphrey. “We remain committed to our communities and small businesses as we maintained our enviable Small Business Administration lender rankings. In terms of SBA loan originations, we’re ranked second in both the Buffalo and Rochester markets, and 38^th nationally. These rankings demonstrate our commitment to serving our communities at a time when many larger banks tapered their small business support.”

Total shareholders’ equity was $212.1 million at December 31, 2010, a $4.0 million decrease from September 30, 2010, due to a $7.5 million decrease in accumulated other comprehensive income, partially offset by a net increase of $3.1 million in the Company’s retained earnings. The decrease in accumulated comprehensive income was primarily related to a decrease in unrealized gains on investment securities from $13.0 million to $3.1 million driven by an increase in interest rates. The Company’s tangible common equity as a percent of tangible assets was 5.56% as of December 31, 2010, with a tangible common book value per share of $11.06.

The Company’s leverage ratio improved to 8.31% at the end of the fourth quarter when compared to 7.96% at the end of 2009. The Company’s capital ratios comfortably exceed the regulatory thresholds required to be classified as a “well capitalized” institution as established by the Company’s primary banking regulators.

Asset Quality and Provision for Loan Losses

Non-performing assets were $8.9 million or 0.40% of total assets at December 31, 2010, up from $8.5 million at September 30, 2010 and down from $10.4 million at the end of last year. The ratio of non-performing loans to total loans was 0.56% at the end of the third and fourth quarters of 2010 versus 0.69% at December 31, 2009. This ratio continues to compare favorably to the average of our peer group, which was 3.71% of total loans at September 30, 2010, the most recent period for which information is available (Source: Federal Financial Institutions Examination Council — Bank Holding Company Performance Report as of September 30, 2010 — Top-tier bank holding companies having consolidated assets between $1 billion and $3 billion).

The provision for loan losses was $2.0 million for the fourth quarter of 2010, compared to $2.2 million for the third quarter of 2010 and $1.1 million in the fourth quarter of 2009. Net charge-offs were $1.2 million, or 0.37% annualized, of average loans, down from $4.3 million, or 1.30% annualized, of average loans in the third quarter of 2010 and up from $1.1 million, or 0.35% annualized, of average loans in the fourth quarter of 2009. As previously disclosed, the third quarter of 2010 included a $3.1 million charge-off related to one commercial business loan.

The allowance for loan losses was $20.5 million at December 31, 2010, compared with $19.7 million at September 30, 2010 and $20.7 million at December 31, 2009. The ratio of the allowance for loan losses to total loans was 1.52% at December 31, 2010, compared with 1.49% at September 30, 2010 and 1.64% at December 31, 2009. The ratio of allowance for loan losses to non-performing loans was 270% at December 31, 2010, compared with 268% at September 30, 2010 and 239% at December 31, 2009.

“Our disciplined underwriting standards are reflected by our strong asset quality ratios,” said Humphrey. “However, Five Star Bank’s quality is demonstrated not just in our measures of asset quality, but also by the solutions we provide our customers and the way we treat our customers. At Five Star, we continually strive to make banking easier and more enjoyable for our customers by offering a broad spectrum of products and services, delivered through an experienced and knowledgeable workforce.”

About Financial Institutions, Inc.

With over $2.2 billion in assets, Financial Institutions, Inc. provides diversified financial services through its subsidiaries, Five Star Bank and Five Star Investment Services, Inc. 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 70 ATMs in Western and Central New York State. Five Star Investment Services provides brokerage and insurance products and services within the same New York State markets. The consolidated entity employs over 600 individuals. The Company’s stock is listed on the Nasdaq Global Select Market under the symbol FISI. Additional information is available at the Company’s website: www.fiiwarsaw.com.

Safe Harbor Statement

This press release may contain forward-looking statements as defined by federal securities laws. These statements may address issues that involve significant risks, uncertainties, estimates and assumptions made by management. Actual results could differ materially from current beliefs or projections. There are a number of important factors that could affect the Company’s forward-looking statements which include its ability to implement its strategic plan, its ability to redeploy investment assets into loan assets, the attitudes and preferences of its customers, the competitive environment, fluctuations in the fair value of securities in the investment portfolio, and general economic and credit market conditions nationally and regionally. For more information about these factors please see the Company’s Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q on file with the SEC. All of these factors should be carefully reviewed, and readers should not place undue reliance on these forward-looking statements. The Company undertakes no obligation to revise these statements following the date of this press release.

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FINANCIAL INSTITUTIONS, INC.
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