FINANCIAL INSTITUTIONS, INC. REPORTS 10% INCREASE IN FIRST HALF EARNINGS

WARSAW, N.Y., July 27, 2011 — Financial Institutions, Inc. (Nasdaq: FISI) (the “Company”), the parent company of Five Star Bank, today announced financial results for the second quarter ended June 30, 2011. Net income was $5.7 million for the second quarter of 2011 compared with $5.2 million for the second quarter of 2010, bringing the Company’s net income for the first half of 2011 to $11.5 million compared to $10.5 million in 2010. After preferred dividends, diluted earnings per share were $0.39 for both the second quarter of 2011 and 2010. On a year to date basis, diluted earnings per share decreased $0.08 to $0.72 per share as compared to $0.80 per share for the same period last year. The 2011 second quarter and year to date earnings per share amounts were impacted by the 2,813,475 additional shares of common stock issued in conjunction with our follow-on public offering in the first quarter of 2011. In addition, year to date earnings for 2011 were reduced by $1.2 million, or $0.10 per common share, for accelerated discount accretion related to the Company’s redemption of the preferred stock that had been issued to the U.S. Treasury pursuant to the Troubled Asset Relief Program’s Capital Purchase Program (the “Capital Purchase Program”).

Highlights for the second quarter of 2011 were as follows:

Commenting on 2011 results, President and Chief Executive Officer Peter G. Humphrey said, “We are pleased to announce that 2011 second quarter and year-to-date earnings were 10% higher than last year.  We were able to accomplish this in spite of the low interest rate environment and the challenges presented by the economy. As a result of our solid performance and strong capital position, we proudly delivered a 20% dividend increase to our common shareholders during the quarter.”

Net Interest Income and Net Interest Margin

Net interest income totaled $20.3 million for the three months ended June 30, 2011, an increase of $415 thousand or 2% compared with the first quarter of 2011. Average earning assets increased $49.3 million or 2% during the second quarter, with most of the growth in investment securities and consumer indirect loans. The Company continues to grow its indirect consumer loan portfolio through expansion into new markets in New York and Pennsylvania.

The net interest margin on a tax-equivalent basis was 4.00% in the second quarter of 2011, compared with 4.05% in the first quarter. The Company’s yield on earning-assets decreased 11 basis points in the second quarter of 2011 compared with last quarter, a result of cash flows being reinvested in the current low interest rate environment. The cost of interest-bearing liabilities decreased 8 basis points compared with the first quarter of 2011, primarily a result of the continued re-pricing of the Company’s certificates of deposit.

Noninterest Income

Total noninterest income decreased $174 thousand compared to the first quarter, as the first quarter of 2011 other noninterest income included strong results from the Company’s capital investment in several limited partnerships. Second quarter results also include an increase of $138 thousand in service charges on deposit accounts and an increase of $107 thousand from ATM and debit card income, offset by a $100 thousand decline in loan servicing income and a $107 thousand decrease in net gains on loans held for sale, primarily a result of a decrease in the sold and serviced mortgage portfolio as well as decreased origination volume of loans to be sold in the secondary market.

Noninterest Expense

Total noninterest expense for the second quarter of 2011 was $15.2 million, as compared to $15.4 million for the first quarter of 2011, a decrease of $197 thousand or 1%. Salaries and employee benefits expense rose by $453 thousand compared to the first quarter, reflecting higher employee benefit costs and increased accruals for incentive compensation, which were historically limited under the Capital Purchase Program. FDIC assessments decreased $439 thousand or 72%, primarily a result of changes made by the FDIC in the method of calculating assessment rates. Also included in noninterest expense were decreases in occupancy and equipment and professional service expense of $199 thousand and $111 thousand, respectively.

Balance Sheet

Total loans were $1.368 billion at June 30, 2011, up $15.5 million from March 31, 2011 and up $22.1 million or 2% from December 31, 2010. Total investment securities were $731.0 million at June 30, 2011, up $13.0 million from March 31, 2011 and up $36.5 million from December 31, 2010.

Deposits were $1.872 billion at June 30, 2011, which was $97.3 million less than the end of the first quarter and $10.7 million less compared with the end of 2010. Public deposit balances decreased $89.3 million during the second quarter of 2011 due largely to the seasonality of municipal cash flows. The Company’s deposit mix remains favorably weighted in lower cost demand, savings and money market accounts, which comprised 62.7% of total deposits at the end of the second quarter.

Shareholders’ equity was $233.7 million at June 30, 2011, compared with $222.8 million at the end of the first quarter. Net income for the quarter increased shareholders’ equity by $5.7 million, which was partially offset by common and preferred stock dividends of $2.0 million and $2.1 million for the repurchase of the warrant issued to the U.S. Treasury. Accumulated other comprehensive income included in shareholders’ equity increased $8.9 million during the second quarter due primarily to higher net unrealized gains on securities available-for-sale.

The Company’s leverage ratio improved to 9.30% and its total risk-based capital ratio improved to 14.96% at the end of the second quarter, compared to 9.11% and 14.73%, respectively, at the end of the first quarter, all of which exceeded 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 include non-performing loans, foreclosed assets and non-performing investment securities. Non-performing assets were $14.5 million or 0.64% of total assets at June 30, 2011, up from $8.5 million or 0.37% of total assets at March 31, 2011 and $8.9 million or 0.40% of total assets at December 31, 2010.

Non-performing investment securities are included in non-performing assets at fair value and represent securities on which the Company has stopped accruing interest. These non-performing investment securities totaled $7.0 million at June 30, 2011, up from $567 thousand at March 31, 2011 and $572 thousand at December 31, 2010. There were no new securities transferred to non-performing status during the quarter. The increase relates solely to an increase in the fair value of each of the 14 securities classified as non-performing. The market for these securities improved dramatically during the second quarter of 2011, resulting in the $6.4 million increase in fair value from the end of the first quarter of 2011.

During July 2011, the Company sold one of the 14 securities classified as non-performing at June 30, 2011 and will recognize a gain of approximately $1 million during the third quarter. The security had a fair value of $752 thousand at June 30, 2011. The Company continues to monitor the market for these securities and evaluate the potential for future dispositions.

Continuing to be well below the average of our peer group, the ratio of non-performing loans to total loans was 0.51% at June 30, 2011 compared to 0.54% at March 31, 2011, and 0.56% at December 31, 2010. The average of our peer group was 3.43% of total loans at March 31, 2011, the most recent period for which information is available (Source: Federal Financial Institutions Examination Council — Bank Holding Company Performance Report as of March 31, 2011 — Top-tier bank holding companies having consolidated assets between $1 billion and $3 billion). The $340 thousand decrease in non-performing loans during the second quarter of 2011 primarily reflects a lower level of nonaccrual loans at quarter-end due to an increased level of loans returning to accrual status during the quarter.

The provision for loan losses was $1.3 million for the second quarter of 2011, compared to $810 thousand for the first quarter of 2011 and $2.0 million in the fourth quarter of 2010. Net charge-offs were $815 thousand, or 0.24% annualized, of average loans in the second quarter of 2011, down from $1.2 million, or 0.35% annualized, of average loans in the first quarter of 2011 and down from $1.2 million, or 0.37% annualized, of average loans in the fourth quarter of 2010.

The allowance for loan losses was $20.6 million at June 30, 2011, compared with $20.1 million at March 31, 2011 and $20.5 million at December 31, 2010. The ratio of the allowance for loan losses to total loans was 1.51% at June 30, 2011, compared with 1.49% at March 31, 2011 and 1.52% at December 31, 2010. The ratio of allowance for loan losses to non-performing loans was 296% at June 30, 2011, compared with 275% at March 31, 2011 and 270% at December 31, 2010.

Mr. Humphrey added, “Although were are already performing at a high level with respect to asset quality metrics, as evidenced by peer comparisons, the quality of our loan portfolio showed additional improvement. This reflects the disciplined credit underwriting and origination processes of our organization and the high quality of our customers.”

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. Financial Institutions, Inc. was named to the 2010 Sandler O’Neill Sm-All Stars list of the top performing publicly-traded small-cap banks and thrifts in the nation and was included in the top 100 best performing community banks in the United States according to a ranking released in April 2011 by SNL Financial. 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, changes in the regulatory environment 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. 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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FINANCIAL INSTITUTIONS, INC.
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