FINANCIAL INSTITUTIONS, INC. REPORTS THIRD QUARTER EARNINGS

WARSAW, N.Y., October 26, 2011 — Financial Institutions, Inc. (Nasdaq: FISI) (the “Company”), the parent company of Five Star Bank, today announced financial results for the third quarter ended September 30, 2011. Net income was $5.5 million for the third quarter of 2011 compared with $5.7 million for the third quarter of 2010, bringing the Company’s net income for the first nine months of 2011 to $17.0 million compared to $16.2 million in 2010. After preferred dividends, third quarter diluted earnings per share was $0.37, a 14% decrease from the $0.43 per share earned during the third quarter of 2010. On a year to date basis, diluted earnings per share decreased $0.14 to $1.09 per share as compared to $1.23 per share for the same period last year. The current 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 completed during the first quarter of 2011.

Highlights for the third quarter of 2011 were as follows:

“We are very encouraged by our results this quarter,” stated Peter G. Humphrey, President and Chief Executive Officer. “The outlook for the banking industry as a whole has been challenging due to regulatory uncertainty, the interest rate environment and the state of the economy. We feel we are well-positioned to take advantage of opportunities in our markets to grow our business, as evidenced by the loan growth we’ve generated.”

Net Interest Income and Net Interest Margin

Net interest income totaled $20.6 million for the three months ended September 30, 2011, an increase of $365 thousand or 2% compared with the second quarter of 2011. Average earning assets increased $10.0 million during the third quarter, as a $31.6 million increase in average loans was partially offset by a $21.5 million decrease in investment securities. The Company had a strong quarter of commercial loan production and continues to grow its indirect consumer loan portfolio.

The net interest margin on a tax-equivalent basis was 4.02% in the third quarter, an increase of 2 basis points from the second quarter of this year. The Company’s yield on earning-assets decreased by 7 basis points in the third quarter of 2011 compared with last quarter. The decline was due primarily to lower loan yields. The cost of interest-bearing liabilities decreased 11 basis points compared with the second quarter of 2011, primarily a result of the redemption of the Company’s 10.20% junior subordinated debentures and the continued re-pricing of the Company’s certificates of deposit. The redemption of the debentures will reduce pre-tax interest expense by approximately $1.7 million annually.

Noninterest Income

Total noninterest income for the third quarter of 2011 was $8.0 million, as compared to $5.0 million for the second quarter of 2011, an increase of $3.0 million. When comparing the second and third quarters of 2011, third quarter income includes increases in broker-dealer fees and commissions, company owned life insurance, net gains on sale of loans held for sale and net gain on investment securities, partially offset by a decline in loan servicing income. Broker-dealer fees and commissions were up $139 thousand or 35% mainly due to increased sales volume. The Company invested an additional $18.0 million in company owned life insurance during the third quarter, which brought the total investment to $45.1 million at September 30, 2011 and resulted in a $143 thousand or 51% increase in income. Net gains on loans held for sale increased by $201 thousand, of which $153 thousand relates to the servicing retained sale of $13.0 million of indirect auto loans during July 2011. The Company recognized pre-tax net gains on the sale of investment securities of $2.3 million during the third quarter 2011, which included pre-tax net gains of $1.6 million from three pooled trust-preferred securities that had been written down in prior periods and included in non-performing assets. The Company recorded an expense of $162 thousand for the quarter due to the valuation of its mortgage servicing rights portfolio, accounting for the majority of the $185 thousand decline in loan servicing income.

Noninterest Expense

Total noninterest expense for the third quarter of 2011 was $17.0 million, as compared to $15.2 million for the second quarter of 2011, an increase of $1.8 million. Salaries and employee benefits rose by $250 thousand compared to the second quarter, reflecting an increase in estimated incentive compensation, which was previously limited under the U.S. Department of the Treasury’s Capital Purchase Program. Advertising and promotions costs were up $224 thousand in the third quarter of 2011 compared to the second quarter of this year due to seasonal promotions and branch events, including the opening of a new branch in suburban Rochester.

As previously announced, during August 2011 the Company redeemed its $16.7 million, 10.20% junior subordinated debentures at a cost of $1.1 million (loss on extinguishment of debt) that included both a call premium and unamortized issuance expenses.

Balance Sheet

Total loans were $1.435 billion at September 30, 2011, up $67.1 million or 5% from June 30, 2011 and up $89.1 million or 7% from December 31, 2010. Total investment securities were $702.6 million at September 30, 2011, down $28.4 million from June 30, 2011 and up $8.1 million from December 31, 2010.

Deposits were $1.984 billion at September 30, 2011, an increase of $111.4 million or 6% from the end of the second quarter and up $100.8 million or 5% compared with the end of 2010. Public deposit balances increased $63.2 million during the third 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 64.3% of total deposits at the end of the third quarter.

Shareholders’ equity was $240.9 million at September 30, 2011, compared with $233.7 million at the end of the second quarter. Net income for the quarter increased shareholders’ equity by $5.5 million, which was partially offset by common and preferred stock dividends of $2.0 million. Accumulated other comprehensive income included in shareholders’ equity increased $3.3 million during the third quarter due primarily to higher net unrealized gains on securities available-for-sale.

The Company’s leverage ratio and total risk-based capital ratio declined to 8.67% and 13.49%, respectively, at the end of the third quarter, compared to 9.30% and 14.96%, respectively, at the end of the second 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. The decline in the Company’s ratios was due to the aforementioned redemption of the Company’s 10.20% junior subordinated debentures. Had the debentures been redeemed prior to June 30, 2011, the Company’s Tier 1 capital would have been reduced by $16.2 million and resulted in a Tier 1 leverage ratio of 8.57% and Total risk-based capital ratio of 13.89% at the end of the second quarter.

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 $13.7 million or 0.58% of total assets at September 30, 2011, down from $14.5 million or 0.64% of total assets at June 30, 2011 and up from $8.9 million or 0.40% of total assets at December 31, 2010.

Non-performing loans totaled $7.8 million at September 30, 2011, up $818 thousand during the third quarter of 2011 due to the addition of a commercial credit relationship with a principal balance of $1.9 million and specific reserve of $941 thousand. Continuing to be well below the average of our peer group, the ratio of non-performing loans to total loans was 0.54% at September 30, 2011 compared to 0.51% at June 30, 2011, and 0.56% at December 31, 2010. The average of our peer group was 3.43% of total loans at June 30, 2011, the most recent period for which information is available (Source: Federal Financial Institutions Examination Council — Bank Holding Company Performance Report as of June 30, 2011 — Top-tier bank holding companies having consolidated assets between $1 billion and $3 billion).

Non-performing investment securities totaled $5.3 million at September 30, 2011, down from $7.0 million at June 30, 2011 and up from $572 thousand at December 31, 2010. Non-performing investment securities are included in non-performing assets at fair value and represent pooled trust preferred securities on which the Company has stopped accruing interest. The market for these securities began to improve during the second quarter of 2011, resulting in substantial increases to their fair value since the beginning of the year. There have been no securities transferred to non-performing status since the first quarter of 2009. During the third quarter of 2011, the Company recognized gains of $1.6 million from the sale of three of the 14 securities classified as non-performing at June 30, 2011. The securities had a fair value of $1.5 million at June 30, 2011 and $154 thousand at December 31, 2010.

The provision for loan losses was $3.5 million for the third quarter of 2011, compared to $1.3 million last quarter and $2.2 million for the third quarter of 2010. This reflected the combination of strong loan growth and the expectation of a weaker and prolonged economic recovery. Net charge-offs were $1.1 million, or 0.32% annualized, of average loans, up from $815 thousand, or 0.24% annualized, of average loans in the second quarter of 2011 and down from $4.3 million, or 1.30% annualized, of average loans in the third quarter of 2010. Net charge-offs for the third quarter of 2010 includes $3.1 million for the charge-off a participation interest in one commercial business loan.

The allowance for loan losses was $23.0 million at September 30, 2011, compared with $20.6 million at June 30, 2011 and $20.5 million at December 31, 2010. The ratio of the allowance for loan losses to total loans was 1.60% at September 30, 2011, compared with 1.51% at June 30, 2011 and 1.52% at December 31, 2010. The ratio of allowance for loan losses to non-performing loans was 295% at September 30, 2011, compared with 296% at June 30, 2011 and 270% at December 31, 2010.

About Financial Institutions, Inc.

With over $2.3 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. Financial Institutions, Inc. and its subsidiaries employ 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 its 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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