FINANCIAL INSTITUTIONS, INC. REPORTS NET INCOME AND EARNINGS PER SHARE
FOR 2013 AT HIGHEST LEVEL IN OVER A DECADE

WARSAW, N.Y., January 29, 2014 – Financial Institutions, Inc. (the “Company”) (Nasdaq: FISI), the parent company of Five Star Bank, today reported financial results for the fourth quarter and year ended December 31, 2013.

Net income for the fourth quarter 2013 was $6.4 million, compared to $6.2 million for the third quarter 2013. After preferred dividends, fourth quarter 2013 net income available to common shareholders was $6.0 million or $0.43 per diluted share compared with $5.8 million or $0.42 per share for third quarter 2013.

For the full year of 2013, the Company earned net income of $25.5 million, compared to $23.4 million for the full year of 2012. Net income available to common shareholders was $24.1 million or $1.75 per diluted share for the full year of 2013. This compares to net income available to common shareholders of $22.0 million or $1.60 per diluted share for the full year of 2012.

Fourth Quarter 2013 highlights:

Full Year 2013 highlights:

“We are pleased with the quality of our performance in 2013, especially in light of the challenging interest-rate environment,” said Martin K. Birmingham, the Company’s President and Chief Executive Officer.  “We maintained solid returns despite industry-wide declines in net interest margin that continued to be impacted by historically low interest rates. Our results exhibit another year of meaningful loan and deposit growth, with annual organic loan and deposit growth rates of 9% and 5%, respectively, in 2013 after increases of 11% and 4%, respectively, in 2012.”

Birmingham concluded, “Our 2013 performance reflects the continued benefits from strategic investments in people, products and services, as well as the advantages gained from the expanded geographic footprint developed over the past several years. We remain committed to delivering shareholder value by leveraging opportunities within existing markets, including strengthening our positions in Buffalo and Rochester.”

Net Interest Income and Net Interest Margin

Net interest income was $23.4 million in the fourth quarter 2013, compared to $22.8 million in the third quarter 2013. The increase resulted from a $72.5 million increase in average earning assets during the fourth quarter 2013, partially offset by a decrease in the net interest margin to 3.61% in the fourth quarter 2013 from 3.62% in the third quarter 2013.

For the year ended December 31, 2013, net interest income rose 3% to $91.6 million from $88.5 million in 2012 as a result of a $288.7 million or 13% increase in average earning assets, largely offset by a 31 basis point narrowing of the net interest margin to 3.64% in 2013 from 3.95% in 2012.

Noninterest Income

Noninterest income was $5.7 million for the fourth quarter 2013 compared to $6.2 million in the third quarter 2013. The decrease in noninterest income was the result of a $142 thousand loss from the disposal of other assets combined with decreases of $217 thousand in service charges on deposit accounts and $140 thousand in broker-dealer fees and commissions, partially offset by a $113 thousand increase in other noninterest income.

Noninterest income totaled $24.8 million for the full year 2013 and 2012, as increases in service charges on deposits, ATM and debit card income, broker-dealer fees and commissions, other noninterest income and a decrease in losses from the disposal of other assets were partially offset by lower income from net securities transactions, company owned life insurance income and mortgage banking revenue. Income from sales of investment securities, net of other-than-temporary impairment charges, totaled $1.2 million in 2013 compared to $2.6 million in 2012.

Noninterest Expense

Noninterest expense was $17.4 million for the fourth quarter 2013 compared to $17.0 million in the third quarter 2013. The increase in noninterest expense was primarily the result of a $178 thousand increase in professional service fees and a $244 thousand increase in occupancy and equipment expense.

Noninterest expense for the full year 2013 totaled $69.4 million compared to $71.4 million in the prior year. The full year 2012 included $3.0 million of noninterest expense related to the branch acquisitions and $2.6 million incurred in association with the retirement of the Company’s former CEO. There were no material expenses related to these transactions during the fourth quarter of 2012.

Balance Sheet and Capital Management

Total assets were $2.93 billion at December 31, 2013, up $61.1 million from $2.87 billion at September 30, 2013 and up $164.8 million from $2.76 billion at December 31, 2012. The increase in total assets is primarily attributable to increases in total loans and investment securities resulting from organic growth activities, including the Company’s successful “Made For You” customer-centric marketing initiatives.

Total loans were $1.84 billion at December 31, 2013, up $54.5 million or 3% from September 30, 2013 and up $129.8 million or 8% from December 31, 2012. The increase in loans was attributable to organic growth, primarily in the commercial, home equity and consumer indirect loan categories. Total investment securities were $859.2 million at December 31, 2013, up $29.9 million or 4% from the end of the prior quarter and up $17.5 million or 2% compared with the end of 2012.

Total deposits were $2.32 billion at December 31, 2013, a decrease of $94.1 million from the end of the prior quarter and an increase of $58.3 million compared with the end of 2012. The decrease from the prior quarter is mainly due to seasonal outflows of municipal deposits, while the year over year increase is largely attributable to successful business development efforts, particularly for branch offices acquired in 2012. Public deposit balances represented 23% of total deposits at December 31, 2013, compared to 25% at September 30, 2013 and 20% at December 31, 2012.

Short-term borrowings were $337.0 million at December 31, 2013, up $148.9 million from September 30, 2013 and up $157.2 million from December 31, 2012. The increase in short-term borrowings was primarily due to increases in short-term FHLB advances, which were used to supplement deposits in funding loan growth.

Shareholders’ equity was $254.8 million at December 31, 2013, compared with $247.8 million at September 30, 2013 and $253.9 million at December 31, 2012. Accumulated other comprehensive loss included in shareholders’ equity decreased $3.1 million during the fourth quarter 2013 due primarily to a decrease in the amounts reported in accumulated other comprehensive loss related to the Company’s pension and post-retirement benefit plans.

During the fourth quarter 2013, the Company declared a common stock dividend of $0.19 per common share, consistent with the prior quarter and up $0.03 per share from the fourth quarter 2012. The fourth quarter 2013 dividend returned 43% of fourth quarter net income to common shareholders.

The Company’s leverage ratio was 7.63% at December 31, 2013, compared to 7.68% and 7.71% at September 30, 2013 and December 31, 2012, respectively. The capital ratios decreased slightly from the prior quarter and the fourth quarter of 2012 due to asset growth offsetting an increase in retained earnings. Common book value and tangible common book value were $17.17 per share and $13.56 per share, respectively, at year end compared to $16.69 per share and $13.06 per share, respectively, at September 30, 2013 and $17.15 per share and $13.49 per share, respectively, at December 31, 2012.

Credit Quality

Non-performing loans were $16.6 million or 0.91% of total loans at December 31, 2013, as compared with $10.3 million or 0.58% of total loans at September 30, 2013, and $9.1 million or 0.53% of total loans at December 31, 2012.

The increase in non-performing loans was primarily due to a single commercial mortgage loan with a principal balance of $6.9 million at December 31, 2013. This loan was modified as a troubled debt restructuring and placed on nonaccrual status during the fourth quarter 2013. The Company had internally downgraded the loan to substandard status from special mention during the third quarter 2013. The loan, which is secured by income property and guaranteed by owners, was current per the terms of the restructured loan agreement as of December 31, 2013.

Net loan charge-offs increased to $2.4 million in the fourth quarter 2013 from $1.7 million in the third quarter 2013. The increase in net loan charge-offs in the fourth quarter 2013 was primarily related to the single commercial mortgage loan referenced above. The provision for loan losses was $2.4 million in the fourth quarter 2013, compared to $2.8 million in the third quarter 2013.

Net charge-offs of $7.1 million for the full year 2013 represented 0.40% of average loans on an annualized basis compared to $5.7 million or 0.36% for the full year 2012. The provision for loan losses for the full year 2013 increased $2.0 million from the prior year and exceeded net charge-offs by $2.0 million as the Company continues to maintain the allowance for loan losses consistent with the growth in its loan portfolio and trends in asset quality.

The allowance for loan losses was $26.7 million at December 31, 2013 and September 30, 2013, compared with $24.7 million at December 31, 2012. The ratio of the allowance for loan losses to total loans was 1.46% at December 31, 2013, compared with 1.50% at September 30, 2013 and 1.45% at December 31, 2012.

About Financial Institutions, Inc.

Financial Institutions, Inc. provides diversified financial services through its subsidiary, Five Star Bank. 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. Financial Institutions, Inc. and its subsidiary employs over 600 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 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 comparison to others in the financial services industry. 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 performance 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 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, whether it experiences greater credit losses than expected, the impact of the current management transition, the attitudes and preferences of its customers, its ability to successfully integrate recently acquired bank branches and profitably operate newly opened bank branches, 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 and other factors that could affect the Company’s forward-looking statements, 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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