FINANCIAL INSTITUTIONS, INC. ANNOUNCES 19% INCREASE IN FIRST QUARTER EARNINGS
Earnings per share of $0.50 up from $0.42 a year ago

WARSAW, N.Y., April 23, 2014 – Financial Institutions, Inc. (the “Company”) (Nasdaq: FISI), the parent company of Five Star Bank, today reported net income for the quarter ended March 31, 2014 of $7.2 million, compared with $6.1 million for the first quarter of 2013 and $6.4 million for the fourth quarter of 2013.

After preferred dividends, first quarter earnings per diluted common share was $0.50, an increase of 19% and 16% when compared to $0.42 and $0.43 per diluted common share for the first and fourth quarters of 2013, respectively.

In announcing these results, Martin K. Birmingham, President and Chief Executive Officer, said, “We are building on the momentum from our solid performance last year.  This is a strong start to 2014 and reinforces our confidence in the outlook for Five Star Bank.  We continue to execute our customer centric “Made for You” growth strategy with a focus on relationship banking in our target markets. We are committed to leveraging opportunities to operate as efficiently as possible while remaining disciplined in our lending practices and our approach to deploying capital.”

Highlights:

Net Interest Income and Net Interest Margin

Net interest income totaled $23.3 million in the first quarter 2014, up from $22.9 million in the first quarter 2013 and down from $23.4 million in the fourth quarter of 2013. Average earning assets were up $202.3 million, led by a $134.2 million increase in loans and a $68.2 million increase in investment securities in the first quarter of 2014 compared to the same quarter in 2013. When comparing the first quarter of 2014 to the fourth quarter of 2013, average earning assets increased $96.1 million, including increases of $40.5 million and $55.4 million in loans and investment securities, respectively. The growth in earning assets was offset by a narrowing net interest margin. First quarter 2014 net interest margin was 3.52%, a decrease of 21 basis points from 3.73% reported in the first quarter of 2013 and a 9 basis point decrease from 3.61% reported in the fourth quarter of 2013.

Kevin B. Klotzbach, Executive Vice President and Chief Financial Officer, commented, “The low interest rate environment has resulted in lower net interest margins across the industry since the financial crisis in 2008. Despite lower margins, we’ve been successful at increasing net interest income through growth in earning assets and the leveraging of our balance sheet.”

“Results in the first quarter of 2014 also reflect our successful deposit gathering strategies and development of a diversified business mix with supportive regional economic conditions that have moderated the effects of net interest margin pressures impacting the overall banking sector,” added Mr. Klotzbach.

Noninterest Income and Expense

Noninterest income totaled $6.4 million in the first quarter of 2014, $6.6 million in the first quarter of 2013 and $5.7 million in the fourth quarter of 2013. Included in these totals are gains realized from the sale of investment securities. Exclusive of those gains, noninterest income was $6.0 million in the recently completed quarter and $5.7 million in the first and fourth quarters of 2013. The main factor contributing to the higher noninterest income was income of $626 thousand from investments in limited partnerships in the first quarter of 2014, compared to $161 thousand and $319 thousand in the first and fourth quarters of 2013, respectively. The Company’s investments in limited partnerships are primarily Small Business Investment Companies.

Noninterest expense in the first quarter of 2014 totaled $17.2 million, compared with $17.6 million and $17.4 million in the first and fourth quarters of 2013, respectively. The declines in noninterest expense were largely due to decreases in salaries and employee benefits due to lower pension and benefit costs during the first quarter of 2014.

Income Tax Expense

Income tax expense in the first quarter of 2014 totaled $3.1 million, compared with $3.0 million in the first and fourth quarters of 2013. Increased tax expense due to higher pre-tax income was partially offset by a lower effective tax rate, reflecting tax savings generated by the Company’s real estate investment trust (“REIT”), which became effective during February 2014.

Balance Sheet and Capital Management

Total assets were $3.02 billion at March 31, 2014, up $188.0 million from $2.83 billion at March 31, 2013 and up $87.0 million from $2.93 billion at December 31, 2013.

Total loans were $1.85 billion at March 31, 2014, up $131.6 million or 8% from March 31, 2013 and up $15.2 million from December 31, 2013. The increase in loans was attributable to organic growth, primarily in the commercial, home equity and consumer indirect loan categories. Total investment securities were $928.2 million at March 31, 2014, up $57.0 million or 7% compared with March 31, 2013 and up $69.0 million or 8% from December 31, 2013. During the first quarter of 2014 we utilized the proceeds from short-term FHLB advances to purchase high-quality investment securities as part of a leverage strategy of approximately $50 million.

Total deposits were $2.53 billion at March 31, 2014, an increase of $123.9 million from March 31, 2013 and an increase of $213.4 million from December 31, 2013. The year-over-year increase was primarily due to successful business development efforts, while the increase during the first quarter of 2014 was mainly due to seasonal inflows of municipal deposits. Public deposit balances represented 28% of total deposits at March 31, 2014, compared to 26% at March 31, 2013 and 23% at December 31, 2013.

Short-term borrowings were $196.7 million at March 31, 2014, up $57.1 million from March 31, 2013 and down $140.3 million from December 31, 2013. The increase in short-term borrowings from March 31, 2013 was primarily due to the previously mentioned leverage strategy executed in the first quarter of 2014. Overnight FHLB borrowings outstanding at the end of 2013 were paid down during the first quarter of 2014 as a result of the aforementioned seasonal inflow of municipal deposits.

Shareholders’ equity was $262.9 million at March 31, 2014, compared with $254.9 million at March 31, 2013 and $254.8 million at December 31, 2013. Common book value per share rose 3% to $17.72 at March 31, 2014 from $17.21 at March 31, 2013 and $17.17 at December 31, 2013. Tangible common book value per share rose 4% to $14.12 at March 31, 2014 from $13.56 at March 31, 2013 and December 31, 2013.

During the first quarter of 2014, the Company declared a common stock dividend of $0.19 per common share, consistent with the prior quarter and up $0.01 per share from the first quarter of 2013. The first quarter 2014 dividend returned 38% of the quarter’s net income to common shareholders.

The Company’s leverage ratio was 7.51% at March 31, 2014, compared to 7.46% and 7.63% at March 31, 2013 and December 31, 2013, respectively. The capital ratios decreased slightly from the prior quarter due to asset growth more than offsetting an increase in shareholders’ equity.

Credit Quality

The provision for loans losses was $2.1 million in the first quarter of 2014, improved from $2.7 million and $2.4 million in the first and fourth quarters of 2013, respectively. Net charge-offs during the recent quarter were $1.7 million, up from $1.6 million in the first quarter of 2013 and down from $2.4 million in the final quarter of 2013. Net charge-offs expressed as an annualized percentage of average loans outstanding were 0.37% during the first three months of 2014, compared with 0.38% and 0.52% in the first and fourth quarters of 2013, respectively.

Non-performing loans were $16.3 million or 0.88% of total loans at March 31, 2014, as compared with $11.8 million or 0.69% of total loans at March 31, 2013, and $16.6 million or 0.91% of total loans at December 31, 2013. The year-over-year increase in non-performing loans was primarily due to a single commercial mortgage, which was modified as a troubled debt restructuring and placed on nonaccrual status during the fourth quarter 2013. The loan had a principal balance of $6.8 million and was current per the terms of the restructured loan agreement as of March 31, 2014.

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 employ 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, breaches of its third party information systems, the attitudes and preferences of its customers, its ability to successfully integrate and profitably operate acquired businesses, 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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