FINANCIAL INSTITUTIONS, INC. REPORTS RECORD YEAR
Net Income Increases by 15%, Reaching New Record High

WARSAW, N.Y., January 28, 2015 – 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, 2014. The financial results for the fourth quarter and full year of 2014 include the contributions from the acquisition of Scott Danahy Naylon Co., Inc. (“SDN”) insurance agency completed in August 2014.  With the acquisition of SDN, the Company’s offerings have expanded to include for the first time a broad range of insurance services to both personal and business clients.

Net income for the fourth quarter 2014 was $7.9 million, compared to $7.2 million for the third quarter 2014, and $6.4 million for the fourth quarter 2013. After preferred dividends, fourth quarter 2014 net income available to common shareholders was $7.6 million or $0.54 per diluted share, compared with $6.8 million or $0.49 per share for third quarter 2014, and $6.0 million or $0.43 per share for fourth quarter 2013.

For the full year of 2014, the Company earned net income of $29.4 million, compared to $25.5 million for the full year of 2013. Net income available to common shareholders was $27.9 million or $2.00 per diluted share for the full year of 2014. This compares to net income available to common shareholders of $24.1 million or $1.75 per diluted share for the full year of 2013.

Financial Institutions, Inc.’s President and Chief Executive Officer Martin K. Birmingham stated, “We delivered another year of solid performance, with increased net income and earnings per share despite the headwinds experienced during the year throughout the industry. We posted record highs for net interest income, total loans and shareholders’ equity, all while maintaining excellent asset quality. In addition, we continued to integrate our acquired insurance agency into our operations.”

“We continue to demonstrate consistent growth in key metrics for our business.  Importantly, we ended 2014 with total assets of $3.1 billion, an increase of over 5%.  This marks the fifth year in a row that we have set a new record for total assets at year-end.  This solid asset growth produced record-setting annual net income of $29.4 million,” added Birmingham.  “We have grown and will seek continued growth in both our legacy markets and in the larger markets that we are now more actively targeting, namely Rochester and Buffalo.  Growth will be achieved through the offering of traditional banking services, as well as from newer products such as insurance, which collectively provide us with a very comprehensive suite of services to meet the evolving needs of our customer base. As we look toward 2015 and beyond, we will continue to follow our proven business model of organic growth and strategic acquisitions.”

Fourth Quarter 2014 highlights:

Full Year 2014 highlights:

Kevin B. Klotzbach, the Company’s Executive Vice President and Chief Financial Officer commented, “We are pleased with the progress we made in 2014 relative to lowering our effective tax rate. The formation of the REIT and the historic tax credit investment both contributed to the lower tax provision and ultimately resulted in higher earnings for the Company in 2014.”

Net Interest Income and Net Interest Margin

Net interest income was $24.1 million in the fourth quarter 2014 compared to $23.3 million in the third quarter 2014 and $23.4 million in the fourth quarter 2013. Our net interest margin increased by 10 basis points from 3.46% for the third quarter 2014 to 3.56% for the fourth quarter 2014, primarily due to non-recurring loan prepayment income received in the fourth quarter.

Net interest income for the fourth quarter 2014 increased $758 thousand compared to the fourth quarter 2013. The increase was primarily related to an increase in average interest-earning assets of $128.7 million, driven by organic loan growth during 2014. The increase was partially offset by a lower net interest margin, which decreased 5 basis points from the fourth quarter 2013 to the fourth quarter 2014.

For the year ended December 31, 2014, net interest income rose 2% to $93.8 million from $91.6 million in 2013 as a result of a $174.3 million or 7% increase in average interest-earning assets. These increases were partially offset by a 14 basis point narrowing of the net interest margin to 3.50% in 2014 from 3.64% in 2013.

Noninterest Income

Noninterest income was $5.2 million for the fourth quarter 2014 compared to $7.3 million in the third quarter 2014 and $5.7 million in the fourth quarter 2013. The quarter-over-quarter change was driven primarily by $2.3 million of amortization of a historic tax investment in a community-based project that was recorded in the 2014 fourth quarter. These types of investments are amortized in the first year the project is placed in service and the Company has recognized the amortization as contra-income, included in noninterest income, with an offsetting tax benefit that reduced income tax expense. Insurance income of $1.4 million was up $498 thousand from the third quarter 2014, reflecting a full quarter of contributions from the SDN acquisition.

Compared to the fourth quarter 2013, noninterest income in the fourth quarter 2014 decreased by $580 thousand. The decrease was primarily related to the amortization of the historic tax credit, described above, partially offset by the increased insurance income attributable to the SDN acquisition.

“We remain focused on generating alternative sources of noninterest income and continue to be excited about the prospects of further developing our insurance line of business,” said Klotzbach.

Noninterest income totaled $25.4 million for the full year 2014, an increase of $517 thousand when compared to $24.8 million in the prior year. Included in noninterest income are gains realized from the sale of investment securities of $2.0 million and $1.2 million for the years ended December 31, 2014 and 2013, respectively. Exclusive of those gains and the tax credit investment amortization described above, noninterest income increased $2.0 million to $25.6 million for 2014 compared to $23.6 million for 2013. Insurance income increased by $2.1 million, primarily as a result of the SDN acquisition. Service charges on deposits decreased by $1.0 million, due primarily to lower overdraft fees.

Noninterest Expense

Noninterest expense was $19.4 million for the fourth quarter 2014 compared to $18.0 million in the third quarter 2014 and $17.4 million in the fourth quarter 2013. Salaries and employee benefits expense, the largest noninterest expense item, was up $826 thousand from the third quarter 2014, and reflects additional personnel as a result of the acquisition of SDN and the hiring of additional loan officers and personnel associated with the Company’s expansion initiatives. Noninterest expense also included increases of $452 thousand in professional service fees and $193 thousand in occupancy and equipment expense when comparing the fourth quarter 2014 to the third quarter 2014.

Compared to the fourth quarter 2013, noninterest expense in the fourth quarter 2014 increased by $2.0 million. The increase in expense was primarily related to the higher salaries and employee benefits expense attributable to the SDN acquisition and higher professional service fees.

Noninterest expense for the full year 2014 totaled $72.4 million compared to $69.4 million in the prior year. The increase reflects higher salaries and employee benefits of $767 thousand due to the addition of new employees from SDN and as part of the Company’s expansion initiatives. Also contributing to the increase were higher occupancy and equipment expense, professional service fees, computer and data processing expense and other noninterest expense. Those increases were partially offset by lower supplies and postage expense due to an increase in customers opting to receive statements electronically and reduced advertising and promotional expenses.

Income Taxes

Income tax expense was $84 thousand in the fourth quarter 2014 compared to $3.4 million in the third quarter 2014, and $3.0 million in the fourth quarter 2013. The differences are driven by the favorable impact of $3.0 million in Federal and New York State historic tax credits realized in the fourth quarter 2014, as discussed above. As a result of the historic tax credits, the current quarter effective tax rate was 1.0%, compared with an effective tax rate of 31.9% in the third quarter 2014 and 31.7% in the fourth quarter 2013.

Income tax expense for the year was $9.6 million, representing an effective tax rate of 24.7% compared with an effective tax rate of 32.7% in 2013. The lower effective tax rate in 2014 reflects the historic tax credit benefit described above combined with New York State tax savings generated by the Company’s real estate investment trust, which became effective during February 2014.

Balance Sheet and Capital Management

Total assets were $3.09 billion at December 31, 2014, up $34.2 million from $3.06 billion at September 30, 2014 and up $160.9 million from $2.93 billion at December 31, 2013. The increases were attributable to loan growth and higher investment security balances.

Total loans were $1.91 billion at December 31, 2014, up $4.2 million from September 30, 2014 and up $78.4 million from December 31, 2013. The increase in loans from the prior year was attributable to organic growth, primarily in home equity and consumer indirect loans. Total investment securities were $916.9 million at December 31, 2014, up $45.5 million or 5% from the end of the prior quarter and up $57.7 million or 7% compared with the end of 2013.

Total deposits were $2.45 billion at December 31, 2014, down $88.3 million from $2.54 billion at September 30, 2014 and up $130.5 million from $2.32 billion at December 31, 2013. The decrease during the fourth quarter 2014 was mainly due to seasonal outflows of municipal deposits, while the year-over-year increase is largely attributable to successful business development efforts. Public deposit balances represented 25% of total deposits at December 31, 2014, compared to 28% at September 30, 2014 and 23% at December 31, 2013.

Short-term borrowings were $334.8 million at December 31, 2014, up $118.8 million from September 30, 2014 and down $2.2 million from December 31, 2013. Short-term borrowings are often utilized to manage the seasonal outflows of municipal deposits.

Shareholders’ equity was $279.5 million at December 31, 2014, compared with $277.8 million at September 30, 2014 and $254.8 million at December 31, 2013. Common book value per share was $18.57 at December 31, 2014, an increase of $0.09 from $18.48 at September 30, 2014 and $1.40 from $17.17 at December 31, 2013. Tangible common book value per share was $13.71 at December 31, 2014, compared to $13.59 at September 30, 2014 and $13.56 at December 31, 2013.

During the fourth quarter 2014, the Company increased its quarterly common stock dividend by 5%, or $0.01 per share, to $0.20 per common share. The fourth quarter 2014 dividend returned 37% of fourth quarter net income to common shareholders.

The Company’s leverage ratio was 7.35% at December 31, 2014, compared to 7.34% at September 30, 2014 and 7.63% at December 31, 2013. Goodwill and intangible assets recorded during the third quarter 2014 in conjunction with the addition of SDN resulted in a reduction in capital ratios upon acquisition. Such goodwill and intangible assets are excluded from regulatory capital under regulatory accounting practices.

Credit Quality

Nonperforming loans at December 31, 2014 increased $2.0 million compared with September 30, 2014. Increases of $1.0 million in commercial business non-performing loans, $560 thousand in commercial mortgage non-performing loans and $538 thousand in residential real estate non-performing loans were partially offset by a decrease of $131 thousand in consumer indirect non-performing loans. Non-performing loans declined $6.5 million from December 31, 2013 due to improvements in the commercial mortgage portfolio. Nonperforming loans to total loans were 0.53% at December 31, 2014 compared with 0.43% at September 30, 2014 and 0.91% at December 31, 2013.

The provision for loans losses for the fourth quarter 2014 was $1.9 million, a decline of $105 thousand from the prior quarter and $497 thousand from the fourth quarter 2013. Net charge-offs were $1.5 million during the current quarter, a $420 thousand decrease compared to the prior quarter. Compared to the fourth quarter 2013, net charge-offs also declined $839 thousand, primarily driven by the commercial business and commercial mortgage loan portfolios. The ratio of annualized net charge-offs to total average loans was 0.32% during the current quarter, compared to 0.40% during the prior quarter and 0.52% during the fourth quarter 2013.

The provision for loans losses for the full year 2014 was $7.8 million, down from $9.1 million in 2013. Net charge-offs were $6.9 million during the current year, a $170 thousand decrease compared to the prior year. The ratio of annualized net charge-offs to total average loans was 0.37% during 2014 compared to 0.40% during the prior year.

The allowance for loans losses to total loans was 1.45% at December 31, 2014, compared with 1.43% at September 30, 2014 and 1.46% at December 31, 2013. The allowance to non-performing loans was 272% at December 31, 2014, compared with 333% at September 30, 2014, and 161% at December 31, 2013.

About Financial Institutions, Inc.

Financial Institutions, Inc. provides diversified financial services through its subsidiaries, Five Star Bank and Scott Danahy Naylon. 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. Scott Danahy Naylon provides a broad range of insurance services to personal and business clients across 44 states. Financial Institutions, Inc. and its subsidiaries employ approximately 650 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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