UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Exact name of registrant as specified in its charter)

NEW YORK		16-0816610
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
220 LIBERTY STREET, WARSAW, NEW YORK		14569
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (585) 786-1100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant had 10,805,319 shares of Common Stock, $0.01 par value, outstanding as of April 30, 2009.

 

 

FINANCIAL INSTITUTIONS, INC.
Form 10-Q
For the Quarterly Period Ended March 31, 2009

TABLE OF CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Financial Condition (Unaudited) — at March 31, 2009 and December 31, 2008			3
Consolidated Statements of Income (Unaudited) — Three months ended March 31, 2009 and 2008			4
Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) — Three months ended March 31, 2009			5
Consolidated Statements of Cash Flows (Unaudited) — Three months ended March 31, 2009 and 2008			6
Notes to Consolidated Financial Statements (Unaudited)			7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk			29
ITEM 4. Controls and Procedures			29
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			30
ITEM 1A. Risk Factors			30
ITEM 6. Exhibits			30
Signatures			32
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

		March 31,				December 31,
(Dollars in thousands, except share and per share data)		2009				2008
ASSETS
Cash and cash equivalents:
Cash and due from banks		$	48,073			$	34,528
Federal funds sold and interest-bearing deposits in other banks			74,616				20,659
Total cash and cash equivalents			122,689				55,187
Securities available for sale, at fair value			553,710				547,506
Securities held to maturity, at amortized cost (fair value of $61,737 and $59,147, respectively)			60,675				58,532
Loans held for sale			2,290				1,013
Loans			1,157,944				1,121,079
Less: Allowance for loan losses			19,657				18,749
Loans, net			1,138,287				1,102,330
Company owned life insurance			23,959				23,692
Premises and equipment, net			36,112				36,712
Goodwill			37,369				37,369
Other assets			55,338				54,578
Total assets		$	2,030,429			$	1,916,919
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand		$	279,284			$	292,586
Interest-bearing demand			392,353				344,616
Savings and money market			396,644				348,594
Certificates of deposit			668,999				647,467
Total deposits			1,737,280				1,633,263
Short-term borrowings			31,884				23,465
Long-term borrowings			46,877				47,355
Other liabilities			22,712				22,536
Total liabilities			1,838,753				1,726,619
Shareholders’ equity:
Series A 3% Preferred Stock, $100 par value, 1,533 shares authorized and issued			153				153
Series A Preferred Stock, $100 par value, 7,503 shares authorized and issued, aggregate liquidation preference $37,515; net of $1,933 and $2,016 discount, respectively			35,582				35,499
Series B-1 8.48% Preferred Stock, $100 par value, 200,000 shares authorized, 174,223 shares issued			17,422				17,422
Total preferred equity			53,157				53,074
Common stock, $0.01 par value, 50,000,000 shares authorized, 11,348,122 shares issued			113				113
Additional paid-in capital			26,472				26,397
Retained earnings			125,922				124,952
Accumulated other comprehensive loss			(3,868	)			(4,013	)
Treasury stock, at cost — 542,803 and 550,103 shares, respectively			(10,120	)			(10,223	)
Total shareholders’ equity			191,676				190,300
Total liabilities and shareholders’ equity		$	2,030,429			$	1,916,919

See accompanying notes to the consolidated financial statements.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

		Three months ended
		March 31,
(Dollars in thousands, except per share amounts)		2009				2008
Interest income:
Interest and fees on loans		$	17,059			$	16,728
Interest and dividends on investment securities			6,007				8,234
Other interest income			27				310
Total interest income			23,093				25,272
Interest expense:
Deposits			5,015				9,236
Short-term borrowings			38				152
Long-term borrowings			713				799
Total interest expense			5,766				10,187
Net interest income			17,327				15,085
Provision for loan losses			1,906				716
Net interest income after provision for loan losses			15,421				14,369
Noninterest income:
Service charges on deposits			2,320				2,500
ATM and debit card			811				752
Broker-dealer fees and commissions			269				459
Loan servicing			257				186
Company owned life insurance			260				19
Net gain on sale of loans held for sale			170				164
Net gain on sale of other assets			158				37
Net gain on investment securities			54				173
Impairment charges on investment securities			(50	)			—
Other			442				454
Total noninterest income			4,691				4,744
Noninterest expense:
Salaries and employee benefits			8,731				8,436
Occupancy and equipment			2,876				2,580
Professional services			849				557
FDIC assessments			680				45
Computer and data processing			617				581
Supplies and postage			465				441
Advertising and promotions			174				150
Other			1,686				1,483
Total noninterest expense			16,078				14,273
Income before income taxes			4,034				4,840
Income tax expense			1,067				1,061
Net income		$	2,967			$	3,779
Preferred stock dividends, net of amortization			918				371
Net income available to common shareholders		$	2,049			$	3,408
Earnings per common share (Note 2):
Basic		$	0.19			$	0.31
Diluted		$	0.19			$	0.31

See accompanying notes to the consolidated financial statements.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

																		Accumulated
										Additional								Other								Total
		Preferred				Common				Paid-in				Retained				Comprehensive				Treasury				Shareholders’
(Dollars in thousands, except per share data)		Equity				Stock				Capital				Earnings				Loss				Stock				Equity
Balance at January 1, 2009		$	53,074			$	113			$	26,397			$	124,952			$	(4,013	)		$	(10,223	)		$	190,300
Comprehensive income:
Net income			—				—				—				2,967				—				—				2,967
Other comprehensive income, net of tax			—				—				—				—				145				—				145
Total comprehensive income																											3,112
Issuance costs of Series A Preferred Stock							—				(68	)			—				—				—				(68	)
Share-based compensation plans:
Share-based compensation			—				—				246				1				—				—				247
Restricted stock awards issued, net			—				—				(103	)			—				—				103				—
Accrued undeclared cumulative dividend on Series A Preferred Stock, net of amortization			83				—				—				(277	)			—				—				(194	)
Cash dividends declared:
Series A 3% Preferred-$.75 per share			—				—				—				(1	)			—				—				(1	)
Series A Preferred-$36.11 per share			—				—				—				(271	)			—				—				(271	)
Series B-1 8.48% Preferred-$2.12 per share			—				—				—				(369	)			—				—				(369	)
Common-$0.10 per share			—				—				—				(1,080	)			—				—				(1,080	)
Balance at March 31, 2009		$	53,157			$	113			$	26,472			$	125,922			$	(3,868	)		$	(10,120	)		$	191,676

See accompanying notes to the consolidated financial statements.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

		Three months ended
		March 31,
(Dollars in thousands)		2009				2008
Cash flows from operating activities:
Net income		$	2,967			$	3,779
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			1,025				988
Net amortization of premiums and discounts on investment securities			252				120
Provision for loan losses			1,906				716
Amortization of unvested stock-based compensation			247				325
Deferred income tax expense			3,810				89
Proceeds from sale of loans held for sale			27,951				11,644
Originations of loans held for sale			(29,058	)			(11,673	)
Increase in company owned life insurance			(260	)			(19	)
Net gain on investment securities			(54	)			(173	)
Impairment charge on investment securities			50				—
Net gain on sale of loans held for sale			(170	)			(164	)
Net gain on sale and disposal of other assets			(158	)			(37	)
Increase in other assets			(4,568	)			(270	)
Increase (decrease) in other liabilities			331				(1,715	)
Net cash provided by operating activities			4,271				3,610
Cash flows from investing activities:
Purchase of investment securities:
Available for sale			(101,293	)			(121,256	)
Held to maturity			(5,801	)			(5,973	)
Proceeds from principal payments, maturities and calls on investment securities:
Available for sale			84,309				97,240
Held to maturity			3,309				7,485
Proceeds from sale of securities available for sale			10,375				33,436
Net loan originations			(38,242	)			(9,075	)
Purchase of company owned life insurance			(7	)			(40	)
Proceeds from sales of other assets			767				250
Purchase of premises and equipment			(355	)			(368	)
Net cash (used in) provided by investing activities			(46,938	)			1,699
Cash flows from financing activities:
Net increase in deposits			104,017				52,001
Net increase in short-term borrowings			8,419				2,192
Repayment of long-term borrowings			(478	)			(67	)
Purchase of common stock			—				(1,304	)
Issuance costs of preferred stock			(68	)			—
Cash dividends paid to preferred shareholders			(641	)			(371	)
Cash dividends paid to common shareholders			(1,080	)			(1,434	)
Net cash provided by financing activities			110,169				51,017
Net increase in cash and cash equivalents			67,502				56,326
Cash and cash equivalents, beginning of period			55,187				46,673
Cash and cash equivalents, end of period		$	122,689			$	102,999
Supplemental disclosure of cash flow information:
Cash paid for interest		$	5,645			$	10,228
Cash paid for income taxes			—				170
Supplemental disclosure of noncash investing and financing activities:
Real estate and other assets acquired in settlement of loans		$	379			$	118
Accrued and declared unpaid dividends			1,691				1,912
Decrease in net unsettled security transactions			571				61

See accompanying notes to the consolidated financial statements.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Financial Institutions, Inc., a financial holding company organized under the laws of New York State, and its subsidiaries provide deposit, lending and other financial services to individuals and businesses in Central and Western New York. The Company owns all of the capital stock of Five Star Bank, a New York State-chartered bank, and Five Star Investment Services, Inc., a broker-dealer subsidiary offering noninsured investment products. The Company also owns 100% of FISI Statutory Trust I (the “Trust”), which was formed in February 2001 for the purpose of issuing trust preferred securities. References to “the Company” mean the consolidated reporting entities and references to “the Bank” mean Five Star Bank.

Basis of Presentation

The consolidated financial statements in this Quarterly Report on Form 10-Q include the accounts of the Company and its subsidiaries. The Trust is not included in the consolidated financial statements of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform to general practices within the banking industry and to U.S. generally accepted accounting principles. Prior years’ consolidated financial statements are re-classified whenever necessary to conform to the current year’s presentation.

These financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in conformity with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary to present fairly the consolidated balance sheet, statements of income, stockholders’ equity and cash flows for the periods indicated, and contain adequate disclosure to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s latest annual report on Form 10-K. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year.

Use of Estimates

The preparation of these financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates relate to the determination of the allowance for loan losses, assumptions used in the defined benefit pension plan accounting, the valuation of goodwill and deferred tax assets, and the valuation and other than temporary impairment considerations related to the securities portfolio.

Recently Adopted Accounting Pronouncements

Earnings Per Share. On January 1, 2009, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) on Emerging Issues Task Force (“EITF”) Issue 03-6, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per common share (“EPS”) pursuant to the two-class method. FSP EITF 03-6-1 was effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. The adoption of FSP EITF 03-6-1 did not have a material impact on the Company’s EPS calculations.

Fair Value Measurements. On January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), for the Company’s financial assets and financial liabilities. In accordance with the provisions of FSP 157-2, Effective Date of FASB Statement No. 157, the Company deferred the effective date of SFAS 157 for the Company’s nonfinancial assets and nonfinancial liabilities, except for those items recognized or disclosed at fair value on an annual or more frequently recurring basis, until January 1, 2009. The adoption of the fair value measurement provisions of SFAS 157 for the Company’s nonfinancial assets and nonfinancial liabilities had no impact on the Company’s statements of income and condition.

Derivative Financial Instruments. On January 1, 2009, the Company adopted the provisions of SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). The statement amended the disclosure requirements for derivative financial instruments and hedging activities. Expanded qualitative disclosures required under SFAS 161 include: (1) how and why an entity uses derivative financial instruments; (2) how derivative financial instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and related interpretations; and (3) how derivative financial instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 also requires several added quantitative disclosures in financial statements. As SFAS 161 amended only the disclosure requirements for derivative financial instruments and hedged items, the adoption had no impact on the Company’s statements of income and condition.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recently Issued Accounting Pronouncements not Yet Adopted

In April 2009, the FASB finalized four FSPs intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.

These FSPs changed the method for determining if OTTI exists and the amount of OTTI to be recorded through an entity’s income statement. The changes brought about by the FSPs provide greater clarity and reflect a more accurate representation of the credit and noncredit components of an OTTI event. The four FSPs are as follows:

•

FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, clarifies the application of FAS 157, Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.

•

FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Assets or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157, Fair Value Measurements.

•

FSP 115-2 and FSP 124-2, Recognition and Presentation of Other-than-temporary impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

•

FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures.

These staff positions are effective for financial statements issued for periods ending after June 15, 2009, with early application possible for the first quarter of 2009. The Company elected not to adopt any of the above positions early. The Company has not completed its evaluation of the impact of these standards on its statements of income and condition.

(2.) EARNINGS PER COMMON SHARE

The Company’s restricted stock awards pay nonforfeitable common stock dividends and meet the criteria of a participating security pursuant to FSP EITF 03-6-1. Accordingly, EPS is calculated using the two-class method, under which earnings are allocated to both common shares and participating securities. This FSP requires retrospective application, thus basic and diluted earnings per share presented for the three months ended March 31, 2008 were calculated in accordance with this FSP. Neither basic nor diluted earnings per share for the three months ended March 31, 2008 changed from the adoption of this FSP.

The computation of basis and diluted EPS is presented in the following table (in thousands, except per share amounts).

		Three months ended
		March 31,
		2009				2008
Net income		$	2,967			$	3,779
Less: Preferred stock dividends and amortization of discount			918				371
Net income available to common shareholders			2,049				3,408
Less: Earnings allocated to participating securities			10				12
Earnings allocated to common shares outstanding		$	2,039			$	3,396
Weighted average common shares used to calculate basic EPS			10,716				10,938
Add: Effect of common stock equivalents			31				37
Weighted average common shares used to calculate diluted EPS			10,747				10,975
Earnings per common share:
Basic		$	0.19			$	0.31
Diluted		$	0.19			$	0.31
The following securities were considered antidilutive and, therefore, were excluded from the computation of diluted EPS:
Stock options			580				381
Restricted stock awards			41				—
Warrant			378				—
			999				381

All shares of restricted stock are deducted from weighted average shares outstanding for the computation of basic EPS. Shares of restricted stock, stock options, and warrant are included in the calculation of diluted EPS using the treasury stock method.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

(3.) INVESTMENT SECURITIES

The amortized cost and fair value of investment securities are summarized below (in thousands):

		March 31, 2009
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available for sale:
U.S. Government agency and government-sponsored enterprise securities		$	95,446			$	446			$	392			$	95,500
Mortgage-backed securities			322,928				7,439				3,998				326,369
Other asset-backed securities			3,763				—				367				3,396
State and municipal obligations			125,860				2,609				24				128,445
Total available for sale securities		$	547,997			$	10,494			$	4,781			$	553,710
Securities held to maturity:
State and municipal obligations		$	60,675			$	1,062			$	—			$	61,737

		December 31, 2008
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
Securities available for sale:
U.S. Government agency and government-sponsored enterprise securities		$	67,871			$	609			$	307			$	68,173
Mortgage-backed securities			339,574				6,813				3,835				342,552
Other asset-backed securities			3,918				—				—				3,918
State and municipal obligations			129,572				2,181				42				131,711
Equity securities			923				281				52				1,152
Total available for sale securities		$	541,858			$	9,884			$	4,236			$	547,506
Securities held to maturity:
State and municipal obligations		$	58,532			$	619			$	4			$	59,147

Included in mortgage-backed securities are collateralized mortgage obligations with an adjusted amortized cost and fair value of $102.5 million and $99.3 million, respectively, at March 31, 2009, and an amortized cost and fair value of $106.3 million and $103.1 million, respectively, at December 31, 2008. The remaining mortgage-backed securities include securities issued by government-sponsored enterprises. Other asset-backed securities include pooled trust preferred securities collateralized by preferred debt issued primarily by financial institutions and, to a lesser extent, insurance companies located throughout the United States.

For the three months ended March 31, 2009, proceeds from sales of securities available for sale were $10.4 million, gross realized gains were $415 thousand and gross realized losses were $361 thousand. The first quarter sales include the Company’s liquidation of its equity securities portfolio, which consisted of auction rate preferred equity securities collateralized by Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) preferred stock and common equity securities.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

(3.) INVESTMENT SECURITIES (Continued)

The following tables show the investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2009 and December 31, 2008 (in thousands).

		March 31, 2009
		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Securities available for sale:
U.S. Government agency and government-sponsored enterprise securities		$	27,955			$	66			$	11,274			$	326			$	39,229			$	392
Mortgage-backed securities			14,581				232				42,411				3,766				56,992				3,998
Other asset-backed securities			3,242				367				—				—				3,242				367
State and municipal obligations			1,251				24				—				—				1,251				24
Total available for sale securities			47,029				689				53,685				4,092				100,714				4,781
Securities held to maturity:
State and municipal obligations			—				—				—				—				—				—
Total temporarily impaired securities		$	47,029			$	689			$	53,685			$	4,092			$	100,714			$	4,781

		December 31, 2008
		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Securities available for sale:
U.S. Government agency and government-sponsored enterprise securities		$	50			$	1			$	11,704			$	306			$	11,754			$	307
Mortgage-backed securities			41,445				2,128				26,923				1,707				68,368				3,835
State and municipal obligations			6,191				41				84				1				6,275				42
Equity securities			310				52				—				—				310				52
Total available for sale securities			47,996				2,222				38,711				2,014				86,707				4,236
Securities held to maturity:
State and municipal obligations			554				4				—				—				554				4
Total temporarily impaired securities		$	48,550			$	2,226			$	38,711			$	2,014			$	87,261			$	4,240

The Company reviews investment securities on an ongoing basis for the presence of other-than-temporary-impairment (“OTTI”) with formal reviews performed quarterly. OTTI losses on individual investment securities are recognized as a realized loss through earnings when it is probable that not all of the contractual cash flows will be collected or it is determined that the Company will be unable to hold the securities until a recovery of fair value, which may be maturity.

Based upon these evaluations, the Company recorded impairment charges totaling $50 thousand during the first quarter of 2009 related to a debt security in the available for sale portfolio considered to be other-than-temporarily impaired. Future reviews for OTTI will consider the particular facts and circumstances during the reporting period in review. There were no securities deemed OTTI, and therefore no impairment charges were recorded, during the three months ended March 31, 2008.

As of March 31, 2009, management has concluded that unrealized losses on its investment securities are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has both the ability and intent to hold these investments until such time as the value recovers or the securities mature. Further deterioration in credit quality and/or a continuation of the current imbalances in liquidity that exist in the marketplace might adversely affect the fair values of the Company’s investment portfolio and may increase the potential that certain unrealized losses will be designated as other than temporary in future periods and that the Company will incur additional write-downs in the future.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

(4.) LOANS

Loans outstanding, including net unearned income and net deferred fees and costs of $13.3 million and $12.3 million as of March 31, 2009 and December 31, 2008, respectively, are summarized as follows (in thousands):

		March 31,				December 31,
		2009				2008
Commercial		$	174,505			$	158,543
Commercial real estate			266,176				262,234
Agricultural			42,524				44,706
Residential real estate			170,834				177,683
Consumer indirect			283,465				255,054
Consumer direct and home equity			220,440				222,859
Total loans			1,157,944				1,121,079
Less: Allowance for loan losses			19,657				18,749
Total loans, net		$	1,138,287			$	1,102,330

(5.) GOODWILL AND OTHER INTANGIBLE ASSETS

The carrying amount of goodwill totaled $37.4 million as of March 31, 2009 and December 31, 2008. In accordance with SFAS 142, the Company is required to test goodwill annually for impairment or more frequently if events and circumstances warrant. During the first quarter of 2009, the Company concluded that events had occurred and circumstances had changed, which may indicate the existence of potential impairment of goodwill. These indicators included a significant decline in the Company’s stock price and adverse industry conditions. As a result, the Company performed an interim assessment of goodwill for impairment as of March 31, 2009 and determined that no impairment existed.

Declines in the market value of the Company’s publicly traded stock price or declines in the Company’s ability to generate future cash flows may increase the potential that goodwill recorded on the Company’s consolidated statement of financial position be designated as impaired and that the Company may incur a goodwill write-down in the future.

(6.) COMPREHENSIVE INCOME

Presented below is a reconciliation of net income to comprehensive income including the components of other comprehensive income for the periods indicated (in thousands):

		Three months ended March 31,
		2009												2008
						Tax												Tax
		Pre-tax				Expense				Net-of-tax				Pre-tax				Expense				Net-of-tax
		Amount				(Benefit)				Amount				Amount				(Benefit)				Amount
Securities available for sale:
Net unrealized gains arising during the period		$	61			$	23			$	38			$	2,182			$	844			$	1,338
Reclassification adjustments:
Gains included in income			54				21				33				173				67				106
Impairment charges included in income			(50	)			(19	)			(31	)			—				—				—
			65				25				40				2,355				911				1,444
Pension liabilities			172				67				105				(11	)			(4	)			(7	)
Other comprehensive income		$	237			$	92				145			$	2,344			$	907				1,437
Net income											2,967												3,779
Comprehensive income										$	3,112											$	5,216

The components of accumulated other comprehensive loss, net of tax, for the periods indicated were as follows (in thousands):

		March 31,				December 31,
		2009				2008
Unfunded pension liabilities		$	(7,371	)		$	(7,476	)
Net unrealized gain on securities available for sale			3,503				3,463
		$	(3,868	)		$	(4,013	)

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

(7.) SHARE-BASED COMPENSATION PLANS

The Company has a Management Stock Incentive Plan and a Director’s Stock Incentive Plan (the “Plans”). Under the Plans, the Company may grant stock options to purchase shares of common stock, shares of restricted stock or stock appreciation rights to its directors and key employees. Grants under the plans may be made up to 10% of the number of shares of common stock issued, including treasury shares. The exercise price of each option equals the market price of the Company’s stock on the date of the grant. All options have a 10-year term and become fully exercisable over a period of 3 to 5 years from the grant date. When option recipients exercise their options, the Company issues shares from treasury stock and record the proceeds as additions to capital.

The share-based compensation expense associated with the amortization of unvested stock compensation included in the consolidated statements of income (unaudited) for the periods indicated (in thousands):

		Three months ended
		March 31,
		2009				2008
Stock options:
Management Stock Incentive Plan		$	74			$	99
Director Stock Incentive Plan			11				7
			85				106
Restricted stock awards:
Management Stock Incentive Plan			162				219
Total share-based compensation		$	247			$	325

The restricted stock award expense for 2009 includes $1 thousand of dividends for unearned shares in the restricted stock plan which is accounted for as compensation expense.

The Company awarded grants of 48,500 restricted shares to certain key officers during the three months ended March 31, 2009. The market price of the restricted shares on the date of grant was $13.21. Both a performance requirement and a service requirement must be satisfied before the participant becomes vested in the shares. The performance period for the awards is the Company’s fiscal year ending on December 31, 2009. As a result of not satisfying certain performance requirements, 41,200 restricted shares granted in the first quarter of 2008 were forfeited during the first quarter of 2009. There was no reversal of restricted stock award expense required during the three months ended March 31, 2009, as the Company reduced share-based compensation expense related to the forfeited shares during 2008.

(8.) EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plan

The Company participates in The New York State Bankers Retirement System (the “System”), which is a defined benefit pension plan covering substantially all employees, subject to the limitations related to the plan closure effective December 31, 2006. The benefits are based on years of service and the employee’s highest average compensation during five consecutive years of employment. The defined benefit plan was closed to new participants effective December 31, 2006. Only employees hired on or before December 31, 2006 and who met participation requirements on or before January 1, 2008 are eligible to receive benefits.

The components of the Company’s net periodic benefit expense for its pension plan were as follows (in thousands):

		Three months ended
		March 31,
		2009				2008
Service cost		$	422			$	364
Interest cost on projected benefit obligation			457				390
Expected return on plan assets			(462	)			(523	)
Amortization of unrecognized prior service cost			3				3
Amortization of unrecognized loss			182				—
Net periodic pension cost		$	602			$	234

The Company’s funding policy is to contribute, at a minimum, an actuarially determined amount that will satisfy the minimum funding requirements determined under the appropriate sections of Internal Revenue Code. In April 2009 the Company made the minimum required contribution for fiscal year 2009 of $1.6 million to the pension plan. The Company may make additional contributions to its pension plan in fiscal year 2009.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

(8.) EMPLOYEE BENEFIT PLANS (Continued)

Defined Contribution Plan

Employees that meet certain age and service requirements are eligible to participate in the Company sponsored 401(k) plan. Under the plan, participants may make contributions, in the form of salary deferrals, up to the maximum Internal Revenue Code limit. The Company matches a participant’s contributions up to 4.5% of compensation, calculated as 100% of the first 3% of compensation and 50% of the next 3% of compensation deferred by the participant. The Company may also make additional discretionary matching contributions, although no such additional discretionary contributions were made in 2009 or 2008. The expense included in salaries and employee benefits in the consolidated statements of income for this plan amounted to $234 thousand and $300 thousand for the three months ended March 31, 2009 and March 31, 2008, respectively.

Supplemental Executive Retirement Plans

During the third quarter of 2008 the Company established non-qualified supplemental executive retirement plans (“SERPs”) for two active executives. The Company has accrued a liability, all of which is unfunded, of $549 thousand as of March 31, 2009, and recorded expense of $240 thousand for the three months ended March 31, 2009. There were no amounts recorded for these SERPs prior to the third quarter of 2008.

(9.) FAIR VALUE ACCOUNTING

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For SFAS 157 disclosures, SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels.

•

Level 1 — Unadjusted quoted prices in active markets for assets or liabilities identical to those to be reported at fair value. An active market is a market in which transactions occur for the item to be fair valued with sufficient frequency and volume to provide pricing information on an ongoing basis. The Company’s Level 1 assets primarily include exchange traded equity securities.

•

Level 2 — Inputs other than quoted prices included within Level 1 inputs that are observable for the asset or liability, either directly or indirectly. These inputs include: (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, such as when there are few transactions for the asset or liability, the prices are not current, price quotations vary substantially over time or in which little information is released publicly; (c) inputs other than quoted prices that are observable for the asset or liability; and (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means. The Company’s Level 2 assets primarily include debt securities classified as available for sale and not included in Level 3.

•

Level 3 — Significant unobservable inputs for the asset or liability. These inputs should be used to determine fair value only when observable inputs are not available. Unobservable inputs should be developed based on the best information available in the circumstances, which might include internally generated data and assumptions being used to price the asset or liability. The Company’s Level 3 assets primarily include pooled trust preferred securities.

Investment Securities. Fair values of equity securities are determined using public quotations, when available. Where quoted market prices are not available, fair values may be estimated based on dealer quotes, pricing models, discounted cash flow methodologies, or similar techniques for which the determination of fair value may require significant judgment or estimation. Fair values of public bonds and those private securities that are actively traded in the secondary market have been determined through the use of third-party pricing services using market observable inputs. Private placement securities and other securities where the Company does not receive a public quotation are valued by discounting the expected cash flows. Market rates used are applicable to the yield, credit quality and average maturity of each security. Private equity securities may also utilize internal valuation methodologies appropriate for the specific asset. Fair values might also be determined using broker quotes or through the use of internal models or analysis.

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

(9.) FAIR VALUE MEASUREMENTS (Continued)

Financial Assets

The following table summarizes financial assets measured and recorded at fair value on a recurring basis as of March 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

		Level 1				Level 2				Level 3				Total
Securities available for sale		$	—			$	550,314			$	3,396			$	553,710

The following table presents changes in Level 3 available for sale securities measured at fair value on a recurring basis during the three months ended March 31, 2009 (in thousands):

Balance at December 31, 2008		$	3,772
Principal paydowns and amortization of premiums			(9	)
Unrealized losses included in other comprehensive income			(367	)
Balance at March 31, 2009		$	3,396

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Examples of these nonrecurring uses of fair value include: loans held for sale, mortgage servicing assets and collateral dependent impaired loans. As of March 31, 2009, the Company had no liabilities measured at fair value on a nonrecurring basis.

Loans held for sale were $2.3 million as of March 31, 2009. These loans are carried at the lower of cost or fair value and are adjusted to fair value on a nonrecurring basis. Fair value is based on observable market rates for comparable loan products which is considered a level 2 fair value measurement.

Mortgage servicing rights were $749 thousand as of March 31, 2009. This asset is carried at the lower of cost or fair value and is adjusted to fair value on a nonrecurring basis. The mortgage servicing rights are a Level 3 fair value measurement, as fair value is determined by calculating the present value of the future servicing cash flows from the underlying mortgage loans.

During the first quarter of 2009, certain impaired loans were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral. Impaired loans with a carrying value of $1.3 million were reduced by specific valuation allowance allocations totaling $410 thousand to a total reported fair value of $849 thousand. The collateral dependent impaired loans are a Level 2 fair measurement, as fair value is determined based upon estimates of the fair value of the collateral underlying the impaired loans typically using appraisals of comparable property or valuation guides.

Nonfinancial Assets and Nonfinancial Liabilities

Certain nonfinancial assets measured at fair value on a non-recurring basis include nonfinancial assets and nonfinancial liabilities measured at fair value in the second step of a goodwill impairment test, and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment. There were no nonfinancial assets or nonfinancial liabilities measured at fair value during the three months ended March 31, 2009.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING INFORMATION

Statements in this Quarterly Report on Form 10-Q that are based on other than historical data are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:

•

statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Financial Institutions, Inc. (“the parent” or “FII”) and its subsidiaries (collectively “the Company,” “we,” “our,” “us”);

•

statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects,” or similar expressions.

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this Quarterly Report on Form 10-Q, including, but not limited to, those presented in the Management’s Discussion and Analysis. Factors that might cause such differences include, but are not limited to:

•

changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts its operations, including without limitation, reduced rates of business formation and growth, commercial and residential real estate development and real estate prices;

•

fluctuations in markets for equity, fixed-income, commercial paper and other securities, including availability, market liquidity levels, and pricing;

•

changes in interest rates, the quality and composition of the loan and securities portfolios, demand for loan products, deposit flows and competition;

•

changes in fiscal, monetary, regulatory, trade and tax policies and laws, including policies of the U.S. Department of Treasury and the Federal Reserve Board (“FRB”);

•

the Company’s participation or lack of participation in governmental programs implemented under the Emergency Economic Stabilization Act (“EESA”) and the American Recovery and Reinvestment Act (“ARRA”), including without limitation the Troubled Asset Relief Program (“TARP”), the Capital Purchase Program (“CPP”), and the Temporary Liquidity Guarantee Program (“TLGP”) and the impact of such programs and related regulations on the Company and on international, national, and local economic and financial markets and conditions;

•

changes in consumer spending and savings habits;

•

increased competitive challenges and expanding product and pricing pressures among financial institutions;

•

demand for financial services in the Company’s market areas;

•

legislation or regulatory changes which adversely affect the Company’s operations or business;

•

the Company’s ability to comply with applicable laws and regulations, including restrictions on dividend payments;

•

changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or regulatory agencies;

•

increased costs of deposit insurance and changes with respect to Federal Deposit Insurance Corporation (“FDIC”) insurance coverage levels; and

•

further declines in the market value of the Company’s publicly traded stock price or declines in the Company’s ability to generate future cash flows may increase the potential that goodwill recorded on the Company’s consolidated statement of financial position be designated as impaired and that the Company may incur a goodwill write-down in the future.

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that various factors, including those described above, could affect the Company’s financial performance and could cause the Company’s actual results or circumstances for future periods to differ materially from those anticipated or projected.

Except as required by law, the Company does not undertake, and specifically disclaims any obligation to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES

The Company’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and are consistent with predominant practices in the banking industry. Application of critical accounting policies, which are those policies that management believes are the most important to the Company’s financial position and results, requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes and are based on information available as of the date of the financial statements. Future changes in information may affect these estimates, assumptions and judgments, which, in turn, may affect amounts reported in the financial statements.

The Company has numerous accounting policies, of which the most significant are presented in Note 1, Summary of Significant Accounting Policies, of the notes to consolidated financial statements included in the Company’s most recently filed Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets, liabilities, revenues and expenses are reported in the consolidated financial statements and how those reported amounts are determined. Based on the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies with respect to the allowance for loan losses, valuation of goodwill and deferred tax assets, the valuation of securities and determination of OTTI, and accounting for defined benefit plans require particularly subjective or complex judgments important to the Company’s financial position and results of operations, and, as such, are considered to be critical accounting policies. These estimates and assumptions are based on management’s best estimates and judgment and are evaluated on an ongoing basis using historical experience and other factors, including the current economic environment. The Company adjusts these estimates and assumptions when facts and circumstances dictate. Illiquid credit markets and volatile equity have combined with declines in consumer spending to increase the uncertainty inherent in these estimates and assumptions. As future events cannot be determined with precision, actual results could differ significantly from the Company’s estimates.

For additional information regarding critical accounting policies, refer to Note 1, Summary of Significant Accounting Policies, of the notes to consolidated financial statements and the section captioned “Critical Accounting Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2008 Form 10-K. There have been no material changes in the Company’s application of critical accounting policies related to the allowance for loan losses, valuation of goodwill and deferred tax assets, the valuation of securities and determination of OTTI, and accounting for defined benefit plans since December 31, 2008.

OVERVIEW

The principal objective of this discussion is to provide an overview of the financial condition and results of operations of the Company for the periods covered in this quarterly report. This discussion and tabular presentations should be read in conjunction with the accompanying consolidated financial statements and accompanying notes.

The Company’s revenues are dependent primarily on net interest income, which is the difference between the income earned on loans and investment securities and the interest paid on deposits and borrowings. Revenues are also affected by service charges on deposits, ATM and debit card income, broker-dealer fees and commissions, loan servicing income, company owned life insurance, gain or loss on the sale or call of investment securities, gain or loss on sale of loans held for sale, gain or loss on the sale of other assets and other miscellaneous noninterest income.

The Company’s expenses primarily consist of the provision for loan losses, salaries and employee benefits, occupancy and equipment, supplies and postage, amortization of other intangible assets, computer and data processing, professional services, advertising and promotions, other miscellaneous noninterest expense and income tax expense.

Results of operations are also affected by the general economic and competitive conditions, particularly changes in interest rates, government policies and the actions of regulatory authorities.

RESULTS OF OPERATIONS

Summary of Performance

Net income for the first quarter of 2009 was $3.0 million compared to $3.8 million for the first quarter of 2008. Net income available to common shareholders was $2.0 million, or $0.19 per diluted share, for the first quarter of 2009 compared to $3.4 million, or $0.31 per diluted share, for the first quarter of 2008. Return on average equity was 6.29% and return on average assets was 0.61% for the first quarter of 2009, compared to 7.69% and 0.80%, respectively, for the first quarter of 2008.

Net income and net income available to common shareholders decreased $812 thousand, or 21%, and $1.4 million, or 40%, respectively, for the three months ended March 31, 2009 compared to the same period in 2008. The decrease in net income during the three months ended March 31, 2009 was primarily the result of a $1.2 million increase in the provision for loan losses and a $1.8 million increase in noninterest expense offset by a $2.2 million increase in net interest income. An increase in preferred dividends relating to the TARP preferred stock resulted in the additional $547 thousand, or $0.05 per diluted share, decrease in net income available to common shareholders.

Details of the changes in the various components of net income are further discussed below.

Net Interest Income

For the first three months of 2009 net interest income was $17.3 million compared to $15.1 million for the same period in 2008. The increase in net interest income was due to an increase in net interest margin for the three month period ended March 31, 2009 to 4.09%, compared to the corresponding period in the prior year of 3.73%. The reason for the increase has been due to a combination of factors, including the following:

•

a favorable change in the mix of our earning assets, as the average balance of our higher yielding loan portfolio increased by 18% and lower yielding investment securities portfolio decreased by 20% when comparing the first quarter of 2009 to the first quarter of 2008

•

corresponding 200 basis point decreases in both the prime interest rate and the federal funds rate during the last nine months of 2008

•

our interest-bearing liabilities generally repriced at a quicker rate than our interest-earning assets, resulting in reductions attributable to rate reductions of $4.8 million in interest expense while interest income was down only $3.1 million when comparing the first quarter of 2009 to the first quarter of 2008

Interest on investment securities and interest-earning deposits was $6.0 million for the three month period ended March 31, 2009, compared to $8.5 million for the same period in 2008. The average balance of investment securities was $601.2 million with an average tax equivalent yield of 4.54% for the three month period ended March 31, 2009 compared to an average balance of $753.8 million with an average yield of 5.04% for the same period in 2008. The decrease in yield is primarily due to lower market interest rates and less tax-exempt and tax-preferred interest income. Tax-preferred interest income for the three months ended March 31, 2008 was primarily dividend income from auction rate preferred equity securities collateralized by FNMA and FHLMC stock, which were sold during the first quarter of 2009. There were no dividends recognized on the auction rate securities during 2009.

Interest on loans was $17.1 million for the three month period ended March 31, 2009, compared to $16.7 million for the three month period in 2008. The average balance of loans was $1.140 billion with an average yield of 6.04% for the three month period ended March 31, 2009 compared to an average balance of $964.4 million with an average yield of 6.97% for the same period in 2008. Average balances of commercial loans in 2009 increased $46.2 million, as compared to 2008 primarily due to strong organic growth in our commercial loan portfolio. The average balance of consumer indirect loans, comprised almost entirely of automobile loans, increased $129.6 million for the first quarter of 2009 over the corresponding quarter last year. This 94.1% increase in volume was responsible for the $2.2 million increase in interest income on consumer indirect loans when comparing the first quarter of 2009 to that of 2008.

Interest on deposits was $5.0 million for the three month period ended March 31, 2009, compared to $9.2 million for the same period in 2008. The average balance of interest-bearing deposits was $1.400 billion with an average cost of 1.45% for the three month period ended March 31, 2009 compared to an average balance of $1.340 billion with an average cost of 2.77% for the same period in 2008. The average balance of noninterest-bearing deposits increased to $281.7 million or 5% during the first quarter of this year compared to the same quarter last year. The increase in the balance of total deposits is due to an increase in public fund deposits, while the decrease in average cost is due primarily to the beneficial repricing of certificates of deposits, and to a lesser extent savings and money market accounts, at lower interest rates.

The declines in interest and average cost on borrowed funds from last year’s first quarter to this year’s first quarter are due to reductions in short-term interest rates.

The following table sets forth certain information relating to the consolidated balance sheets and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the periods indicated (in thousands).

		Three Months Ended March 31,
		2009												2008
		Average								Average				Average								Average
		Balance				Interest				Rate				Balance				Interest				Rate
Interest-earning assets:
Federal funds sold and interest-earning deposits		$	43,618			$	27				0.25	%		$	40,807			$	310				3.06	%
Investment securities (1):
Taxable			413,540				4,433				4.29				492,312				5,582				4.54
Tax-exempt (2)			186,813				2,377				5.09				228,319				3,129				5.48
Tax-preferred (2)			846				7				3.17				33,192				799				9.52
Total investment securities			601,199				6,817				4.54				753,823				9,510				5.04
Loans held for sale			2,483				30				4.88				587				9				6.42
Loans:
Commercial			165,688				1,919				4.70				138,016				2,452				7.15
Commercial real estate			268,749				4,204				6.34				247,557				4,327				7.03
Agricultural			42,690				597				5.68				45,372				904				8.02
Residential real estate			174,659				2,659				6.09				166,682				2,668				6.40
Consumer indirect			267,360				4,559				6.92				137,756				2,389				6.98
Consumer direct and home equity			221,024				3,091				5.67				229,035				3,979				6.99
Total loans			1,140,170				17,029				6.04				964,418				16,719				6.97
Total interest-earning assets			1,787,470				23,903				5.39				1,759,635				26,548				6.05
Allowance for loan losses			(19,200	)											(15,530	)
Other noninterest-earning assets			195,494												146,769
Total assets		$	1,963,764											$	1,890,874
Interest-bearing liabilities:
Deposits:
Interest-bearing demand		$	360,470			$	224				0.25	%		$	345,102			$	1,117				1.30	%
Savings and money market			371,738				251				0.27				361,425				1,324				1.47
Certificates of deposit			668,041				4,540				2.76				633,599				6,795				4.31
Total interest-bearing deposits			1,400,249				5,015				1.45				1,340,126				9,236				2.77
Short-term borrowings			24,264				38				0.64				26,814				152				2.28
Long-term borrowings			47,099				713				6.06				42,521				799				7.52
Total interest-bearing liabilities			1,471,612				5,766				1.59				1,409,461				10,187				2.91
Noninterest-bearing demand deposits			281,690												267,322
Other noninterest-bearing liabilities			19,075												16,517
Shareholders’ equity			191,387												197,574
Total liabilities and shareholders’ equity		$	1,963,764											$	1,890,874
Net interest income (tax-equivalent)						$	18,137											$	16,361
Interest rate spread											3.80	%											3.14	%
Net earning assets		$	315,858											$	350,174
Net interest margin (tax-equivalent)											4.09	%											3.73	%
Ratio of average interest-earning assets to average interest-bearing liabilities											121.46	%											124.84	%