Edgar Filing: FINANCIAL INSTITUTIONS INC

10-Q

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

For the quarterly period ended March 31, 2010


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

Commission File Number: 000-26481

(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 10,924,052 shares of Common Stock, $0.01 par value, outstanding as of April 30, 2010.

FINANCIAL INSTITUTIONS, INC.
Form 10-Q
For the Quarterly Period Ended March 31, 2010

TABLE OF CONTENTS


	PAGE
PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Consolidated Statements of Financial Condition (Unaudited) - at March 31, 2010 and December 31, 2009		3

Consolidated Statements of Income (Unaudited) - Three months ended March 31, 2010 and 2009		4

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited) - Three months ended March 31, 2010		5

Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2010 and 2009		6

Notes to Consolidated Financial Statements (Unaudited)		7

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk		34

ITEM 4. Controls and Procedures		34

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings		35

ITEM 1A. Risk Factors		35

ITEM 6. Exhibits		35

Signatures		37

Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)


	March 31,			December 31,
*(Dollars in thousands, except share and per share data)*	2010			2009
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	38,081		$	42,874
Federal funds sold and interest-bearing deposits in other banks		33,793			85

Total cash and cash equivalents		71,874			42,959
Securities available for sale, at fair value		648,667			580,501
Securities held to maturity, at amortized cost (fair value of $35,545 and $40,629, respectively)		34,556			39,573
Loans		1,268,181			1,264,427
Less: Allowance for loan losses		20,586			20,741

Loans, net		1,247,595			1,243,686
Company owned life insurance		25,143			24,867
Premises and equipment, net		34,330			34,783
Goodwill		37,369			37,369
Other assets		56,521			58,651

Total assets	$	2,156,055		$	2,062,389


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	308,822		$	324,303
Interest-bearing demand		409,094			363,698
Savings and money market		426,330			368,603
Certificates of deposit		705,628			686,351

Total deposits		1,849,874			1,742,955

Short-term borrowings		36,608			59,543
Long-term borrowings		46,846			46,847
Other liabilities		19,124			14,750

Total liabilities		1,952,452			1,864,095

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 of $37,515; net of $1,582 and $1,672 discount, respectively		35,933			35,843
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		53,508			53,418
Common stock, $0.01 par value, 50,000,000 shares authorized, 11,348,122 shares issued		113			113
Additional paid-in capital		25,308			26,940
Retained earnings		134,688			131,371
Accumulated other comprehensive loss		(2,029	)		(3,702	)
Treasury stock, at cost - 428,084 and 527,854 shares, respectively		(7,985	)		(9,846	)

Total shareholders’ equity		203,603			198,294

Total liabilities and shareholders’ equity	$	2,156,055		$	2,062,389

See accompanying notes to the consolidated financial statements.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)


	Three months ended
	March 31,
*(Dollars in thousands, except per share amounts)*	2010			2009
Interest income:
Interest and fees on loans	$	18,618		$	17,059
Interest and dividends on investment securities		5,199			6,007
Other interest income		7			27

Total interest income		23,824			23,093

Interest expense:
Deposits		3,784			5,015
Short-term borrowings		78			38
Long-term borrowings		710			713

Total interest expense		4,572			5,766

Net interest income		19,252			17,327
Provision for loan losses		418			1,906

Net interest income after provision for loan losses		18,834			15,421

Noninterest income:
Service charges on deposits		2,230			2,320
ATM and debit card		934			811
Loan servicing		280			257
Company owned life insurance		269			260
Broker-dealer fees and commissions		380			269
Net gain on sale of loans held for sale		62			170
Net gain on investment securities		6			54
Impairment charges on investment securities		(526	)		(50	)
Net gain on sale and disposal of other assets		2			158
Other		446			442

Total noninterest income		4,083			4,691

Noninterest expense:
Salaries and employee benefits		8,247			8,731
Occupancy and equipment		2,771			2,876
Professional services		606			849
FDIC assessments		602			680
Computer and data processing		571			617
Supplies and postage		445			465
Advertising and promotions		187			174
Other		1,309			1,686

Total noninterest expense		14,738			16,078

Income before income taxes		8,179			4,034
Income tax expense		2,851			1,067

Net income	$	5,328		$	2,967

Preferred stock dividends, net of amortization		929			918

Net income applicable to common shareholders	$	4,399		$	2,049

Earnings per common share (Note 2):
Basic	$	0.41		$	0.19
Diluted	$	0.40		$	0.19

See accompanying notes to the consolidated financial statements.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)


											Accumulated
					Additional						Other						Total
*(Dollars in thousands,*	Preferred		Common		Paid-in			Retained			Comprehensive			Treasury			Shareholders’
*except per share data)*	Equity		Stock		Capital			Earnings			Loss			Stock			Equity

Balance at January 1, 2010	$	53,418	$	113	$	26,940		$	131,371		$	(3,702	)	$	(9,846	)	$	198,294
Comprehensive income:
Net income		—		—		—			5,328			—			—			5,328
Other comprehensive income, net of tax		—		—		—			—			1,673			—			1,673

Total comprehensive income																		7,001
Share-based compensation plans:
Share-based compensation		—		—		221			—			—			—			221
Stock options exercised		—		—		(4	)		—			—			12			8
Restricted stock awards issued, net		—		—		(1,849	)		—			—			1,849			—
Accrued undeclared cumulative dividend on Series A Preferred Stock, net of amortization		90		—		—			(90	)		—			—			—
Cash dividends declared:
Series A 3% Preferred-$0.75 per share		—		—		—			(1	)		—			—			(1	)
Series A Preferred-$62.50 per share		—		—		—			(469	)		—			—			(469	)
Series B-1 8.48% Preferred-$2.12 per share		—		—		—			(369	)		—			—			(369	)
Common-$0.10 per share		—		—		—			(1,082	)		—			—			(1,082	)


Balance at March 31, 2010	$	53,508	$	113	$	25,308		$	134,688		$	(2,029	)	$	(7,985	)	$	203,603

See accompanying notes to the consolidated financial statements.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)


	Three months ended
	March 31,
*(Dollars in thousands)*	2010			2009
Cash flows from operating activities:
Net income	$	5,328		$	2,967
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		898			1,025
Net amortization of premiums and discounts on investment securities		508			252
Provision for loan losses		418			1,906
Amortization of unvested stock-based compensation		221			247
Deferred income tax expense		759			3,810
Proceeds from sale of loans held for sale		6,031			27,951
Originations of loans held for sale		(5,651	)		(29,058	)
Increase in company owned life insurance		(269	)		(260	)
Net gain on investment securities		(6	)		(54	)
Impairment charge on investment securities		526			50
Net gain on sale of loans held for sale		(62	)		(170	)
Net gain on sale and disposal of other assets		(2	)		(158	)
Decrease (increase) in other assets		463			(4,568	)
(Decrease) increase in other liabilities		(522	)		331

Net cash provided by operating activities		8,640			4,271

Cash flows from investing activities:
Purchase of investment securities:
Available for sale		(110,252	)		(101,293	)
Held to maturity		(2,654	)		(5,801	)
Proceeds from principal payments, maturities and calls on investment securities:
Available for sale		35,731			84,309
Held to maturity		7,567			3,309
Proceeds from sale of securities available for sale		12,950			10,375
Net loan originations		(4,715	)		(38,242	)
Purchase of company owned life insurance		(7	)		(7	)
Proceeds from sales of other assets		56			767
Purchase of premises and equipment		(471	)		(355	)

Net cash used in investing activities		(61,795	)		(46,938	)

Cash flows from financing activities:
Net increase in deposits		106,919			104,017
Net (decrease) increase in short-term borrowings		(22,935	)		8,419
Repayment of long-term borrowings		(1	)		(478	)
Issuance of preferred and common shares		—			(68	)
Stock options exercised		8			—
Cash dividends paid to preferred shareholders		(839	)		(641	)
Cash dividends paid to common shareholders		(1,082	)		(1,080	)

Net cash provided by financing activities		82,070			110,169

Net increase in cash and cash equivalents		28,915			67,502
Cash and cash equivalents, beginning of period		42,959			55,187

Cash and cash equivalents, end of period	$	71,874		$	122,689

See accompanying notes to the consolidated financial statements.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Financial Institutions, Inc., a financial holding company organized under the laws of New York State (“New York” or “NYS”), 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 include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP 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, shareholders’ equity and cash flows for the periods indicated, and contain adequate disclosure to make the information presented not misleading. Prior years’ consolidated financial statements are re-classified whenever necessary to conform to the current year’s presentation. These consolidated financial statements should be read in conjunction with the Company’s 2009 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 GAAP 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 carrying value of goodwill and deferred tax assets, and the valuation and other than temporary impairment considerations related to the securities portfolio.

Cash Flow Information

Supplemental cash flow information addressing certain cash payments and noncash investing and financing activities was as follows (in thousands):


	Three months ended
	March 31,
	2010		2009
Cash payments:
Interest	$	5,315	$	5,645
Income taxes		—		—
Noncash investing and financing activities:
Real estate and other assets acquired in settlement of loans	$	70	$	379
Accrued and declared unpaid dividends		1,692		1,691
Increase (decrease) in net unsettled security transactions		4,896		(571	)

Recent Accounting Pronouncements

FASB ASC 810 Consolidation (“ASC 810”) was amended to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new authoritative accounting guidance under ASC 810 was adopted effective January 1, 2010 and did not have a significant impact on the Company’s consolidated financial statements.

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

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

FASB ASC 860 Transfers and Servicing (“ASC 860”) was amended to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC 860 was adopted effective January 1, 2010 and did not have a significant impact on the Company’s consolidated financial statements.

FASB ASC 820 Fair Value Measurements and Disclosures (“ASC 820”) was amended to require some new disclosures and clarify some existing disclosure requirements about fair value measurement. It requires separate presentation of significant transfers into and out of Levels 1 and 2 of the fair value hierarchy and disclosure of the reasons for such transfers. It will also require the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendments also clarify that disclosures should be disaggregated by class of asset or liability and that disclosures about inputs and valuation techniques should be provided for both recurring and non-recurring fair value measurements. These new disclosure requirements were adopted by the Company during the current period, with the exception of the requirement concerning gross presentation of Level 3 activity, which is effective for fiscal years beginning after December 15, 2010. With respect to the portions of this amendment that were adopted during the current period, the adoption of this standard did not have a significant impact on the Company’s consolidated financial statements. The Company believes that the adoption of the remaining portion of this amendment will not have a significant impact on the Company’s consolidated financial statements.

(2.) EARNINGS PER COMMON SHARE

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS for the three months ended March 31, 2010 and 2009 (in thousands, except per share amounts).


	Three months ended
	March,
	2010		2009
Net income applicable to common shareholders	$	4,399	$	2,049
Less: Earnings allocated to participating securities		30		10

Earnings allocated to common shares outstanding	$	4,369	$	2,039

Weighted average common shares used to calculate basic EPS		10,746		10,716
Add: Effect of common stock equivalents		55		31

Weighted average common shares used to calculate diluted EPS		10,801		10,747


Earnings per common share:
Basic	$	0.41	$	0.19
Diluted	$	0.40	$	0.19

Shares subject to the following securities, outstanding as of March 31 of the respective year, were excluded from the computation of diluted EPS because the effect would be antidilutive:


Stock options	451	580
Restricted stock awards	—	41
Warrant	378	378

	829	999

The accounting guidance under ASC Topic 260, “Earnings Per Share,” provides 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 share pursuant to the two-class method. The outstanding non-vested stock awards issued prior to 2010 are participating securities and are included in the computation of earnings per share pursuant to the two-class method. The outstanding non-vested stock awards issued during the first quarter of 2010 do not have rights to dividends or dividend equivalents and are not considered participating securities.

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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, 2010
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	203,030	$	913	$	151	$	203,792
State and political subdivisions		78,785		2,379		2		81,162
Mortgage-backed securities:
Federal National Mortgage Association		70,226		577		211		70,592
Federal Home Loan Mortgage Corporation		42,527		373		11		42,889
Government National Mortgage Association		107,975		461		389		108,047
Collateralized mortgage obligations:
Federal National Mortgage Association		14,180		275		56		14,399
Federal Home Loan Mortgage Corporation		18,103		456		7		18,552
Government National Mortgage Association		102,911		622		200		103,333
Privately issued		4,875		582		320		5,137

Total collateralized mortgage obligations		140,069		1,935		583		141,421

Total mortgage-backed securities		360,797		3,346		1,194		362,949
Asset-backed securities		733		83		52		764

Total available for sale securities	$	643,345	$	6,721	$	1,399	$	648,667


Securities held to maturity:
State and political subdivisions	$	34,556	$	989	$	—	$	35,545


	December 31, 2009
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	134,564	$	86	$	545	$	134,105
State and political subdivisions		80,812		2,850		3		83,659
Mortgage-backed securities:
Federal National Mortgage Association		75,108		629		259		75,478
Federal Home Loan Mortgage Corporation		37,321		413		56		37,678
Government National Mortgage Association		110,576		97		342		110,331
Collateralized mortgage obligations:
Federal National Mortgage Association		16,274		250		94		16,430
Federal Home Loan Mortgage Corporation		20,879		504		14		21,369
Government National Mortgage Association		95,886		56		873		95,069
Privately issued		5,087		403		330		5,160

Total collateralized mortgage obligations		138,126		1,213		1,311		138,028

Total mortgage-backed securities		361,131		2,352		1,968		361,515
Asset-backed securities		1,295		171		244		1,222

Total available for sale securities	$	577,802	$	5,459	$	2,760	$	580,501


Securities held to maturity:
State and political subdivisions	$	39,573	$	1,056	$	—	$	40,629

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

(3.) INVESTMENT SECURITIES (Continued)

Sales of securities available for sale were as follows (in thousands):


	Three months ended
	March 31,
	2010		2009
Proceeds from sales	$	12,950	$	10,375
Gross realized gains		6		415
Gross realized losses		—		361

The scheduled maturities of securities available for sale and securities held to maturity at March 31, 2010 are shown below (in thousands). Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.


	Amortized		Fair
	Cost		Value
Debt securities available for sale:
Due in one year or less	$	49,206	$	49,546
Due from one to five years		143,205		146,077
Due after five years through ten years		92,716		93,527
Due after ten years		358,218		359,517

	$	643,345	$	648,667

Debt securities held to maturity:
Due in one year or less	$	25,662	$	25,862
Due from one to five years		6,951		7,430
Due after five years through ten years		1,570		1,800
Due after ten years		373		453

	$	34,556	$	35,545

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, 2010 and December 31, 2009 (in thousands).


	March 31, 2010
	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 agencies and government sponsored enterprises	$	—	$	—	$	9,562	$	151	$	9,562	$	151
State and political subdivisions		50		1		100		1		150		2
Mortgage-backed securities:
Federal National Mortgage Association		30,556		210		511		1		31,067		211
Federal Home Loan Mortgage Corporation		6,592		10		420		1		7,012		11
Government National Mortgage Association		52,389		389		—		—		52,389		389
Collateralized mortgage obligations:
Federal National Mortgage Association		338		1		4,755		55		5,093		56
Federal Home Loan Mortgage Corporation		633		1		723		6		1,356		7
Government National Mortgage Association		28,761		200		—		—		28,761		200
Privately issued		—		—		2,982		320		2,982		320

Total collateralized mortgage obligations		29,732		202		8,460		381		38,192		583

Total mortgage-backed securities		119,269		811		9,391		383		128,660		1,194
Asset-backed securities		123		52		—		—		123		52

Total temporarily impaired securities	$	119,442	$	864	$	19,053	$	535	$	138,495	$	1,399

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

(3.) INVESTMENT SECURITIES (Continued)


	December 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 agencies and government sponsored enterprises	$	83,480	$	360	$	10,003	$	185	$	93,483	$	545
State and political subdivisions		—		—		150		3		150		3
Mortgage-backed securities:
Federal National Mortgage Association		24,964		258		643		1		25,607		259
Federal Home Loan Mortgage Corporation		5,627		56		—		—		5,627		56
Government National Mortgage Association		55,304		342		—		—		55,304		342
Collateralized mortgage obligations:
Federal National Mortgage Association		353		2		5,384		92		5,737		94
Federal Home Loan Mortgage Corporation		490		1		814		13		1,304		14
Government National Mortgage Association		79,645		873		—		—		79,645		873
Privately issued		—		—		2,985		330		2,985		330

Total collateralized mortgage obligations		80,488		876		9,183		435		89,671		1,311

Total mortgage-backed securities		166,383		1,532		9,826		436		176,209		1,968
Asset-backed securities		278		244		—		—		278		244

Total temporarily impaired securities	$	250,141	$	2,136	$	19,979	$	624	$	270,120	$	2,760

The Company reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) with formal reviews performed quarterly. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit issues or concerns, or the security is intended to be sold. The amount of the impairment related to non-credit related factors is recognized in other comprehensive income. Evaluating whether the impairment of a debt security is other than temporary involves assessing i.) the intent to sell the debt security or ii.) the likelihood of being required to sell the security before the recovery of its amortized cost basis. In determining whether the other-than-temporary impairment includes a credit loss, the Company uses its best estimate of the present value of cash flows expected to be collected from the debt security considering factors such as: a.) the length of time and the extent to which the fair value has been less than the amortized cost basis, b.) adverse conditions specifically related to the security, an industry, or a geographic area, c.) the historical and implied volatility of the fair value of the security, d.) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future, e.) failure of the issuer of the security to make scheduled interest or principal payments, f.) any changes to the rating of the security by a rating agency, and g.) recoveries or additional declines in fair value subsequent to the balance sheet date.

During the first quarter of 2010, the Company recorded OTTI charges totaling $526 thousand on four pooled trust preferred securities, all of which were designated as impaired due to reasons of credit quality. The OTTI charges reduced the amortized cost on these securities to their fair value as of March 31, 2010. Accordingly, these securities are no longer in a loss position as of March 31, 2010. The Company recorded an OTTI charge of $50 thousand during the first quarter of 2009 related to an asset backed security considered to be other-than-temporarily impaired.

At March 31, 2010, the number of investment securities in an unrealized loss position totaled 73. As of March 31, 2010, management does not have the intent to sell any of the securities in a loss position and believes that it is likely that it will not be required to sell any such securities before the anticipated recovery of amortized cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities in a loss position are impaired due to reasons of credit quality. Accordingly, as of March 31, 2010, management has concluded that unrealized losses on its investment securities are temporary and no further impairment loss has been realized in the Company’s consolidated statements of income.

- 11 -

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 $16.8 million and $16.5 million as of March 31, 2010 and December 31, 2009, respectively, are summarized as follows (in thousands):


	March 31,		December 31,
	2010		2009
Commercial	$	208,976	$	206,383
Commercial mortgage		331,870		330,748
Residential mortgage		142,406		144,636
Home equity		200,287		200,684
Consumer indirect		356,873		352,611
Other consumer		27,769		29,365

Total loans		1,268,181		1,264,427
Less: Allowance for loan losses		20,586		20,741

Total loans, net	$	1,247,595	$	1,243,686

Loans held for sale (included in residential mortgage), totaled $103 thousand and $421 thousand as of March 31, 2010 and December 31, 2009, respectively.

(5.) 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,
	2010									2009
				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	$	2,103		$	813		$	1,290		$	69		$	27		$	42
Reclassification adjustments:
Realized net gains included in income		(6	)		(2	)		(4	)		(54	)		(21	)		(33	)
Impairment charges included in income		526			204			322			50			19			31

		2,623			1,015			1,608			65			25			40
Pension and post-retirement benefit liabilities		106			41			65			172			67			105

Other comprehensive income	$	2,729		$	1,056			1,673		$	237		$	92			145

Net income								5,328									2,967

Comprehensive income							$	7,001								$	3,112

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


	March 31,			December 31,
	2010			2009
Net actuarial loss and prior service cost on defined benefit pension and post-retirement plans	$	(5,292	)	$	(5,357	)
Net unrealized gain on securities available for sale		3,263			1,655

Accumulated other comprehensive loss	$	(2,029	)	$	(3,702	)

- 12 -

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

(6.) SHARE-BASED COMPENSATION PLANS

The Company maintains certain stock-based compensation plans, approved by the Company’s shareholders that are administered by the Board, or the Management Development and Compensation Committee of the Board. The share-based compensation plans were established to allow for the granting of compensation awards to attract, motivate and retain employees, executive officers and non-employee directors who contribute to the success and profitability of the Company and to give such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Company’s success.

The Company awarded grants of 99,340 restricted shares to certain members of management during the three months ended March 31, 2010. The weighted average market price of the restricted shares on the date of grant was $12.20. Either a service requirement or both service and performance requirements must be satisfied before the participant becomes vested in the shares. Where applicable, the performance period for the awards is the Company’s fiscal year ending on December 31, 2010. The share-based payment awards granted in 2010 do not have rights to dividends or dividend equivalents.

The following is a summary of restricted stock award activity for the three months ended March 31, 2010:


				Weighted
				Average
				Market
	Number of			Price at
	Shares			Grant Date
Outstanding at beginning of year		77,772		$	15.05
Granted		99,340			12.20
Released		(4,600	)		19.22
Forfeited		(194	)		13.21

Outstanding at end of period		172,318		$	13.30

The Company amortizes the expense related to restricted stock awards over the vesting period. Share-based compensation expense is included in the consolidated statements of income under salaries and employee benefits for awards granted to management and in other noninterest expense for awards granted to directors. The share-based compensation expense included in the consolidated statements of income is as follows for the periods indicated (in thousands):


	Three months ended
	March 31,
	2010		2009
Stock options:
Management Stock Incentive Plan	$	26	$	74
Director Stock Incentive Plan		11		11

		37		85
Restricted stock awards:
Management Stock Incentive Plan		170		162
Director Stock Incentive Plan		14		—

		184		162

Total share-based compensation	$	221	$	247

- 13 -

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

(7.) EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plan

The Company participates in The New York State Bankers Retirement System (the “System”), 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,
	2010			2009
Service cost	$	408		$	422
Interest cost on projected benefit obligation		483			457
Expected return on plan assets		(611	)		(462	)
Amortization of unrecognized prior service cost		3			3
Amortization of unrecognized loss		115			182

Net periodic pension cost	$	398		$	602

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 December 2009, the Company contributed $3.5 million to the pension plan for fiscal year 2010, which exceeds the minimum required contribution of $1.5 million.

(8.) FAIR VALUE MEASUREMENTS

Valuation Hierarchy

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

•

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

•

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

•

Level 3 - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

- 14 -

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

(8.) FAIR VALUE MEASUREMENTS (Continued)

Investment Securities. Pooled trust preferred securities are reported at fair value utilizing Level 3 inputs. Fair values for these securities are determined through the use of internal valuation methodologies appropriate for the specific asset, which may include the use of a discounted expected cash flow analysis or the use of broker quotes. Other securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Assets Measured at Fair Value on a Recurring Basis

Assets measured and recorded at fair value on a recurring basis as of March 31, 2010 and December 31, 2009 were as follows (in thousands):


	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
March 31, 2010:
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	—	$	203,792	$	—	$	203,792
State and political subdivisions		—		81,162		—		81,162
Mortgage-backed securities		—		362,949		—		362,949
Asset-backed securities:
Trust preferred securities		—		—		661		661
Other		—		103		—		103

	$	—	$	648,006	$	661	$	648,667


December 31, 2009:
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	—	$	134,105	$	—	$	134,105
State and political subdivisions		—		83,659		—		83,659
Mortgage-backed securities		—		361,515		—		361,515
Asset-backed securities:
Trust preferred securities		—		—		1,015		1,015
Other		—		207		—		207

	$	—	$	579,486	$	1,015	$	580,501

There were no transfers in or out of Level 1 or Level 2 during the three months ended March 31, 2010.

Changes in Level 3 Fair Value Measurements

The reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2010, is as follows (in thousands):


Securities available for sale (Level 3), beginning of year	$	1,015
Transfers into Level 3		—
Capitalized interest		86
Principal paydowns and amortization of premiums		—
Coupon payments applied to principal		(35	)
Total gains (losses) (realized/unrealized):
Included in earnings		(526	)
Included in other comprehensive income		121

Securities available for sale (Level 3), end of period	$	661

- 15 -

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

(8.) FAIR VALUE MEASUREMENTS (Continued)

Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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, 2010, the Company had no liabilities measured at fair value on a nonrecurring basis.

Loans held for sale are carried at the lower of cost or fair value. As of March 31, 2010, loans held for sale were recorded at their fair value of $103 thousand. Fair value is based on observable market rates for comparable loan products which is considered a level 2 fair value measurement.

Mortgage servicing rights (“MSR”) are carried at the lower of cost or fair value. Due primarily to a sustained decline in the estimated prepayment speed of the Company’s sold loan portfolio with servicing retained the fair value of the Company’s MSR increased during 2010. As a result of this increase, the Company reduced its corresponding valuation allowance by $17 thousand during the three months ended March 31, 2010. A valuation allowance of $168 thousand existed as of March 31, 2010. 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.

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 $2.2 million were reduced by specific valuation allowance allocations totaling $982 thousand to a total reported fair value of $1.2 million. 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 month period ended March 31, 2010.

Fair Value of Financial Instruments

The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The following discussion describes the valuation methodologies used for assets and liabilities measured or disclosed at fair value. The techniques utilized in estimating the fair values of financial instruments are reliant on the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument.

- 16 -

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

(8.) FAIR VALUE MEASUREMENTS (Continued)

The estimated fair value approximates carrying value for cash and cash equivalents, FHLB and FRB stock, company owned life insurance, accrued interest receivable, short-term borrowings and accrued interest payable. Fair value estimates for other financial instruments are discussed below.

Loans (including loans held for sale). For variable rate loans that re-price frequently, fair value approximates carrying amount. The fair value for fixed rate loans is estimated through discounted cash flow analysis using interest rates currently being offered on loans with similar terms and credit quality. For criticized and classified loans, fair value is estimated by discounting expected cash flows at a rate commensurate with the risk associated with the estimated cash flows, or estimates of fair value discounts based on observable market information. The fair value for loans held for sale is based on estimates, quoted market prices and investor commitments.

Deposits. The fair values for demand accounts, money market and savings deposits are equal to their carrying amounts. The fair values of certificates of deposit are estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments.

Long-term borrowings (excluding junior subordinated debentures). The fair value for long-term borrowings is estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments.

Junior subordinated debentures. The fair value for the junior subordinated debentures is estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments.

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The accounting guidelines exclude certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented at March 31, 2010 and December 31, 2009 may not necessarily represent the underlying fair value of the Company.

The estimated fair values of financial instruments were as follows (in thousands):


	March 31, 2010				December 31, 2009
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	71,874	$	71,874	$	42,959	$	42,959
Securities available for sale		648,667		648,667		580,501		580,501
Securities held to maturity		34,556		35,545		39,573		40,629
Loans (including loans held for sale)		1,247,595		1,296,092		1,243,686		1,290,557
Company owned life insurance		25,143		25,143		24,867		24,867
Accrued interest receivable		8,158		8,158		7,386		7,386
FHLB and FRB stock		7,185		7,185		7,185		7,185

Financial liabilities:
Demand, savings and money market deposits		1,144,246		1,144,246		1,056,604		1,056,604
Time deposits		705,628		712,493		686,351		692,429
Short-term borrowings		36,608		36,608		59,543		59,543
Long-term borrowings (excluding junior subordinated debentures)		30,144		30,743		30,145		30,886
Junior subordinated debentures		16,702		10,868		16,702		10,741
Accrued interest payable		6,832		6,832		7,576		7,576

- 17 -

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;

•

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, including the Obama Administration’s regulatory reform proposals concerning the financial services sector released on June 17, 2009;

•

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

•

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 condition 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.

- 18 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 condition 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 2009 Annual Report on 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 adequacy of the allowance for loan losses, valuation of goodwill and deferred tax assets, the valuation of securities and determination of other-than-temporary impairment (“OTTI”), and accounting for defined benefit plans require particularly subjective or complex judgments important to the Company’s financial condition 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 2009 Annual Report on 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, 2009.

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. Certain reclassifications have been made to make prior periods comparable. This discussion and tabular presentations should be read in conjunction with the accompanying consolidated financial statements and accompanying notes.

RESULTS OF OPERATIONS

Summary of Performance

Net income for the first quarter of 2010 was $5.3 million compared to $3.0 million for the first quarter of 2009. Net income available to common shareholders for the first quarter of 2010 was $4.4 million, or $0.41 and $0.40 earnings per basic and diluted share, respectively. Comparatively, net income available to common shareholders for the first quarter of 2009 was $2.0 million, or $0.19 for both basic and diluted earnings per share. Return on average equity was 10.67% and return on average assets was 1.02% for the first quarter of 2010, compared to 6.29% and 0.61%, respectively, for the first quarter of 2009. The net interest margin for the first three months of 2010 was 4.12% compared to 4.09% for the first three months of 2009.

Details of the changes in the various components of net income are further discussed in the sections that follow.

- 19 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

Net Interest Income and Net Interest Margin

Net interest income in the consolidated statements of income (which excludes the taxable equivalent adjustment) was $19.3 million in for the first three months of 2010 compared to $17.3 million for the same period in 2009. The taxable equivalent adjustments (the adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that income been subject to a taxation using a 34% tax rate) of $507 thousand and $810 thousand for the first quarters of 2010 and 2009, respectively, resulted in fully taxable equivalent net interest income of $19.8 million in 2010 and $18.1 million in 2009.

Net interest income is the primary source of the Company’s revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities and repricing frequencies.

Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and shareholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.

Net interest income on a taxable equivalent basis for the three months ended March 31, 2010, was $19.8 million, an increase of $1.6 million or 9% versus the comparable quarter last year. The increase in taxable equivalent net interest income was primarily attributable to favorable volume variances (as changes in the balances and mix of earning assets and interest-bearing liabilities added $1.9 million to taxable equivalent net interest income), offset by unfavorable rate variances (as the impact of changes in the interest rate environment and product pricing reduced taxable equivalent net interest by $236 thousand).

The net interest margin for the first three months of 2010 was 4.12%, 3 basis points higher than 4.09% for the same period in 2009. This comparable period increase was a function of an 11 basis point increase in interest rate spread, substantially offset by an 8 basis point lower contribution from net free funds (due principally to lower rates on interest-bearing liabilities reducing the value of noninterest-bearing deposits and other net free funds). The improvement in interest rate spread was a net result of a 42 basis point decrease in the cost of interest-bearing liabilities and a 31 basis point decrease in the yield on earning assets.

The yield on earning assets was 5.08% for the first quarter of 2010, 31 basis points lower than the comparable quarter last year, attributable principally to the yield on investment securities (down 107 basis points, to 3.47%). The yield on loans decreased 7 basis points (to 5.97%), also impacted by the lower rate environment.

The rate on interest-bearing liabilities of 1.17% for the first quarter of 2010 was 42 basis points lower than the same quarter in 2009. Rates on interest-bearing deposits were down 42 basis points (to 1.03%), reflecting the lower rate environment, yet moderated by product-focused pricing to retain balances. The cost of short-term borrowings increased modestly (up 2 basis points to 0.66%), while the cost of long-term funding remained the same at 6.09%.

Average interest-earning assets were $1.936 billion for first quarter 2010, an increase of $148.2 million or 8% from the comparable quarter last year, with average loans up $120.4 million and average securities up $57.0 million. The growth in average loans was comprised of increases in retail loans (up $92.4 million, primarily indirect loans) and commercial loans (up $61.4 million), while residential mortgages decreased (down $33.4 million).

Average interest-bearing liabilities of $1.578 billion in first quarter of 2010 were $106.7 million or 7% higher than the first quarter of 2009. On average, interest-bearing deposits grew $83.2 million (primarily attributable to $70.5 million higher retail deposits), while noninterest-bearing demand deposits (a principal component of net free funds) were up $31.5 million. Average wholesale funding balances increased $23.4 million between the first quarter periods, with short-term borrowing higher by $23.7 million and long-term funding lower by $252 thousand.

- 20 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following tables 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,
	2010								2009
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	14,366		$	7		0.21	%	$	43,618		$	27		0.25	%
Investment securities⁽¹⁾:
Taxable		541,906			4,213		3.11			413,540			4,433		4.29
Tax-exempt⁽²⁾		116,275			1,493		5.14			187,659			2,384		5.08

Total investment securities		658,181			5,706		3.47			601,199			6,817		4.54
Loans:
Commercial		204,905			2,464		4.88			185,372			2,163		4.73
Commercial mortgage		333,579			4,976		6.05			291,755			4,557		6.33
Residential mortgage		143,780			2,222		6.18			177,142			2,689		6.07
Home equity		199,903			2,277		4.62			189,328			2,307		4.94
Consumer indirect		352,778			5,966		6.86			267,360			4,559		6.92
Other consumer		28,145			713		10.27			31,696			784		10.03

Total loans		1,263,090			18,618		5.97			1,142,653			17,059		6.04

Total interest-earning assets		1,935,637			24,331		5.08			1,787,470			23,903		5.39

Allowance for loan losses		(21,020	)							(19,200	)
Other noninterest-earning assets		197,575								195,494

Total assets	$	2,112,192							$	1,963,764


Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	392,896		$	189		0.20	%	$	360,470		$	224		0.25	%
Savings and money market		401,294			276		0.28			371,738			251		0.27
Certificates of deposit		689,284			3,319		1.95			668,041			4,540		2.76

Total interest-bearing deposits		1,483,474			3,784		1.03			1,400,249			5,015		1.45
Short-term borrowings		47,964			78		0.66			24,264			38		0.64
Long-term borrowings		46,847			710		6.09			47,099			713		6.09

Total borrowings		94,811			788		3.34			71,363			751		4.24

Total interest-bearing liabilities		1,578,285			4,572		1.17			1,471,612			5,766		1.59

Noninterest-bearing demand deposits		313,227								281,690
Other noninterest-bearing liabilities		18,150								19,075
Shareholders’ equity		202,530								191,387

Total liabilities and shareholders’ equity	$	2,112,192							$	1,963,764

Net interest income (tax-equivalent)				$	19,759							$	18,137

Interest rate spread							3.91	%							3.80	%

Net earning assets	$	357,352							$	315,858

Net interest margin (tax-equivalent)							4.12	%							4.09	%

Ratio of average interest-earning assets to average interest-bearing liabilities							122.64	%							121.46	%


⁽¹⁾		Investment securities are shown at amortized cost and include non-performing securities.

⁽²⁾		The interest on tax-exempt securities is calculated on a tax equivalent basis assuming a Federal tax rate of 34%.

- 21 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following table presents, on a tax equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands):


	Three months ended
	March 31, 2010 vs. 2009
	Increase/(Decrease)
	Due to Change in						Total Net
	Average			Average			Increase
	Volume			Rate			(Decrease)
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	(15	)	$	(5	)	$	(20	)
Investment securities:
Taxable		1,175			(1,395	)		(220	)
Tax-exempt		(917	)		26			(891	)

Total investment securities		258			(1,369	)		(1,111	)
Loans:
Commercial		233			68			301
Commercial mortgage		631			(212	)		419
Residential mortgage		(515	)		48			(467	)
Home equity		125			(155	)		(30	)
Consumer indirect		1,445			(38	)		1,407
Other consumer		(90	)		19			(71	)

Total loans		1,829			(270	)		1,559

Total interest-earning assets		2,072			(1,644	)		428


Interest-bearing liabilities:
Deposits:
Interest-bearing demand		19			(54	)		(35	)
Savings and money market		20			5			25
Certificates of deposit		140			(1,361	)		(1,221	)

Total interest-bearing deposits		179			(1,410	)		(1,231	)
Short-term borrowings		39			1			40
Long-term borrowings		(4	)		1			(3	)

Total borrowings		35			2			37

Total interest-bearing liabilities		214			(1,408	)		(1,194	)

Change in net interest income	$	1,858		$	(236	)	$	1,622

Provision for Loan Losses

The provision for loan losses is based upon credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the current loan portfolio. The provision for loan losses for the first quarter of 2010 was $418 thousand, compared to $1.9 million for the same period in 2009. See “Allowance for Loan Losses” included herein for additional information.

- 22 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

Noninterest Income

Noninterest income was $4.1 million for the first quarter of 2010. Core fee-based revenues (defined as service charges on deposit accounts, ATM and debit card income, and broker-dealer fees and commissions) totaled $3.5 million for 2010, up $144 thousand or 4% from $3.4 million for 2009. Net mortgage banking income (defined as loan servicing and net gain on sale of loans held for sale) was $342 thousand for 2010, compared to $427 thousand in 2009, a decrease of $85 thousand from 2009, primarily attributable to lower secondary mortgage production experienced during the first quarter of 2010. The following table details the major categories of noninterest income for the periods presented (in thousands):


	Three months ended
	March 31,
	2010			2009
Noninterest income:
Service charges on deposits	$	2,230		$	2,320
ATM and debit card		934			811
Loan servicing		280			257
Company owned life insurance		269			260
Broker-dealer fees and commissions		380			269
Net gain on sale of loans held for sale		62			170
Net gain on investment securities		6			54
Impairment charges on investment securities		(526	)		(50	)
Net gain on sale and disposal of other assets		2			158
Other		446			442

Total noninterest income	$	4,083		$	4,691

The components of noninterest income fluctuated as discussed below.

Service charges on deposits were $2.2 million, $90 thousand or 4% lower than 2009. The decrease was primarily attributable to lower nonsufficient funds fees (down $73 thousand to $1.8 million).

ATM and debit card income was $934 thousand for 2010, an increase of $123 thousand or 15%, compared to 2009, as the increased popularity of electronic banking and transaction processing has resulted in higher ATM and debit card point-of-sale usage income.

Broker-dealer fees and commissions were up $111 thousand, or 41%, in the three months ended March 31, 2010 compared to the same period a year ago. Broker-dealer fees and commissions fluctuate mainly due to sales volume, which is up significantly in 2010.

Net gain on sale of loans held for sale decreased $108 thousand compared to the prior year, due primarily to lower gains on sales and related income resulting from decreased volumes. Secondary mortgage production was $5.7 million for the first quarter of 2010, compared to $29.1 million for 2009, as the prior year benefited from higher volumes due to refinance activity.

Impairment charges on investment securities are comprised of valuation write-downs of $526 thousand on pooled trust preferred securities. See “Investing Activities” herein for additional information.

The decrease in net gain on sale and disposal of other assets when comparing the first quarter 2010 to 2009 was primarily due to a gain on the sale of a foreclosed commercial property that was recorded in the first quarter of last year.

- 23 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

Noninterest Expense

Noninterest expense for the first quarter of 2010 was $14.7 million, a decrease of $1.3 million or 8% over 2009. Salaries and employee benefits, professional services and other noninterest expense decreased a combined total of $1.1 million. Collectively, all remaining noninterest expense categories were down an additional $236 thousand compared to the first quarter of 2009. The following table details the major categories of noninterest expense for the periods presented (in thousands):


	Three months ended
	March 31,
	2010		2009
Noninterest expense:
Salaries and employee benefits	$	8,247	$	8,731
Occupancy and equipment		2,771		2,876
Professional services		606		849
FDIC assessments		602		680
Computer and data processing		571		617
Supplies and postage		445		465
Advertising and promotions		187		174
Other		1,309		1,686

Total noninterest expense	$	14,738	$	16,078

The components of noninterest expense fluctuated as discussed below.

Salaries and employee benefits (which includes salary-related expenses and fringe benefit expenses) was $8.2 million for 2010, down $484 thousand or 6% from 2009. Average full-time equivalent employees (“FTEs”) were 579 for 2010, down 3% from 595 for 2009. Salary-related expenses decreased $267 thousand or 4%, a result of fewer FTEs and lower incentives and commissions. Fringe benefit expenses decreased $217 thousand or 10%, primarily from lower pension and post-retirement benefit costs.

As a result of lower utilities and depreciation expense the Company experienced a 4% decrease in occupancy and equipment expense in the three month period ended March 31, 2010, compared to the same period a year ago.

Professional services decreased $243 thousand or 29% from 2009. The Company had incurred higher expenses associated with loan workouts and consulting services during the first quarter of 2009.

Other noninterest expense was $1.3 million for 2010, a decrease of $377 thousand or 22% from the first quarter of 2009. The first quarter of 2009 included $77 thousand in amortization expense versus none in the first quarter of 2010, as well as declines in miscellaneous other expense categories given the efforts to control discretionary expense.

The efficiency ratio for the first quarter of 2010 was 60.31% compared with 69.72% for the first quarter of 2009. The 2010 efficiency ratio, compared to 2009, reflects lower levels of noninterest expense, partially offset by decreases in noninterest income. The efficiency ratio equals noninterest expense less other real estate expense and amortization of intangible assets as a percentage of net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains and impairment charges on investment securities.

Income Taxes

For the three months ended March 31, 2010, the Company recorded income tax expense of $2.9 million, versus $1.1 million a year ago. The change in income tax was primarily due to higher pre-tax income during the first quarter of 2010. The effective tax rates for the first quarter of 2010 and 2009 were 34.9% and 26.5%, respectively. Effective tax rates are impacted by items of income and expense that are not subject to federal or state taxation. The Company’s effective tax rates reflect the impact of these items, which include, but are not limited to, interest income from tax-exempt and tax-preferred securities and earnings on company owned life insurance.

- 24 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

ANALYSIS OF FINANCIAL CONDITION

INVESTING ACTIVITIES

The following table sets forth selected information regarding the composition of the Company’s investment securities portfolio as of the dates indicated (in thousands):


	Investment Securities Portfolio Composition
	March 31, 2010				December 31, 2009
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Securities available for sale:
U.S. Government agency and government-sponsored enterprise securities	$	203,030	$	203,792	$	134,564	$	134,105
State and political subdivisions		78,785		81,162		80,812		83,659
Mortgage-backed securities:
Agency mortgage-backed securities		355,922		357,812		356,044		356,355
Non-Agency mortgage-backed securities		4,875		5,137		5,087		5,160
Asset-backed securities		733		764		1,295		1,222

Total available for sale securities		643,345		648,667		577,802		580,501
Securities held to maturity:
State and political subdivisions		34,556		35,545		39,573		40,629

Total investment securities	$	677,901	$	684,212	$	617,375	$	621,130

Impairment Assessment

The Company reviews investment securities on an ongoing basis for the presence of other-than-temporary impairment (“OTTI”) with formal reviews performed quarterly. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses or the security is intended to be sold. The amount of the impairment related to non-credit related factors is recognized in other comprehensive income. Evaluating whether the impairment of a debt security is other than temporary involves assessing i.) the intent to sell the debt security or ii.) the likelihood of being required to sell the security before the recovery of its amortized cost basis. In determining whether the other-than-temporary impairment includes a credit loss, the Company uses its best estimate of the present value of cash flows expected to be collected from the debt security considering factors such as: a.) the length of time and the extent to which the fair value has been less than the amortized cost basis, b.) adverse conditions specifically related to the security, an industry, or a geographic area, c.) the historical and implied volatility of the fair value of the security, d.) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future, e.) failure of the issuer of the security to make scheduled interest or principal payments, f.) any changes to the rating of the security by a rating agency, and g.) recoveries or additional declines in fair value subsequent to the balance sheet date.

The table below summarizes unrealized losses in each category of the securities portfolio at the end of the periods indicated (in thousands).


	Unrealized Losses on Investment Securities
	March 31, 2010					December 31, 2009
	Unrealized		Percent			Unrealized		Percent
	Loss		of Total			Loss		of Total
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	151		10.8	%	$	545		19.8	%
State and political subdivisions		2		0.1			3		0.1
Mortgage-backed securities:
Agency mortgage-backed securities		874		62.5			1,638		59.3
Non-Agency mortgage-backed securities		320		22.9			330		12.0
Asset-backed securities		52		3.7			244		8.8

Total investment securities	$	1,399		100.0	%	$	2,760		100.0	%

There were no unrealized losses in held to maturity securities at March 31, 2010 or December 31, 2009.

- 25 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

U.S. Government Agencies and Government Sponsored Enterprises (“GSE”). As of March 31, 2010, there were 8 securities in the U.S. Government agencies and GSE portfolio that were in an unrealized loss position. These were in an unrealized loss position for 12 months or longer and had an aggregate amortized cost of $9.7 million and unrealized losses of $151 thousand. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2010.

State and Political Subdivisions. At March 31, 2010, the state and political subdivisions portfolio (“municipals”) totaled $115.7 million, of which $81.2 million was classified as available for sale. As of that date, $34.6 million was classified as held to maturity, with a fair value of $35.5 million. As of March 31, 2010, there were 3 municipals that were in an unrealized loss position. These securities had an aggregate amortized cost of $152 thousand and unrealized losses of $2 thousand.

Agency Mortgage-backed Securities. At March 31, 2010, with the exception of the non-Agency mortgage-backed securities (“non-Agency MBS”) discussed below, all of the mortgage-backed securities held by the Company were issued by U.S. government sponsored entities and agencies (“Agency MBS”), primarily FNMA and the FHLMC. The contractual cash flows of the Company’s Agency MBS are guaranteed by FNMA, FHLMC or GNMA. The GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government.

Given the high credit quality inherent in Agency MBS, the Company does not consider any of the unrealized losses as of March 31, 2010, on such MBS to be credit related. As a result of its analyses, the Company determined at March 31, 2010 that the unrealized losses on its Agency MBS are temporary. As of March 31, 2010, the Company did not intend to sell any of Agency MBS that were in an unrealized loss position, all of which were performing in accordance with their terms.

Non-Agency Mortgage-backed Securities. The Company’s non-Agency MBS portfolio consists of positions in five privately issued whole loan collateralized mortgage obligations with a fair value of $5.1 million and net unrealized gains of $262 thousand at March 31, 2010. As of that date, there were two non-Agency MBS with an aggregate amortized cost of $3.3 million and unrealized losses of $320 thousand that have been in an unrealized loss position for 12 months or longer.

As of March 31, 2010, there were three non-Agency MBS with an aggregate amortized cost of $1.6 million rated below investment grade. None of these securities was in an unrealized loss position. To date, the Company has recognized aggregate OTTI charges due to reasons of credit quality of $6.0 million against these securities, all of which was recorded prior to 2010.

As a result of its analyses, the Company determined at March 31, 2010 that the unrealized losses on its non-Agency MBS are temporary. These temporary unrealized losses are believed to be primarily related to an overall widening in liquidity spreads related to the reduced liquidity and uncertainty in the markets and not the credit quality of the individual issuer or underlying assets. As of March 31, 2010, the Company did not intend to sell any of its non-Agency MBS that were in an unrealized loss position prior to recovery of amortized cost.

Asset-backed Securities (“ABS”). As of March 31, 2010, the carrying value of the ABS portfolio totaled $733 thousand and consisted of positions in 15 securities, the majority of which are pooled trust preferred securities (“TPS”) collateralized by preferred debt issued primarily by financial institutions and, to a lesser extent, insurance companies located throughout the United States. As a result of some issuers defaulting and others electing to defer interest payments on the preferred debt which collateralize the securities, the Company considered the TPS to be non-performing and stopped accruing interest on the investments during 2009.

During the first quarter of 2010, the Company recognized OTTI charges totaling $526 thousand against four of these ABS, all of which were acquired prior to November 2007. Since the second quarter of 2008, the Company has written down each of the securities in the ABS portfolio, resulting in OTTI charges totaling $32.8 million through March 31, 2010. The Company expects to recover the remaining carrying value of $733 thousand, representing the Company’s maximum exposure to future OTTI charges on the current ABS portfolio. As of March 31, 2010, each of the securities in the ABS portfolio was rated below investment grade. There were 6 ABS securities in a loss position with an aggregate amortized cost of $175 thousand and unrealized losses totaling $52 thousand as of March 31, 2010. Each of these securities has been in loss position for less than 12 months.

Other Investments. As a member of the FHLB the Bank is required to hold FHLB stock. The amount of required FHLB stock is based on the Bank’s asset size and the amount of borrowings from the FHLB. The Company has assessed the ultimate recoverability of its FHLB stock and believes no impairment currently exists. The Company’s ownership of FHLB stock, which totaled $3.3 million at March 31, 2010, is included in other assets and recorded at cost.

As a member of the FRB system, the Company is required to maintain a specified investment in FRB stock based on a ratio relative to the Company’s capital. FRB stock totaled $3.9 million at March 31, 2010, is included in other assets and recorded at cost.

- 26 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

Below Investment Grade Securities

The Company’s non-Agency MBS and ABS are rated by a nationally recognized rating agency, such as Moody’s Investors Services, Inc. (“Moody’s”), Standard & Poor’s Corporation (“S&P”) or Fitch, Inc. (collectively, “Rating Agencies”). The rating indicates the opinion of the Rating Agency as to the credit worthiness of the investment, indicating the obligor’s ability to meet its financial commitment on the obligation. Investment grade includes all securities with Fitch/S&P ratings above BB+ and Moody’s ratings above Ba1. Securities with a Fitch/S&P rating below BBB- and Moody’s ratings below Baa3 are considered to be below investment grade. The Company uses the lowest rating provided by either of the Rating Agencies when classifying each security as investment grade or below investment grade.

The following table provides detail of securities rated below investment grade (dollars in thousands).


	At March 31, 2010											OTTI losses recognized in earnings
	Number								Unrealized			For the year ended				1^st
Current	of		Par		Amortized		Fair		Gains			December 31,				Quarter		Total
Rating⁽¹⁾	Cusips		Value		Cost		Value		(Losses)			2008		2009		2010		to Date

Securities with unrealized gains:
Non-Agency MBS:
Ba1/CCC		1	$	1,320	$	524	$	606	$	82		$	626	$	166	$	—	$	792
CC/B ⁽²⁾		1		2,333		594		661		67			1,240		494		—		1,734
CC ⁽³⁾		1		3,777		455		888		433			3,513		—		—		3,513

		3		7,430		1,573		2,155		582			5,379		660		—		6,039
Asset-backed securities:
Baa3/CC ⁽⁴⁾		1		661		68		102		34			545		50		—		595
Caa2/CC		1		1,999		36		36		—			1,615		313		—		1,928
Caa3/C		1		3,000		43		70		27			2,860		—		—		2,860
Ca/CC		1		2,983		37		56		19			2,435		476		—		2,911
Ca/C		4		14,124		355		358		3			12,103		801		484		13,388
Ca/D		1		2,000		18		18		—			1,868		8		42		1,918

		9		24,767		557		640		83			21,426		1,648		526		23,600

Securities with unrealized gains		12		32,197		2,130		2,795		665			26,805		2,308		526		29,639


Securities with unrealized losses:
Asset-backed securities:
Ca/C		4		4,527		95		58		(37	)		3,977		278		—		4,255
C/C		2		5,040		80		65		(15	)		4,570		388		—		4,958

Securities with unrealized losses		6		9,567		175		123		(52	)		8,547		666		—		9,213


		18	$	41,764	$	2,305	$	2,918	$	613		$	35,352	$	2,974	$	526	$	38,852


⁽¹⁾		Ratings presented are Moody’s/Fitch except as noted.

⁽²⁾		Ratings presented are Fitch /S&P.

⁽³⁾		Rating presented is S&P.

⁽⁴⁾		Ratings presented are Moody’s/S&P.

- 27 -

MANAGEMENT’S DISCUSSION AND ANALYSIS

LENDING ACTIVITIES

The following table sets forth selected information regarding the composition of the Company’s loan portfolio as of the dates indicated (in thousands):


	Loan Portfolio Composition
	March 31, 2010					December 31, 2009
	Amount		Percent			Amount		Percent
Commercial	$	208,976		16.5	%	$	206,383		16.3	%
Commercial mortgage		331,870		26.2			330,748		26.2
Residential mortgage		142,406		11.2			144,636		11.4
Home equity		200,287		15.8			200,684		15.9
Consumer indirect		356,873		28.1			352,611		27.9
Other consumer		27,769		2.2			29,365		2.3

Total loans		1,268,181		100.0	%		1,264,427		100.0	%

Less: Allowance for loan losses		20,586					20,741

Total loans, net	$	1,247,595				$	1,243,686

Total loans increased $3.8 million to $1.268 billion as of March 31, 2010 from $1.264 billion as of December 31, 2009.

Commercial and commercial mortgages combined increased $3.7 million to $540.8 million as of March 31, 2010 from $537.1 million as of December 31, 2009, a result of the Company’s continued focus on commercial business development programs.

Residential mortgage loans decreased $2.2 million to $142.4 million as of March 31, 2010 in comparison to $144.6 million as of December 31, 2009. This category of loans decreased as the majority of newly originated and refinanced residential mortgages were sold to the secondary market rather than being added to the portfolio. The Company does not engage in sub-prime or other high-risk residential mortgage lending as a line-of-business.

The consumer indirect portfolio increased $4.3 million to $356.9 million as of March 31, 2010, from $352.6 million as of December 31, 2009. During the first quarter of 2010 the Company originated $35.2 million in indirect auto loans with a mix of approximately 29% new auto and 71% used auto. This compares with $48.7 million in indirect loan auto originations with a mix of approximately 35% new auto and 65% used auto for the same period in 2009.

Loans Held for Sale

Loans held for sale (included in residential mortgage), totaled $103 thousand and $421 thousand as of March 31, 2010 and December 31, 2009, respectively.

The Company sells certain qualifying newly originated residential mortgages to the secondary market. Residential mortgages serviced for others totaled $344.7 million and $349.8 million as of March 31, 2010 and December 31, 2009, respectively, and are not included in the consolidated statements of financial condition.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Allowance for Loan Losses

The following table sets forth an analysis of the activity in the allowance for loan losses for the periods indicated (in thousands):


	Loan Loss Analysis
	Three months ended March 31,
	2010			2009
Balance as of beginning of period	$	20,741		$	18,749
Charge-offs:
Commercial		69			102
Commercial mortgage		45			92
Residential mortgage		12			54
Home equity		47			122
Consumer indirect		1,228			868
Other consumer		212			262

Total charge-offs		1,613			1,500
Recoveries:
Commercial		92			119
Commercial mortgage		432			43
Residential mortgage		4			3
Home equity		2			3
Consumer indirect		340			176
Other consumer		170			158

Total recoveries		1,040			502

Net charge-offs		573			998
Provision for loan losses		418			1,906

Balance at end of period	$	20,586		$	19,657


Net loan charge-offs to average loans (annualized)		0.18	%		0.35	%
Allowance for loan losses to total loans		1.62	%		1.70	%
Allowance for loan losses to non-performing loans		308	%		215	%

The allowance for loan losses represents the estimated amount of probable credit losses inherent in the Company’s loan portfolio. The Company performs periodic, systematic reviews of the loan portfolio to estimate probable losses in the respective loan portfolios. In addition, the Company regularly evaluates prevailing economic and business conditions, industry concentrations, changes in the size and characteristics of the portfolio and other pertinent factors. The process used by the Company to determine the overall allowance for loan losses is based on this analysis. Based on this analysis the Company believes the allowance for loan losses is adequate as of March 31, 2010.

Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based upon management’s evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing a variety of factors, including the risk-profile of the Company’s loan products and customers. The Company does not engage in sub-prime or other high-risk residential mortgage lending as a line-of-business. The Company primarily originates fixed and variable rate one-to-four family residential mortgages collateralized by owner-occupied properties located within its central and western New York marketplace, which has been relatively stable in recent years. Residential mortgages collateralized by one-to-four family residential real estate generally have been originated in amounts of no more than 85% of appraised value or have mortgage insurance.

The adequacy of the allowance for loan losses is subject to ongoing management review. While management evaluates currently available information in establishing the allowance for loan losses, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process, periodically review a financial institution’s allowance for loan losses. Such agencies may require the financial institution to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The provision for loan losses represents management’s estimate of the adjustment necessary to maintain the allowance for loan losses at a level representative of probable credit losses inherent in the portfolio. There were provisions for loan losses of $418 thousand and $1.9 million for the three month periods ended March 31, 2010 and 2009, respectively. The decrease in the provision for loan losses is largely due to a 43% decline in net charge-offs compared with the first quarter of 2009. Net charge-offs decreased by $425 thousand when comparing the first quarter of 2010 to the prior year. The decrease in net charge-offs in 2010 was primarily due to a $354 thousand recovery on one commercial real estate relationship which was charged off during 2008 and 2009.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Non-Performing Assets and Potential Problem Loans

The table below sets forth the amounts and categories of the Company’s non-performing assets at the dates indicated. At each date presented there were no troubled debt restructurings (in thousands).


	Delinquent and Non-Performing Assets
	March 31,			December 31,			March 31,
	2010			2009			2009
Nonaccrual loans:
Commercial	$	774		$	650		$	1,698
Commercial mortgage		2,513			2,288			2,497
Residential mortgage		2,056			2,376			3,566
Home equity		1,048			880			645
Consumer indirect		293			621			393
Other consumer		1			7			27

Total nonaccrual loans		6,685			6,822			8,826
Accruing loans 90 days or more delinquent		2			1,859			301

Total non-performing loans		6,687			8,681			9,127
Foreclosed assets		771			746			877
Non-performing investment securities		661			1,015			3,396

Total non-performing assets	$	8,119		$	10,442		$	13,400


Non-performing loans to total loans		0.53	%		0.69	%		0.79	%
Non-performing assets to total assets		0.38	%		0.51	%		0.66	%

Information regarding the activity in nonaccrual loans for the three months ended March 31, 2010 is as follows (in thousands):


Nonaccrual loans, beginning of year	$	6,822
Additions		3,101
Payments		(1,431	)
Charge-offs		(1,487	)
Returned to accruing status		(250	)
Transferred to other real estate or repossessed assets		(70	)

Nonaccrual loans, end of period	$	6,685

Non-performing assets include non-performing loans, foreclosed assets and non-performing investment securities. Non-performing assets at March 31, 2010 decreased $2.3 million from December 31, 2009. During the first quarter of 2010 the Company collected substantially all of a $1.9 million commercial relationship included in accruing loans past due 90 days or more at December 31, 2009. The $354 thousand decrease in non-performing investment securities reflects net losses, both realized and unrealized, in the Company’s asset backed securities portfolio.

Generally, loans and investment securities are placed on nonaccrual status if principal or interest payments become 90 days past due and/or management deem the collectibility of the principal and/or interest to be in question, as well as when required by regulatory requirements. Once interest accruals are discontinued, accrued but uncollected interest is charged to current year income. Subsequent receipts on nonaccrual assets are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured.

Potential problem loans are loans that are currently performing, but information known about possible credit problems of the borrowers causes management to have concern as to the ability of such borrowers to comply with the present loan payment terms and may result in disclosure of such loans as non-performing at some time in the future. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and/or personal or government guarantees. Management considers loans classified as substandard, which continue to accrue interest, to be potential problem loans. The Company identified $17.4 million and $18.4 million in loans that continued to accrue interest which were classified as substandard as of March 31, 2010 and December 31, 2009, respectively.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

FUNDING ACTIVITIES

Deposits

The Company offers a broad array of deposit products including noninterest-bearing demand, interest-bearing demand, savings and money market accounts and certificates of deposit. As of March 31, 2010, total deposits were $1.850 billion, an increase of $106.9 million in comparison to $1.743 billion as of December 31, 2009.

Nonpublic deposits represent the largest component of the Company’s funding. Total nonpublic deposits were $1.392 billion and $1.387 billion as of March 31, 2010 and December 31, 2009, respectively. The Company continues to manage this segment of funding through a strategy of competitive pricing and relationship-based sales and marketing that minimizes the number of customer relationships that have only a single high-cost deposit account.

The Company offers a variety of public deposit products to the many towns, villages, counties and school districts within our market. Public deposits generally range from 20 to 25% of the Company’s total deposits. As of March 31, 2010, total public deposits were $458.0 million in comparison to $355.9 million as of December 31, 2009. There is a high degree of seasonality in this component of funding, as the level of deposits varies with the seasonal cash flows for these public customers. The Company maintains the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits.

Borrowings

The Company has credit capacity with the FHLB and can borrow through facilities that include an overnight line of credit, as well as amortizing and term advances. The Company’s primary borrowing source was FHLB advances and repurchase agreements, which amounted to $30.1 million as of March 31, 2010 and December 31, 2009. The FHLB borrowings mature on various dates through 2011 and are classified as short-term or long-term in accordance with the original terms of the agreement. The Company had approximately $57.0 million of immediate credit capacity with FHLB as of March 31, 2010. The FHLB credit capacity is collateralized by securities from the Company’s investment portfolio and certain qualifying loans.

The Company has $32.8 million in secured borrowing capacity at the Federal Reserve Bank (“FRB”) Discount Window, of which none was outstanding at March 31, 2010. The FRB credit capacity is collateralized by securities from the Company’s investment portfolio. During the first quarter, the Company repaid $9.4 million of Federal funds purchased and a $15.0 million advance from the Federal Reserve’s Term Auction Facility which were outstanding at December 31, 2009.

The Company also had $94.0 million of credit available under unsecured lines of credit with various banks as of March 31, 2010. There were no advances outstanding on these lines of credit as of March 31, 2010. The Company also utilizes short-term retail repurchase agreements with customers as a source of funds. These short-term repurchase agreements amounted to $36.6 million and $35.1 million as of March 31, 2010 and December 31, 2009, respectively.

Equity Activities

Total shareholders’ equity amounted to $203.6 million as of March 31, 2010, an increase of $5.3 million from $198.3 million as of December 31, 2009. The increase in shareholders’ equity through the first three months ended March 31, 2010 resulted primarily from $7.0 million in comprehensive income, partially offset by $1.9 million in accrued and declared dividends.

The Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation and the New York State Banking Department (“NYSBD”). At March 31, 2010, the Bank’s regulatory capital ratios exceeded all regulatory requirements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The objective of maintaining adequate liquidity is to assure the ability of the Company to meet its financial obligations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the servicing and repayment of debt and preferred equity obligations, the ability to fund new and existing loan commitments, to take advantage of new business opportunities and to satisfy other operating requirements. The Company achieves liquidity by maintaining a strong base of core customer funds, maturing short-term assets, its ability to sell securities, lines of credit, and access to the financial and capital markets.

Liquidity for the Bank is managed through the monitoring of anticipated changes in loans, the investment portfolio, core deposits and wholesale funds. The strength of the Bank’s liquidity position is a result of its base of core customer deposits. These core deposits are supplemented by wholesale funding sources that include credit lines with the other banking institutions, the FHLB and the FRB.

The primary sources of liquidity for FII are dividends from the Bank and access to financial and capital markets. Dividends from the Bank are limited by various regulatory requirements related to capital adequacy and earnings trends. The Bank relies on cash flows from operations, core deposits, borrowings and short-term liquid assets. Five Star Investment Services relies on cash flows from operations and funds from FII when necessary.

The Company’s cash and cash equivalents were $71.9 million as of March 31, 2010, an increase of $28.9 million from $43.0 million as of December 31, 2009. The Company’s net cash provided by operating activities totaled $8.6 million. Net cash used in investing activities totaled $61.8 million, which included cash outflows of $4.7 million for net loan originations and $56.7 million from investment securities transactions. Net cash provided by financing activities of $82.0 million was attributed to a $106.9 million increase in deposits, offset against a $22.9 million decrease in net borrowings and $1.9 million in dividend payments.

Capital Resources

Banks and financial holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material impact on the Company’s consolidated financial statements. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (all as defined in the regulations). These minimum amounts and ratios are included in the table below.

The Company’s and the Bank’s Tier 1 capital consists of shareholders’ equity excluding unrealized gains and losses on securities available for sale (except for unrealized losses which have been determined to be other than temporary and recognized as expense in the consolidated statements of income), goodwill and other intangible assets and disallowed portions of deferred tax assets. Tier 1 capital for the Company includes, without limitation, $37.5 million of preferred stock issued to the U.S. Department of Treasury (the “Treasury”) through the Treasury’s Troubled Asset Relief Program (“TARP”) and, subject to limitation, $16.7 million of trust preferred securities issued by FISI Statutory Trust I and $17.5 million of preferred stock. The Company and the Bank’s total capital are comprised of Tier 1 capital for each entity plus a permissible portion of the allowance for loan losses.

The Tier 1 and total capital ratios are calculated by dividing the respective capital amounts by risk-weighted assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, excluding goodwill and other intangible assets and disallowed portions of deferred tax assets, allocated by risk weight category and certain off-balance-sheet items (primarily loan commitments and securities more than one level below investment grade that are subject to the low level exposure rules). The leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets and disallowed portions of deferred tax assets.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

The Company’s and the Bank’s actual and required regulatory capital ratios as of March 31, 2010 and December 31, 2009 were as follows (in thousands):


						For Capital
	Actual					Adequacy Purposes					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
March 31, 2010:
Tier 1 leverage:
Company	$	171,065		8.32	%	$	82,201		4.00	%	$	102,752		5.00	%
Bank (FSB)		158,235		7.72			82,018		4.00			102,522		5.00

Tier 1 capital (to risk-weighted assets):
Company		171,065		12.37			55,300		4.00			82,950		6.00
Bank (FSB)		158,235		11.49			55,106		4.00			82,660		6.00

Total risk-based capital (to risk-weighted assets):
Company		188,387		13.63			110,600		8.00			138,250		10.00
Bank (FSB)		175,497		12.74			110,213		8.00			137,766		10.00

December 31, 2009:
Tier 1 leverage:
Company	$	163,613		7.96	%	$	82,188		4.00	%	$	102,735		5.00	%
Bank (FSB)		154,316		7.53			82,018		4.00			102,522		5.00

Tier 1 capital (to risk-weighted assets):
Company		163,613		11.95			54,746		4.00			82,119		6.00
Bank (FSB)		154,316		11.33			54,475		4.00			81,712		6.00

Total risk-based capital (to risk-weighted assets):
Company		180,766		13.21			109,492		8.00			136,865		10.00
Bank (FSB)		171,385		12.58			108,949		8.00			136,186		10.00

Dividend Restrictions

In the ordinary course of business, the Company is dependent upon dividends from Five Star Bank to provide funds for the payment of interest expense on the junior subordinated debentures, dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. The Bank is currently required to obtain approval from the NYS Banking Department for dividend payments.

In addition, pursuant to the terms of the Treasury’s TARP Capital Purchase Program, the Company may not declare or pay any cash dividends on its common stock other than regular quarterly cash dividends of not more than $0.10 without the consent of the U.S. Treasury.

- 33 -

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The principal objective of the Company’s interest rate risk management is to evaluate the interest rate risk inherent in certain assets and liabilities, determine the appropriate level of risk to the Company given its business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with the guidelines approved by the Company’s Board of Directors. The Company’s management is responsible for reviewing with the Board its activities and strategies, the effect of those strategies on the net interest margin, the fair value of the portfolio and the effect that changes in interest rates will have on the portfolio and exposure limits. Management develops an Asset-Liability Policy that meets strategic objectives and regularly reviews the activities of the Bank.

The primary tool the Company uses to manage interest rate risk is a “rate shock” simulation to measure the rate sensitivity of the balance sheet. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on net interest income and economic value of equity. The Company measures net interest income at risk by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of different magnitudes over a period of twelve months. This simulation is based on management’s assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. While this simulation is a useful measure as to net interest income at risk due to a change in interest rates, it is not a forecast of the future results and is based on many assumptions that, if changed, could cause a different outcome.

In addition to the changes in interest rate scenarios listed above, the Company typically runs other scenarios to measure interest rate risk, which vary depending on the economic and interest rate environments.

The Company has experienced no significant changes in market risk due to changes in interest rates since the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, dated March 12, 2010, as filed with the Securities and Exchange Commission.

ITEM 4. Controls and Procedures

Evaluation of disclosure controls and procedures

As of March 31, 2010, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

- 34 -

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company has experienced no significant changes in its legal proceedings from the disclosure included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, dated March 12, 2010, as filed with the Securities and Exchange Commission.

ITEM 1A. Risk Factors

The Company has experienced no significant changes in its risk factors from the disclosure included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, dated March 12, 2010 as filed with the Securities and Exchange Commission.

ITEM 6. Exhibits

(a)

The following is a list of all exhibits filed or incorporated by reference as part of this Report.


Exhibit
Number		Description	Location

	3.1	Amended and Restated Certificate of Incorporation of the Company	Incorporated by reference to Exhibit 3.1 of the Form 10-K for the year ended December 31, 2008, dated March 12, 2009

	3.2	Amended and Restated Bylaws of the Company	Incorporated by reference to Exhibit 3.4 of the Form 10-K for the year ended December 31, 2008, dated March 12, 2009

	4.1	Warrant to Purchase Common Stock, dated December 23, 2008 issued by the Registrant to the United States Department of the Treasury	Incorporated by reference to Exhibit 4.2 of the Form 8-K, dated December 19, 2008

	10.1	1999 Management Stock Incentive Plan	Incorporated by reference to Exhibit 10.1 of the S-1 Registration Statement

	10.2	Amendment Number One to the FII 1999 Management Stock Incentive Plan	Incorporated by reference to Exhibit 10.1 of the Form 8-K, dated July 28, 2006

	10.3	Form of Non-Qualified Stock Option Agreement Pursuant to the FII 1999 Management Stock Incentive Plan	Incorporated by reference to Exhibit 10.2 of the Form 8-K, dated July 28, 2006

	10.4	Form of Restricted Stock Award Agreement Pursuant to the FII 1999 Management Stock Incentive Plan	Incorporated by reference to Exhibit 10.3 of the Form 8-K, dated July 28, 2006

	10.5	Form of Restricted Stock Award Agreement Pursuant to the FII 1999 Management Stock Incentive Plan	Incorporated by reference to Exhibit 10.1 of the Form 8-K, dated January 23, 2008

	10.6	1999 Directors Stock Incentive Plan	Incorporated by reference to Exhibit 10.2 of the S-1 Registration Statement

	10.7	Amendment to the 1999 Director Stock Incentive Plan	Incorporated by reference to Exhibit 10.7 of the Form 10-K for the year ended December 31, 2008, dated March 12, 2009

	10.8	2009 Management Stock Incentive Plan	Incorporated by reference to Exhibit 10.8 of the Form 10-Q for the quarterly period ended June 30, 2009, dated August 5, 2009

	10.9	2009 Directors’ Stock Incentive Plan	Incorporated by reference to Exhibit 10.9 of the Form 10-Q for the quarterly period ended June 30, 2009, dated August 5, 2009

	10.10	Form of Restricted Stock Award Agreement Pursuant to the FII 2009 Management Stock Incentive Plan	Incorporated by reference to Exhibit 10.1 of the Form 8-K, dated January 19, 2010

- 35 -


Exhibit
Number		Description	Location

	10.11	Form of Restricted Stock Award Agreement Pursuant to the FII 2009 Management Stock Incentive Plan	Incorporated by reference to Exhibit 10.1 of the Form 8-K, dated March 1, 2010

	10.12	Form of Restricted Stock Award Agreement Pursuant to the FII 2009 Management Stock Incentive Plan	Incorporated by reference to Exhibit 10.2 of the Form 8-K, dated March 1, 2010

	10.13	Amended Stock Ownership Requirements, dated December 14, 2005	Incorporated by reference to Exhibit 10.19 of the Form 10-K for the year ended December 31, 2005, dated March 15, 2006

	10.14	Executive Agreement with Peter G. Humphrey	Incorporated by reference to Exhibit 10.1 of the Form 8-K, dated June 30, 2005

	10.15	Executive Agreement with James T. Rudgers	Incorporated by reference to Exhibit 10.2 of the Form 8-K, dated June 30, 2005

	10.16	Executive Agreement with Ronald A. Miller	Incorporated by reference to Exhibit 10.3 of the Form 8-K, dated June 30, 2005

	10.17	Executive Agreement with Martin K. Birmingham	Incorporated by reference to Exhibit 10.4 of the Form 8-K, dated June 30, 2005

	10.18	Agreement with Peter G. Humphrey	Incorporated by reference to Exhibit 10.6 of the Form 8-K, dated June 30, 2005

	10.19	Executive Agreement with John J. Witkowski	Incorporated by reference to Exhibit 10.7 of the Form 8-K, dated September 14, 2005

	10.20	Executive Agreement with George D. Hagi	Incorporated by reference to Exhibit 10.7 of the Form 8-K, dated February 2, 2006

	10.21	Voluntary Retirement Agreement with James T. Rudgers	Incorporated by reference to Exhibit 10.1 of the Form 8-K, dated September 24, 2008

	10.22	Amendment to Voluntary Retirement Agreement with James T. Rudgers	Incorporated by reference to Exhibit 10.1 of the Form 8-K, dated July 1, 2009

	10.23	Voluntary Retirement Agreement with Ronald A. Miller	Incorporated by reference to Exhibit 10.2 of the Form 8-K, dated September 24, 2008

	10.24	Amendment to Voluntary Retirement Agreement with Ronald A. Miller	Incorporated by reference to Exhibit 10.1 of the Form 8-K, dated March 3, 2010

	10.25	Letter Agreement, dated December 23, 2008, including the Securities Purchase Agreement-Standard Terms attached thereto, by and between the Company and the United States Department of the Treasury	Incorporated by reference to Exhibit 10.1 of the Form 8-K, dated December 19, 2008

	11.1	Statement of Computation of Per Share Earnings	Incorporated by reference to Note 2 of the Registrant’s unaudited consolidated financial statements under Item 1 filed herewith.

	12	Ratio of Earnings to Fixed Charges and Preferred Dividends	Filed Herewith

	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Principal Executive Officer	Filed Herewith

	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 — Principal Financial Officer	Filed Herewith

	32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed Herewith

- 36 -

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FINANCIAL INSTITUTIONS, INC.


*/s/ Peter G. Humphrey*	, May 4, 2010
Peter G. Humphrey
President and Chief Executive Officer
(Principal Executive Officer)

*/s/ Karl F. Krebs*	, May 4, 2010
Karl F. Krebs
Executive Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)

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