Financial Institutions, Inc. is a financial holding company organized in 1931 under the laws of New York State (“New York” or “NYS”). Through its subsidiaries, including its wholly-owned, New York State chartered banking subsidiary, Five Star Bank, Financial Institutions, Inc. provides a broad array of deposit, lending and other financial services to individualsretail, commercial, and businessesmunicipal customers in CentralWestern and WesternCentral New York. All references in this Annual Report on Form 10-K to the parent company are to Financial Institutions, Inc. (“FII”). Unless otherwise indicated or unless the context requires otherwise, all references in this Annual Report on Form 10-K to “the Company”Company,” “we,” “our” or “us” means Financial Institutions, Inc. and its subsidiaries on a consolidated basis. Five Star Bank is referred to as Five Star Bank, “FSB” or “the Bank”. The parent company is a legal entity separate and distinct from its subsidiaries, assisting those subsidiaries by providing financial resources and management. The Company’sOur executive offices are located at 220 Liberty Street, Warsaw, New York.

We conduct our business primarily through our banking subsidiary, Five Star Bank, which adopted its current name in 2005 when the Companywe merged three of itsour bank subsidiaries, Wyoming County Bank, National Bank of Geneva and Bath National Bank into itsour New York chartered bank subsidiary, First Tier Bank & Trust, which was then renamed Five Star Bank. In addition, our business operations include a wholly-owned broker-dealer subsidiary, Five Star Investment Services, Inc. (100% owned) (“FSIS”).

This annual report,Annual Report on Form 10-K, including the exhibits and schedules filed as part of the annual report,Annual Report on Form 10-K, may be inspected at the public reference facility maintained by the SEC at its public reference room at 100 F. Street, N.E., Room 1580, Washington, DC 20549 and copies of all or any part thereof may be obtained from that office upon payment of the prescribed fees. You may call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room and you can request copies of the documents upon payment of a duplicating fee, by writing to the SEC. In addition, the SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the SEC which can be accessed at www.sec.gov.

The CompanyWe also makesmake available, free of charge through itsour website atwww.fiiwarsaw.com,, all reports filed with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable after those documents are filed with, or furnished to, the SEC. Information available on our website is not a part of, and is not incorporated into, this annual reportAnnual Report on Form 10-K.

The Company providesWe provide a wide range of consumer and commercial banking and financial services to individuals, municipalities and businesses through a network of 51over 50 offices and overmore than 70 ATMs in fourteen contiguous counties of Western and Central New York: Allegany, Cattaraugus, Cayuga, Chautauqua, Chemung, Erie, Genesee, Livingston, Monroe, Ontario, Seneca, Steuben, Wyoming and Yates Counties.

The Company’sOur market area is geographically and economically diversified in that it serveswe serve both rural markets and the larger more affluent markets of suburban Rochester and suburban Buffalo. Rochester and Buffalo are the two largest citiesmetropolitan areas in New York outside of New York City, with combined metropolitan area populations of over two million people. The Company anticipatesWe anticipate increasing itsour presence in and around these metropolitan statistical areas in the coming years.

The Company facesWe face significant competition in both making loans and attracting deposits, as Western and Central New York have a high density of financial institutions. The Company’sOur competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies and other financial service companies. ItsOur most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. The Company facesWe face additional competition for deposits from non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance companies. We generally compete with other financial service providers on factors such as; level of customer service, responsiveness to customer needs, availability and pricing of products, and geographic location.

The Company offersWe offer a broad range of loans including commercial and agricultural working capitalbusiness and revolving lines of credit, commercial and agricultural mortgages, equipment loans, crop and livestock loans, residential mortgage loans and home equity loans and lines of credit, home improvement loans, automobile loans and personal loans. Newly originated and refinanced fixed rate residential mortgage loans are either retained in the Company’sour portfolio or sold to the secondary market andwith servicing rights are retained.

The CompanyWe continually evaluatesevaluate and updates itsupdate our lending policy. The key elements of the Company’sour lending philosophy include the following:

The Company originatesWe originate commercial business loans in itsour primary market areas and underwritesunderwrite them based on the borrower’s ability to service the loan from operating income. The Company offersWe offer a broad range of commercial lending products, including term loans and lines of credit. Short and medium-term commercial loans, primarily collateralized, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion and improvements) and the purchase of equipment. Commercial business loans are offered to the agricultural industry for short-term crop production, farm equipment and livestock financing. As a general practice, where possible, a collateral lien is placed on any available real estate, equipment or other assets owned by the borrower and a personal guarantee of the owner is obtained. As of December 31, 2009, $49.52010, $70.0 million, or 27%33%, of the aggregate commercial business loan portfolio were at fixed rates, while $136.9$141.0 million, or 73%67%, were at variable rates. The Company utilizes government loan guarantee programs where available and appropriate. See “Government Guarantee Programs” below.

In addition toWe also offer commercial loans secured by real estate, the Company makes commercial real estatemortgage loans to finance the purchase of real property, which generally consists of real estate with completed structures.structures and, to a smaller extent, agricultural real estate financing. Commercial real estatemortgage loans are secured by first liens on the real estate and are typically amortized over a 10 to 20 year period. The underwriting analysis includes credit verification, appraisals and a review of the borrower’s financial condition and repayment capacity. As of December 31, 2009, $78.22010, $100.0 million, or 25%28%, of the aggregate commercial real estate loanmortgage portfolio were at fixed rates, while $230.7$252.9 million, or 75%72%, were at variable rates.

Agricultural loans are offered for short-term crop production, farm equipment and livestock financing and agricultural real estate financing, including term loans and lines of credit. Short and medium-term agricultural loans, primarily collateralized, are made available for working capital (crops and livestock), business expansion (including acquisition of real estate, expansion and improvement) and the purchase of equipment. As of December 31, 2009, $11.3 million, or 27%, of the agricultural loan portfolio were at fixed rates, while $30.6 million, or 73%, were at variable rates. The Company utilizesWe utilize government loan guarantee programs where available and appropriate. See “Government Guarantee Programs” below.

The Company participatesWe participate in government loan guarantee programs offered by the Small Business Administration (“SBA”), U.S. Department of Agriculture, Rural Economic and Community Development and Farm Service Agency, among others. As of December 31, 2009, the Company2010, we had loans with an aggregate principal balance of $44.4$55.1 million that were covered by guarantees under these programs. The guarantees typically only cover a certain percentage of these loans. By participating in these programs, the Company iswe are able to broaden itsour base of borrowers while minimizing credit risk.

The Company offersWe offer a variety of loan products to itsour consumer customers, located in Western and Central New York, including home equity loans and lines of credit, automobile loans, secured installment loans and various other types of secured and unsecured personal loans. At December 31, 2009,2010, outstanding consumer loan balances were concentrated in indirect automobile loans and home equity products.

The CompanyWe indirectly originates,originate, through franchised new car dealers, consumer indirect automobileconsumer loans. The consumer indirect loan portfolio is primarily comprised of new and used automobile loans with terms that typically range from 36 to 84 months. The Company hasWe have expanded itsour relationships with franchised new car dealers primarily in our general market area,Western, Central and, hasmost recently, into the Capital District of New York, and have selectively originated a mix of new and used automobile loans from those dealers. In the latter part of 2010, we began efforts to expand our dealer network into Northern Pennsylvania and anticipate indirectly originating loans there in the first half of 2011. As of December 31, 2009,2010, the consumer indirect portfolio totaled $352.6$418.0 million, nearly allor 31% of which were fixed rate automobile loans.our total loan portfolio.

The Company’sOur loan policy establishes standardized underwriting guidelines, as well as the loan approval process and the committee structures necessary to facilitate and insureensure the highest possible loan quality decision-making in a timely and businesslike manner. The policy establishes requirements for extending credit based on the size, risk rating and type of credit involved. The policy also sets limits on individual loan officer lending authority and various forms of joint lending authority, while designating which loans are required to be approved at the committee level.

The Company’sOur credit objectives are as follows:

The Company’sOur policy includes loan reviews, under the supervision of the Audit and Risk Oversight committees of the Board of Directors and directed by the Chief Risk Officer, in order to render an independent and objective evaluation of the Company’sour asset quality and credit administration process.

Risk ratings are assigned to loans in the commercial business and commercial real estate and agriculturalmortgage portfolios. The risk ratings are specifically used as follows:

Through the loan approval process, loan administration and loan review program, management seeks to continuously monitor theour credit risk profile of the Company and assesses the overall quality of the loan portfolio and adequacy of the allowance for loan losses.

The Company hasWe have several procedures in place to assist in maintaining the overall quality of itsour loan portfolio. Delinquent loan reports are monitored by credit administration to identify adverse levels and trends. Loans, including impaired loans, are generally classified as non-accruing if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-collateralized and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accruing if repayment in full of principal and/or interest is uncertain.

The allowance for loan losses is established through charges or credits to earnings in the form of a provision (credit) for loan losses. The allowance reflects management’s estimate of the amount of probable loan losses in the portfolio, based on factors such as:

The Company’sOur methodology in the estimation of the allowance for loan losses includes the following broad areas:

Management presents a quarterly review of the adequacy of the allowance for loan losses to the Company’sour Board of Directors based on the methodology described above. See also the sectionssection titled “Analysis of Allowance“Allowance for Loan Losses” and “Allocation of Allowance for Loan Losses” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Company’sOur investment policy is contained within itsour overall Asset-Liability Management and Investment Policy. This policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, need for collateral and desired risk parameters. In pursuing these objectives, the Company considerswe consider the ability of an investment to provide earnings consistent with factors of quality, maturity, marketability, pledgeable nature and risk diversification. The Company’sOur Treasurer, guided by the ALCOAsset-Liability Committee (“ALCO”), is responsible for investment portfolio decisions within the established policies.

The Company’sOur investment securities strategy centers on providing liquidity to meet loan demand and redeeming liabilities, meeting pledging requirements, managing credit risks, managing overall interest rate risks and maximizing portfolio yield. The Company’sOur current policy generally limits security purchases to the following:

The Company’sOur primary sources of funds are deposits, borrowed funds and repurchase agreements, scheduled amortization and prepayments of principal from loans and mortgage-backed securities, maturities and calls of investment securities and funds provided by operations.

The Company offersWe offer a variety of deposit account products with a range of interest rates and terms. The deposit accounts consist of noninterest-bearing demand, interest-bearing demand, savings, money market, club accounts and certificates of deposit. The CompanyWe also offersoffer certificates of deposit with balances in excess of $100,000 to local municipalities, businesses, and individuals as well as Individual Retirement Accounts and other qualified plan accounts. The flow of deposits is influenced significantly by general economic conditions, prevailing interest rates and competition. The Company’sOur deposits are obtained predominantly from the areas in which itsour branch offices are located. The Company reliesWe rely primarily on competitive pricing of itsour deposit products, customer service and long-standing relationships with customers to attract and retain these deposits. The Company hasWe have also utilized certificate of deposit sales in the national brokered market (“brokered deposits”) as a wholesale funding source,source; however, the Companywe had no brokered deposits at December 31, 2009. The Company’s2010. Our borrowings consist mainly of advances entered into with the FHLB, the Federal Reserve’s Term Auction Facility, federal funds purchased and securities sold under repurchase agreements.

The Company’sOur primary operating segment is itsour subsidiary bank, FSB. The Company’sOur brokerage subsidiary, FSIS, is also deemed an operating segment; however, it does not meet the applicable thresholds for separation.

Holding Company is in compliance in all material respects with these lawsRegulation. As a bank holding company and regulations. Changes in the laws, regulations or policies that impact the Company cannot necessarily be predicted, but they may have a material effect on the Company’s consolidated financial position, consolidated results of operations, or liquidity.

The Bank Holding Company Act generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain circumstances couldnon-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things: lending; operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. These activities may also be requiredaffected by federal legislation.

The Gramm-Leach-Bliley Act amended portions of the Bank Holding Company Act to guarantee the capital plan of an undercapitalized banking subsidiary.

Depository Institution Regulation.Our bank subsidiary is subject to regulation by the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. Depending upon the circumstances, the FRB could take the position that paying a dividend would constitute an unsafe or unsound banking practice.Federal Deposit Insurance Corporation (“FDIC”). This regulatory structure includes:

Capital Adequacy Requirements.The FRB has adopted a system usingand FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to evaluate the capital adequacy of bank holding companies. Undercompanies and banks. In addition, these regulatory agencies may from time to time require that a bank holding company or bank maintain capital above the minimum levels, based on its financial condition or actual or anticipated growth.

The FRB’s risk-based guidelines specific categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determineestablish a “risk-weighted” asset base. The guidelines require a minimum total risk-basedtwo-tier capital ratio of 8.0% (of which at least 4.0% is required to consist offramework. Tier 1 capital elements). Totalgenerally consists of common shareholders’ equity, retained earnings, a limited amount of qualifying perpetual preferred stock, qualifying trust preferred securities and non-controlling interests in the equity accounts of consolidated subsidiaries, less goodwill and certain intangibles. Tier 2 capital is thegenerally consists of certain hybrid capital instruments and perpetual debt, mandatory convertible debt securities and a limited amount of subordinated debt, qualifying preferred stock, loan loss allowance, and unrealized holding gains on certain equity securities. The sum of Tier 1 and Tier 2 capital. Ascapital represents qualifying total capital, at least 50% of December 31, 2009, the Company’s ratiowhich must consist of Tier 1 capital.

Risk-based capital ratios are calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to total risk-weighted assets was 11.95%one of four categories of risk-weights, based primarily on relative credit risk. For bank holding companies, generally the minimum Tier 1 risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%. Our Tier 1 and total risk-based capital ratios under these guidelines at December 31, 2010 were 12.34% and 13.60%, respectively.

The FRB’s leverage capital guidelines establish a minimum leverage ratio determined by dividing Tier 1 capital by adjusted average total assets. The minimum leverage ratio is 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies generally are required to maintain a leverage ratio of total capital to total risk-weighted assets was 13.21%at least 4%. At December 31, 2010, we had a leverage ratio of 8.31%. See also the section titled “Capital Resources” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 10, Regulatory Matters, of the notes to consolidated financial statements.

In addition to theThe federal regulatory authorities’ risk-based capital guidelines are based upon the FRB uses a leverage ratio as an additional tool to evaluate1988 capital accord (“Basel I”) of the capital adequacy of bank holding companies.Basel Committee on Banking Supervision (the “Basel Committee”). The leverage ratioBasel Committee is a company’scommittee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies and regulations to which they apply. Actions of the Committee have no direct effect on banks in participating countries. In 2004, the Basel Committee published a new capital accord (“Basel II”) to replace Basel I. Basel II provides two approaches for setting capital standards for credit risk — an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than permitted in existing risk-based capital guidelines. Basel II also would set capital requirements for operational risk and refine the existing capital requirements for market risk exposures.

On December 17, 2009, the Basel Committee issued a set of proposals (the “2009 Capital Proposals”) that would significantly revise the definitions of Tier 1 capital divided by quarterly average consolidated assets. Certain highly ratedand Tier 2 capital. Among other things, the 2009 Capital Proposals would re-emphasize that common equity is the predominant component of Tier 1 capital. Concurrently with the release of the 2009 Capital Proposals, the Basel Committee also released a set of proposals related to liquidity risk exposure (the “2009 Liquidity Proposals”). The 2009 Liquidity Proposals include the implementation of (i) a “liquidity coverage ratio” or LCR, designed to ensure that a bank maintains an adequate level of unencumbered, high-quality assets sufficient to meet the bank’s liquidity needs over a 30-day time horizon under an acute liquidity stress scenario and (ii) a “net stable funding ratio” or NSFR, designed to promote more medium and long-term funding of the assets and activities of banks over a one-year time horizon.

The Dodd-Frank Act includes certain provisions concerning the capital regulations of the U.S. banking regulators, which are often referred to as the “Collins Amendment.” These provisions are intended to subject bank holding companies may maintainto the same capital requirements as their bank subsidiaries and to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under the Collins Amendment, trust preferred securities issued by a minimum leverage ratiocompany, such as our company, with total consolidated assets of 3.0%,less than $15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but other bank holding companies may be required to maintain a leverage ratio of up to 200 basis points above theany such securities issued later are not eligible as regulatory minimum. As of December 31, 2009, the Company’s leverage ratio was 7.96%.

In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be considered by U.S. banking organizationsregulators in developing new regulations applicable to other banks in the United States, including Five Star Bank.

The Basel III provisions on liquidity include complex criteria establishing the LCR and NSFR. The purpose of the LCR is to ensure that a bank maintains adequate unencumbered, high quality liquid assets to meet its liquidity needs for 30 days under a severe liquidity stress scenario. The purpose of the NSFR is to promote more medium and long-term funding of assets and activities, using a one-year horizon. Although Basel III is described as a “final text,” it is subject to the resolution of certain specified criteria, assumingissues and to further guidance and modification, as well as to adoption by U.S. banking regulators, including decisions as to whether and to what extent it will apply to U.S. banks that they haveare not large, internationally active banks.

Prompt Corrective Action.The Federal Deposit Insurance Corporation Improvement Act of 1991, among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. Therespective federal bank regulatory agencies may set capital requirementsto implement systems for a particular banking organization that are higher than the minimum ratios when circumstances warrant. FRB guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

On December 23, 2008, as part of the TARP Capital Purchase Program of the Treasury, we sold to the Treasury 7,503 shares of our fixed rate cumulative perpetual preferred stock, Series A preferred stock (“FSB”Series A”), having a liquidation preference amount of $5,000 per share, for a purchase price of $37.5 million in cash and issued to Treasury a ten-year warrant to purchase 378,175 shares of the Company’s common stock at an exercise price of $14.88 per share (the “Warrant”).

We may redeem the Series A preferred stock at any time by repaying the Treasury, without penalty, subject to Treasury’s consultation with our appropriate regulatory agency and approval. Additionally, upon redemption of the Series A preferred stock, the Warrant generally may be repurchased from the Treasury at its fair market value as agreed-upon by us and the Treasury. In February 2011, the Company repaid one-third or $12.5 million of its obligation.

The securities purchase agreement between us and the “Bank”)Treasury provides that prior to the earlier of (i) December 23, 2011 and (ii) the date on which all of the shares of the Series A preferred stock have been redeemed by us or transferred by the Treasury to third parties, we may not, without the consent of the Treasury, (a) pay a quarterly cash dividend on our common stock of more than $0.10 per share or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of our common stock, preferred stock (other than the Series A preferred stock) or trust preferred securities. In addition, under the terms of the Series A preferred stock, we may not pay dividends on our common stock at any time we are in arrears on the dividends payable on the Series A preferred stock. Dividends on the Series A preferred stock are payable quarterly at a rate of 5% per annum for the first five years and a rate of 9% per annum thereafter if not redeemed prior to that time.

Our primary source for cash dividends is athe dividends we receive from our subsidiary bank. Our bank is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. Approval of the New York chartered bank andState Banking Department is required prior to paying a memberdividend if the dividends declared by the Bank exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years.

Federal Reserve System. Deposit Insurance Assessments.The FDIC, throughBank’s deposits are insured to the maximum extent permitted by the Deposit Insurance Fund (“DIF”), insures deposits. Upon enactment of the Bank.Emergency Economic Stabilization Act of 2008 on October 3, 2008, federal deposit insurance coverage levels under the DIF temporarily increased from $100,000 to $250,000 per deposit category, per depositor, per institution, through December 31, 2009. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase through December 31, 2013. The supervisionDodd-Frank Act permanently increases the maximum amount of deposit insurance to $250,000 per deposit category, per depositor, per institution retroactive to January 1, 2008, and noninterest-bearing transaction accounts have unlimited deposit insurance through December 31, 2013.

As the insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. The FDIC also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation of FSB subjectsor order to pose a serious threat to the BankDIF. The FDIC also has the authority to special restrictions, requirements, potentialinitiate enforcement actions and periodic examinationagainst banks. Insurance of deposits may be terminated by the FDIC upon a finding that the FRB and the New York State Banking Department (“NYSBD”). Because the FRB regulates the holding company parent, the FRB alsoinstitution has supervisory authority that directly affects FSB.

Under the Federal Deposit Insurance Act, the FDIC Board has the authority to set the annual assessment rate range for the various risk categories within certain regulatory limits and to impose special assessments upon insured depository institutions when deemed necessary by the FDIC’s Board. As part of the Deposit Insurance Fund Restoration Plan adopted by the FDIC in October 2008, on February 27, 2009, the FDIC adopted the final rule modifying the risk-based assessment system, which set initial base assessment rates between 12 and 45 basis points, beginning April 1, 2009. The FDIC imposed an emergency special assessment on June 30, 2009, which totaled $923 thousand and was collected in September 2009.for our Bank. In addition, in September 2009, the FDIC extended the Restoration Plan period to eight years. OnIn November 12, 2009, the FDIC adopted a final rule requiring prepayment of 13 quarters of FDIC premiums. The Bank’s required prepayment amounted to $9.9 million and was collected in December 2009.

In November 2010, the FDIC issued a notice of proposed rulemaking to change the deposit insurance assessment base from total domestic deposits to average total assets minus average tangible equity, as required by the Dodd-Frank Act, effective April 1, 2011. The FDIC also issued a notice of proposed rulemaking to revise the deposit insurance assessment system for large institutions. The FDIC proposed to create a two tier system — one for most large institutions paythat have more than $10 billion in assets, and another for “highly complex” institutions that have over $50 billion in assets and are fully owned by a Financing Corporation (“FICO”)parent with over $500 billion in assets. These proposals did not apply to us or the Bank.

On February 9, 2011, the FDIC adopted a final rule which redefines the deposit insurance assessment base as required by the Dodd-Frank Act. The final rule sets the deposit insurance assessment base as average consolidated total assets minus average tangible equity. It also sets a new assessment rate schedule which reflects assessment rate adjustments including potentially reduced rates tied to unsecured debt and potentially increased rates for brokered deposits. The final rule generally becomes effective on April 1, 2011. Under the new rule, our FDIC insurance premiums are expected to decline in order2011. However, there can be no assurances that such premium reductions will be realized in 2011.

Transactions with Affiliates.FII and FSB are affiliates within the meaning of the Federal Reserve Act. The Federal Reserve Act imposes limitations on a bank with respect to fundextensions of credit to, investments in, and certain other transactions with, its parent bank holding company and the interest on bonds issued inholding company’s other subsidiaries. Furthermore, bank loans and extensions of credit to affiliates also are subject to various collateral requirements.

Community Reinvestment Act.Under the 1980sCommunity Reinvestment Act, every FDIC-insured institution is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act requires the appropriate federal banking regulator, in connection with the failuresexamination of an insured institution, to assess the institution’s record of meeting the credit needs of its community and to consider this record in its evaluation of certain applications, such as a merger or the establishment of a branch. An unsatisfactory rating may be used as the basis for the denial of an application and will prevent a bank holding company of the institution from making an election to become a financial holding company.

Interstate Banking and Branching.The FRB may approve an application of a bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than the bank holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the law of the target bank’s home state. The FRB also may not approve an application if the bank holding company (and its bank affiliates) controls or would control more than ten percent of the insured deposits in the thrift industry. For the fourth quarter of 2009, the FICO assessment is equal to 1.06 basis points for each $100 in domestic deposits. These assessments will continue until the bonds mature in 2019. The FDIC bills and collects this assessment on behalf of FICO.

.International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.The CommunityPresident signed the USA Patriot Act of 2001 into law in October 2001. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA substantially broadens existing anti-money laundering legislation and the extraterritorial jurisdiction of the U.S., imposes new compliance and due diligence obligations, creates new crimes and penalties, compels the production of documents located both inside and outside the U.S., including those of foreign institutions that have a correspondent relationship in the U.S., and clarifies the safe harbor from civil liability to customers. The Treasury Department has issued a number of regulations implementing the USA Patriot Act that apply certain of its requirements to financial institutions such as our banking and broker-dealer subsidiaries. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The increased obligations of financial institutions, including us, to identify their customers, watch for and report suspicious transactions, respond to requests for information by regulatory authorities and law enforcement agencies, and share information with other financial institutions, requires the implementation and maintenance of internal procedures, practices and controls which have increased, and may continue to increase, our costs and may subject us to liability.

In addition to the restrictions on the Company’s ability to pay dividends on and repurchase its stock, as described above under “Dividends,” participation in the TARP Capital Purchase Program also includes certain requirements and restrictions regarding compensation that were expanded significantly by the American Recovery and Reinvestment Act of 19772009 (“CRA”ARRA”), as implemented by the Treasury’s Interim Final Rule on TARP Standards for Compensation and Corporate Governance. These requirements and restrictions include, among others, the following: (i) a prohibition on paying or accruing bonuses, retention awards and incentive compensation, other than qualifying long-term restricted stock or pursuant to certain preexisting employment contracts, to our five most highly-compensated employees; (ii) a general prohibition on providing severance benefits, or other benefits due to a change in control of the Company, to our senior executive officers (“SEOs”) and next five most highly compensated employees; (iii) a requirement to make subject to clawback any bonus, retention award, or incentive compensation paid to any of the regulationsSEOs and any of the next twenty most highly compensated employees if such compensation was based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria; (iv) a requirement to establish a policy on luxury or excessive expenditures; (v) a requirement to annually provide shareholders with a non-binding advisory “say on pay” vote on executive compensation; (vi) a prohibition on deducting more than $500,000 in annual compensation, including performance-based compensation, to the executives covered under Internal Revenue Code Section 162(m); (vii) a requirement that the compensation committee of the board of directors evaluate and review on a semi-annual basis the risks involved in employee compensation plans; and (viii) a prohibition on providing tax “gross-ups” to our SEOs and the next 20 most highly compensated employees. These requirements and restrictions will remain applicable to us until we have redeemed the Series A preferred stock in full.

Incentive Compensation.On October 22, 2009, the Federal Reserve issued hereunder area comprehensive proposal on incentive compensation policies (the “Incentive Compensation Proposal”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Proposal, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage banksrisk-taking beyond the organization’s ability to help meeteffectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the credit needsorganization’s board of directors. Banking organizations are instructed to begin an immediate review of their service area, including lowincentive compensation policies to ensure that they do not encourage excessive risk-taking and moderate income neighborhoods, consistent withimplement corrective programs as needed. Where there are deficiencies in the safe and sound operationsincentive compensation arrangements, they must be immediately addressed.

Additionally, the Incentive Compensation Proposal will require the Federal Reserve to review, as part of the banks.regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as us, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Sarbanes-Oxley Act of 2002.The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate governance, accounting and reporting measures for companies that have securities registered under the Exchange Act, including publicly-held bank holding companies such as Financial Institutions. Specifically, the Sarbanes-Oxley Act of 2002 and the various regulations also providepromulgated thereunder, established, among other things: (i) requirements for regulatory assessmentaudit committees, including independence, expertise, and responsibilities; (ii) responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of a bank’s record in meeting the needsreporting company; (iii) the forfeiture of its service area when considering applications regarding establishing branches, mergersbonuses or other bank or branch acquisitions. The Financial Institutions Reform, Recoveryincentive-based compensation and Enforcement Act of 1989 requires federal banking agencies to make public a rating of a bank’s performance underprofits from the CRA. In the case of a bank holding company, the CRA performance recordsale of the banks involvedreporting company’s securities by the Chief Executive Officer and Chief Financial Officer in the transaction are reviewed in connection withtwelve-month period following the filinginitial publication of any financial statements that later require restatement; (iv) the creation of an applicationindependent accounting oversight board; (v) standards for auditors and regulation of audits, including independence provisions that restrict non-audit services that accountants may provide to acquire ownership or controltheir audit clients; (vi) disclosure and reporting obligations for the reporting company and their directors and executive officers, including accelerated reporting of shares or assets ofstock transactions and a bank orprohibition on trading during pension blackout periods; (vii) a prohibition on personal loans to mergedirectors and officers, except certain loans made by insured financial institutions on non-preferential terms and in compliance with any other bank holding company. An unsatisfactory record can substantially delay or blockregulatory requirements; and (viii) a range of civil and criminal penalties for fraud and other violations of the transaction. FSB received a rating of “outstanding” as of its most recent CRA performance evaluation.securities laws.

Consumer Laws and Regulations.In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include, among others, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act and the Real Estate Settlement Procedures Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of theirits ongoing customer relations. The Check Clearing for the 21st Century Act (“Check(the “Check 21 Act” or “the Act”), which became effective on October 28, 2004, creates a new negotiable instrument, called a “substitute check”, which banks are required to accept as the legal equivalent of a paper check if it meets the requirements of the Check 21 Act. The Check 21 Act is designed to facilitate check truncation, to foster innovation in the check payment system, and to improve the payment system by shortening processing times and reducing the volume of paper checks.

At December 31, 2009, the Company2010, we had 513 full-time and 107 part-time616 employees. None of the employees are subject to a collective bargaining agreement and management believes its relations with employees are good.

The following table sets forth current information regarding the Company’sour executive officers and certain other significant employees (ages are as of May 4, 2011, the 2010date of the 2011 Annual Meeting)Meeting of Shareholders).

Making or continuingAn investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment in securities issued by the Company, including its common stock, involves certain risks thatdecision, you should carefully consider.consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference herein. The risks and uncertainties described below are not the only risks that may have a material adverse effect on the Company.ones facing us. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also could adversely affect the Company’simpair our business financial condition and results of operations. If any of the following risks actually occur, the Company’s business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment.This Annual Report on Form 10-K is qualified in its entirety by these risk factors. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’sour actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

If any of the Company.following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.

The capital and credit markets have been experiencing unprecedented levels of volatility and disruption for more than a year. In some cases,From December 2007 through June 2009, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. As a consequence of the recession that the United States now finds itselfU.S. economy was in businessrecession. Business activity across a wide range of industries faceand regions in the U. S. was greatly reduced. Although economic conditions have begun to improve, certain sectors, such as real estate, remain weak and unemployment remains high. Local governments and many businesses are still in serious difficultiesdifficulty due to the lack oflower consumer spending and reduced tax collections.

Market conditions also led to the extreme lackfailure or merger of liquidity inseveral prominent financial institutions and numerous regional and community-based financial institutions. These failures, as well as projected future failures, have had a significant negative impact on the global credit markets. Unemployment has also increased significantly.

Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the Company’s business, financial condition and resultsvalue of operations:

An impairmentWe face substantial competition in all areas of certain intangible assets,our operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include national, regional and internet banks within the various markets in which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as goodwill;

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and counterparties who become delinquent, file for protection under bankruptcy laws or defaultprofitability, which, in turn, could have a material adverse effect on their loans or other obligations to the Company. An increase in the numberour financial condition and results of delinquencies, bankruptcies or defaultsoperations.

Our goodwill is evaluated for loan losses,impairment on an annual basis or when triggering events or circumstances indicate impairment may exist. Significant and valuation adjustments on loans held for sale.

The Company maintainsOur liquidity primarily through customer deposits and other funding sources. If economic influences change socould be impaired by an inability to access the capital markets or unforeseen outflows of cash. This situation may arise due to circumstances that we do not have accessmay be unable to short-term credit,control, such as a general market disruption or our depositors withdraw a substantial amount of their funds for other uses, the Company might experience liquidity issues.an operational problem that affects third parties or us. Our efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated reductions in our liquidity. In such events, our cost of funds may increase, thereby reducing our net interest revenue, or we may need to sell a portion of our investment and/or loan portfolio, which, depending upon market conditions, could result in our realizing a loss.

The parent company, FII, is a legal entity separate and distinct from its banking and other subsidiaries. FII’s principal source of cash flow, including cash flow to pay dividends to its shareholders and principal and interest on its outstanding debt, is dividends from FSB. There are statutory and regulatory limitations on the payment of dividends by FSBPursuant to the parent company,Letter Agreement, dated December 23, 2008, and the Securities Purchase Agreement - Standard Terms attached thereto, which we refer to collectively as the Securities Purchase Agreement, that we entered into with the Treasury, in connection with our participation in TARP, the Treasury received a warrant to purchase up to 378,175 shares of our common stock, which we refer to as the warrant, at an exercise price of $14.88 per share, and we have provided the Treasury with registration rights covering the warrant and the underlying shares of common stock. We may seek the approval of our regulators to repurchase the warrant with the proceeds from any offering. The issuance of additional shares of common stock as a result of exercise of the warrant or otherwise or the issuance of securities convertible or exercisable into shares of common stock would dilute the ownership interest of existing holders of our common stock. Although the Treasury has agreed to not vote any of the shares of common stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound by this restriction. The market price of our common stock could decline as a result of any offering as well as by FII to its shareholders. Regulationsother sales of both the Federal Reserve and the State of New York affect the ability of FSB to pay dividends and other distributions, as well as make loans to FII. The Bank is currently required to obtain approval from the NYS Banking Department for dividend payments. If FSB is unable to make dividend payments to FII and sufficient capital is not otherwise available, FII may not be able to make dividend payments to its common shareholders or principal and interest payments on its outstanding debt. See also the section titled “Supervision and Regulation—Restrictions on Distribution of Subsidiary Bank Dividends and Assets” of this Annual Report on Form 10-K.

The terms of the Company’s securitieswarrant include an anti-dilution adjustment, which provides that (except in certain permitted transactions, including registered offerings), if we issue shares of common stock at a price that is less than 90% of the market price of such shares on the last trading day preceding the date of the agreement to sell such shares, the number of shares of common stock to be issued under the warrant would increase and the per share price of common stock to be purchased pursuant to the warrant would decrease.

In addition, our right to participate in any distribution of assets of any of our subsidiaries upon the subsidiary’s liquidation or otherwise, and thus your ability as a holder of our common stock to benefit indirectly from such distribution, will be subject to the prior claims of creditors of that subsidiary and holders of any of that subsidiary’s preferred stock, except to the extent that any of our claims as a creditor of such subsidiary may dilute the ownership interestsbe recognized. As a result, our common stock will effectively be subordinated to all existing and future liabilities and obligations of existing shareholders.our subsidiaries.

ShareholdersHolders of the Company’sour common stock are only entitled to receive such dividends as the Company’sour Board of Directors may declare out of funds legally available for such payments. Although the Company haswe have historically declared cash dividends on itsour common stock, it iswe are not required to do so and may reduce or eliminate itsour common stock dividend in the future. This could adversely affect the market price of the Company’sour common stock. Also, participation in the CPPTARP limits our ability to increase our dividend or to repurchase our common stock, for so long as any securities issued under such program remain outstanding, as discussed in greater detail below.

Provisions of oneour certificate of its primaryincorporation, our bylaws, and federal and state banking regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of its loan portfolio. The actual amount of future provisions for credit losses may vary from the amount of past provisions.