UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004

Commission File Number 0-26481

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 twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES[X] NO[   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES[X] NO[   ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

2

FINANCIAL INSTITUTIONS, INC.

FORM 10-Q

INDEX

2

Item 1. Financial Statements (Unaudited)

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

See Accompanying Notes to Unaudited Consolidated Financial Statements.

3

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

See Accompanying Notes to Unaudited Consolidated Financial Statements.

4

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

See Accompanying Notes to Unaudited Consolidated Financial Statements.

5

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

See Accompanying Notes to Unaudited Consolidated Financial Statements.

6

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

Financial Institutions, Inc. (“FII”), a bank holding company organized under the laws of New York State, and subsidiaries (the “Company”) provides deposit, lending and other financial services to individuals and businesses in Central and Western New York State. FII and subsidiaries are each subject to regulation by certain federal and state agencies.

The consolidated financial statements include the accounts of FII and its four banking subsidiaries, Wyoming County Bank (99.65% owned) (“WCB”), National Bank of Geneva (100% owned) (“NBG”), First Tier Bank & Trust (100% owned) (“FTB”) and Bath National Bank (100% owned) (“BNB”), collectively referred to as the “Banks”. During 2003, the Company disclosed that the Boards of Directors of its two national bank subsidiaries, NBG and BNB, entered into agreements with their primary regulator, the Office of the Comptroller of the Currency (“OCC”). Under the terms of the agreements, NBG and BNB, without admitting any violations, have taken actions designed to assure that their operations are in accordance with applicable laws and regulations. On July 23, 2004, the OCC sent “15-day letters” to certain current and former directors and officers of NBG, notifying them that the OCC is considering an administrative action against them, such as reprimand or civil money penalty, arising out of violations of law identified in the September 30, 2002 Report of Examination, and providing them an opportunity to submit information prior to the commencement of any administrative action. Four NBG directors and one officer who received such letters submitted a response on September 9, 2004. NBG’s By-Laws provide that, to the fullest extent permitted by law, it shall indemnify directors and officers made a party to an administrative proceeding, provided that the acts of the indemnified party that are the subject of the proceeding were not committed in bad faith, were not the result of dishonesty, and did not result in personal gain. Federal law prohibits indemnifying directors for fines and civil money penalties, but indemnification is permitted under certain circumstances for legal and professional expenses. The five individuals who participated in the joint response to the “15-day letters” that was submitted on September 9, 2004 have transmitted their legal bills to NBG for payment.

The Company also has two financial services subsidiaries: The FI Group, Inc. (“FIGI”) and the Burke Group, Inc. (“BGI”), collectively referred to as the “Financial Services Group” (“FSG”). FIGI is a brokerage subsidiary that commenced operations as a start-up company in March 2000. BGI is an employee benefits and compensation consulting firm acquired by the Company in October 2001. During 2003, the Company terminated its financial holding company status to operate instead as a bank holding company. The change in status did not affect the non-financial subsidiaries or activities being conducted by the Company, although future acquisitions or expansions of non-financial activities may require prior Federal Reserve Board approval and will be limited to those that are permissible for bank holding companies.

In February 2001, the Company formed FISI Statutory Trust I (“FISI” or “Trust”) (100% owned) and capitalized the trust with a $502,000 investment in FISI’s common securities. The Trust was formed to accommodate the private placement of $16.2 million in capital securities (“trust preferred securities”), the proceeds of which were utilized to partially fund the acquisition of BNB. Effective December 31, 2003, the provisions of FASB Interpretation No. 46 (Revised), “Consolidation of Variable Interest Entities,” resulted in the deconsolidation of the Company’s wholly-owned Trust. The deconsolidation resulted in the derecognition of the $16.2 million in trust preferred securities and the recognition of $16.7 million in junior subordinated debentures and a $502,000 investment in the subsidiary trust recorded in other assets in the Company’s consolidated statements of financial condition.

In management’s opinion, the interim consolidated financial statements reflect all adjustments necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results of operation to be expected for the full year ended December 31, 2004. The interim consolidated financial statement should be read in conjunction with the Company’s 2003 Annual report on Form 10K. The consolidated financial information included herein consolidates the results of operations,

7

the assets, liabilities and shareholders’ equity of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. Amounts in the prior year’s consolidated financial statements are reclassified when necessary to conform to the current year’s presentation.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and prevailing practices in the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, and the reported revenues and expenses for the period. Actual results could differ from those estimates.

(2) Stock Compensation Plans

The Company uses a fixed award stock option plan to compensate certain key members of management of the Company and its subsidiaries. The Company accounts for issuance of stock options under the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Under APB No. 25, compensation expense is recorded on the date the options are granted only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed under SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above and has adopted only the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock — Based Compensation – Transition and Disclosure.”

Had the Company recognized compensation cost based on the fair value method under SFAS No. 123, the Company’s net income and earnings per share would have been as follows:

8

(3) Earnings Per Common Share

Basic earnings per share, after giving effect to preferred stock dividends, has been computed using weighted average common shares outstanding. Diluted earnings per share reflect the effects, if any, of incremental common shares issuable upon exercise of dilutive stock options.

Earnings per common share have been computed based on the following:

There were stock options totaling 222,427 and 52,057 for the three months ended September 30, 2004 and 2003, respectively that were not considered in the calculation of diluted earnings per share since the stock options’ exercise price was greater than the average market price during these periods. There were stock options totaling 139,785 and 82,974 for the nine months ended September 30, 2004 and 2003, respectively that were not considered in the calculation of diluted earnings per share since the stock options’ exercise price was greater than the average market price during these periods.

9

(4) Segment Information

Reportable segments are comprised of WCB, NBG, BNB, FTB and the Financial Services Group. The reportable segment information is as follows:

10

(5) Retirement Plans and Postretirement Benefits

The Company participates in The New York State Bankers Retirement System, which is a defined benefit pension plan covering substantially all employees. The benefits are based on years of service and the employee’s highest average compensation during five consecutive years of employment. The Company’s funding policy is to contribute at least the minimum funding requirement as determined actuarially to cover current service cost plus amortization of prior service costs.

Net periodic pension cost consists of the following components:

The Company contributed $1,406,000 to the pension plan on August 31, 2004.

The Company’s BNB subsidiary has a postretirement benefit plan that provides health and dental benefits to eligible retirees. The plan was amended in 2001 to curtail eligible benefit payments to only retired employees and active participants who were fully vested under the plan. Expense for the plan amounted to $54,000 and $142,000 for the nine months ended September 30, 2004 and 2003, respectively.

(6) Commitments and Contingencies

In the normal course of business, the Company has outstanding commitments to extend credit not reflected in the Company’s consolidated financial statements. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company uses the same credit policy to make such commitments as it uses for on-balance-sheet items. Unused lines of credit and loan commitments totaling $253.4 million and $271.9 million were contractually available at September 30, 2004 and December 31, 2003, respectively. Since commitments to extend credit and unused lines of credit may expire without being fully drawn upon, the amount does not necessarily represent future cash commitments.

The Company guarantees the obligations or performance of customers by issuing stand-by letters of credit to third parties. The risk involved in issuing stand-by letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet products. Typically, these instruments have terms of five years or less and expire unused; therefore, the amount does not necessarily represent future cash requirements. Standby letters of credit totaled $11.1 million and $11.8 million at September 30, 2004 and December 31, 2003, respectively. As of September 30, 2004, the fair value of the standby letters of credit was not material to the Company’s consolidated financial statements.

11

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

GENERAL

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

Income. The Company’s results of operations are dependent primarily on net interest income, which is the difference between the income earned on loans and securities and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for loan losses, service charges on deposits, financial services group fees and commissions, mortgage banking activities, gain or loss on the sale or call of investment securities and other miscellaneous income.

Expenses. The Company’s noninterest expenses primarily consist of salaries and employee benefits, occupancy and equipment, supplies and postage, amortization of intangible assets, computer and data processing, professional fees, other miscellaneous expense and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and the actions of regulatory authorities.

OVERVIEW

Net income was $5.1 million, or $0.42 per share (diluted), and $4.1 million, or $0.33 per share (diluted), for the quarter ended September 30, 2004 and 2003, respectively. Return on average common equity (annualized) for the quarter ended September 30, 2004 was 11.36%, compared to 8.70% for the same period a year ago. Return on average assets (annualized) for the three months ended September 30, 2004 was 0.94%, compared to 0.75% for the same period a year ago.

Net income was $13.3 million, or $1.08 per share (diluted), and $12.0 million, or $0.97 per share (diluted), for the nine months ended September 30, 2004 and 2003, respectively. Return on average common equity (annualized) for the nine months ended September 30, 2004 was 9.79%, compared to 8.73% for the same period a year ago. Return on average assets (annualized) for the nine months ended September 30, 2004 was 0.81%, compared to 0.74% for the same period a year ago.

The improved earnings during 2004 is due primarily to a decrease in the provision for loan losses, which was $2.1 million for the third quarter of 2004 and $9.5 million for the nine months ended September 30, 2004 compared to $5.6 million for the third quarter 2003 and $14.2 million for the nine months ended September 30, 2003.

Net interest income, the principal source of the Company’s earnings, was $19.2 million for the third quarter of 2004 compared to $18.5 million for the same quarter last year. Net interest margin was 3.98% for the three months ended September 30, 2004, an increase of 12 basis points from the 3.86% level for the same quarter last year. Net interest income was $56.4 million for the nine months ended September 30, 2004 compared to $56.6 million for the same period last year. Net interest margin for the nine months ended September 30, 2004 was 3.88%, a drop of 7 basis points from 3.95% for the nine months ended September 30, 2003.

As the Company has been actively working to reduce credit risk in the loan portfolio and implement more stringent underwriting requirements, its loan origination processes have slowed. The Company has made investments in people and processes to provide for a stronger credit and sales culture within the organization. The Company is in the process of expanding its loan origination staff, providing additional training on the new credit processes and increasing sales training activities in an effort to grow the loan portfolio. On October 13, 2004, the Company announced the appointment of James T. Rudgers as Senior Vice President and Chief of Community Banking. In that position, Mr. Rudgers will oversee and support the management of the Company’s four banking subsidiaries.

12

CRITICAL ACCOUNTING POLICIES

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

The Company has numerous accounting policies, of which the most significant are presented in Note 1 of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K as of December 31, 2003, dated March 12, 2004, as filed with the Securities and Exchange Commission. 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 financial statements and how those reported amounts are determined. Based on the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has determined that the accounting policies with respect to the allowance for loan losses and goodwill require particularly subjective or complex judgments important to the Company’s financial position and results of operations, and, as such, are considered to be critical accounting policies as discussed below.

Allowance for Loan Losses: Arriving at an appropriate level of allowance involves a high degree of judgment. The Company’s allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Management uses historical information to assess the adequacy of the allowance for loan losses and considers the prevailing business environment, as it is affected by changing economic conditions and various external factors, which may impact the loan portfolio. Management also uses a loan risk rating system as well as current portfolio performance to determine the allowance. The allowance is increased by provisions for loan losses and by recoveries of loans previously charged-off and reduced by loans charged-off.

Goodwill: SFAS No. 141 requires that the purchase method of accounting be used for all business combinations and further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets are subject to at least an annual impairment review, and more frequently if certain impairment indicators are in evidence. Changes in the estimates and assumptions used to evaluate impairment may have a material impact on the Company’s consolidated financial statements or results of operations. SFAS No. 142 also requires that reporting units be identified for the purpose of assessing impairment of goodwill.

13

FORWARD LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. When used in this report, or in the documents incorporated by reference herein, the words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “project”, “plan”, “seek” and similar expressions identify such forward-looking statements. Actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained herein. These forward-looking statements are based on the current expectations of the Company or the Company’s management and are subject to a number of risks and uncertainties, including but not limited to, economic, competitive, regulatory, and other factors affecting the Company’s operations, markets, products and services, as well as expansion strategies and other factors discussed elsewhere in this report filed by the Company with the Securities and Exchange Commission. Many of these factors are beyond the Company’s control.

14

SELECTED FINANCIAL DATA

The following tables present certain information and ratios that management of the Company considers important in evaluating performance:

15

SELECTED FINANCIAL DATA (CONTINUED)

16

NET INCOME ANALYSIS

Average Balance Sheets

The tables on the following pages set forth certain information relating to the Company’s consolidated statements of financial condition and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities as of and for the periods presented. Dividing interest income or interest expense by the average balances of interest-earning assets or interest-bearing liabilities, respectively, derived such yields and rates. Tax equivalent adjustments have been made. All average balances are average daily balances. Nonaccrual loan balances are included in the yield calculations in these tables.

17