Good morning, ladies and gentlemen, and welcome to the Financial Institutions second quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during the conference, please press star followed by the zero. As reminder, this conference is being recorded today, Wednesday, August 10, 2005.

I would now like to turn the call over to Ms. Deborah Pawlowski. Please go ahead.

Good morning, everyone. I'm Debbie Pawlowski with Kei Advisors, Investor Relations for Financial Institutions. Thank you for joining us today.

For our teleconference presentation, we have with us Peter Humphrey, Chairman, President and CEO of Financial Institutions; as well as Ron Miller, Chief Financial Officer; Jim Rudgers, Chief of Community Banking; and Matt Murtha, Senior Vice President responsible for corporate and investor communications. Pete and Ron will discuss the second quarter results, and then we will open for questions.

As you are aware, we may make some forward-looking statements during the formal presentation as well as during the Q&A. These statements apply to future events and are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today. The factors are outlined in the press release as well as in the 10K and 10Qs filed with the SEC.

If you have any questions, you can always access those documents. You should have the press release available to you, which went out yesterday afternoon. If not, you can find it on the website at www.fiiwarsaw.com.

With that, let me turn it over to Pete to start the discussion.

Thank you, Debbie, and thank you, everyone, for joining us today. As noted in the press release, the second quarter was a complex one, but one that illustrates the progress we are making in our efforts to address our asset quality issues.

Over the last two years, we have made many changes throughout our organization and, more specifically, at our two subsidiary banks, National Bank of Geneva, or NBG, and Bath National Bank, BNB. These banks are operating under formal agreements with the regulatory body that oversees them, which is the Office of the Controller of the Currency, or OCC.

The review of the most recent reports of examination for the period that ended last year, that we received, acknowledged the significant efforts of management, but also outlined several areas of continued problems, especially at NBG. As a result, we have made even more aggressive changes in 2005, and many financially measurable and obvious actions took place in the second quarter.

Over the last two years, we have made considerable strides in changing the decentralized and individualized credit administration processes at FI subsidiary banks, ultimately centralizing the function, control and process. We also lowered the levels at which subsidiary banks could approve loans without corporate approvals.

In 2005, we separated the lending officer function from portfolio administration and review functions. Another important change was the addition of new Board members at National Bank of Geneva and Bath National Bank. Concurrent with the new additions, we reorganized the compliance committees of these Boards to better manage and monitor compliance with the formal agreements under which they are operating.

A major part of our problems have been related to personnel skills and experience at our subsidiary banks. In the last year, we have made major changes in the restructuring of our management team. We have added experienced, capable talents such as Jim Rudgers, who has since brought on board many other strong and experienced leaders.

Specifically at NBG in early 2005, its president resigned and we were able to appoint Marty Birmingham, formally a Rochester regional executive at the Bank of America, as our new president at NBG.

During the second quarter, we made arrangements to sell most of our problem loans and recorded them at their fair market value. Most should be sold by the close of the third quarter this year. Although this move negatively impacted our earnings in the second quarter dramatically, we believe it was a very solid and necessary step forward for the health of the subsidiary banks. Other actions to repair the problem loans would, just by their nature, take too long of a time to allow our company to move forward expeditiously.

Also during the second quarter, we reduced our dividend by half from an annual rate of 16 cents per share to 8 cents per share. At this level, current dividends received by the parent from Wyoming County Bank and First Tier Bank covered the cost of our common dividend and preferred dividend as well as the interest cost of our debt.

Over the years, we have operated as a holding company with four subsidiary banks. Strategically we have always been centered on the strong retail franchise area we serve. Given the challenges we have faced with control and risk management, we are assessing the possibility of consolidating two or more of our banks into one under a state charter. Part of this process includes a pre-application review by the New York State Banking Department and the Federal Reserve Bank of New York. We are currently in the process of that review during this month.

The key component of our strategy has been our retail and business services. During our growth in the late ‘90s and early in this decade, I believe we overemphasized other kinds of services in the larger commercial businesses. In order to improve our focus and our vision of providing high quality, comfortable banking service to our customers throughout our roughly 10,000 square mile service area, we are working to strategically realign the company.

Part of this effort includes the potential sale of the Burke Group which provides compensation and benefits consulting services across the country. During the second quarter, with our decision to sell this business, we recorded the Burke Group as a discontinued operation.

Our current and future product and services development will be focused on the retail market and businesses within our franchise area. We believe there is still significant market share to be gained through the advantages of our large branch network, our friendly service, our broad range of available services and our significant reach throughout this territory. We also believe this can be accomplished within more appropriate risk parameters.

Now let me turn it over to Ron to review the financials in detail.

Thanks, Pete, and good morning, everyone.

As noted in our earnings release and in the 10Q filed with the SEC yesterday, we reported a net loss for the second quarter of $12 million or $1.09 per share. That represents a decrease of $17.6 million from last year's second quarter.

The primary reason for this significant decline in earnings was our previously announced decision to sell $174 million in criticized and classified loans. We settled $7 million of those loans at about 90% of their recorded value before the end of the quarter, and then placed in held for sale status the remaining portion of $167 million at an estimated fair value of $131 million.

Of those $131 million in held for sale loans, at quarter end we had agreements to sell or settle $79 million and have since closed approximately $66 million of those loans.

The second part of our loan sale process addresses the remaining $52 million in problem loans. Those loans are currently being marketed, and we expect to receive bids on them within the third quarter.

Our total net loan charge-offs for the quarter were $40.8 million and included $37 million related to our decision to sell the problem loans. A portion of the loss on those loans had previously been allocated in our allowance for loan losses, and we recorded a total loan loss provision of $21.9 million in the second quarter.

Our allowance for loan losses at June 30th was $21 million, which was equal to 2.04% of our total loans, and provided a coverage ratio on non-performing loans of 123%.

As Pete mentioned, the company also decided in the second quarter to sell our benefits administration and compensation consulting subsidiary, and in conjunction with the discontinuance of those operations and our decision to sell the subsidiary, we recorded a $2.3 million loss in the second quarter.

Let me take a few minutes to discuss our general operating performance, looking first to the income statement.

Our net interest income declined by $1.8 million, to $16.9 million, in the second quarter when compared to the same quarter last year. Several factors contribute to this decline, including a higher level of non-accruing assets this year and the reversal against interest income of interest that was accrued but unpaid at the time we transferred the $167 million in loans into held for sale status.

We have also had a change in a mix of our earnings assets over the past year. Lower yielding investment securities have increased while our generally higher yield loans have declined. The loan decrease occurred primarily from a slowing in loan originations as we tightened credit standards and addressed credit administration and portfolio management issues.

Our net interest margin for the quarter was 3.56%, a drop of 27 basis points from last year, and for the first 6 months of 2005 averaged 3.73% compared to 3.86% last year.

Non-interest income for the second quarter declined $1.6 million to $4.8 million. This drop is largely attributed to a $1.2 million gain recorded on the sale of a credit card portfolio that occurred in the second quarter of last year.

We've also had an increase in non-interest expense this year. Year-to-date, both professional fees and salaries and benefits have increased $1.1 million each. The increase in salaries and benefits primarily relates to the addition of staff in the area of credit administration and loan underwriting. Much of the increase in professional fees is related to legal and audit costs associated with our credit and regulatory issues. We have also incurred professional fees in connection with the consolidation of some functional areas, as well as work performed in the consideration of consolidating our subsidiary banks under one charter.

As to the balance sheet, I previously discussed the loan portfolio and the allowance for loan losses. Our portfolio of investment securities has a relatively short average duration and is designed to balance interest rate risk and provide funding flexibility to the company. As we complete the sale of the $131 million in loans held for sale, we will be adding even more securities and liquidity to our balance sheet.

From a funding standpoint, the company's principal source of funds is our stable deposit base generated from our core community banking business. Other funding sources to the company include advances from the Federal Home Loan Bank. In addition, our parent company has a credit agreement with M&T Bank. Due to our reported loss for the second quarter, we were not in compliance with certain covenants of that credit agreement. We have received, from the lender, a waiver of the noncompliance at June 30th, and we've also begun discussions with the lender to modify the covenants in that agreement.

From a capital perspective, we continue to meet and exceed regulatory requirements, even after absorbing the second quarter losses. The consolidated company has a leveraged ratio of 6.676% at the end of the second quarter and our two subsidiary banks, under formal agreement, exceed the required capital levels in their respective agreements while our other two subsidiary banks' capital ratios exceed regulatory guidelines for well capitalized banks.

In summary, the risk in our balance sheet has been greatly reduced from the completion of nearly all of the first phase of our loan sale. It will be reduced even further with successful completion of the second phase.

We have a stable deposit funding base and a growing and liquid investment portfolio. We have opportunities to gain overhead efficiencies from consolidation activities and revenue opportunities from refocusing our resources towards the marketplace and lastly, we have a capital base that has absorbed our losses and continues to meet and exceed regulatory requirements. Pete.

Thank you, Ron. And at this point I would ask our operator, Adrian, if we could open the call for questions.

Thank you, sir. Ladies and gentlemen, at this time we will conduct the question and answer session. If you have a question, please press star followed by the one on your pushbutton phone. If you would like to decline from the polling process, press star followed by the two. You will hear a three-toned prompt acknowledging your selection. Your questions will be polled in the order they are received.

If you're using speaker equipment, you'll need to pick up your handset before pressing the numbers. Also, we ask that you please ask one question with a follow question. If you have any additional questions, please press star/one to queue up once again. One moment, please, for our first question.

Our first question comes from the line of David Darst with FTN Midwest. Please go ahead.

Good morning. Can you give us any indication of your commercial and agricultural loan portfolios going forward, if you expect to grow those portfolios or as loans are paid off, those will decline as a percentage of loans?

That's a very good question. Our approach going forward is to remain actively involved in our marketplace in all loan segments, whether in commercial or agricultural as well as retail. It has been our effort over the last several years to re-balance the portfolio and better realign the risk within the portfolio.

The goal is to slightly reduce the percentage of our commercial and agriculture as a total of the portfolio, but clearly continuing to remain active in those segments.

A second question regarding your non-performing assets. At the end of the first quarter, the total was $200 million including criticize and then you indicated the sale of $175 for the resolution of part of that. That would have left a remaining $25 million, and it looks like the combination of NPLs and criticize is now $33 million.

Can you give us some idea of what those increases were, either in non-performing loans or criticize, and what may be left in those portfolios of large size?

David, this is Ron. I think your numbers are pretty much in line with the sale of the loans. The amount of problem loans are classified. Substandard loans are approximately in the $30 million range in a post-loan sale environment.

I'm not sure of your question on the non-accrual loans. We reported $18 million in non-performing assets, and from a technical reporting standpoint, the $131 million that we have in loans available for sale are also reported as non-performers at the end of the quarter.

Can you give us an indication of what the increase of $5 to $8 million was during the period? It looks like credit quality maybe continued to deteriorate excluding the loan sale.

I'm sure there was some migration into the portfolio, but I would attribute that more to a normal migration pattern as opposed to any continued movement of deterioration.

Do you expect a portion of the $17 million to be resolved over the near term?

We continue to actively work on those, as you might expect, and are hoping to make additional progress in the third quarter.

But are there any one or two large loans you could pinpoint and say this is $4 million or give us a number?

The remaining $17 million in non-accrual loans are of a relatively small dollar amount.

Okay. Thank you.

Thank you. Our next question comes from Steve Walsh with Byrn Mawr Capital. Please go ahead.

Hi. If you were to back out these nonrecurring charges for the second quarter, and if you assume no provision for loan losses, can you give us kind of an operating number for the quarter?

I'm sorry, Steve. We're all looking at each other. I'm not sure we really understand your question.

I'm trying to get to a core operating earnings per share number. If you'd back out these nonrecurring charges, assuming these provisions for the loan sales did not occur again in the forthcoming quarters.

As you're moving forward though, we do have the issue that we still have the remaining sale out there that could occur in the third and fourth quarter, so you're still going to see some unusual things occurring within the financial statement, so a real formula isn't really obvious or available yet.

So if you were to back those unusual charges out and get to a core number, what would that be?

The recorded provision for loan losses in the quarter…I think the question really is what the ongoing provision might be, and we really are not providing any earnings guidance in that direction. The provision for the quarter was $21.9 million and, as Deb alluded to, we have recorded at fair value the loans held for sale that, obviously, if there were adjustments to be made on the actual realized values on those, would flow through in the third quarter. I don't know if that's helpful or not.

So what about the non-interest expenses? How much were those in nonrecurring charges there? In other words, you had the sale of that company and are there any other charges that we didn't see like OREO expense or anything?

There was no significant OREO expense in the quarter. Again only discontinued operations is separately identified on the financial statements. And in terms of the overhead charges...

There were some severance costs in the 6 month period.

In the 6 month period and then just some higher than normal legal fees and accounting fees in general for the first 6 months as well as for the second quarter.

When you say in general, can you quantify those accounting charges at all or back to a more normalized level?

In a very round context, I would say a half of a million dollars in nonrecurring expense for the quarter.

Okay. Thank you.

There are no further questions at this time. Please go ahead.

Thank you. This is Peter. In closing, I'd like to reiterate that our strategy is to return to our core community banking business, serving our large retail and business markets throughout our territory.

We have a very solid capital structure, as Ron pointed out, and we believe in our continued potential of gaining market share within our operating region.

We readily acknowledge that these have been sometimes unbearably challenging times with the situation at NBG and BNB, and the situations are not fully resolved as we address the findings of the most recent report. However, we strive to meet those expectations of the formal agreements.

Going forward, we will need to reduce our costs while maintaining the improved risk profile we have attained. There is still much to do, yet we are encouraged by the plans we have to maintain the momentum we have gained at this point this year.

Thank you again for your interest in Financial Institutions and have a nice day.

Ladies and gentlemen, this does conclude the Financial Institutions second quarter earnings call. If you would like to listen to the replay of today's conference please dial 303-590-3000 with the pass code 11034752.

You may now disconnect and thank you for using ACT Teleconferencing.

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