10-K/A

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A

                                 Amendment No.1

            |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 2003

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

                         Commission File Number 0-26481

                      [LOGO] Financial Institutions, Inc.

             (Exact Name of Registrant as specified in its charter)

                NEW YORK                               16-0816610
        (State of Incorporation)         (I.R.S. Employer Identification Number)
      220 Liberty Street Warsaw, NY                       14569
(Address of Principal Executive Offices)               (Zip Code)

               Registrant's Telephone Number Including Area Code:
                                 (585) 786-1100

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      NONE

   Securities Registered Pursuant to Section 12(g) of the Act: Title of Class:
                     COMMON STOCK, PAR VALUE $.01 PER SHARE

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 such reports) and (2) has been subject to such filing
requirements for the past 90 days.

         YES |X|  NO |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |_|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).

        YES |X|   NO |_|

Aggregate market value of common stock held by non-affiliates of the registrant,
computed by reference to the closing price as of close of business on June 30,
2003 was $181,724,967.

As of March 1, 2004 there were issued and outstanding, exclusive of treasury
shares, 11,172,673 shares of the Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's proxy statement to be filed with the Securities and
Exchange Commission in connection with the 2004 Annual Meeting of Shareholders
are incorporated by reference in Part III of this Annual Report on Form 10-K.



Explanatory Note

This Form 10-K/A is being filed solely to correct typographical errors generated
during the edgarization process in Item 8 of Financial Institutions Inc.'s
Annual Report on Form 10-K for the year ended December 31, 2003, filed with the
Securities and Exchange Commission on March 12, 2004. Specifically, in the
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive
Income on page 53, data in the line items associated with the purchase of
preferred stock in 2001 and 2003 were inadvertently shifted to the wrong column.

The amendment conforms the Form 10-K as filed to the version that was certified
by Financial Institution Inc.'s Chief Executive Officer and Chief Financial
Officer, pursuant to Rules 13a-14(a) and 13a-14(b) under the Securities Exchange
Act of 1934, as amended (Exchange Act). No other changes are being made by means
of this filing.



                          FINANCIAL INSTITUTIONS, INC.

                         2003 ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

PART I

Item 1.     Business                                                           3
Item 2.     Properties                                                        25
Item 3.     Legal Proceedings                                                 26
Item 4.     Submission of Matters to a Vote of Security Holders               26

PART II

Item 5.     Market for Registrant's Common Equity and Related Stockholder
              Matters                                                         26
Item 6.     Selected Financial Data                                           27
Item 7.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                       29
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk        48
Item 8.     Financial Statements and Supplementary Data                       51
Item 9.     Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure                                        83
Item 9A.    Controls and Procedures                                           83

PART III

Item 10.    Directors and Executive Officers of the Registrant                83
Item 11.    Executive Compensation                                            84
Item 12.    Security Ownership of Certain Beneficial Owners and Management
              and Related Stockholder Matters                                 84
Item 13.    Certain Relationships and Related Transactions                    85
Item 14.    Principal Accountant Fees and Services                            86

PART IV

Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K   86


                                       2


PART I

Item I. Business

Forward Looking Statements

This Annual Report on Form 10-K contains forward-looking statements, which can
be identified by the use of such words as estimate, project, believe, intend,
anticipate, plan, seek, expect and similar expressions. These statements are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 and may include:

      o     statements regarding our business plans, and prospects;

      o     statements of our goals, intentions and expectations;

      o     statements regarding our growth and operating strategies;

      o     statements regarding the quality of our loan and investment
            portfolios; and

      o     estimates of our risks and future costs and benefits.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
Some of the risks and uncertainties that may affect the operations, performance,
development and results of the Company's business, the interest rate sensitivity
of its assets and liabilities, and the adequacy of its allowance for loan
losses, include but are not limited to the following:

      o     significantly increased competition among depository and other
            financial institutions;

      o     changes in the interest rate environment that reduces our margins or
            the fair value of financial instruments;

      o     general economic conditions, either nationally or in our market
            areas, that are worse than expected;

      o     declines in the value of real estate, equipment, livestock and other
            assets serving as collateral for our loans outstanding;

      o     legislative or regulatory changes that adversely affect our
            business;

      o     changes in consumer spending, borrowing and savings habits; and

      o     changes in accounting policies and practices, as generally accepted
            in the United States of America.

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

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



                                       3


General

Financial Institutions, Inc. (the "Company" or "FII") is a bank holding company
headquartered in Warsaw, New York, which is located 45 miles southwest of
Rochester and 45 miles southeast of Buffalo. The Company operates a
super-community bank holding company - a bank holding company that owns multiple
community banks that are separately managed.

The Company owns four commercial banks that provide consumer, commercial and
agricultural banking services in Western and Central New York State: Wyoming
County Bank ("WCB"), National Bank of Geneva ("NBG"), First Tier Bank & Trust
("FTB") and Bath National Bank ("BNB"), collectively referred to as the "Banks".
During 2002, the Company completed a geographic realignment of the subsidiary
banks, which involved the merger of the subsidiary formerly known as The
Pavilion State Bank ("PSB") into NBG and transfer of other branch offices
between subsidiary banks. In September 2003 the Boards of Directors of the
Company's two national bank subsidiaries, NBG and BNB entered into formal
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 agreed to take various actions to reduce the level of
credit risk in the banks, including reviewing loan policies, charge-off policies
for nonaccrual loans, real property appraisal standards, insider lending and
overdraft policies and affiliate transactions, and adopting capital plans to
ensure levels of risk-based capital at higher than minimum levels. Pursuant to
these agreements, the banks have taken actions required by the agreements to
ensure that their operations are in accordance with applicable laws and
regulations.

The Company formerly qualified as financial holding company under the
Gramm-Leach-Bliley Act (see discussion beginning on page 19), which allowed FII
to expand business operations to include financial services businesses. The
Company currently has two financial services subsidiaries: The FI Group, Inc.
("FIGI") and 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
and now operates 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, "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 2003 consolidated statement of
financial position.

As a super-community bank holding company, the Company's strategy has been to
manage its bank subsidiaries on a decentralized basis. This strategy provides
the Banks the flexibility to efficiently serve their markets and respond to
local customer needs. While generally operating on a decentralized basis, the
Company has consolidated selected lines of business, operations and support
functions in order to achieve economies of scale, greater efficiency and
operational consistency. In furtherance of this objective, in September 2002,
the Company added a Credit Administration Department at the holding company to
review company-wide credit policies and strengthen overall credit
administration.


                                       4


Available Information

This annual report, including the exhibits and schedules filed as part of the
annual report, may be inspected at the public reference facility maintained by
the Securities and Exchange Commission ("SEC") at its public reference room at
450 Fifth Street, NW, 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 Company also makes available, free of charge through its website at
www.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 should not be incorporated into, this
annual report on Form 10-K.

Market Area and Competition

The Company provides a wide range of consumer and commercial banking and
financial services to individuals, municipalities and businesses through a
network of 48 branches and 69 ATMs in fifteen contiguous counties of Western and
Central New York State: Allegany, Cattaraugus, Cayuga, Chautauqua, Chemung,
Erie, Genesee, Livingston, Monroe, Ontario, Schuyler, Seneca, Steuben, Wyoming
and Yates Counties.

The Company's market area is geographically and economically diversified in that
it serves both rural markets and, increasingly, the larger more affluent markets
of suburban Rochester and suburban Buffalo. Rochester and Buffalo are the two
largest cities in New York State outside of New York City, with combined
metropolitan area populations of over two million people. The Company
anticipates increasing its presence in the markets around these two cities.

The Company faces significant competition in both making loans and attracting
deposits, as Western and Central New York have a high density of financial
institutions. The Company's 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. Its most direct competition for deposits has historically come from
savings and loan associations, savings banks, commercial banks and credit
unions. The Company faces additional competition for deposits from
non-depository competitors such as the mutual fund industry, securities and
brokerage firms and insurance companies.

Operating Segments

The relative asset size, profitability and average number of full-time
equivalent employees ("FTEs") of the Company's operating segments as of or for
the year ended December 31, 2003, are depicted in the following table:

(Dollars in thousands)



                                            Percent    Net Income    Percent       Average   Percent
Subsidiary                       Assets     of Total      (Loss)     of Total        FTEs    of Total
- -----------------------------------------------------------------------------------------------------
                                                                                
Wyoming County Bank            $  754,639         35%    $  9,042          63%         168         23%
National Bank of Geneva           721,374         33          151           1          190         27
Bath National Bank                462,113         21        4,108          29          133         19
First Tier Bank & Trust           225,080         11        2,117          15           67          9
Financial Services Group            5,135         --         (115)         (1)          50          7
Parent and eliminations, net        5,391                  (1,056)         (7)         106         15
                               ----------   --------     --------    --------     --------   --------

Total                          $2,173,732        100%    $ 14,247         100%         714        100%
                               ==========   ========     ========    ========     ========   ========



                                       5


Mergers and Acquisitions

On December 13, 2002, BNB acquired two Chemung County branch offices of BSB Bank
& Trust Company of Binghamton, New York. The two offices purchased, located in
Elmira and Elmira Heights, had deposit liabilities totaling $44.2 million at the
time of acquisition. The acquisition was accounted for as a business combination
using the purchase method of accounting, and accordingly, the excess of the
purchase price over the fair value of identifiable tangible and intangible
assets acquired, less liabilities assumed, of approximately $1.5 million has
been recorded as goodwill. In accordance with Statement of Financial Accounting
Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets," the Company is
not required to amortize goodwill recognized in this acquisition. The Company
also recorded a $2.0 million intangible asset attributable to core deposits,
which is being amortized using the straight-line method over seven years.

On May 1, 2002, FII acquired all of the common stock of the Bank of Avoca
("BOA") in exchange for 47,036 shares of FII common stock. BOA was a community
bank with its main office located in Avoca, New York, as well as a branch office
in Cohocton, New York. Subsequent to the acquisition, BOA was merged with BNB.
The acquisition was accounted for as a business combination using the purchase
method of accounting, and accordingly, the excess of the purchase price ($1.5
million) over the fair value of identifiable tangible and intangible assets
acquired ($18.4 million), less liabilities assumed ($17.3 million), of
approximately $0.4 million has been recorded as goodwill. In accordance with
SFAS No. 142, the Company is not required to amortize goodwill recognized in
this acquisition. The Company recorded a $146,000 core deposit intangible asset,
which is being amortized using the straight-line method over seven years. The
results of operations for BOA are included in the income statements from the
date of acquisition (May 1, 2002).

On October 22, 2001, the Company acquired the Burke Group, Inc. ("BGI"); an
employee benefits administration and compensation consulting firm, with offices
in Honeoye Falls and Syracuse, New York. BGI's expertise includes design and
consulting for retirement and employee welfare plans, administrative services
for defined contribution and benefit plans, actuarial services and post
employment benefits. Under the terms of the agreement, BGI shareholders received
primarily common stock as consideration for their ownership in BGI. The
acquisition was accounted for as a business combination using the purchase
method of accounting, and accordingly, the excess of the purchase price ($3.3
million including earned amounts and contingent amounts to date, see Note 2 of
the notes to consolidated financial statements for additional discussion
regarding the merger consideration) over the fair value of identifiable tangible
and intangible assets acquired ($1.7 million), less liabilities assumed ($1.7
million), of approximately $3.3 million has been recorded as goodwill. In
accordance with SFAS No. 142, the Company is not required to amortize goodwill
recognized in this acquisition. The Company also recorded a $500,000 intangible
asset for a customer list that is being amortized using the straight-line method
over five years. The results of operations for BGI are included in the income
statements from the date of acquisition (October 22, 2001).

On May 1, 2001, FII acquired all of the common stock of BNC, and its wholly
owned subsidiary bank, BNB. BNB is a full service community bank headquartered
in Bath, New York, which had 9 branch locations in Steuben, Yates, Ontario and
Schuyler Counties. The Company paid $48.00 per share in cash for each of the
outstanding shares of BNC common stock with an aggregate purchase price of
approximately $62.6 million. The acquisition was accounted for under the
purchase method of accounting, and accordingly, the excess of the purchase price
($62.6 million) over the fair value of identifiable tangible and intangible
assets acquired ($295.4 million), less liabilities assumed ($269.9 million), of
approximately $37.1 million has been recorded as goodwill. Goodwill was
amortized in 2001 using the straight-line method over 15 years, since the
transaction was consummated prior to June 30, 2001, the effective date of SFAS
No. 142. However, in accordance with SFAS No. 142, the Company ceased goodwill
amortization on January 1, 2002. The results of operations for BNB are included
in the income statements from the date of acquisition (May 1, 2001).


                                       6


Lending Activities

General. The Company, through its banking subsidiaries, offers a broad range of
loans including commercial and agricultural working capital and revolving lines
of credit, commercial and agricultural mortgages, equipment loans, crop and
livestock loans, residential mortgage loans and home equity lines of credit,
home improvement loans, student loans, automobile loans, personal loans and
credit cards. Under the Company's decentralized management philosophy, each of
the banks determines individually which loans are sold and which are retained
for the portfolio. However, most newly originated fixed rate residential
mortgage loans are sold in the secondary market. The Company retains the
servicing rights on most mortgage loans it sells and realizes monthly service
fee income.

Underwriting Standards. During 2003, the Company expanded the role of the
position formerly known as Chief Credit Officer to Chief Risk Officer in an
effort to better manage overall corporate risk. The Credit Administration
Department, which falls under the supervision of the Chief Risk Officer, was
given the responsibility of reviewing company-wide credit policies with the goal
of developing and implementing stronger and more standardized underwriting and
credit administration policies. This process included a thorough evaluation and
update of the Company's loan policy and the adoption of enhanced risk rating
guidelines company-wide. The revisions to the loan policy included a focus on
the Company's lending philosophy and credit objectives.

The key elements of the Company's lending philosophy include the following:

      o     to ensure consistent underwriting, all employees must share a common
            view of the risks inherent in lending to businesses as well as the
            standards to be applied in underwriting and managing specific credit
            exposures;

      o     pricing of credit products should be risk-based;

      o     the loan portfolio must be diversified to limit the potential impact
            of negative events; and

      o     careful, timely exposure monitoring through dynamic use of our risk
            rating system, is required to provide early warning and assure
            proactive management of potential problems.

The Company's credit objectives are as follows:

      o     service the legitimate credit needs of small businesses within
            target markets of our subsidiary banks;

      o     compete effectively as a high volume producer of credit to
            commercial and agricultural business within our markets;

      o     maintain our banks' reputations for superior quality and timely
            delivery of products and services to our customers;

      o     continue to provide competitive pricing that reflects the entire
            relationship and is commensurate with the risk profiles of our
            borrowers;

      o     retain, develop and acquire profitable, multi-product, value added
            relationships with high quality businesses;

      o     continue the focus on government guaranteed lending and establish a
            specialization in this area to meet the needs of the small
            businesses in our communities; and

      o     comply with the relevant laws and regulations.

The loan policy establishes the lending authority of individual loan officers as
well as the loan authority of the banks' loan committees. The policy limits
exposure to any one borrower or affiliated group of borrowers to a limit of
$8,000,000 unless the amount above that number has liquid collateral pledged as
security or has a U.S. Government agency guarantee. The Senior Loan
Administrators and Commercial Team Leaders can approve loans up to $500,000
jointly. The subsidiary bank CEOs and Senior Loan Administrators can approve
loans up to $1,000,000 jointly. Each bank has an External Loan Committee that
consists of up to three lending officers and at least two outside bank
directors. The External Loan Committee may approve loans up to $2,000,000. Loans
of $2,000,000 and over require the approval of


                                       7


the Company's Executive Loan Committee. The Executive Loan Committee consists of
the Company's CEO, the FII Chief Risk Officer (non-voting), the FII Risk
Manager, the FII Loan Administration Manager, each subsidiary bank CEO, and each
subsidiary bank Senior Loan Administrator.

Commercial Loans. The Company, through its banking subsidiaries, originates
commercial loans in its primary market areas and underwrites them based on the
borrower's ability to service the loan from operating income. The Company,
through its banking subsidiaries, offers 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. As a general practice, a collateral lien is placed on any
available real estate, equipment or other assets owned by the borrower and a
personal guarantee of the borrower is obtained. At December 31, 2003, $32
million, or 12.9%, of the aggregate commercial loan portfolio was at fixed rates
while $216 million, or 87.1%, was at variable rates. The Company also utilizes
government loan guarantee programs offered by the Small Business Administration
(or "SBA") and Rural Economic and Community Development (or "RECD") when
appropriate. See "Government Guarantee Programs" below.

Commercial Real Estate Loans. In addition to commercial loans secured by real
estate, the Company, through its banking subsidiaries, makes commercial real
estate loans to finance the purchase of real property which generally consists
of real estate with completed structures. Commercial real estate loans are
secured by first liens on the real estate, typically have variable interest
rates and are amortized over a 10 to 20 year period. The underwriting analysis
includes credit verification, appraisals and a review of the borrower's
financial condition. At December 31, 2003, $46 million, or 12.5%, of the
aggregate commercial real estate loan portfolio was at fixed rates while $324
million, or 87.5%, was at variable rates.

Agricultural Loans. 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. The Banks also
closely monitor commodity prices and inventory build-up in various commodity
categories to better anticipate price changes in key agricultural products that
could adversely affect the borrowers' ability to repay their loans. At December
31, 2003 the Company had $119 million in loans to the dairy industry, which
represents 8.9% of the total loan portfolio. The dairy industry is under stress
from an extended period of low milk prices. The Company routinely evaluates the
effect of those price changes on the cash flow of borrowers and the values of
collateral supporting those loans. Borrower cash flows in the dairy industry
have recently improved due to some stabilization and upward movement in milk
prices. At December 31, 2003, $21 million, or 9.1%, of the agricultural loan
portfolio was at fixed rates while $214 million, or 90.9%, was at variable
rates. The Banks utilize government loan guarantee programs offered by the SBA
and the Farm Service Agency (or "FSA") of the United States Department of
Agriculture where available and appropriate. See "Government Guarantee Programs"
below.

Residential Real Estate Loans. The Banks originate fixed and variable rate
one-to-four family residential real estate loans collateralized by
owner-occupied properties located in its market areas. A variety of real estate
loan products, which generally are amortized over five to 30 years, are offered.
Loans collateralized by one-to-four family residential real estate generally
have been originated in amounts of no more than 80% of appraised value or have
mortgage insurance. Mortgage title insurance and hazard insurance are normally
required. The Company sells most newly originated fixed rate one-to-four family
residential mortgages on the secondary mortgage market and retains the rights to
service the mortgages. To assure maximum salability of the residential loan
products for possible resale, the Company has formally adopted the underwriting,
appraisal, and servicing guidelines of the Federal Home Loan Mortgage
Corporation ("Freddie Mac") as part of its standard loan policy. At December 31,
2003, the residential mortgage servicing portfolio totaled $386 million, the
majority of which have been sold to Freddie Mac. At December 31, 2003, $197
million, or 78.5%, of residential real estate loans retained in portfolio were
at fixed rates while $54 million, or 21.5%, were at variable rates.


                                       8


Consumer and Home Equity Loans. The Banks originate direct and indirect credit
automobile loans, recreational vehicle loans, boat loans, home improvement
loans, fixed and open-ended home equity loans, personal loans (collateralized
and uncollateralized), student loans and deposit account collateralized loans.
Visa cards that provide consumer credit lines are also issued. The terms of
these loans typically range from 12 to 120 months and vary based upon the nature
of the collateral and the size of loan. The majority of the consumer lending
program is underwritten on a secured basis using the customer's home or the
financed automobile, mobile home, boat or recreational vehicle as collateral. At
December 31, 2003, $139 million, or 57.7%, of consumer and home equity loans
were at fixed rates while $102 million, or 42.3%, were at variable rates.

Government Guarantee Programs. The Banks participate in government loan
guarantee programs offered by the SBA, RECD and FSA. At December 31, 2003, the
Banks had loans with an aggregate principal balance of $45.9 million that were
covered by guarantees under these programs. The guarantees only cover a certain
percentage of these loans. By participating in these programs, the Banks are
able to broaden their base of borrowers while minimizing credit risk.

Delinquencies and Nonperforming Assets. The Banks have several procedures in
place to assist in maintaining the overall quality of the Company's loan
portfolio. Standardized underwriting guidelines have been established for
subsidiary bank lending officers. The Company requires each bank subsidiary to
report delinquencies on a monthly basis, and the Chief Risk Officer monitors
these levels to identify adverse trends.

Loans are generally placed on nonaccrual status and cease accruing interest when
the payment of principal or interest is delinquent for 90 days, or earlier in
some cases, unless the loan is in the process of collection and the underlying
collateral further supports the carrying value of the loan.

Classification of Assets. As previously indicated, the Company adopted enhanced
risk rating guidelines company-wide during 2003. Risk ratings are assigned to
loans in the commercial, commercial real estate and agricultural portfolios. The
risk ratings are specifically used as follows:

      o     profile banks' risk and exposure in the loan portfolio and identify
            developing trends and relative levels of risk;

      o     guide polices which control individual exposure with regard to
            degree of risk;

      o     identify deteriorating credits which may become criticized according
            to regulatory definitions; and

      o     reflect the probability that a given customer may default on its
            obligations to pay in a timely fashion.

Through the underwriting and loan review process, the Banks maintain internally
classified loan lists which, along with delinquency reporting, helps management
assess the overall quality of the loan portfolio and the allowance for loan
losses.

Loans classified as "watch" are basically satisfactory, but a higher degree of
risk is evident. Loans classified as "warning" or "special mention" have
potential weaknesses that may, if not corrected, weaken the loan or inadequately
protect the banks' credit position.

"Substandard" loans are those with clear and well-defined weaknesses such as a
higher leveraged position, unfavorable financial ratios, uncertain repayment
sources or poor financial condition, which may jeopardize the full collection of
the debt. Substandard loans may be placed on nonaccrual status and may have
specific loss allowances assigned. Once a loan is identified as substandard, the
credit relationship is assigned to the Credit Administration Department's Loan
Workout Group. The Loan Workout Group performs a detailed analysis of each
substandard credit, which includes evaluating the borrower's paying capacity and
assessing the collateral supporting the loans outstanding. Various forms of
collateral including receivables, inventory, livestock, equipment, real property
and other assets, secure the majority of the substandard credits. The Loan
Workout Group also quantifies credit loss exposure by determining specific loss
allowances where appropriate.


                                       9


Loans classified as "doubtful" have characteristics similar to substandard with
the added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently existing facts, conditions, and values, highly
questionable and improbable. Due to the high probability of loss, nonaccrual
accounting treatment is required for all assets listed as doubtful.

Assets are classified as "loss" when considered to be uncollectible and of such
little value that their continuance as bankable assets is not warranted. This
classification does not mean that the asset has absolutely no recovery or
salvage value, but rather, that it is not practical or desirable to defer
write-off even though partial recovery may be achieved in the future.

Allowance for Loan Losses. The allowance for loan losses is established through
charges to earnings in the form of a provision for loan losses. The allowance
reflects management's estimate of the amount of probable loan losses in the
portfolio, based on the following factors:

      o     historical charge-off experience;

      o     the evaluation of the loan portfolio by the loan review function;

      o     levels and trends in delinquencies and non-accruals;

      o     trends in volume and terms;

      o     collateral values;

      o     effects of changes in lending policy;

      o     experience, ability and depth of management;

      o     national and local economic trends and conditions; and

      o     concentration of credit.

Subsidiary Bank management presents a quarterly review of the allowance for loan
losses to each subsidiary Bank's Board of Directors as well as to the Company's
Board of Directors, indicating any change in the allowance since the last review
and any recommendations as to adjustments in the allowance. In order to
determine the allowance for loan losses, the risk classification and delinquency
status of loans and other factors are considered, such as collateral value,
government guarantees, portfolio composition, trends in economic conditions and
the financial strength of borrowers. Specific allowances for loans, which have
been individually evaluated for impairment, are established when required. An
allowance is also established for groups of loans with similar risk
characteristics, based upon average historical charge-off experience taking into
account levels and trends in delinquencies, loan volumes, economic and industry
trends and concentrations of credit.

Investment Activities

General. The Company's investment securities policy is contained within the
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 considers the ability of an investment to provide earnings consistent
with factors of quality, maturity, marketability and risk diversification. The
Board of each subsidiary bank adopts an asset/liability policy containing an
investment securities policy within the parameters of the Company's overall
asset/liability policy. The FII Treasurer, guided by the separate ALCO
Committees of each subsidiary bank, is responsible for securities portfolio
decisions within the established policies.


                                       10


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

      o     U.S. treasury securities;

      o     U.S. government agency and government sponsored agency securities;

      o     mortgage-backed pass-through securities and collateralized mortgage
            obligations ("CMOs") issued by the Federal National Mortgage
            Association ("FNMA"), the Government National Mortgage Association
            ("GNMA") and Federal Home Loan Mortgage Corporation ("Freddie Mac");

      o     investment grade municipal securities, including tax, revenue and
            bond anticipation notes and general obligation and revenue notes and
            bonds;

      o     certain creditworthy un-rated securities issued by municipalities;
            and investment grade corporate debt.

Additionally, the Company's investment policy limits investments in corporate
bonds to no more than 10% of total investments and to bonds rated as Baa or
better by Moody's Investor Services, Inc. or BBB or better by Standard & Poor's
Ratings Services at the time of purchase.

Sources of Funds

General. Deposits and borrowed funds are the primary sources of the Company's
funds for use in lending, investing and for other general purposes. In addition,
repayments on loans, proceeds from sales of loans and securities, and cash flows
from operations provide additional sources of funds.

Deposits. The Company, through its banking subsidiaries, offers a variety of
deposit account products with a range of interest rates and terms. The deposit
accounts consist of savings, interest-bearing checking accounts, checking
accounts, money market accounts, savings, club accounts and certificates of
deposit. The Company offers certificates of deposit with balances in excess of
$100,000 at preferential rates (jumbo certificates) to local municipalities,
businesses, and individuals as well as Individual Retirement Accounts ("IRAs")
and other qualified plan accounts. To enhance its deposit product offerings, the
Company provides commercial checking accounts for small to moderately sized
commercial businesses, as well as a low-cost checking account service for
low-income customers. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates and competition. The Banks' deposits are obtained predominantly from the
areas in which the Banks' branch offices are located. The Banks rely primarily
on competitive pricing of their deposit products, customer service and
long-standing relationships with customers to attract and retain these deposits.
On a secondary basis, the Company utilizes time deposit sales in the national
brokered market ("brokered deposits") as a wholesale funding source.

Borrowed Funds. Borrowings consist mainly of advances entered into with the
Federal Home Loan Bank ("FHLB"), a debt agreement with a commercial bank and
sweep repurchase agreements.

Junior Subordinated Debentures Issued to Unconsolidated Subsidiary Trust. The
Company formed a trust in February 2001 to accommodate the private placement of
capital securities, the proceeds of which were utilized to partially fund the
acquisition of BNC.

Risk Factors

Asset Quality. A significant source of risk for the Company arises from the
possibility that losses will be sustained because borrowers, guarantors and
related parties may fail to perform in accordance with the terms of their loans.
Most loans originated by the Company are secured, but loans may be unsecured
depending on the nature of the loan. With respect to secured loans, the
collateral securing the repayment of these loans includes a wide variety of
diverse real and personal property that may be insufficient to cover the
obligations owed under such loans. Collateral values may be adversely affected
by changes in prevailing economic, environmental and other conditions, including
declines in the value of real estate, changes in interest rates, changes in
monetary and fiscal policies of the federal government, wide-spread


                                       11


disease, terrorist activity, environmental contamination and other external
events. In addition, collateral appraisals that are out of date or that do not
meet M.A.I. or other recognized standards may create the impression that a loan
is adequately collateralized when in fact it is not. The Company has adopted
underwriting and credit monitoring procedures and policies, including the
establishment and review of the allowance for loan losses and regular review of
appraisals and borrower financial statements, that management believes are
appropriate to mitigate the risk of loss by assessing the likelihood of
nonperformance and the value of available collateral, monitoring loan
performance and diversifying the Company's credit portfolio. Such policies and
procedures, however, may not prevent unexpected losses that could have a
material adverse effect on the Company's business, financial condition, results
of operations or liquidity. See "Lending Activities" for further discussion on
underwriting standards.

Interest Rate Risk. The bank industry earnings depend largely on the
relationship between the yield on earning assets, primarily loans and
investments, and the cost of funds, primarily deposits and borrowings. This
relationship, known as the interest rate spread, is subject to fluctuation and
is affected by economic and competitive factors which influence interest rates,
the volume and mix of interest earning assets and interest bearing liabilities
and the level of non-performing assets. Fluctuations in interest rates affect
the demand of customers for the Company's products and services. The Company is
subject to interest rate risk to the degree that its interest bearing
liabilities reprice or mature more slowly or more rapidly or on a different
basis than its interest earning assets. Significant fluctuations in interest
rates could have a material adverse effect on the Company's business, financial
condition, results of operations or liquidity. For additional information
regarding interest rate risk, see Part II, Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk."

Changes in the Value of Goodwill and Other Intangible Assets. The Company had
goodwill of $40.6 million and other intangible assets of $2.7 million as of
December 31, 2003. Under current accounting standards, the Company is not
required to amortize goodwill but rather must evaluate goodwill for impairment
at least annually. If deemed impaired at any point in the future, an impairment
charge representing all or a portion of goodwill will be recorded to current
earnings in the period in which the impairment occurred. The capitalized value
of other intangible assets is amortized to earnings over their estimated lives.
Other intangible assets are also subject to periodic impairment reviews. If
these assets are deemed impaired at any point in the future, an impairment
charge will be recorded to current earnings in the period in which the
impairment occurred. For additional information regarding goodwill and other
intangible assets, see Note 6 of the notes to consolidated financial statements.

Breach of Information Security and Technology Dependence. The Company depends
upon data processing, software, communication and information exchange on a
variety of computing platforms and networks and over the internet. Despite
instituted safeguards, the Company cannot be certain that all of its systems are
entirely free from vulnerability to attack or other technological difficulties
or failures. The Company relies on the services of a variety of vendors to meet
its data processing and communication needs. If information security is breached
or other technology difficulties or failures occur, information may be lost or
misappropriated, services and operations may be interrupted and the Company
could be exposed to claims from customers. Any of these results could have a
material adverse effect on the Company's business, financial condition, results
of operations or liquidity.

Economic Conditions, Limited Geographic Diversification. The Company's banking
operations are located in Western and Central New York State. Because of the
geographic concentration of its operations, the Company's results depend largely
upon economic conditions in this area, which include depressed wholesale milk
prices, losses of manufacturing jobs in Rochester and Buffalo, and minimal
population growth throughout the region. Further deterioration in economic
conditions could adversely affect the quality of the Company's loan portfolio
and the demand for its products and services, and accordingly, could have a
material adverse effect on the Company's business, financial condition, results
of operations or liquidity. See also "Market Area and Competition."

Ability of the Company to Execute Its Business Strategy. The financial
performance and profitability of the Company will depend on its ability to
execute its strategic plan and manage its future growth. Although the Company
believes that it has substantially integrated recently acquired banks into the


                                       12


Company's operations, there can be no assurance that unforeseen issues relating
to the assimilation or prior operations of these banks, including the emergence
of any material undisclosed liabilities, will not materially adversely affect
the Company. In addition, the effect of the formal agreements entered into by
NBG and BNB has been to increase the capital needs at those banks, and to
increase staffing and loan administration expense. It is unlikely that either of
these banks will be able to grow significantly through loan growth or
acquisitions while the formal agreements remain in place. The Company has
incurred, and may continue to incur, additional operating costs in connection
with compliance with the formal agreements including, among others, incremental
staff and continued higher legal, accounting and consulting expenses. Further,
the reputational risk created by the formal agreements could have an impact on
such matters as business generation and retention, the ability to attract and
retain management at the banks, liquidity and funding. The Company's financial
performance will also depend on the Company's ability to maintain profitable
operations through implementing its strategic plan. Moreover, the Company's
future performance is subject to a number of factors beyond its control,
including when the formal agreements are lifted at BNB and NBG, pending and
future federal and state banking legislation, regulatory changes, unforeseen
litigation outcomes, inflation, lending and deposit rate changes, interest rate
fluctuations, increased competition and economic conditions. Accordingly, these
issues could have a material adverse effect on the Company's business, financial
condition, results of operations or liquidity.

Dependence on Key Personnel. The Company's success depends to a significant
extent on the management skills of its existing executive officers and
directors, many of whom have held officer and director positions with the
Company for many years. The loss or unavailability of any of its key executives
or directors, including Peter G. Humphrey, Chairman of the Board of Directors,
President and Chief Executive Officer, Ronald M. Miller, Senior Vice President
and Chief Financial Officer, or Thomas D. Grover, Senior Vice President and
Chief Risk Officer, could have a material adverse effect on the Company's
business, financial condition, results of operations or liquidity. See also Part
III, Item 10, "Directors and Executive Officers of Registrant."

Competition. National competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader array
of financial services than the Company. There can be no assurance that the
Company will be able to compete effectively in its markets. Furthermore,
developments increasing the nature or level of competition could have a material
adverse effect on the Company's business, financial condition, results of
operations or liquidity. See also "Market Area and Competition" and "Supervision
and Regulation."

Government Regulation and Monetary Policy. The Company and the banking industry
are subject to extensive regulation and supervision under federal and state laws
and regulations. The restrictions imposed by such laws and regulations limit the
manner in which the Company conducts its banking business, undertakes new
investments and activities and obtains financing. These regulations are designed
primarily for the protection of the deposit insurance funds and consumers and
not to benefit holders of the Company's securities. Financial institution
regulation has been the subject of significant legislation in recent years and
may be the subject of further significant legislation in the future, none of
which is in the control of the Company. Significant new laws or changes in, or
repeals of, existing laws could have a material adverse effect on the Company's
business, financial condition, results of operations or liquidity. Further,
federal monetary policy, particularly as implemented through the Federal Reserve
System, significantly affects credit conditions for the Company, and any
unfavorable change in these conditions could have a material adverse effect on
the Company's business, financial condition, results of operations or liquidity.
See also "Supervision and Regulation."

Supervision and Regulation

The supervision and regulation of financial and bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds regulated by the FDIC and the banking system as a whole, and not
for the protection of shareholders or creditors of bank holding companies. The
various bank regulatory agencies have broad enforcement power over bank holding
companies and banks, including the power to impose substantial fines,
operational restrictions and other penalties for violations of laws and
regulations.


                                       13


The following description summarizes some of the laws to which the Company and
its subsidiaries are subject. References to applicable statutes and regulations
are brief summaries and do not claim to be complete. They are qualified in their
entirety by reference to such statutes and regulations. Management believes the
Company is in compliance in all material respects with these laws 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 business and earnings of the Company.

The Company

The Company is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended, and is subject to supervision, regulation and
examination by the Federal Reserve Board. During 2003, the Company terminated
its financial holding company status and now operates as a bank holding company.
The change in status did not affect any 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. The
Bank Holding Company Act and other federal laws subject bank holding companies
to particular restrictions on the types of activities in which they may engage,
and to a range of supervisory requirements and activities, including regulatory
enforcement actions for violations of laws and regulations.

Regulatory Restrictions on Dividends; Source of Strength. It is the policy of
the Federal Reserve Board that bank holding companies should pay cash dividends
on common stock only out of income available over the past year, and only if
prospective earnings retention is consistent with the holding company's expected
future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the bank
holding company's ability to serve as a source of strength to its banking
subsidiaries.

Under Federal Reserve Board policy, a bank holding company is expected to act as
a source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve Board policy, a holding company may not be inclined to
provide it. As discussed below, a bank holding company in certain circumstances
could be required to guarantee the capital plan of an undercapitalized banking
subsidiary.

Safe and Sound Banking Practices. Bank holding companies are not permitted to
engage in unsafe and unsound banking practices. The Federal Reserve Board's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve Board prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate any law or
regulation. Depending upon the circumstances, the Federal Reserve Board could
take the position that paying a dividend would constitute an unsafe or unsound
banking practice.

The Federal Reserve Board has broad authority to prohibit activities of bank
holding companies and their non-banking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations,
and can assess civil money penalties for certain activities conducted on a
knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1,000,000 for each day
the activity continues.

Anti-Tying Restrictions. Bank holding companies and their affiliates are
prohibited from tying the provision of certain services, such as extensions of
credit, to other services offered by a holding company or its affiliates. In
late 2002, the Federal Reserve Board adopted Regulation W, a comprehensive
synthesis of prior opinions and interpretations under Sections 23A and 23B of
the Federal Reserve Act. Regulation W contains an extensive discussion of tying
arrangements, which could impact the way banks and bank holding companies
transact business with affiliates.


                                       14


Capital Adequacy Requirements. The Federal Reserve Board has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies. Under the 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
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of December 31, 2003, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 10.18% and the ratio of total capital to total
risk-weighted assets was 11.44%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Financial Condition-Capital
Resources."

In addition to the risk-based capital guidelines, the Federal Reserve Board uses
a leverage ratio as an additional tool to evaluate the capital adequacy of bank
holding companies. The leverage ratio is a company's Tier 1 capital divided by
three-month average consolidated assets. Certain highly rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis points
above the regulatory minimum. As of December 31, 2003, the Company's leverage
ratio was 7.03%.

The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve Board 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.

Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are
required to take "prompt corrective action" to resolve problems associated with
insured depository institutions whose capital declines below certain levels. In
the event an institution becomes "undercapitalized," it must submit a capital
restoration plan. The capital restoration plan will not be accepted by the
regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institutions holding company is entitled to a priority of payment in bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank is
limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
Board approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.

Acquisitions by Bank Holding Companies. The Bank Holding Company Act requires
every bank holding company to obtain the prior approval of the Federal Reserve
Board before it may acquire all or substantially all of the assets of any bank,
or ownership or control of any voting shares of any bank, if after such
acquisition it would own or control, directly or indirectly, more than 5% of the
voting shares of such bank. In approving bank acquisitions by bank holding
companies, the Federal Reserve Board is required to consider the financial and
managerial resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be served, and
various competitive factors.

Control Acquisitions. The Change in Bank Control Act prohibits a person or group
of persons from acquiring "control" of a bank holding company unless the Federal
Reserve Board has been notified and has not objected to the transaction. Under a
rebuttable presumption established by the Federal Reserve Board, the acquisition
of 10% or more of a class of voting stock of a bank holding company with a class
of


                                       15


securities registered under Section 12 of the Exchange Act, would, under the
circumstances set forth in the presumption, constitute acquisition of control of
the Company.

In addition, any entity is required to obtain the approval of the Federal
Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the
case of an acquirer that is a bank holding company) or more of the Company's
outstanding common stock, or otherwise obtaining control or a "controlling
influence" over the Company.

The Banks

Wyoming County Bank ("WCB") and First Tier Bank & Trust ("FTB") are New York
State-chartered banks. National Bank of Geneva ("NBG") and Bath National Bank
("BNB") are national banks chartered by the Office of the Comptroller of
Currency. The FDIC through the Bank Insurance Fund insures all of the deposits
of the four subsidiary banks. FTB is a member of the Federal Reserve System. The
Banks are subject to supervision and regulation that subject them to special
restrictions, requirements, potential enforcement actions and periodic
examination by the FDIC, the Federal Reserve Board and the New York State
Banking Department (in the case of the state-chartered banks) and the Office of
the Comptroller of Currency (in the case of the national banks). Because the
Federal Reserve Board regulates the bank holding company parent of the Banks,
the Federal Reserve Board also has supervisory authority, which directly affects
the banks.

Restrictions on Transactions with Affiliates and Insiders. Transactions between
the holding company and its subsidiaries, including the Banks, are subject to
Section 23A of the Federal Reserve Act, and to the requirements of Regulation W.
In general, Section 23A imposes limits on the amount of such transactions, and
also requires certain levels of collateral for loans to affiliated parties. It
also limits the amount of advances to third parties, which are collateralized by
the securities, or obligations of the Company or its subsidiaries.

Affiliate transactions are also subject to Section 23B of the Federal Reserve
Act, and to the requirements of Regulation W which generally requires that
certain transactions between the holding company and its affiliates be on terms
substantially the same, or at least as favorable to the banks, as those
prevailing at the time for comparable transactions with or involving other
nonaffiliated persons.

The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.

Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends
paid by the Banks have provided a substantial part of the Company's operating
funds and, for the foreseeable future, it is anticipated that dividends paid by
the Banks will continue to be its principal source of operating funds. Capital
adequacy requirements serve to limit the amount of dividends that may be paid by
the subsidiaries. Under federal law, the subsidiaries cannot pay a dividend if,
after paying the dividend, a particular subsidiary will be "undercapitalized."
The FDIC may declare a dividend payment to be unsafe and unsound even though the
bank would continue to meet its capital requirements after the dividend. Neither
of the formal agreements entered into by NBG or BNB restrict the ability of the
banks to pay dividends to the Company, provided the minimum capital requirements
set forth in the agreements are met.

Because the Company is a legal entity separate and distinct from its
subsidiaries, the Company's right to participate in the distribution of assets
of any subsidiary upon the subsidiary's liquidation or reorganization will be
subject to the prior claims of the subsidiary's creditors. In the event of a
liquidation or other resolution of an insured depository institution, the claims
of depositors and other general or subordinated


                                       16


creditors are entitled to a priority of payment over the claims of holders of
any obligation of the institution to its shareholders, including any depository
bank holding company (such as the Company) or any shareholder or creditor
thereof.

Examinations. The New York State Banking Department (in the case of WCB and
FTB), the Office of the Comptroller of the Currency (in the case of NBG and
BNB), the Federal Reserve Board and the FDIC periodically examine and evaluate
the Banks. Based upon such examinations, the appropriate regulator may revalue
the assets of the institution and require that it establish specific reserves to
compensate for the difference between what the regulator determines the value to
be and the book value of such assets.

Audit Reports. Insured institutions with total assets of $500 million or more at
the beginning of a fiscal year must submit annual audit reports prepared by
independent auditors to federal and state regulators. In some instances, the
audit report of the institution's holding company can be used to satisfy this
requirement. Auditors must receive examination reports, supervisory agreements
and reports of enforcement actions. In addition, financial statements prepared
in accordance with generally accepted accounting principles, management's
certifications concerning responsibility for the financial statements, internal
controls and compliance with legal requirements designated by the FDIC, and an
attestation by the auditor regarding the statements of management relating to
the internal controls must be submitted. The FDIC Improvement Act of 1991
requires that independent audit committees be formed, consisting of outside
directors only. The committees of institutions with assets of more than $3
billion must include members with experience in banking or financial management
must have access to outside counsel and must not include representatives of
large customers.

Capital Adequacy Requirements. The FDIC has adopted regulations establishing
minimum requirements for the capital adequacy of insured institutions. The FDIC
may establish higher minimum requirements if, for example, a bank has previously
received special attention or has a high susceptibility to interest rate risk.

The FDIC's risk-based capital guidelines generally require banks to have a
minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and a
ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for the Company. As of December 31, 2003,
the ratio of Tier 1 capital to total risk-weighted assets for the Banks was
8.91% for WCB, 11.15% for NBG, 13.69% for BNB, and 10.90% for FTB, and the ratio
of total capital to total risk-weighted assets was 10.16% for WCB, 12.41% for
NBG, 14.94% for BNB, and 12.16% for FTB. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."

The FDIC's leverage guidelines require banks to maintain Tier 1 capital of no
less than 4.0% of average total assets, except in the case of certain highly
rated banks for which the requirement is 3.0% of average total assets. As of
December 31, 2003, the ratio of Tier 1 capital to average total assets (leverage
ratio) was 6.71% for WCB, 8.04% for NBG, 8.02% for BNB, and 6.09% for FTB. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

As part of the agreements in place with their primary regulator, NBG and BNB
were required to develop capital plans enabling them to achieve, by March 31,
2004, Tier 1 leverage capital equal to 8% of risk-weighted assets, Tier 1
risk-based capital equal to 10% of risk-weighted assets, and total risk-based
capital of 12% of risk-weighted assets. Each of the banks meets the required
levels at December 31, 2003.

Corrective Measures for Capital Deficiencies. The federal banking regulators are
required to take "prompt corrective action" with respect to capital-deficient
institutions. Agency regulations define, for each capital category, the levels
at which institutions are "well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized." A "well-capitalized" bank has a total risk-based capital
ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a
leverage ratio of 5.0% or higher; and is not subject to any written agreement,
order or directive requiring it to maintain a specific capital level for any
capital measure. An "adequately capitalized" bank


                                       17


has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based
capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or
higher if the bank was rated a composite 1 in its most recent examination report
and is not experiencing significant growth); and does not meet the criteria for
a well-capitalized bank. A bank is "undercapitalized" if it fails to meet any
one of the "adequately capitalized" ratios.

In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.

As an institution's capital decreases, the FDIC's enforcement powers become more
severe. A significantly undercapitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management and other restrictions. The FDIC has only
very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.

Banks with risk-based capital and leverage ratios below the required minimums
may also be subject to certain administrative actions, including the termination
of deposit insurance upon notice and hearing, or a temporary suspension of
insurance without a hearing in the event the institution has no tangible
capital.

Deposit Insurance Assessments. The bank subsidiaries must pay assessments to the
FDIC for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by the FDIC Improvement Act. Under this system,
FDIC-insured depository institutions pay insurance premiums at rates based on
their risk classification. Institutions assigned to higher risk classifications
(that is, institutions that pose a greater risk of loss to their respective
deposit insurance funds) pay assessments at higher rates than institutions that
pose a lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to the
regulators. In addition, the FDIC can impose special assessments in certain
instances.

The FDIC maintains a process for raising or lowering all rates for insured
institutions semi-annually if conditions warrant a change. Under this system,
the FDIC has the flexibility to adjust the assessment rate schedule twice a year
without seeking prior public comment, but only within a range of five cents per
$100 above or below the premium schedule adopted. The FDIC can make changes in
the rate schedule outside the five-cent range above or below the current
schedule only after a full rulemaking with opportunity for public comment.

The Deposit Insurance Fund Act of 1996 contained a comprehensive approach to
recapitalizing the Savings Association Insurance Fund and to assuring the
payment of the Financing Corporation's bond obligations. Under this law, banks
insured under the Bank Insurance Fund are required to pay a portion of the
interest due on bonds that were issued by the Financing Corporation in 1987 to
help shore up the ailing Federal Savings and Loan Insurance Corporation.

Enforcement Powers. The FDIC and the other federal banking agencies have broad
enforcement powers, including the power to terminate deposit insurance, impose
substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Company or its banking subsidiaries, as
well as the officers, directors and other institution-affiliated parties of
these organizations, to administrative sanctions and potentially substantial
civil money penalties.

Brokered Deposit Restrictions. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll over


                                       18


brokered deposits. The Company's NBG and BNB subsidiaries for purposes of
brokered deposit restrictions are deemed to be adequately capitalized
institutions.

Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision which
generally makes commonly controlled insured depository institutions liable to
the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.

Community Reinvestment Act. The Community Reinvestment Act of 1977 ("CRA") and
the regulations issued hereunder are intended to encourage banks to help meet
the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's record in meeting
the needs of its service area when considering applications regarding
establishing branches, mergers or other bank or branch acquisitions. FIRREA
requires federal banking agencies to make public a rating of a bank's
performance under the CRA. In the case of a bank holding company, the CRA
performance record of the banks involved in the transaction are reviewed in
connection with the filing of an application to acquire ownership or control of
shares or assets of a bank or to merge with any other bank holding company. An
unsatisfactory record can substantially delay or block the transaction.

Consumer Laws and Regulations. In addition to the laws and regulations discussed
herein, the subsidiary banks are 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,
the Real Estate Settlement Procedures Act, and the "Check 21" 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 Banks must comply with the applicable
provisions of these consumer protection laws and regulations as part of their
ongoing customer relations.

Changing Regulatory Structure

Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act ("Gramm-Leach") was signed into law on November 12,
1999. Gramm-Leach permits, subject to certain conditions, combinations among
banks, securities firms and insurance companies beginning March 11, 2000. Under
Gramm-Leach, bank holding companies are permitted to offer their customers
virtually any type of financial service including banking, securities
underwriting, insurance (both underwriting and agency), and merchant banking. In
order to engage in these additional financial activities, a bank holding company
must qualify and register with the Board of Governors of the Federal Reserve
System as a "financial holding company" by demonstrating that each of its bank
subsidiaries is "well capitalized," "well managed," and has at least a
"satisfactory" rating under the CRA. On May 12, 2000 the Company received
approval from the Federal Reserve Bank of New York to become a financial holding
company resulting in the eventual formation of FIGI and acquisition of BGI as
previously discussed. During 2003, the Company terminated its financial holding
company status and now operates 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. Gramm-Leach
establishes that the federal banking agencies will regulate the banking
activities of financial holding companies and banks' financial subsidiaries, the
U.S. Securities and Exchange Commission will regulate their securities
activities and state insurance regulators will regulate their insurance
activities. Gramm-Leach also provides new protections against the transfer and
use by financial institutions of consumers' nonpublic, personal information.

The major provisions of Gramm-Leach are:


                                       19


Financial Holding Companies and Financial Activities. Title I establishes a
comprehensive framework to permit affiliations among commercial banks, insurance
companies, securities firms, and other financial service providers by revising
and expanding the Bank Holding Company Act framework to permit a holding company
system to engage in a full range of financial activities through qualification
as a new entity known as a financial holding company. A bank holding company
that qualifies as a financial holding company can expand into a wide variety of
services that are financial in nature, if its subsidiary depository institutions
are well-managed, well-capitalized and have received at least a "satisfactory"
rating on their last CRA examination. Services that have been deemed to be
financial in nature include securities underwriting, dealing and market making,
sponsoring mutual funds and investment companies, insurance underwriting and
agency activities and merchant banking.

Title I also required the FDIC to adopt regulations implementing Section 121 of
Title I, regarding permissible activities and investments of insured state
banks. Final regulations adopted by the FDIC in January 2001, in the form of
amendments to Part 362 of the FDIC rules and regulations, provide the framework
for subsidiaries of state nonmember banks to engage in financial activities that
Gramm-Leach permits national banks to conduct through a financial subsidiary.
The regulations require that prior to commencing such financial activities, a
state nonmember bank must notify the FDIC of its intent to do so, and must
certify that it is well-managed and that it and all of its subsidiary insured
depository institutions are well-capitalized after deducting its investment in
the new subsidiary. Furthermore, the regulations require that the notifying bank
must, and must continue to, (i) disclose the capital deduction in published
financial statements, and (ii) comply with sections 23A and 23B of the Federal
Reserve Act and (iii) comply with all required financial and operational
safeguards.

Activities permissible for financial subsidiaries of national banks, and,
pursuant to Section 362 of the FDIC rules and regulations, also permissible for
financial subsidiaries of state nonmember banks, include, but are not limited
to, the following: (a) Lending, exchanging, transferring, investing for others,
or safeguarding money or securities; (b) Insuring, guaranteeing, or indemnifying
against loss, harm, damage, illness, disability, or death, or providing and
issuing annuities, and acting as principal, agent, or broker for purposes of the
foregoing, in any State; (c) Providing financial, investment, or economic
advisory services, including advising an investment company; (d) Issuing or
selling instruments representing interests in pools of assets permissible for a
bank to hold directly; and (e) Underwriting, dealing in, or making a market in
securities.

Securities Activities. Title II narrows the exemptions from the securities laws
previously enjoyed by banks, requires the Federal Reserve Board and the SEC to
work together to draft rules governing certain securities activities of banks
and creates a new, voluntary investment bank holding company.

Insurance Activities. Title III restates the proposition that the states are the
functional regulators for all insurance activities, including the insurance
activities of federally-chartered banks, and bars the states from prohibiting
insurance activities by depository institutions. The law encourages the states
to develop uniform or reciprocal rules for the licensing of insurance agents.

Privacy. Under Title V, federal banking regulators were required to adopt rules
that have limited the ability of banks and other financial institutions to
disclose non-public information about consumers to nonaffiliated third parties.
These limitations require disclosure of privacy policies to consumers and, in
some circumstances, allow consumers to prevent disclosure of certain personal
information to a nonaffiliated third party. Federal banking regulators issued
final rules on May 10, 2000 to implement the privacy provisions of Title V.
Under the rules, financial institutions must provide:

      o     initial notices to customers about their privacy policies,
            describing the conditions under which they may disclose nonpublic
            personal information to nonaffiliated third parties and affiliates;

      o     annual notices of their privacy policies to current customers; and

      o     a reasonable method for customers to "opt out" of disclosures to
            nonaffiliated third parties.

Compliance with the rules is mandatory after July 1, 2001. The Company and the
banks were in full compliance with the rules as of or prior to their respective
effective dates.


                                       20


Safeguarding Confidential Customer Information. Under Title V, federal banking
regulators are required to adopt rules requiring financial institutions to
implement a program to protect confidential customer information. In January
2000, the federal banking agencies adopted guidelines requiring financial
institutions to establish an information security program to:

      o     identify and assess the risks that may threaten customer
            information;

      o     develop a written plan containing policies and procedures to manage
            and control these risks;

      o     implement and test the plan; and

      o     adjust the plan on a continuing basis to account for changes in
            technology, the sensitivity of customer information and internal or
            external threats to information security.

The Banks' approved security programs appropriate to their size and complexity
and the nature and scope of their operations prior to the July 1, 2001 effective
date of the regulatory guidelines. The implementation of the programs is an
ongoing process.

Community Reinvestment Act Sunshine Requirements. In February 2001, the federal
banking agencies adopted final regulations implementing Section 711 of Title
VII, the CRA Sunshine Requirements. The regulations require nongovernmental
entities or persons and insured depository institutions and affiliates that are
parties to written agreements made in connection with the fulfillment of the
institution's CRA obligations to make available to the public and the federal
banking agencies a copy of each agreement. The regulations impose annual
reporting requirements concerning the disbursement, receipt and use of funds or
other resources under these agreements. The effective date of the regulations
was April 1, 2001. Neither the Company nor the banks is a party to any agreement
that would be the subject of reporting pursuant to the CRA Sunshine
Requirements.

The Company continues to evaluate the strategic opportunities presented by the
broad powers granted to bank holding companies that elect to be treated as
financial holding companies. In the event that the Company determines that
access to the broader powers of a financial holding company is in the best
interests of the Company, its shareholders and the banks, the Company will file
the appropriate election with the Federal Reserve Board.

USA Patriot Act

As part of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act"),
signed into law on October 26, 2001, Congress adopted the International Money
Laundering Abatement and Financial Anti-Terrorism Act of 2001 ("IMLAFATA").
IMLAFATA authorizes the Secretary of the Treasury, in consultation with the
heads of other government agencies, to adopt special measures applicable to
banks, bank holding companies, or other financial institutions. During 2002, the
Department of Treasury issued a number of regulations relating to enhanced
recordkeeping and reporting requirements for certain financial transactions that
are of primary money laundering concern, due diligence requirements concerning
the beneficial ownership of certain types of accounts, and restrictions or
prohibitions on certain types of accounts with foreign financial institutions.
Covered financial institutions also are barred from dealing with foreign "shell"
banks. In addition, IMLAFATA expands the circumstances under which funds in a
bank account may be forfeited and requires covered financial institutions to
respond under certain circumstances to requests for information from federal
banking agencies within 120 hours.

Regulations were also adopted during 2002 to implement minimum standards to
verify customer identity, to encourage cooperation among financial institutions,
federal banking agencies, and law enforcement authorities regarding possible
money laundering or terrorist activities, to prohibit the anonymous use of
"concentration accounts," and to require all covered financial institutions to
have in place a Bank Secrecy Act compliance program. IMLAFATA also amends the
Bank Holding Company Act and the Bank Merger Act to require the federal banking
agencies to consider the effectiveness of a financial institution's anti-money
laundering activities when reviewing an application under these acts.


                                       21


The Banks have in place a Bank Secrecy Act compliance program, and they engage
in very few transactions of any kind with foreign financial institutions or
foreign persons.

Sarbanes-Oxley Act

On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002
(the "Act") implementing legislative reforms intended to address corporate and
accounting fraud. In addition to the establishment of a new accounting oversight
board that enforces auditing, quality control and independence standards and is
funded by fees from all publicly traded companies, the law restricts provision
of both auditing and consulting services by accounting firms. To ensure auditor
independence, any non-audit services being provided to an audit client requires
pre-approval by the issuer's audit committee members. In addition, the audit
partners must be rotated. The Act requires chief executive officers and chief
financial officers, or their equivalent, to certify to the accuracy of periodic
reports filed with the SEC, subject to civil and criminal penalties if they
knowingly or willfully violate this certification requirement. In addition,
under the Act, legal counsel is required to report evidence of a material
violation of the securities laws or a breach of fiduciary duty by a company to
its chief executive officer or its chief legal officer, and, if such officer
does not appropriately respond, to report such evidence to the audit committee
or other similar committee of the board of directors or the board itself.

Longer prison terms and increased penalties are also applied to corporate
executives who violate federal securities laws, the period during which certain
types of suits can be brought against a company or its officers has been
extended, and bonuses issued to top executives prior to restatement of a
company's financial statements are subject to disgorgement if such restatement
was due to corporate misconduct. Executives are also prohibited from insider
trading during retirement plan "blackout" periods, and loans to company
executives are restricted. The Act accelerates the time frame for disclosures by
public companies, as they must immediately disclose any material changes in
their financial condition or operations. Directors and executive officers must
also provide information for most changes in ownership in a company's securities
within two business days of the change.

The Act also prohibits any officer or director of a company or any other person
acting under their direction from taking any action to fraudulently influence,
coerce, manipulate or mislead any independent public or certified accountant
engaged in the audit of the company's financial statements for the purpose of
rendering the financial statement's materially misleading. The Act also requires
the SEC to prescribe rules requiring inclusion of an internal control report and
assessment by management in the annual report to stockholders. In addition, the
Act requires that each financial report required to be prepared in accordance
with (or reconciled to) accounting principles generally accepted in the United
States of America and filed with the SEC reflect all material correcting
adjustments that are identified by a "registered public accounting firm" in
accordance with accounting principles generally accepted in the United States of
America and the rules and regulations of the SEC.

Effective August 29, 2002, as directed by Section 302(a) of the Act, the
Company's chief executive officer and chief financial officer are each required
to certify that the Company's quarterly and annual reports do not contain any
untrue statement of a material fact. The Act imposes several requirements,
including having these officers certify that: they are responsible for
establishing, maintaining and regularly evaluating the effectiveness of the
Company's internal controls; they have made certain disclosures to the Company's
auditors and the audit committee of the Board of Directors about the Company's
internal controls; and they have included information in the Company's quarterly
and annual reports about their evaluation and whether there have been
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls during the last quarter.

Fair Credit Reporting Act

In 1970, the U. S. Congress enacted the Fair Credit Reporting Act (the "FCRA")
in order to ensure the confidentiality, accuracy, relevancy and proper
utilization of consumer credit report information. Under the framework of the
FCRA, the United States has developed a highly advanced and efficient credit
reporting system. The information contained in that broad system is used by
financial institutions, retailers and other creditors of every size in making a
wide variety of decisions regarding financial transactions. Employers, and law
enforcement agencies have also made wide use of the information


                                       22


collected and maintained in databases made possible by the FCRA. The FCRA
affirmatively preempts state law in a number of areas, including the ability of
entities affiliated by common ownership to share and exchange information
freely, the requirements on credit bureaus to reinvestigate the contents of
reports in response to consumer complaints, among others. By its terms, the
preemption provisions of the FCRA were to terminate as of December 31, 2003.
With the enactment of the Fair and Accurate Transactions Act (FACT Act) in late
2003, the preemption provisions of FCRA were extended, although the FACT Act
imposes additional requirements on entities that gather and share consumer
credit information. The FACT Act requires the Federal Reserve Board and the
Federal Trade Commission to issue final regulations within nine months of the
effective date of the Act. The provisions of these implementing regulations, and
their effect on the Company's banks, cannot be determined at this time.

Expanding Enforcement Authority

The Federal Reserve Board, the Office of the Comptroller of Currency, the New
York State Superintendent of Banks and the FDIC possess extensive authority to
police unsafe or unsound practices and violations of applicable laws and
regulations by depository institutions and their holding companies. For example,
the FDIC may terminate the deposit insurance of any institution, which it
determines has engaged in an unsafe or unsound practice. The agencies can also
assess civil money penalties, issue cease and desist or removal orders, seek
injunctions, and publicly disclose such actions. The OCC has indicated, in the
case of NBG, that it is considering whether civil money penalties should be
imposed for certain of the violations of law identified in its Report of
Examination for the period ended September 30, 2002.

Effect On Economic Environment

The policies of regulatory authorities, including the monetary policy of the
Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, changes in the discount rate on member bank
borrowings and changes in reserve requirements against member bank deposits.
These means are used in varying combinations to influence overall growth and
distribution of bank loans, investments and deposits, and their use may affect
interest rates charged on loans or paid for deposits. Federal Reserve Board
monetary policies have materially affected the operating results of commercial
banks in the past and are expected to continue to do so in the future.

2003 Regulatory Developments

On September 4, 2003, the boards of NBG and BNB entered into formal agreements
with their primary regulator, the OCC. Under the terms of the agreements, NBG
and BNB, without admitting any violations, agreed to take certain actions
designed to assure that their operations are in accordance with applicable laws
and regulations. The agreements require them, among other things, to: appoint a
Compliance Committee of the Board; develop, implement and ensure compliance with
a written plan outlining actions to be taken to address regulatory
recommendations set forth in the reports of examination, review and assess the
capabilities of management; develop various policies and programs to reduce
credit risk and identify problem loans and to adopt policies that will permit
them to declare dividends only when they are in compliance with their approved
capital plans and applicable laws, and upon prior written notice to (but not
with the consent of) the OCC. The boards of both banks have taken, or are in the
process of taking, the actions required by the agreements, and the Company has
implemented a compliance monitoring program to track and monitor compliance
within each bank of each requirement in the formal agreements.

Both banks were required to develop capital plans that will enable them to
achieve, by March 31, 2004, Tier 1 leverage capital equal to 8% of risk-weighted
assets, Tier 1 risk-based capital equal to 10% of risk-weighted assets, and
total risk-based capital of 12% of risk-weighted assets. Interim levels, to be
achieved by December 31, 2003, were also established, at 6.25%, 9.0% and 11.0%,
respectively, for Bath, and 7.0%, 9.0% and 10.5%, respectively, for NBG.
Following the closing of the credit facility with M&T Bank in December 2003,
loan proceeds were downstreamed to NBG and BNB so that the capital levels
required to be achieved by March 31, 2004 were met by December 31, 2003.


                                       23


The NBG agreement also requires its board of directors to adopt, implement and
ensure adherence to a written policy on extensions of overdraft credit and limit
the circumstances under which NBG will be permitted to extend credit to its
affiliates, and requires the bank to engage an independent appraiser to provide
updated real estate appraisals where required.

The BNB agreement also requires its board of directors to adopt, implement and
ensure adherence to a written action plan outlining proposed corrective action
addressing issues in the pre-existing Matters Requiring Attention pertaining to
interest rate risk measurement and monitoring systems.

Also on September 4, 2003, in a letter to the Federal Reserve Bank of New York,
the Company's primary regulator, the Company terminated its financial holding
company status and began operating instead as a bank holding company. The change
in status will not affect any non-financial subsidiaries or activities currently
being conducted by the Company, although it will mean that 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.

The Company believes that it has made substantial progress to date in enhancing
its risk management and governance practices while working with management and
Boards of NBG and BNB to address the various requirements set forth in the
formal agreements. There can be no assurance, however, as to the precise timing
for determining that all required corrective actions have been taken to the
appropriate satisfaction of the OCC. The Board and senior management team are
committed to the goal of establishing and maintaining "best practices" at both
the Company and the bank level in the areas of governance, corporate conduct,
risk management and regulatory compliance, and to meeting all of the banks'
commitments to their regulators. While the Company believes that substantial
progress has been made in this pursuit to date, the Company also recognizes that
this remains an important ongoing effort requiring dedication and a commitment
of resources at all levels of the holding company and the banks.


                                       24


Item 2.  Properties

The Company's headquarters and operations center is located in Warsaw, New York.
This facility is leased for a nominal rent from the Wyoming County Industrial
Development Agency for local tax reasons and the Company has the right to
purchase it for nominal consideration beginning in November 2006. The following
table lists the properties of each of the Company's subsidiaries:



                                                  TYPE OF          LEASED OR            EXPIRATION
            ENTITY \ LOCATION                    FACILITY            OWNED               OF LEASE
            -----------------                    --------            -----               --------
                                                                             
     Wyoming County Bank
       Warsaw.............................      Main Office           Own                   --
       Attica.............................        Branch              Own                   --
       Batavia............................        Branch             Lease            September 2011
       Batavia (In-Store).................        Branch             Lease              August 2009
       Dansville..........................        Branch             Lease              March 2014
       East Aurora........................        Branch             Lease              March 2013
       Geneseo............................        Branch              Own                   --
       Lakeville..........................        Branch              Own                   --
       Mount Morris.......................        Branch              Own                   --
       North Java.........................        Branch              Own                   --
       North Warsaw.......................        Branch              Own                   --
       Orchard Park.......................        Branch         Ground Lease          January 2019
       Pavilion...........................        Branch              Own                   --
       Strykersville......................        Branch              Own                   --
       Williamsville......................        Branch             Lease               May 2005
       Wyoming............................        Branch              Own                   --
       Yorkshire..........................        Branch             Lease             November 2007

     National Bank of Geneva
       Geneva.............................      Main Office           Own                   --
       Geneva.............................    Drive-up Branch         Own                   --
       Geneva (Plaza).....................        Branch         Ground Lease          January 2016
       Caledonia..........................        Branch             Lease              April 2006
       Canandaigua........................        Branch              Own                   --
       Honeoye Falls......................        Branch             Lease            September 2017
       Leroy..............................        Branch              Own                   --
       North Chili........................        Branch              Own                   --
       Ovid...............................        Branch              Own                   --
       Penn Yan...........................        Branch              Own                   --
       Victor.............................        Branch              Own                   --
       Waterloo...........................        Branch              Own                   --

     Bath National Bank
       Bath...............................      Main Office           Own                   --
       Bath...............................    Drive-up Branch         Own                   --
       Avoca..............................        Branch              Own                   --
       Avoca..............................    Drive-up Branch        Lease            September 2004
       Cohocton...........................     Closed Branch         Lease              August 2005
       Dundee.............................        Branch              Own                   --
       Elmira.............................        Branch              Own                   --
       Elmira Heights.....................        Branch             Lease              August 2009
       Erwin..............................        Branch             Lease              August 2004
       Hammondsport.......................        Branch              Own                   --
       Hornell............................        Branch              Own                   --
       Horseheads.........................        Branch             Lease             October 2012
       Naples.............................        Branch              Own                   --
       Wayland............................        Branch              Own                   --

     First Tier Bank & Trust
       Olean..............................      Main Office           Own                   --
       Olean..............................    Drive-up Branch         Own                   --
       Allegany...........................        Branch              Own                   --
       Cuba...............................        Branch              Own                   --
       Ellicottville......................        Branch              Own                   --
       Lakewood...........................        Branch              Own                   --
       Salamanca..........................        Branch              Own                   --

     Burke Group
       Honeoye Falls......................      Main Office          Lease             December 2018
       Syracuse...........................        Branch             Lease              April 2005



                                       25


Item 3. Legal Proceedings

From time to time the Company and its subsidiaries are parties to or otherwise
involved in legal proceedings arising in the normal course of business.
Management does not believe that there is any pending or threatened proceeding
against the Company or its subsidiaries, which, if determined adversely, would
have a material effect on the Company's business, results of operations or
financial condition.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter of the year ended December
31, 2003 to a vote of security holders.

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The common stock of the Company is traded under the symbol of FISI on the Nasdaq
National Market. At March 1, 2004, the Company had 11,172,673 shares of common
stock outstanding (exclusive of treasury shares) and approximately 2,400
shareholders of record. The following chart lists prices of actual sales
transactions as reported by Nasdaq, as well as the Company's cash dividends
declared.

                                 Sales Price            Cash Dividends
                          High       Low        Close      Declared
                        -------------------------------------------------
  2003
  First Quarter         $ 29.75    $ 19.05     $ 19.82      $ 0.16
  Second Quarter          27.23      18.94       23.53        0.16
  Third Quarter           27.20      21.80       21.92        0.16
  Fourth Quarter          29.40      22.00       28.23        0.16

  2002
  First Quarter         $ 30.00    $ 23.33     $ 29.11      $ 0.13
  Second Quarter          38.85      28.74       37.86        0.14
  Third Quarter           38.25      24.35       27.15        0.15
  Fourth Quarter          32.04      25.05       29.36        0.16

The Company pays regular quarterly cash dividends on its common stock, and the
Board of Directors presently intends to continue the payment of regular
quarterly cash dividends, subject to the need for those funds for debt service
and other purposes. However, because substantially all of the funds available
for the payment of dividends are derived from the Banks, future dividends will
depend upon the earnings of the Banks', their financial condition and need for
funds. Furthermore, there are a number of federal banking policies and
regulations that restrict the Company's ability to pay dividends. For further
discussion on dividend restrictions, please refer to page 14, as these
restrictions may have the effect of reducing the amount of dividends that the
Company can declare to its shareholders.


                                       26


Item 6. Selected Financial Data



(Dollars in thousands)                                        December 31
                                    --------------------------------------------------------------
                                       2003         2002         2001         2000         1999
                                    --------------------------------------------------------------
                                                                         
Selected Financial Condition Data
Total assets                        $2,173,732   $2,105,034   $1,794,296   $1,289,327   $1,136,460
Loans                                1,345,347    1,321,892    1,166,050      887,145      763,745
Allowance for loan losses               29,064       21,660       19,074       13,883       11,421
Securities available for sale          604,964      596,862      428,423      257,823      197,134
Securities held to maturity             47,131       47,125       61,281       76,947       81,356
Deposits                             1,818,891    1,708,523    1,433,658    1,078,111      949,531
Borrowed funds                         154,247      195,479      190,389       62,384       56,336
Shareholders' equity                   183,103      178,294      149,187      131,618      117,539



(Dollars in thousands)                             For the years ended December 31
                                    --------------------------------------------------------------
                                       2003         2002         2001         2000         1999
                                    --------------------------------------------------------------
                                                                         
Selected Results of Operations
Data
Interest income                     $  111,450   $  118,439   $  114,468   $   96,467   $   78,692
Interest expense                        35,949       42,585       49,694       43,605       31,883
                                    --------------------------------------------------------------
Net interest income                     75,501       75,854       64,774       52,862       46,809
Provision for loan losses               22,526        6,119        4,958        4,211        3,062
                                    --------------------------------------------------------------
Net interest income after
   Provision for loan loss              52,975       69,735       59,816       48,651       43,747
Noninterest income                      26,072       22,189       15,782        9,409        8,055
Noninterest expense (3)                 60,823       53,049       43,352       30,156       27,032
                                    --------------------------------------------------------------
Income before income taxes              18,224       38,875       32,246       27,904       24,770
Income taxes                             3,977       12,419       11,033        9,804        8,813
                                    --------------------------------------------------------------
Net income                          $   14,247   $   26,456   $   21,213   $   18,100   $   15,957
                                    ==============================================================




                                                            At or for the years ended December 31
                                                        ----------------------------------------------
                                                         2003      2002      2001      2000      1999
                                                        ----------------------------------------------
                                                                                 
Per Common Share Data
Net income - basic                                      $ 1.14    $ 2.26    $ 1.79    $ 1.51    $ 1.38
Net income - diluted                                      1.13      2.23      1.77      1.51      1.38
Cash dividends declared on common stock                   0.64      0.58      0.48      0.42      0.31
Book value                                               14.81     14.46     11.93     10.36      9.05
Market value                                             28.23     29.36     23.40     13.61     12.12

Selected Financial Ratios and Other Data
Performance Ratios:
  Return on common equity                                 7.65%    17.01%    15.84%    15.78%    16.16%
  Return on assets                                        0.66      1.35      1.34      1.51      1.54
  Common dividend payout                                 56.14     25.66     26.82     27.81     22.46
  Net interest rate spread                                3.62      3.96      3.96      3.98      4.19
  Net interest margin (1)                                 3.95      4.37      4.62      4.87      5.00
  Efficiency ratio                                       55.73     50.62     48.49     45.19     45.55
  Noninterest income to average total assets (2)          1.16      1.11      0.96      0.76      0.75
  Noninterest expenses to average total assets            2.82      2.70      2.73      2.52      2.61
  Average interest-earning assets to average interest
     bearing liabilities                                118.62    117.82    119.67    123.25    124.86

Asset Quality Ratios:
  Non-performing loans to total loans                     3.82%     2.81%     0.86%     0.80%     0.75%
  Non-performing assets to total loans and other real     3.87      2.90      0.94      0.91      0.88
     estate
  Allowance for loan losses to non-performing loans         56        58       190       195       199
  Allowance for loan losses to total loans                2.16      1.64      1.64      1.56      1.50
  Net charge-offs during the period to average loans
     outstanding during the year                          1.11      0.30      0.23      0.21      0.17

Capital ratios:
  Equity to total assets                                  8.42%     8.47%     8.31%    10.21%    10.34%
  Average common equity to average assets                 7.74      7.47      7.84      8.78      8.63

Other Data:
  Number of full-service offices                            48        47        41        32        29
  Loans serviced for others (in millions)               $439.5    $356.4    $302.3    $205.2    $200.2
  Full time equivalent employees                           744       685       608       441       411


(1)   Net interest income divided by average interest earning assets. A
      tax-equivalent adjustment to interest earned from tax-exempt securities
      has been computed using a federal tax rate of 35%.

(2)   Noninterest income excludes net gain (loss) on sale of securities
      available for sale.

(3)   Noninterest expense includes goodwill amortization, which amounted to
      $1,653,000 for 2001 compared to zero in all other years presented.


                                       27




                                                                       ----------------------------------------------
  (Dollars in thousands)                                                 First       Second     Third       Fourth
                                                                        Quarter     Quarter    Quarter     Quarter
                                                                       ----------------------------------------------
                                                                                                 
  Selected Quarterly Financial Information
  2003
  Results of operations data:
    Interest income                                                       $28,527    $28,764     $27,310     $26,849
    Interest expense                                                        9,686      9,571       8,770       7,922
    Net interest income                                                    18,841     19,193      18,540      18,927
    Provision for loan losses                                               3,298      5,311       5,590       8,327
    Net interest income after provision for loan losses                    15,543     13,882      12,950      10,600
    Noninterest income                                                      6,102      6,160       7,059       6,751
    Noninterest expense                                                    15,576     14,947      14,896      15,404
    Income before income taxes                                              6,069      5,095       5,113       1,947
    Income taxes                                                            1,773      1,445       1,058       (299)
    Net income                                                              4,296      3,650       4,055       2,246

  Per common share data:
    Net income - basic                                                      $0.35      $0.29       $0.33       $0.17
    Net income - diluted                                                     0.35       0.29        0.33        0.17
    Cash dividends declared                                                  0.16       0.16        0.16        0.16
    Book value                                                              14.57      15.11       14.78       14.81
    Market value                                                            19.82      23.53       21.92       28.23



                                                                       ----------------------------------------------
                                                                         First       Second     Third       Fourth
                                                                        Quarter     Quarter    Quarter     Quarter
                                                                       ----------------------------------------------
                                                                                                 
  2002
  Results of operations data:
    Interest income                                                       $28,560    $29,927     $30,343     $29,609
    Interest expense                                                       10,483     10,941      10,810      10,351
    Net interest income                                                    18,077     18,986      19,533      19,258
    Provision for loan losses                                               1,007      1,181       1,452       2,479
    Net interest income after provision for loan losses                    17,070     17,805      18,081      16,779
    Noninterest income                                                      4,937      5,157       5,687       6,408
    Noninterest expense                                                    12,100     13,093      13,418      14,438
    Income before income taxes                                              9,907      9,869      10,350       8,749
    Income taxes                                                            3,250      3,225       3,466       2,478
    Net income                                                              6,657      6,644       6,884       6,271

  Per common share data:
    Net income - basic                                                      $0.57      $0.57       $0.59       $0.53
    Net income - diluted                                                     0.56       0.56        0.58        0.53
    Cash dividends declared                                                  0.13       0.14        0.15        0.16
    Book value                                                              12.26      13.23       14.03       14.46
    Market value                                                            29.11      37.86       27.15       29.36



                                       28


Item 7. 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 the Company during the year
ended December 31, 2003 and the preceding two years. 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 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 $14.2 million, $26.5 million and $21.2 million for 2003, 2002 and
2001, respectively. Diluted earnings per share for the year ended December 31,
2003 was $1.13, compared to $2.23 in 2002 and $1.77 in 2001. The return on
average common equity in 2003 was 7.65%, compared to 17.01% in 2002 and 15.84%
in 2001. The return on average assets in 2003 was 0.66%, compared to 1.35% in
2002 and 1.34% in 2001.

Net interest income, the principal source of the Company's earnings, was $75.5
million in 2003 comparable to $75.9 million in 2002. Net interest margin was
3.95% for the year ended December 31, 2003, a drop of 42 basis points from the
4.37% level for last year.

The most significant item affecting 2003 financial results was the provision for
loan losses, which totaled $22.5 million in 2003, an increase of $16.4 million
over the $6.1 million provision for loan losses in 2002. Credit quality issues
made 2003 a challenging year for the Company. High levels of nonperforming loans
with associated charge-offs and increases to the allowance for loan losses
significantly impacted financial results. Nonperforming assets increased to $52
million at December 31, 2003 compared to $38 million at December 31, 2002.
Nonperforming agricultural credits, principally dairy farms, have increased $10
million since December 31, 2002. Total nonperforming agricultural loans were $22
million at December 31, 2003 or 9.40% of total agricultural loans. Borrower cash
flows in the dairy industry have recently improved due to some stabilization and
upward movement in milk prices. Net loan charge-offs were $15 million, or 1.11%
of average loans, for the year ended December 31, 2003 compared to $4 million,
or 0.30% of average loans for 2002. Commercial and commercial mortgage loans
represented $11 million of net charge-offs in 2003.

During 2003, increased regulatory oversight was put in place in the form of
formal agreements at the two national banks, NBG and BNB. In addition, the
Company's management placed a renewed focus on risk management, from both a
corporate and credit perspective. This included expansion of the position
formerly known as Chief Credit Officer to Chief Risk Officer. The Company has
committed substantial resources to credit administration and underwriting
functions with the goal of increasing consistency among subsidiary banks in
reporting and grading loans, and strengthening the review and oversight of
subsidiary bank lending and credit administration at the holding company level.

The Company's future challenges include managing existing credit quality issues
as well as continuing to strengthen and standardize the current loan
underwriting process. Significant resources have been invested in building an
infrastructure necessary to manage the current credit issues and to support
future


                                       29


growth. Management is now faced with the challenge of leveraging that
infrastructure to grow revenues by investing in quality assets.

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, which are those policies that Management believes
are the most important to the Company's financial position and results, requires
Management to make estimates, assumptions, and judgments that affect the amounts
reported in the consolidated financial statements and accompanying notes and are
based on information available as of the date of the financial statements.
Future changes in information may affect these estimates, assumptions and
judgments, which, in turn, may affect amounts reported in the financial
statements.

The Company has numerous accounting policies, of which the most significant are
presented in Note 1 of the notes to consolidated financial statements. These
policies, along with the disclosures presented in the other financial statement
notes and in this discussion, provide information on how significant assets,
liabilities, revenues and expenses are reported in the consolidated financial
statements and how those reported amounts are determined. Based on the
sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, Management has determined that the
accounting policies with respect to the allowance for loan losses 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: The allowance for loan losses represents management's
estimate of probable credit losses inherent in the loan portfolio. Determining
the amount of the allowance for loan losses is considered a critical accounting
estimate because it requires significant judgment and the use of subjective
measurements including management's assessment of the internal risk
classifications of loans, changes in the nature of the loan portfolio, industry
concentrations and the impact of current local, regional and national economic
factors on the quality of the loan portfolio. Changes in these estimates and
assumptions are reasonably possible and may have a material impact on the
Company's consolidated financial statements, results of operations or liquidity.
For additional discussion related to the Company's accounting policies for the
allowance for loan losses, see Note 1 of the notes to consolidated financial
statements.

Goodwill: Statement of Financial Accounting Standard (SFAS) No. 142, "Goodwill
and Other Intangible Assets" 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,
results of operations or liquidity. During 2003, the Company evaluated goodwill
for impairment using a discounted cash flow analysis and determined no
impairment existed. For additional discussion related to the Company's
accounting policy for goodwill and other intangible assets, see Note 1 of the
notes to the consolidated financial statements.


                                       30


NET INCOME ANALYSIS

Average Balance Sheet
The following table sets 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 for the years indicated. Such yields and rates were
derived by dividing interest income or expense by the average balances of
interest-earning assets or interest-bearing liabilities, respectively, for the
years shown. Tax equivalent adjustments have been made. All average balances are
average daily balances. Nonaccrual loans are included in the yield calculations
in this table.



                                                                        Year ended December 31
                                    ----------------------------------------------------------------------------------------------
                                                 2003                           2002                            2001
                                    -----------------------------  -----------------------------  --------------------------------
                                      Average    Interest            Average   Interest             Average    Interest
                                    Outstanding   Earned/  Yield/  Outstanding  Earned/   Yield/  Outstanding   Earned/    Yield/
(Dollars in thousands)                Balance      Paid     Rate     Balance     Paid      Rate     Balance      Paid       Rate
                                    ----------------------------------------------------------------------------------------------
                                                                                                  
Interest-earning assets:
   Federal funds sold and
     interest bearing deposits      $   45,361  $    505     1.11%  $   28,889  $    494     1.71%  $    8,634  $    358     4.15%
   Investment securities (1):
     Taxable                           387,799    16,073     4.14      364,356    19,109     5.24      251,794    15,288     6.07
     Non-taxable                       231,529    12,794     5.53      211,358    13,109     6.20      170,151    11,279     6.63
                                    ----------  --------  -------   ----------  --------  -------   ----------  --------  -------
       Total investment securities     619,328    28,867     4.66      575,714    32,218     5.59      421,945    26,567     6.30
   Loans (2):
     Commercial and agricultural       859,709    51,196     5.96      766,818    52,177     6.80      611,866    51,244     8.38
     Residential real estate           255,429    18,340     7.18      234,813    19,362     8.25      227,784    20,193     8.86
     Consumer and home equity          242,491    17,020     7.02      233,173    18,776     8.05      217,070    20,045     9.23
                                    ----------  --------  -------   ----------  --------  -------   ----------  --------  -------
       Total loans                   1,357,629    86,556     6.38    1,234,804    90,315     7.31    1,056,720    91,482     8.66
         Total interest-earning
           assets                    2,022,318   115,928     5.73    1,839,407   123,027     6.69    1,487,299   118,407     7.96

Allowance for loan losses              (25,135)                        (20,030)                        (16,825)
Other non-interest earning assets      158,554                         145,639                         117,698
                                    ----------                      ----------                      ----------

           Total assets             $2,155,737                      $1,965,016                      $1,588,172
                                    ==========                      ==========                      =========

Interest-bearing liabilities:
   Savings and money market         $  411,587  $  3,958     0.96%  $  366,708  $  5,768     1.57%  $  253,128  $  5,244     2.07%
   Interest-bearing checking           389,267     3,547     0.91      354,687     5,059     1.43      172,022     2,110     1.23
   Certificates of deposit             744,022    21,758     2.92      655,737    24,340     3.71      696,230    36,060     5.18
   Borrowed funds                      143,749     5,009     3.48      167,883     5,741     3.42      107,530     4,840     4.50
   Guaranteed preferred
     beneficial interests in
     corporations junior
     subordinated debentures            16,200     1,677    10.35       16,200     1,677    10.35       13,892     1,440    10.37
                                    ----------  --------  -------   ----------  --------  -------   ----------  --------  -------
         Total interest-bearing
           liabilities               1,704,825    35,949     2.11    1,561,215    42,585     2.73    1,242,802    49,694     4.00
                                    ----------  --------  -------   ----------  --------  -------   ----------  --------  -------

Non-interest bearing demand
  deposits                             245,234                         219,028                         181,831
                                    ----------                      ----------                      ----------
Other non-interest-bearing
  liabilities                           21,165                          20,306                          21,318
                                    ----------                      ----------                      ----------
           Total liabilities         1,971,224                       1,800,549                       1,445,951

Stockholders' equity (3)               184,513                         164,467                         142,221
                                    ----------                      ----------                      ----------
           Total liabilities
              and stockholders'
               equity               $2,155,737                      $1,965,016                      $1,588,172
                                    ==========                      ==========                      ==========
Net interest income                             $ 79,979                        $ 80,442                        $ 68,713
                                                ========                        ========                        ========
Net interest rate spread                                     3.62%                           3.96%                           3.96%
                                                          =======                         =======                         =======
Net earning assets                  $  317,493                      $  278,192                      $ 244,497
                                    ==========                      ==========                      ==========
Net interest income as a
   percentage of average
   interest-earning assets                                   3.95%                           4.37%                           4.62%
                                                          =======                         =======                         =======
Ratio of average interest-earning
   assets to average
   interest-bearing liabilities                            118.62%                         117.82%                         119.67%
                                                          =======                         =======                         =======


(1)   Amounts shown are amortized cost for held to maturity securities and fair
      value for available for sale securities. In order to make pre-tax income
      and resultant yields on tax-exempt securities comparable to those on
      taxable securities and loans, a tax-equivalent adjustment to interest
      earned from tax-exempt securities has been computed using a federal tax
      rate of 35%.

(2)   Net of deferred loan fees and costs, and loan discounts and premiums.

(3)   Includes unrealized gains/(losses) on securities available for sale.


                                       31


Net Interest Income

Net interest income, the principal source of the Company's earnings, was $75.5
million in 2003 comparable to $75.9 million in 2002. Net interest margin was
3.95% for the year ended December 31, 2003, a drop of 42 basis points from the
4.37% level for the same period last year. Growth in average earning assets of
$183 million, or 10%, served to partially offset the fall in net interest
margin. The growth in average earning assets is comprised of average increases
of $123 million and $60 million in loans and investment securities,
respectively. The Company's yield on average earning assets was 5.73% for 2003,
down 96 basis points from 6.69% from 2002. The Company's loan portfolio yield
was 6.38% and tax-equivalent investment yield was 4.66% for 2003, each down 93
basis point from 2002. The decline in both categories is partially due to the
historically low interest rate environment, which has led to repricing of
variable rate loans and prepayments of higher yielding investment securities and
redeployment of those funds at current market rates. Lost interest on the higher
levels of nonaccrual loans has also contributed to the decline in loan portfolio
yield.

Total average interest-bearing liabilities were $1.705 billion for the year
ended December 31, 2003 representing a $144 million increase over 2002 and
represented approximately 80% of the average increased funding required to
support the growth in average earning assets. The principal funding source for
the average earning asset growth was deposits, with the average for the year
ended December 31, 2003 increasing $194 million or 12% over the average for the
same period in 2002. Net interest margin declined in 2003, as general market
interest rates declined to historically low levels. As overall interest rates
have continued to remain low, the Company's yields on earning assets declined in
2003 more rapidly than the cost of funds.

The Company's cost of interest bearing liabilities was 2.11% for 2003, a drop of
62 basis points from 2002. Interest bearing liabilities represented
approximately 85% of the funding sources for earning assets in 2003 and 2002
with the balance of earning assets being funded by net noninterest bearing
funding sources. Net noninterest bearing funding sources represent the amount of
zero interest cost funds such as demand deposits and equity that are available
to fund earning assets after funding non-interest earning assets. Coupling the
zero interest funding sources with interest bearing liabilities results in a
total cost of funds for the Company in 2003 of 1.78%, down 54 basis points from
the 2002 total cost of funds of 2.32%.

Net interest income was $75.9 million in 2002 compared with $64.8 million in
2001, an increase of $11.1 million or 17%. Average earning assets grew by $352
million to $1.839 billion in 2002, or 24% over 2001, which offset the effects of
a 25 basis point decline in the net interest margin from 4.62% in 2001 to 4.37%
in 2002. Total average interest-bearing liabilities were $1.561 billion for the
year ended December 31, 2002, representing a $318 million increase over 2001 and
90% of the average increased funding required to support the growth in average
earning assets.


                                       32


Rate/Volume Analysis

The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by current year rate); (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.



                                                             Year ended December 31
                                           ----------------------------------------------------------------
                                                 2003 vs. 2002                      2002 vs. 2001
                                           ----------------------------------------------------------------
                                            Increase/(Decrease)   Total    Increase/(Decrease)     Total
                                                  Due To         Increase/        Due To         Increase/
(Dollars in thousands)                      Volume      Rate    (Decrease)   Volume      Rate    (Decrease)
                                           ---------------------------------------------------------------
                                                                                
Interest-earning assets:
   Federal funds sold and
     interest-bearing deposits             $    200   $   (189)  $     11   $    349   $   (213)  $    136
   Investment securities:
     Taxable                                    971     (4,007)    (3,036)     5,957     (2,136)     3,821
     Non-taxable                              1,165     (1,480)      (315)     2,565       (735)     1,830
                                           --------   --------   --------   --------   --------   --------
       Total investment securities            2,136     (5,487)    (3,351)     8,522     (2,871)     5,651
   Loans:
     Commercial and agricultural              5,965     (6,946)      (981)    11,249    (10,316)       933
     Residential real estate                  1,466     (2,488)    (1,022)       595     (1,426)      (831)
     Consumer and home equity                   657     (2,413)    (1,756)     1,300     (2,569)    (1,269)
                                           --------   --------   --------   --------   --------   --------
       Total loans                            8,088    (11,847)    (3,759)    13,144    (14,311)    (1,167)
                                           --------   --------   --------   --------   --------   --------

       Total interest-earning assets         10,424    (17,523)    (7,099)    22,015    (17,395)     4,620
                                           ========   ========   ========   ========   ========   ========

Interest-bearing liabilities:
   Savings and money market                     432     (2,242)    (1,810)     1,807     (1,283)       524
   Interest-bearing checking                    311     (1,823)    (1,512)     2,606        343      2,949
   Certificates of deposit                    2,557     (5,138)    (2,581)    (1,500)   (10,220)   (11,720)
   Borrowed funds                              (833)       100       (733)     2,059     (1,158)       901
   Junior subordinated debentures
     issued to unconsolidated
     subsidiary trust                            --         --         --        240         (3)       237
                                           --------   --------   --------   --------   --------   --------

       Total interest-bearing liabilities     2,467     (9,103)    (6,636)     5,212    (12,321)    (7,109)
                                           ========   ========   ========   ========   ========   ========

       Net interest income                 $  7,957   $ (8,420)  $   (463)  $ 16,803   $ (5,074)  $ 11,729
                                           ========   ========   ========   ========   ========   ========


Provision for Loan Losses

The provision for loan losses represents management's estimate of the expense
necessary to maintain the allowance for loan losses at a level representative of
losses in the portfolio. The provision for loan losses was $22.5 million in
2003, compared to $6.1 million in 2002 and $5.0 million in 2001. The significant
increase in the provision for loan losses during 2003 primarily relates to
higher levels of nonperforming loans and charge-offs. Nonperforming loans
increased to $51.5 million at December 31, 2003 compared to $37.1 million at
December 31, 2002. Nonperforming agricultural credits, principally dairy farms,
have increased $10 million since December 31, 2002 after a long period of
depressed milk prices. Total nonperforming agricultural loans were $22 million
at December 31, 2003 or 9.40% of total agricultural loans. Borrower cash flows
in the dairy industry have recently improved due to some stabilization and
upward movement in milk prices. Net loan charge-offs were $15 million, or 1.11%
of average loans, for the year ended December 31, 2003 compared to $4 million,
or 0.30% of average loans for 2002. Commercial and commercial mortgage loans
represented $11 million of net charge-offs in 2003. The ratio of the allowance
for loan losses to nonperforming loans was 56% at December 31, 2003 versus 58%
at December 31, 2002. The ratio of allowance for loan losses to total loans was
2.16% and 1.64% at December 31, 2003 and 2002, respectively. See "Lending
Activities" section for further discussion.


                                       33


Noninterest Income

The following table presents the major categories of noninterest income during
the years indicated:



                                                                          Year Ended December 31
                                                              --------------------------------------------
(Dollars in thousands)                                             2003             2002              2001
                                                                   ----             ----              ----
                                                                                        
     Service charges on deposits..........................    $  11,461        $  10,603         $   7,653
     Financial services group fees and commissions........        5,692            5,629             2,690
     Mortgage banking activities..........................        4,036            2,279             2,190
     Gain on sale or call of securities...................        1,041              285               531
     Other................................................        3,842            3,393             2,718
                                                              ---------        ---------         ---------

       Total noninterest income...........................    $  26,072        $  22,189         $  15,782
                                                              =========        =========         =========


Noninterest income increased 17% to $26.1 million in 2003 compared to $22.2
million in 2002. The increase in noninterest income is partially attributed to
the growth in deposits and related service fees. The increase in mortgage
banking activities, which includes gains and losses from the sale of loans,
mortgage servicing income and the amortization and impairment of mortgage
servicing rights, corresponds with the increase in residential mortgage
refinancing activity resulting from the historically low interest rate
environment during 2003. Gains and losses from the sale of loans, the largest
component of mortgage banking activities, totaled $3.2 million and $1.5 million
in 2003 and 2002, respectively. The Company sells most fixed rate newly
originated and refinanced mortgage loans in the secondary market and retains the
servicing rights. The Company's loan servicing portfolio was $439 million at
December 31, 2003 compared to $356 million at December 31, 2002.

Noninterest income increased 41% to $22.2 million in 2002 compared to $15.8
million in 2001. The increase in noninterest income is partially attributed to
the growth in deposits and related service fees. In addition, the increase in
financial services group fees and commissions reflects the ongoing expansion of
the financial services line of business. In comparison to 2001, the year ended
December 31, 2002 reflects a full year of fees and commissions generated by the
Company's employee benefits administration and compensation consulting firm,
BGI, acquired during the fourth quarter of 2001.

Noninterest Expense

The following table presents the major categories of noninterest expense during
the years indicated:



                                                                          Year Ended December 31
                                                              --------------------------------------------
(Dollars in thousands)                                             2003             2002              2001
                                                                   ----             ----              ----
                                                                                        
     Salaries and employee benefits.......................    $  33,825        $  30,093         $  22,958
     Occupancy and equipment..............................        8,270            7,285             6,050
     Supplies and postage.................................        2,468            2,371             1,953
     Amortization of goodwill.............................           --               --             1,653
     Amortization of other intangible assets..............        1,226              898               728
     Computer and data processing.........................        1,829            1,759             1,501
     Professional fees....................................        1,881            1,612             1,326
     Other................................................       11,324            9,031             7,183
                                                              ---------        ---------         ---------

       Total noninterest expense..........................    $  60,823        $  53,049         $  43,352
                                                              =========        =========         =========


Noninterest expense was $60.8 million compared to $53.0 million in 2002. The
overall increase in noninterest expense is generally attributed to higher credit
collection costs, costs of opening new branch offices and costs for additional
lending and credit administration staff. The Company's largest component of
noninterest expense, salaries and employee benefits, increased 13% in 2003,
primarily a reflection of staffing additions as previously indicated. Included
in 2003 other expenses are the following items which increased substantially
from the prior year: $1.1 million of other real estate expense, $683,000 of
commercial loan expense and $544,000 of limited partnership expense. The
additional noninterest expenses, coupled with a slowing of revenue growth, are
the principal factors in an increase in the


                                       34


Company's efficiency ratio to 55.7% for the year ended December 31, 2003,
compared to 50.6% and 48.5% in 2002 and 2001, respectively.

Noninterest expense increased 22% to $53.0 million in 2002 compared to $43.4
million in 2001. The Company's largest component of noninterest expense,
salaries and employee benefits, increased 31% in 2002, a reflection of staffing
additions from acquisitions and other additions necessary to support the
Company's growth. The increase also results from overhead coupled with
integrating the newly acquired companies, expenditures associated with
maintaining the Company's investment in technology and costs connected with
opening new branch offices. In contrast, goodwill amortization expense
recognized on the BNB acquisition, which amounted to $1.7 million in 2001,
ceased on January 1, 2002 with the adoption of SFAS No. 142.

Income Tax Expense

The provision for income taxes provides for Federal and New York State income
taxes, which amounted to $4.0 million, $12.4 million and $11.0 million for the
years ended December 31, 2003, 2002 and 2001, respectively. The fluctuation in
the provision for income taxes corresponds in general with taxable income levels
for each year. The effective tax rate for 2003 was 21.8%, compared to 31.9% in
2002 and 34.2% in 2001. The lower effective tax rate in 2003 is primarily
attributable to tax exempt interest income constituting a larger proportion of
net income before income taxes.

Segment Information

In accordance with the provisions of SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information," the Company's reportable segments are
comprised of WCB, NBG, BNB, FTB and FSG as the Company evaluates performance on
an individual bank basis. During 2002 the Company completed a geographic
realignment of the subsidiary banks, which involved the merger of the subsidiary
formerly known as PSB into NBG and subsequent transfer of branches between NBG
and WCB. Accordingly, the Company restated segment results to reflect the merger
and transfers for each of the years presented. Financial information related to
the Company's segments is presented in Note 17 of the notes to consolidated
financial statements.

FINANCIAL CONDITION

At December 31, 2003 the Company had total assets of $2.174 billion, an increase
of 3% from $2.105 billion at December 31, 2002. Total deposits were $1.819
billion at year-end 2003, compared with $1.709 billion a year earlier. Book
value per common share at December 31, 2003 was $14.81, an increase of 2% from
$14.46 at December 31, 2002.

At December 31, 2003 the Company's total shareholders' equity was $183 million
compared to $178 million a year earlier. During the fourth quarter of 2003 the
Company completed a debt-financing plan that raised $25 million. Approximately
$15 million of the financing proceeds were contributed as capital to the
Company's NBG and BNB subsidiaries allowing those banks to meet higher capital
ratios required in agreements imposed by their regulator. See Note 15 of the
notes to consolidated financial statements.


                                       35


Lending Activities

Set forth below is selected information concerning the composition of the
Company's loan portfolio.



                                                      At December 31
                              ---------------------------------------------------------------
(Dollars in thousands)             2003          2002          2001         2000        1999
                              ---------------------------------------------------------------
                                                                     
Commercial                    $   248,313   $   262,630   $   232,379   $ 169,832   $ 140,376
Commercial real estate            369,712       332,134       274,702     166,041     137,648
Agricultural                      235,199       233,769       186,623     165,367     151,534
Residential real estate           251,502       251,898       240,141     201,160     189,149
Consumer and home equity          240,591       241,461       232,205     184,745     145,038
                              -----------   -----------   -----------   ---------   ---------
   Total loans, gross           1,345,317     1,321,892     1,166,050     887,145     763,745

   Allowance for loan losses      (29,064)      (21,660)      (19,074)    (13,883)    (11,421)
                              -----------   -----------   -----------   ---------   ---------

   Total loans, net           $ 1,316,253   $ 1,300,232   $ 1,146,976   $ 873,262   $ 752,324
                              ===========   ===========   ===========   =========   =========


Gross loans increased slightly to $1.345 billion at December 31, 2003 from
$1.322 billion at December 31, 2002, an increase of $23 million or 1.8%.
Commercial loans decreased $14 million or 5.5%, while commercial real estate
loans increased by $38 million or 11.3%. At December 31, 2003, commercial loans
totaled $248 million, representing 18.5% of total loans, and commercial real
estate loans totaled $370 million, representing 27.5% of total loans. At
December 31, 2003, agricultural loans, which include agricultural real estate
loans, totaled $235 million, representing 17.5% of the total loan portfolio.

As of December 31, 2003 and 2002, residential real estate loans remained flat at
$252 million or 18.7% of total loans in 2003. Although the residential real
estate loans portfolio remained flat year-over-year, the Company processed a
significant number of mortgage applications during 2003 because of the
historically low interest rate environment during 2003. The Company sells most
qualifying newly originated and refinanced residential real estate mortgages on
the secondary market. The sold and serviced residential real estate loan
portfolio increased to $386 million at December 31, 2003 from $301 million at
December 31, 2002. During 2003 and 2002, the Company sold residential real
estate loans totaling $192 million and $139 million, respectively.

Gross loans increased to $1.322 billion at December 31, 2002 from $1.166 billion
at December 31, 2001, an increase of $156 million or 13.4%, principally from
continued expansion of the commercial, commercial real estate and agricultural
loan portfolios. Commercial loans increased $30 million or 13.0%, while
commercial real estate loans increased by $57 million or 20.9%. At December 31,
2002, commercial loans totaled $263 million, representing 19.9% of total loans,
and commercial real estate loans totaled $332 million, representing 25.1% of
total loans. At December 31, 2002, agricultural loans increased by $47 million
or 25.3%, to $234 million, represented 17.7% of the total loan portfolio. The
2002 increases in commercial, commercial real estate and agricultural loans
reflect the Company's expanded business development efforts.

As of December 31, 2002, residential real estate loans grew by $12 million or
4.9% from December 31, 2001, and totaled $252 million or 19.1% of total loans.
The relatively small percentage increase in residential real estate loans in
comparison to commercial loan types corresponds with the Company's trend towards
selling newly originated residential real estate mortgages, which is evidenced
by the increase in the sold and serviced loan portfolio to $301 million at
December 31, 2002 from $246 million at December 31, 2001. During 2002 and 2001,
the Company sold residential real estate loans totaling $139 million and $117
million, respectively.

The Company also offers a broad range of consumer loan products. Consumer and
home equity loans totaled $241 million at December 31, 2003 and 2002,
representing 17.9% of the total loan portfolio at year-end 2003. The flat
consumer portfolio is a reflection of an increase in home equity lines of credit
offset by a decline in the Company's indirect lending program, which resulted
from an increase in competition for automobile financing.


                                       36


Nonaccrual Loans and Nonperforming Assets

During 2003, the Company's credit quality declined further, particularly in the
agricultural sector. Nonperforming loans increased to $51.5 million at December
31, 2003 compared to $37.1 million at December 31, 2002. Nonperforming
agricultural credits, principally dairy farms, have increased $10 million since
December 31, 2002 after a long period of depressed milk prices. Total
nonperforming agricultural loans were $22 million at December 31, 2003 or 9.40%
of total agricultural loans. Net loan charge-offs were $15 million, or 1.11% of
average loans, for the year ended December 31, 2003 compared to $4 million, or
0.30% of average loans for 2002. Commercial and commercial mortgage loans
represented $11 million of net charge-offs in 2003.

The Company has performed a comprehensive analysis of each impaired loan over
$250,000, including the borrower's paying capacity; assessed the collateral
supporting the loans outstanding and made appropriate allocations of loss
allowances. Various forms of collateral including receivables, inventory,
livestock, equipment, real property and other assets, secure the majority of the
nonperforming loans.

The following table sets forth information regarding nonaccrual loans and other
nonperforming assets.



                                                              At December 31
                                           ----------------------------------------------------
(Dollars in thousands)                        2003       2002       2001       2000       1999
                                           ----------------------------------------------------
                                                                        
Nonaccrual loans (1)
     Commercial                            $ 12,983   $ 12,760   $  2,623   $  1,044   $  1,159
     Commercial real estate                  11,745      8,407      3,344      1,619      1,373
     Agricultural                            18,870      8,739      1,529      2,881      1,455
     Residential real estate                  2,496      1,065        921        835        413
     Consumer and home equity                   578        915        541        217        375
                                           --------   --------   --------   --------   --------
         Total nonaccrual loans              46,672     31,886      8,958      6,596      4,775

Restructured loans                            3,069      4,129         --         --         --

Accruing loans 90 days or more delinquent     1,709      1,091      1,064        521        969
                                           --------   --------   --------   --------   --------

Total nonperforming loans                    51,450     37,106     10,022      7,117      5,744

Other real estate owned                         653      1,251        947        932        969
                                           --------   --------   --------   --------   --------

Total nonperforming assets                 $ 52,103   $ 38,357   $ 10,969   $  8,049   $  6,713
                                           ========   ========   ========   ========   ========

Total nonperforming loans to total loans       3.82%      2.81%      0.86%      0.80%      0.75%

Total nonperforming assets to total loans
     and other real estate                     3.87%      2.90%      0.94%      0.91%      0.88%


(1)   Although loans are generally placed on nonaccrual status when they become
      90 days or more past due they may be placed on nonaccrual status earlier
      if they have been identified by the Company as presenting uncertainty with
      respect to the collectibility of interest or principal.


                                       37


Analysis of the Allowance for Loan Losses

The allowance for loan losses represents the estimated amount of probable credit
losses in the Company's loan portfolio. The Company performs periodic,
systematic reviews of its Banks' portfolios to identify these probable losses,
and to assess the overall collectibility of these portfolios. These reviews
result in the identification and quantification of loss factors, which are used
in determining the amount of the allowance for loan losses. In addition, the
Company periodically evaluates prevailing economic and business conditions,
industry concentrations, changes in the size and characteristics of the
portfolio and other pertinent factors. The allowance for loan losses is
allocated to cover the estimated losses in each loan category based on the
results of this detailed review. The process used by the Company to determine
the overall allowance for loan losses is based on this analysis, taking into
consideration management's judgment. Allowance methodology is reviewed on a
periodic basis and modified as appropriate. Based on this analysis, the Company
believes that the allowance for loan losses is fairly stated at December 31,
2003.

The following table sets forth an analysis of the activity in the allowance for
loan losses for the periods indicated.



                                                                  Years Ended December 31
                                                   ----------------------------------------------------
(Dollars in thousands)                               2003       2002       2001       2000       1999
                                                   ----------------------------------------------------
                                                                                
Balance at beginning of year                       $ 21,660   $ 19,074   $ 13,883   $ 11,421   $  9,570

Addition resulting from acquisitions                     --        174      2,686         --         --

Charge-offs:
     Commercial                                       8,891      1,771      1,003        466        312
     Commercial real estate                           2,953        944        394        629        139
     Agricultural                                     1,876        106         58         85         12
     Residential real estate                            215         98        178        113        461
     Consumer and home equity                         2,107      1,499      1,319        905        663
                                                   --------   --------   --------   --------   --------
         Total charge-offs                           16,042      4,418      2,952      2,198      1,587

Recoveries:
     Commercial                                         525        210         58        206         88
     Commercial real estate                              35         69         23         22         23
     Agricultural                                         3         36         --          1         --
     Residential real estate                             11         67         19          5        163
     Consumer and home equity                           346        329        399        215        102
                                                   --------   --------   --------   --------   --------
         Total recoveries                               920        711        499        449        376

Net charge-offs                                      15,122      3,707      2,453      1,749      1,211

Provision for loan losses                            22,526      6,119      4,958      4,211      3,062
                                                   --------   --------   --------   --------   --------

Balance at end of year                             $29,064    $ 21,660   $ 19,074   $ 13,883   $ 11,421
                                                   ========   ========   ========   ========   ========

Ratio of net charge-offs during the year to
     average loans outstanding during the year         1.11%      0.30%      0.23%      0.21%      0.17%

Ratio of allowance for loan losses to total loans      2.16%      1.64%      1.64%      1.56%      1.50%

Ratio of allowance for loan losses to
     nonperforming loans                                 56%        58%       190%       195%       199%


At December 31, 2003, the Company's allowance for loan losses totaled $29
million, an increase of $7 million over the previous year-end. The allowance as
a percentage of total loans was 2.16% and 1.64% at December 31, 2003 and 2002,
respectively. The ratio of allowance for loan losses to nonperforming loans
declined slightly to 56% at December 31, 2003 versus 58% at December 31, 2002.
The allowance for loan losses at December 31, 2003 represents the estimated
probable losses in the loan portfolio


                                       38


based on the Company's comprehensive assessment of collateral values and
borrower paying capacity on impaired loans in excess of $250,000 together with
the Company's assessment of current economic conditions in the Company's market
area. The results of these assessments showed that a provision for loan losses
of $22.5 million was required and recorded during 2003.

The increase in commercial loan charge-offs to $8.9 million at December 31, 2003
from $1.8 million at December 31, 2002 related primarily to NBG, as the NBG
subsidiary accounted for approximately 90% of the Company's increase in
commercial loan charge-offs. In addition, over 60%, or $4.6 million of NBG's
commercial loan charge-offs were attributed to four credit relationships.

The following table summarizes the loan delinquencies (excluding past due
nonaccrual loans) in the loan portfolio as of December 31, 2003:

                                                                   Accruing
                                                                    Loans
                                                        60-89      90 Days
(Dollars in thousands)                                   Days      or More
                                                         ----      -------

Commercial                                             $  1,426    $  1,219
Commercial real estate                                      519          --
Agricultural                                                284         178
Residential real estate                                     524         106
Consumer and home equity                                    508         206
                                                       --------    --------

     Total                                             $  3,261    $  1,709
                                                       ========    ========

Allocation of Allowance for Loan Losses

The following table sets forth the allocation of the allowance for loan losses
by loan category at the dates indicated. The allocation is made for analytical
purposes and is not necessarily indicative of the categories in which actual
losses may occur. The total allowance is available to absorb losses from any
segment of the loan portfolio.





                                                                   At December 31
                        -----------------------------------------------------------------------------------------------------------
                                 2003               2002                2001                2000               1999
                        -----------------------------------------------------------------------------------------------------------
                         Amount    Percent     Amount    Percent     Amount    Percent     Amount    Percent     Amount    Percent
                           of      of Loans      of      of Loans      of      of Loans      of      of Loans      of      of Loans
                        Allowance  in Each    Allowance  in Each    Allowance  in Each    Allowance  in Each    Allowance  in Each
                           for     Category      for     Category      for     Category      for     Category      for     Category
                          Loan     to Total     Loan     to Total     Loan     to Total     Loan     to Total     Loan     to Total
(Dollars in thousands)   Losses     Loans      Losses     Loans      Losses     Loans      Losses     Loans      Losses     Loans
                        -----------------------------------------------------------------------------------------------------------
                                                                                                 
Commercial              $   7,739      18.4%  $   5,321      19.9%  $   4,376      19.9%  $   2,924      19.1%  $   1,909      18.4%
Commercial real
  estate                    5,354      27.5       4,725      25.1       3,611      23.6       1,902      18.7       2,071      18.0
Agricultural                6,078      17.5       3,711      17.7       2,341      16.0       2,270      18.7       1,443      19.8
Residential real
  estate                    1,447      18.7       1,414      19.1       1,700      20.6       1,186      22.7         914      24.8
Consumer and home
  equity                    2,161      17.9       2,007      18.2       2,578      19.9       1,818      20.8       1,270      19.0
Unallocated                 6,285        --       4,482        --       4,468        --       3,783        --       3,814        --
                        ---------  --------   ---------  --------   ---------  --------   ---------  --------   ---------  --------

Total                   $  29,064       100%  $  21,660       100%  $  19,074       100%  $  13,883       100%  $  11,421       100%
                        =========  ========   =========  ========   =========  ========   =========  ========   =========  ========



                                       39


Loan Maturity and Repricing Schedule

The following table sets forth certain information as of December 31, 2003,
regarding the amount of loans maturing or repricing in the portfolio. Demand
loans having no stated schedule of repayment or maturity and overdrafts are
reported as due in one year or less. Adjustable and floating-rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than the period in which they contractually mature, and fixed-rate loans
are included in the period in which the final contractual repayment is due.



                                                               At December 31, 2003
                                               ----------------------------------------------------
                                                                One
                                                 Within       Through        After
                                                  One           Five          Five
(Dollars in thousands)                            Year         Years         Years         Total
                                               ----------    ----------    ----------    ----------
                                                                             
Commercial                                     $  121,226    $   75,081    $   52,006    $  248,313
Commercial real estate                             10,534        40,525       318,653       369,712
Agricultural                                       59,990        48,113       127,096       235,199
Residential real estate                            12,064        18,256       221,182       251,502
Consumer and home equity                            9,759       109,802       121,030       240,591
                                               ----------    ----------    ----------    ----------

     Total loans                               $  213,573    $  291,777    $  839,967    $1,345,317
                                               ==========    ==========    ==========    ==========

Loans maturing after one year:
     With a predetermined interest rate                      $  171,158    $  236,295
     With a floating or adjustable rate                         120,619       603,672
                                                             ----------    ----------

                                                             $  291,777    $  839,967
                                                             ==========    ==========


Investing Activities

U.S. Treasury and Agency Securities. At December 31, 2003, the U.S. Treasury and
agency securities portfolio totaled $211.9 million, all of which was classified
as available for sale. The portfolio consisted entirely of U.S. federal agency
securities. The U.S. agency security portfolio consists of primarily callable
securities, as callable securities provide higher yields than similar securities
without call features. During 2003 the Company also utilized U.S. agency
discount notes as a short-term investment alternative, particularly at the NBG
and BNB subsidiaries. At December 31, 2002, the U.S. Treasury and agency
securities portfolio totaled $120.6 million, all of which was classified as
available for sale. The portfolio consisted of $1.0 million in U. S. Treasury
securities and $119.6 million in U. S. federal agency securities. The $91.3
million increase in the Company's investment in U.S. agency securities during
2003 relates to the utilization of agency discount notes as a cash management
tool, as well as the overall attractiveness of U.S. agency securities from a
yield, risk or liquidity perspective.

State and Municipal Obligations. At December 31, 2003, the portfolio of state
and municipal obligations totaled $242.5 million, of which $195.4 million was
classified as available for sale. At that date, $47.1 million was classified as
held to maturity, with a fair value of $48.1 million. At December 31, 2002, the
portfolio of state and municipal obligations totaled $222.0 million, of which
$174.9 million was classified as available for sale. At that date, $47.1 million
was classified as held to maturity, with a fair value of $48.1 million. Over the
past few years, more favorable yields on new purchases of these securities, when
compared to taxable investment alternatives, has led to growth in this
portfolio. In addition, the Company has expanded its overall municipal banking
relationship business that includes both deposit activities and investing in
obligations issued by those municipalities.

Mortgage-Backed Securities. Mortgage-backed securities, all of which were
classified as available for sale, totaled $192.7 million and $283.5 million at
December 31, 2003 and 2002, respectively. The portfolio was comprised of $138.5
million of mortgage-backed pass-through securities, $45.1 million of
collateralized mortgage obligations (CMOs) and $9.1 million of other
asset-backed securities at December 31, 2003. The mortgage backed pass-through
securities were predominantly issued by government sponsored enterpises (FNMA,
FHLMC, or GNMA). Approximately 80% of the mortgage-


                                       40


backed pass-through securities were in fixed rate securities that were most
frequently formed with mortgages having an original balloon payment of five or
seven years. The adjustable rate agency mortgage-backed securities portfolio is
principally indexed to the one-year Treasury bill. The CMO portfolio consists of
government issues and privately issued AAA rated securities. The other
asset-backed securities are primarily Student Loan Marketing Association (SLMA)
floaters, which are securities backed by student loans. At December 31, 2002 the
portfolio consisted of $193.4 million of mortgage-backed pass-through
securities, $78.6 million of CMOs and $11.5 million of SLMAs. The decrease in
mortgage-backed securities is a result of significant prepayments of this
security class during the year due to the historically low interest rate
environment and redeployment of the funds in alternative investment vehicles,
namely U.S. agency securities.

Corporate Bonds. The corporate bond portfolio, all of which was classified as
available for sale, totaled $4.1 million and $13.9 million at December 31, 2003
and 2002, respectively. The decline in this class of securities relates to the
liquidation of certain bonds to satisfy managements desire to decrease overall
credit risk. The Company's investment policy limits investments in corporate
bonds to no more than 10% of total investments and to bonds rated as Baa or
better by Moody's Investors Service, Inc. or BBB or better by Standard & Poor's
Ratings Services at the time of purchase.

Equity Securities. At December 31, 2003 and 2002, available for sale equity
securities totaled $0.9 million and $3.9 million, respectively.

Security Yields and Maturities Schedule

The following table sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Company's debt
securities portfolio as of December 31, 2003. No tax equivalent adjustments were
made to the weighted average yields.



                                                               December 31, 2003
                         --------------------------------------------------------------------------------------------------------
                                                 More than One        More than Five
                          One Year or Less    Year to Five Years    Years to Ten Years   After Ten Years            Total
                         --------------------------------------------------------------------------------------------------------
                                    Weighted             Weighted             Weighted             Weighted             Weighted
                         Amortized   Average  Amortized   Average  Amortized   Average  Amortized   Average  Amortized   Average
(Dollars in thousands)      Cost      Yield      Cost      Yield      Cost      Yield      Cost      Yield      Cost      Yield
                         --------------------------------------------------------------------------------------------------------
                                                                                              
Available for Sale:
     US Treasury and
       agency             $ 39,424      1.57%  $ 26,946      4.41%  $ 45,534      4.94%  $ 98,666      4.47%  $210,570      4.02%
     Mortgage-backed
       securities              176      2.28     20,520      4.67     82,698      4.43     86,518      4.30    189,912      4.39
     State and municipal
       obligations          13,712      4.40    105,978      3.74     61,636      3.87      5,003      4.74    186,329      3.86
     Corporate bonds         3,015      5.84        506      6.38         --        --        499      9.50      4,020      6.37
                          -------------------------------------------------------------------------------------------------------

Total debt securities
     available for sale   $ 56,327      2.49%  $153,950      3.99%  $189,868      4.37%  $190,686      4.41%  $590,831      4.11%
                          =======================================================================================================

Held to Maturity:
     State and municipal
       obligations        $ 33,458      2.14%  $ 10,654      4.39%  $  2,220      4.81%  $    799      5.11%  $ 47,131      2.82%
                          =======================================================================================================

Total debt securities
     held to maturity     $ 33,458      2.14%  $ 10,654      4.39%  $  2,220      4.81%  $    799      5.11%  $ 47,131      2.82%
                          =======================================================================================================



                                       41


Borrowing Activities

Outstanding borrowings at December 31, 2003 and 2002 are summarized as follows:

(Dollars in thousands)                                        2003         2002
                                                            -------      -------

Short-term borrowings:
   Federal funds purchased and securities
     sold under repurchase agreements                       $22,525      $60,679
   FHLB advances                                             26,500       26,000
   Other                                                      1,000          510
                                                            -------      -------

       Total short-term borrowings                          $50,025      $87,189
                                                            =======      =======

Long-term borrowings:
   FHLB advances                                            $62,469      $86,822
   Other                                                     25,051        5,268
                                                            -------      -------

       Total long-term borrowings                           $87,520      $92,090
                                                            =======      =======

Information related to Federal funds purchased and securities sold under
repurchase agreements as of and for the years ended December 31, 2003, 2002 and
2001 is summarized as follows:

(Dollars in thousands)                               2003       2002       2001
                                                  -------    -------    -------

Weighted average interest rate at year-end           0.89%      1.50%      1.88%
Maximum outstanding at any month-end              $36,414    $61,951    $65,474
Average amount outstanding during the year        $30,284    $47,924    $33,157

The average amounts outstanding are computed using daily average balances.
Related interest expense for 2003, 2002 and 2001 was $376,000, $ 951,000 and
$1,108,000, respectively.

At December 31, 2003, the Company had outstanding various short and long-term
FHLB advances with maturity dates extending through 2014. The FHLB advances bear
interest at fixed rates ranging from 2.41% to 7.80% and the weighted average
interest rate amounted to 4.47% as of December 31, 2003.

The Company's FHLB advances include $20.0 million in fixed-rate callable
borrowings, which can be called by the FHLB on a quarterly basis. FHLB advances
are collateralized by $6.0 million of FHLB stock, mortgage loans with a carrying
value of $84.2 million at December 31, 2003 and investment securities with a
fair market value of $37.8 million at December 31, 2003. At December 31, 2003,
the Company had remaining credit available of $27.8 million under lines of
credit with the FHLB. The Company also had $74.3 million of remaining credit
available under unsecured lines of credit with various banks at December 31,
2003. The Company also has available lines of credit with Farmer Mac permitting
borrowings to a maximum of $25.0 million. Advances outstanding against the
Farmer Mac lines at December 31, 2003 amounted to $1.0 million.

During 2003, FII expanded the terms of an existing credit agreement with M&T
Bank to aid in achieving the capital plans established for its NBG and BNB
subsidiaries. The credit agreement includes a $25.0 million term loan facility
and a $5.0 million revolving loan facility. The term loan requires monthly
payments of interest only, at a variable interest rate of London Interbank
Offered Rate ("LIBOR") plus 1.75%, which was 2.98% as of December 31, 2003. The
$25.0 million term loan is included in long-term borrowings on the consolidated
statements of financial condition as principal installments are due as follows:
$5 million in December 2006, $10 million in December 2007 and $10 million in
December 2008. The $5 million revolving loan accrues interest at a rate of LIBOR
plus 1.50%. There were no advances outstanding on the revolving loan as of
December 31, 2003. The credit agreement includes affirmative financial
covenants, all of which were met as of December 31, 2003. FII pledged the stock
of its subsidiary banks as collateral for the credit facility.


                                       42


Trust Preferred Securities and Junior Subordinated Debentures

On February 22, 2001, the Company established FISI Statutory Trust I (the
"Trust"), which is a statutory business trust formed under Connecticut law. The
Trust exists for the exclusive purposes of (i) issuing and selling 30 year
guaranteed preferred beneficial interests in the trust assets ("trust preferred"
or "capital" securities) in the aggregate amount of $16.2 million at a fixed
rate of 10.20%, (ii) using the proceeds from the sale of the capital securities
to acquire the junior subordinated debentures issued by the Company and (iii)
engaging in only those other activities necessary, advisable or incidental
thereto.

The Company's junior subordinated debentures are the primary assets of the Trust
and, accordingly, payments under the corporation obligated junior debentures are
the sole revenue of the Trust. The capital securities of the Trust are
non-voting. The Company owns all of the common securities of the Trust. The
Company used the net proceeds from the sale of the capital securities to
partially fund the BNB acquisition. The capital securities qualified as Tier 1
capital under regulatory definitions as of December 31, 2003 and 2002.

The Company's primary sources of funds to pay interest on the debentures held by
the Trust are current dividends from its subsidiary banks. Accordingly, the
Company's ability to service the debentures is dependent upon the continued
ability of the subsidiary banks to pay dividends to the Company. Since the
junior subordinated debentures and trust preferred securities at December 31,
2003 and 2002, respectively are classified as debt for financial statement
purposes, the tax-deductible expense associated with the capital securities is
recorded as interest expense in the consolidated statements of income.

The Company incurred $487,000 in costs to issue the securities and the costs are
being amortized over 20 years using the straight-line method

As of December 31, 2003, the Company deconsolidated the subsidiary Trust, which
had issued trust preferred securities, and replaced the presentation of such
instruments with the Company's junior subordinated debentures issued to the
subsidiary Trust. Such presentation reflects the adoption of FASB Interpretation
No. 46 ("FIN 46 R"), "Consolidation of Variable Interest Entities."

Deposits

The Banks offer a broad array of core deposit products including checking
accounts, interest-bearing transaction accounts, savings and money market
accounts and certificates of deposit under $100,000. These core deposits totaled
$1.552 billion or 85.3% of total deposits of $1.819 billion at December 31,
2003. The core deposit base consists almost exclusively of in-market accounts.
Core deposits are supplemented with certificates of deposit over $100,000, which
amounted to $267.1 million as of December 31, 2003, primarily from in-market
municipal, business and individual customers. As of December 31, 2003, brokered
certificates of deposit included in certificates of deposit over $100,000
totaled $125.4 million.

Total deposits at December 31, 2003 amounted to $1.819 billion, an increase of
$110.4 million or 6.5% from $1.709 billion at December 31, 2002. Core deposit
products were $1.507 billion or 88.2% of total deposits at December 31, 2002.
Certificates of deposit over $100,000 totaled $201.8 million at December 31,
2002, which included $71.6 million in brokered certificates of deposit.


                                       43


The daily average balances, percentage composition and weighted average rates
paid on deposits for each of the years ended December 31, 2003, 2002 and 2001
are presented below:



                                                               For the year ended December 31
                               ------------------------------------------------------------------------------------------------
                                            2003                             2002                           2001
                               ------------------------------------------------------------------------------------------------
                                           Percent                         Percent                         Percent
                                           of Total   Weighted             of Total    Weighted            of Total    Weighted
                                Average    Average    Average    Average   Average     Average   Average   Average      Average
(Dollars in thousands)          Balance    Deposits     Rate     Balance   Deposits      Rate    Balance   Deposits       Rate
                               ------------------------------------------------------------------------------------------------
                                                                                               
Interest-bearing checking      $ 389,267      21.8%     0.91%   $ 354,687      22.2%      1.43%  $ 172,022      13.2%      1.23%
Savings and money market         411,587      23.0      0.96      366,708      23.0       1.57     253,128      19.4       2.07
Certificates of deposit
   under $100,000                509,056      28.4      2.93      438,587      27.5       3.80     376,256      28.9       5.36
Certificates of deposit
   over $100,000                 234,966      13.1      2.90      217,150      13.6       3.53     319,974      24.6       4.97
Non-interest bearing accounts    245,234      13.7        --      219,028      13.7         --     181,831      13.9         --
                               ------------------------------------------------------------------------------------------------

Total average deposits         $1,790,110    100.0%     1.63%  $1,596,160    100.0%      2.20%  $1,303,211    100.0%      3.33%
                               ================================================================================================


The following table indicates the amount of the Company's certificates of
deposit by time remaining until maturity as of December 31, 2003:



                                                      At December 31, 2003
                                    ----------------------------------------------------------
                                     3 Months   Over 3 To   Over 6 To    Over 12
(Dollars in thousands)               Or Less     6 Months   12 Months     Months      Total
                                    ----------  ----------  ----------  ----------  ----------
                                                                     
Certificates of deposit
   less than $100,000               $  147,641  $  105,578  $  105,686  $  143,661  $  502,566

Certificates of deposit
   of $100,000 or more                  92,378      35,401      39,033     100,304     267,116
                                    ----------  ----------  ----------  ----------  ----------

     Total certificates of deposit  $  240,019  $  140,979  $  144,719  $  243,965  $  769,682
                                    ==========  ==========  ==========  ==========  ==========


RECENT ACCOUNTING DEVELOPMENTS

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. SFAS No. 142 does not apply to costs associated with an exit
activity that involves an entity newly acquired in a business combination. The
provisions of SFAS No. 146 did not affect the Company's consolidated financial
statements.

FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others," was
issued in November 2002. FASB Interpretation No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FASB Interpretation No. 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. The Company has provided the required
disclosures. The Company adopted the recognition and measurement provisions of
FASB Interpretation No. 45 effective January 1, 2003. The adoption did not have
a material impact on the Company's consolidated financial statements.


                                       44


In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance could
be accounted for as equity, be accounted for as liabilities. Financial
instruments affected include mandatorily redeemable securities, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for all other financial instruments. The Company adopted the provisions of
SFAS No. 150 on July 1, 2003. The adoption did not have a material impact on the
Company's consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". The objective of this
interpretation is to provide guidance on how to identify a variable interest
entities ("VIE") and determine when the assets, liabilities, non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. FIN 46 was effective for all VIEs created
after January 31, 2003. However, the FASB postponed that effective date to
December 31, 2003. In December 2003, the FASB issued a revised FIN 46 ("FIN
46R') which further delayed the effective date until March 31, 2004 for VIE's
created prior to February 1, 2003. The requirements of FIN 46R resulted in the
deconsolidation of the Company's wholly-owned subsidiary trust, formed to issue
mandatorily redeemable preferred securities ("trust preferred securities"). The
deconsolidation, as of December 31, 2003, results in the derecognition of the
$16.2 million of trust preferred securities and the recognition of junior
subordinated debentures of $16.7 million and investment in the subsidiary trust
of $502,000 in the Company's 2003 consolidated statement of financial position.

In December 2003, the FASB issued a revision of SFAS No. 132, "Employers
Disclosure about Pensions and Other Post Retirement Benefits" to expand
disclosure requirements to include descriptions of plan assets, investment
strategy, measurement dates, plan obligations, cash flows and components of net
periodic benefit cost recognized during interim periods. The Company adopted the
provisions of SFAS No. 132, as revised, on December 31, 2003. Required
disclosures have been made in the notes to the consolidated financial
statements.

LIQUIDITY

The objective of maintaining adequate liquidity is to assure the ability of the
Company and its subsidiaries to meet their financial obligations. These
obligations include the withdrawal of deposits on demand or at their contractual
maturity, the repayment of borrowings as they mature, the ability to fund new
and existing loan commitments and the ability to take advantage of new business
opportunities. The Company and its subsidiaries achieve liquidity by maintaining
a strong base of core customer funds, maturing short-term assets, the ability to
sell securities, lines of credit, and access to capital markets.

Liquidity at the subsidiary bank level is managed through the monitoring of
anticipated changes in loans, the investment portfolio, core deposits and
wholesale funds. The strength of the subsidiary bank's liquidity position is a
result of its base of core customer deposits. These core deposits are
supplemented by wholesale funding sources that include credit lines with the
other banking institutions, the FHLB, Farmer Mac and the Federal Reserve Bank.

The primary source of liquidity for the parent company is dividends from
subsidiaries, lines of credit, and access to capital markets. Dividends from
subsidiaries are limited by various regulatory requirements related to capital
adequacy and earnings trends. The Company's subsidiaries rely on cash flows from
operations, core deposits, borrowings, short-term liquid assets, and, in the
case of non-banking subsidiaries, funds from the parent company.

The Company's cash and cash equivalents were $85.6 million at December 31, 2003,
an increase of $37.2 million from the balance of $48.4 million at December 31,
2002. The principal sources of cash from financing activities were $110 million
from the net increase in deposits, offset by $42 million of net decrease in
borrowings and $9 million in dividend payments. The principal source of net cash
from


                                       45


operating activities is the Company's net income of $14 million and loan sale
proceeds. The Company utilized its cash in the following investing activities:
$14 million in the net acquisition of securities, $37 million in the net
origination of loans and $10 million in the purchase of premises and equipment.

An additional source of liquidity to the Company is provided from its ability to
limit its investing activities and/or dispose of its securities and loans.
Additional liquidity can be provided to the Company through limiting the growth
in loans by offering terms and pricing that would not be competitive. Securities
available for sale and newly originated loans could be sold to provide
additional liquidity. The fair value of assets being sold is dependent upon
market conditions at the time of sale and potentially could adversely affect the
Company's earnings.

CONTRACTUAL OBLIGATIONS

The following table presents the Company's contractual obligations as of
December 31, 2003:



                                            Less Than                            More Than
                                   Total      1 Year     1-3 Years   3-5 Years    5 Years
                                ----------  ----------  ----------  ----------  ----------
                                                                 
Operating Leases                $    5,540  $      651  $    1,105  $      942  $    2,842
Long-term Borrowings                87,520          --      22,421      44,330      20,769
Junior subordinated debentures      16,702          --          --          --      16,702
                                ----------  ----------  ----------  ----------  ----------

         Total Obligations      $  109,762  $      651  $   23,526  $   45,272  $   40,313
                                ==========  ==========  ==========  ==========  ==========


OFF-BALANCE SHEET ARRANGEMENTS

The Company has an off-balance sheet arrangement, which includes the guarantee
of distributions, and payments for redemption or liquidation of trust preferred
securities issued by a wholly owned, deconsolidated subsidiary trust to the
extent of funds held by the trust. Although the guarantee is not separately
recorded, the obligation underlying the guarantee is fully reflected on the
Company's consolidated statement of financial condition as junior subordinated
debentures. The subsidiary's trust preferred securities currently qualify as
Tier 1 capital under the Federal Reserve capital adequacy guidelines. For
further information regarding the junior subordinated debentures issued to
unconsolidated subsidiary trust, see Note 9 of the notes to consolidated
financial statements.

In the normal course of business, the Company has outstanding commitments to
extend credit, which are 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. At December 31, 2003
letters of credit totaling $11.8 million and unused loan commitments of $271.9
million were contractually available. Comparable amounts for these commitments
at December 31, 2002 were $13.4 million and $316.6 million, respectively. The
total commitment amounts do not necessarily represent future cash requirements
as many of the commitments are expected to expire without funding. For further
information regarding the outstanding loan commitments, see Note 4 of the notes
to consolidated financial statements.


                                       46


CAPITAL RESOURCES

The Federal Reserve Board has adopted a system using risk-based capital
guidelines to evaluate the capital adequacy of bank holding companies. The
guidelines require a minimum total risk-based capital ratio of 8.0%. Leverage
ratio is also utilized in assessing capital adequacy with a minimum requirement
that can range from 3.0% to 5.0%. The following table reflects the changes in
the components of those ratios:



(Dollars in thousands)                                      2003         2002         2001
                                                        ----------   ----------   ----------
                                                                         
Total shareholders' equity                              $  183,103   $  178,294   $  149,187
Less:  Unrealized gains/(losses) on securities
         available or sale                                   8,197       10,368        2,176
       Disallowed goodwill and other intangible assets      43,556       44,667       39,256
Plus:  Minority interests in consolidated subsidiaries         172          161          475
       Qualifying trust preferred securities                16,200       16,200       12,408
                                                        ----------   ----------   ----------

Total Tier 1 capital                                    $  147,722   $  139,620   $  120,638
                                                        ==========   ==========   ==========

Adjusted average assets                                 $2,102,061   $2,005,837   $1,718,034
Tier 1 leverage ratio                                         7.03%        6.96%        7.02%

Total Tier 1 capital                                    $  147,722   $  139,620   $  120,638
Plus:  Qualifying allowance for loan losses                 18,270       17,813       15,417
       Nonqualifying trust preferred securities                 --           --        3,792
                                                        ----------   ----------   ----------

Total risk-based capital                                $  165,992   $  157,433   $  139,847
                                                        ==========   ==========   ==========

Net risk-weighted assets                                $1,450,839   $1,421,160   $1,229,811
Total risk-based capital ratio                               11.44%       11.08%       11.37%


The Company's Tier 1 leverage ratio was 7.03% at December 31, 2003. The ratio
increased slightly from 6.96% at December 31, 2002. Total Tier 1 capital of
$147.7 million at December 31, 2003 increased $8.1 million from $139.6 million
at December 31, 2002. The increase in Tier 1 capital relates primarily to the
increase in retained earnings resulting from 2003 net income of $14.2 million
and reduced by $8.6 million in preferred and common dividends declared during
2003.

The Company's total risk-weighted capital ratio was 11.44% at December 31, 2003.
The ratio increased from 11.08% at December 31, 2002. Total risk-based capital
was $166.0 million at December 31, 2002 an increase of $8.6 million from $157.4
million at December 31, 2001. The increase is primarily attributed to the $8.3
million increase in Tier 1 capital previously discussed plus the slight increase
in qualifying allowance for loan losses.

In addition, the formal agreements entered into by NBG and BNB with their
primary regulator required both banks to develop capital plans enabling them to
achieve, by March 31, 2004, a Tier 1 leverage capital ratio equal to 8%, a Tier
1 risk-based capital ratio equal to 10%, and a total risk-based capital ratio of
12%. Each of the banks meets the required levels at December 31, 2003. For
further information regarding regulatory capital, see Note 15 of the notes to
consolidated financial statements.


                                       47


Item 7A. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

The principal objective of the Company's interest rate risk management is to
evaluate the interest rate risk inherent in certain assets and liabilities,
determine the appropriate level of risk to the Company given its business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the guidelines
approved by the Company's Board of Directors. The Company's senior management is
responsible for reviewing with the Board its activities and strategies, the
effect of those strategies on the net interest margin, the fair value of the
portfolio and the effect that changes in interest rates will have on the
portfolio and exposure limits. Senior Management develops an Asset-Liability
Policy that meets strategic objectives and regularly reviews the activities of
the subsidiary banks. Each subsidiary bank board adopts an Asset-Liability
Policy within the parameters of the overall FII Asset-Liability Policy and
utilizes an asset/liability committee comprised of senior management of the bank
under the direction of the bank's board.

The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring the Company's interest rate sensitivity "gap." An asset or liability
is said to be interest rate sensitive within a specific time period if it will
mature or re-price within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or re-pricing within a specific time period and the amount of interest-bearing
liabilities maturing or re-pricing within that same time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. At December 31, 2003, the one-year gap position,
representing the difference between the amount of interest-earning assets
maturing or re-pricing within one year and interest-bearing liabilities maturing
or re-pricing within one year, was a positive $540.4 million, or 24.9% of total
assets. Accordingly, over the one-year period following December 31, 2003, the
Company will have an estimated $540.4 million more in assets re-pricing than
liabilities. Generally if rate-sensitive assets re-price sooner than
rate-sensitive liabilities, earnings will be positively impacted in a rising
rate environment. Conversely, in a declining rate environment, earnings will
generally be negatively impacted. If rate-sensitive liabilities re-price sooner
than rate-sensitive assets then generally earnings will be negatively impacted
in a rising rate environment. Conversely, in a declining rate environment
earnings will generally be positively impacted. Management believes that the
positive gap position at December 31, 2003 will not have a material adverse
effect on the Company's operating results.

Gap Analysis

The following table (the "Gap Table") sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at December 31, 2003 which
management anticipates, based upon certain assumptions, to re-price or mature in
each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which re-price or mature during a particular period
were determined in accordance with the earlier of the re-pricing date or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected re-pricing of assets and liabilities at December
31, 2003, on the basis of contractual maturities, anticipated prepayments and
scheduled rate adjustments within the selected time intervals. All non-maturity
deposits (demand deposits and savings deposits) were assumed to become rate
sensitive over time, with 1%, 3%, 4%, 15%, 14% and 63% of such deposits assumed
to re-price in the periods of less than 30 days, 31 to 180 days, 181 to 365
days, 1 to 3 years, 3 to 5 years and more than 5 years, respectively. Prepayment
and re-pricing rates can have a significant impact on the estimated gap. While
management believes the assumptions used in modeling the Gap Table are
reasonable, there can be no assurance that assumed prepayment and re-pricing
rates will approximate actual future activity.


                                       48


Gap Table



                                                                              December 31, 2003
                                    ----------------------------------------------------------------------------------------------
                                                                     Volumes Subject to Repricing Within
                                    ----------------------------------------------------------------------------------------------
                                      0-30      31-180       181-365       1-3        3-5         >5          Non-
(Dollars in thousands)                days       days         days        years      years       years      Sensitive        Total
                                    --------   ---------    ---------    --------   --------   ---------    ---------   ----------
                                                                                                
Interest-earning assets:
     Federal funds sold and
       and interest-bearing
       deposits                     $ 40,006   $      75    $      --    $     --   $     --   $      --    $      --   $   40,081
     Investment
       securities (1)                113,974      74,375       72,844     143,315     93,006     154,581           --      652,095
     Loans (2)                       632,422     119,431       98,974     262,859    148,398      81,281        1,952    1,345,317
                                    --------   ---------    ---------    --------   --------   ---------    ---------   ----------
       Total interest-earning
         assets                      786,402     193,881      171,818     406,174    241,404     235,862        1,952    2,037,493
                                    --------   ---------    ---------    --------   --------   ---------    ---------   ----------
Interest-bearing liabilities:
     Interest-bearing checking,
       savings and money
       market deposits                 4,901      24,507       29,408     117,633    117,633     490,137           --      784,219
     Certificates of deposit         110,234     267,254      144,963     197,490     48,035       1,706           --      769,682
     Borrowed funds (3)                7,247      18,719        4,467      27,864     50,016      45,934           --      154,247
                                    --------   ---------    ---------    --------   --------   ---------    ---------   ----------
       Total interest-bearing
         liabilities                 122,382     310,480      178,838     342,987    215,684     537,777           --    1,708,148
                                    --------   ---------    ---------    --------   --------   ---------    ---------   ----------

Period gap                          $664,020   $(116,599)   $  (7,020)   $ 63,187   $ 25,720   $(301,915)   $   1,952   $  329,345
                                    ========   =========    =========    ========   ========   =========    =========   ==========

Cumulative gap                      $664,020   $ 547,421    $ 540,401    $603,588   $629,308   $ 327,393    $ 329,345
                                    ========   =========    =========    ========   ========   =========    =========

Period gap to total assets             30.55%      (5.36)%      (0.32)%      2.91%      1.18%     (13.89)%       0.09%       15.15%
                                    ========   =========    =========    ========   ========   =========    =========   ==========

Cumulative gap to
     total assets                      30.55%      25.18%       24.86%      27.77%     28.95%      15.06%       15.15%
                                    ========   =========    =========    ========   ========   =========    =========

Cumulative interest-earning assets
     to cumulative interest-
     bearing liabilities              642.58%     226.47%      188.34%     163.22%    153.77%     119.17%      119.28%
                                    ========   =========    =========    ========   ========   =========    =========


(1)   Amounts shown include the amortized cost of held to maturity securities
      and the fair value of available for sale securities.

(2)   Amounts shown include principal balance net of deferred loan fees and
      costs, unamortized premiums and discounts.

(3)   Amounts shown include junior subordinated debentures.

Certain shortcomings are inherent in the method of analysis presented in the Gap
Table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates, both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table.

As a result of these shortcomings, the Company directs more attention on
simulation modeling, such as "net interest income at risk" discussed below,
rather than gap analysis. Even though the gap analysis reflects a ratio of
cumulative gap to total assets within acceptable limits, the net interest income
at risk simulation modeling is considered by management to be more informative
in forecasting future income at risk.


                                       49


Net Interest Income at Risk Analysis

In addition to the Gap Analysis, management uses a "rate shock" simulation to
measure the rate sensitivity of the balance sheet. Rate shock simulation is a
modeling technique used to estimate the impact of changes in rates on net
interest income and economic value of equity. The following table sets forth the
results of the modeling analysis at December 31, 2003:



   Change in Interest            Net Interest Income               Economic Value of Equity
 Rates in Basis Points     --------------------------------    --------------------------------
      (Rate Shock)          Amount    $ Change    % Change      Amount    $ Change    % Change
      ------------         ---------  ---------   ---------    ---------  ---------   ---------
                                                                        
(Dollars in thousands)

200                         $ 82,800  $   5,113        6.58%   $ 414,868  $ (32,092)      (7.18%)
100                           80,406      2,719        3.50%     425,572    (21,388)      (4.79%)
Static                        77,687         --          --      446,960         --          --
(100)                         72,072     (5,615)      (7.23%)    435,342    (11,618)      (2.60%)


The Company measures net interest income at risk by estimating the changes in
net interest income resulting from instantaneous and sustained parallel shifts
in interest rates of different magnitudes over a period of 12 months. As of
December 31, 2003, a 200 basis point increase in rates would increase net
interest income by $5.1 million, or 6.58%, over the next twelve-month period. A
100 basis point decrease in rates would decrease net interest income by $5.6
million, or 7.23%, over a twelve-month period. This simulation is based on
management's assumption as to the effect of interest rate changes on assets and
liabilities and assumes a parallel shift of the yield curve. It also includes
certain assumptions about the future pricing of loans and deposits in response
to changes in interest rates. Further, it assumes that delinquency rates would
not change as a result of changes in interest rates, although there can be no
assurance that this will be the case. While this simulation is a useful measure
as to net interest income at risk due to a change in interest rates, it is not a
forecast of the future results and is based on many assumptions that, if
changed, could cause a different outcome.


                                       50


Item 8. Financial Statements and Supplementary Data

                  FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           DECEMBER 31, 2003 AND 2002



(Dollars in thousands, except per share amounts)                      2003          2002
                                                                  -----------   -----------
                                                                          
Assets

Cash, due from banks and interest-bearing deposits                $    45,635   $    48,429
Federal funds sold                                                     40,006            --
Securities available for sale, at fair value                          604,964       596,862
Securities held to maturity (fair value of $48,121 and
     $48,089 at December 31, 2003 and 2002, respectively)              47,131        47,125
Loans, net                                                          1,316,253     1,300,232
Premises and equipment, net                                            34,239        27,254
Goodwill                                                               40,621        40,593
Other assets                                                           44,883        44,539
                                                                  -----------   -----------

       Total assets                                               $ 2,173,732   $ 2,105,034
                                                                  ===========   ===========

Liabilities And Shareholders' Equity

Liabilities:

Deposits:
     Demand                                                       $   264,990   $   240,755
     Savings, money market and interest-bearing checking              784,219       779,772
     Certificates of deposit                                          769,682       687,996
                                                                  -----------   -----------
       Total deposits                                               1,818,891     1,708,523

Short-term borrowings                                                  50,025        87,189
Long-term borrowings                                                   87,520        92,090
Junior subordinated debentures issued to unconsolidated
   subsidiary trust ("Junior subordinated debentures")                 16,702            --
Guaranteed preferred beneficial interests in corporation's
   junior subordinated debentures ("Trust preferred securities")           --        16,200
Accrued expenses and other liabilities                                 17,491        22,738
                                                                  -----------   -----------

       Total liabilities                                            1,990,629     1,926,740

Shareholders' equity:

3% cumulative preferred stock, $100 par value,
     authorized 10,000 shares, issued and outstanding
     1,666 shares in 2003 and 2002                                        167           167
8.48% cumulative preferred stock, $100 par value,
     authorized 200,000 shares, issued and outstanding
     175,683 shares in 2003 and 175,755 shares in 2002                 17,568        17,575
Common stock, $ 0.01 par value, authorized 50,000,000
     shares, issued 11,303,533 shares in 2003 and 2002                    113           113
Additional paid-in capital                                             21,055        19,728
Retained earnings                                                     136,938       131,320
Accumulated other comprehensive income                                  8,197        10,368
Treasury stock, at cost - 135,223 shares in 2003 and
     199,719 shares in 2002                                              (935)         (977)
                                                                  -----------   -----------

       Total shareholders' equity                                     183,103       178,294
                                                                  -----------   -----------

       Total liabilities and shareholders' equity                 $ 2,173,732   $ 2,105,034
                                                                  ===========   ===========


          See accompanying notes to consolidated financial statements.


                                       51


                  FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



(Dollars in thousands, except per share amounts)                        2003      2002      2001
                                                                      --------  --------  --------
                                                                                 
Interest income:
     Loans                                                            $ 86,556  $ 90,315  $ 91,482
     Securities                                                         24,389    27,630    22,628
     Other                                                                 505       494       358
                                                                      --------  --------  --------

         Total interest income                                         111,450   118,439   114,468
                                                                      --------  --------  --------

Interest expense:
     Deposits                                                           29,263    35,167    43,414
     Borrowings                                                          5,009     5,741     4,840
     Guaranteed preferred beneficial interests in corporation's
       junior subordinated debentures ("Trust preferred securities")     1,677     1,677     1,440
                                                                      --------  --------  --------

         Total interest expense                                         35,949    42,585    49,694
                                                                      --------  --------  --------

Net interest income                                                     75,501    75,854    64,774

Provision for loan losses                                               22,526     6,119     4,958
                                                                      --------  --------  --------

         Net interest income after provision for loan losses            52,975    69,735    59,816
                                                                      --------  --------  --------

Noninterest income:
     Service charges on deposits                                        11,461    10,603     7,653
     Financial services group fees and commissions                       5,692     5,629     2,690
     Mortgage banking activities                                         4,036     2,279     2,190
     Gain on sale and call of securities                                 1,041       285       531
     Other                                                               3,842     3,393     2,718
                                                                      --------  --------  --------

         Total noninterest income                                       26,072    22,189    15,782
                                                                      --------  --------  --------

Noninterest expense:
     Salaries and employee benefits                                     33,825    30,093    22,958
     Occupancy and equipment                                             8,270     7,285     6,050
     Supplies and postage                                                2,468     2,371     1,953
     Amortization of goodwill                                               --        --     1,653
     Amortization of other intangible assets                             1,226       898       728
     Computer and data processing                                        1,829     1,759     1,501
     Professional fees                                                   1,881     1,612     1,326
     Other                                                              11,324     9,031     7,183
                                                                      --------  --------  --------

         Total noninterest expense                                      60,823    53,049    43,352
                                                                      --------  --------  --------

Income before income taxes                                              18,224    38,875    32,246

Income taxes                                                             3,977    12,419    11,033
                                                                      --------  --------  --------

Net income                                                            $ 14,247  $ 26,456  $ 21,213
                                                                      ========  ========  ========

Earnings per common share:
     Basic                                                            $   1.14  $   2.26  $   1.79
     Diluted                                                          $   1.13  $   2.23  $   1.77


          See accompanying notes to consolidated financial statements.


                                       52


                  FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CHANGES IN
                  SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001




                                                                                                 Accumulated
                                                                                                    Other                   Total
                                                  3%        8.48%           Additional          Comprehensive               Share-
(Dollars in thousands,                        Preferred   Preferred  Common  Paid in   Retained     Income      Treasury   holders'
     except per share amounts)                  Stock       Stock    Stock   Capital   Earnings     (Loss)       Stock      Equity
                                              ---------   ---------  ------  --------  --------     -------     --------   --------
                                                                                                  
Balance - December 31, 2000                   $     171   $  17,587  $  113  $ 16,472  $ 98,348     $  (144)    $  (929)  $131,618
Purchase of 45 shares of 3%
   preferred stock                                   (4)         --      --         2        --          --          --         (2)
Purchase of 11 shares of 8.48%
   preferred stock                                   --          (2)     --        --        --          --          --         (2)
Purchase of 1,000 shares of common stock             --          --      --        --        --          --         (12)       (12)
Issue 1,141 shares of common stock -
   directors plan                                    --          --      --        23        --          --           4         27
Issue 34,452 shares of common stock -
   Burke Group, Inc. acquisition                     --          --      --       698        --          --         102        800
Comprehensive income:
     Net income                                      --          --      --        --    21,213          --          --     21,213
     Unrealized gain on securities available
       for sale (net of tax of $1,803)               --          --      --        --        --       2,636          --      2,636
     Reclassification adjustment for gains
       included in net income  (net of
       tax of $215)                                  --          --      --        --        --        (316)         --       (316)
                                                                                                                          --------
     Net unrealized gain on securities
       available for sale (net of tax
       of $1,588)                                                                                                            2,320
                                                                                                                          --------
         Total comprehensive income                                                                                         23,533
                                                                                                                          --------
Cash dividends declared:
     3% Preferred - $3.00 per share                  --          --      --        --        (5)         --          --         (5)
     8.48% Preferred - $8.48 per share               --          --      --        --    (1,491)         --          --     (1,491)
     Common - $0.482 per share                       --          --      --        --    (5,279)         --          --     (5,279)
                                              ---------   ---------  ------  --------  --------     -------     -------   --------
Balance - December 31, 2001                   $     167   $  17,585  $  113  $ 17,195  $112,786     $ 2,176     $  (835)  $149,187
Purchase of 100 shares of 8.48%
  preferred stock                                    --         (10)     --        --        --          --          --        (10)
Purchase of 22,240 shares of common stock            --          --      --        --        --          --        (571)      (571)
Issue 1,049 shares of common stock -
   directors plan                                    --          --      --        33        --          --           4         37
Issue 19,955 shares of common stock -
   exercised stock options                           --          --      --       342        --          --          84        426
Issue 36,700 shares of common stock -
   Burke Group, Inc. acquisition and earnout         --          --      --       840        --          --         160      1,000
Issue 47,036 shares of common stock -
   Bank of Avoca acquisition                         --          --      --     1,318        --          --         181      1,499
Comprehensive income:
     Net income                                      --          --      --        --    26,456          --          --     26,456
     Unrealized gain on securities available
       for sale (net of tax of $5,603)               --          --      --        --        --       8,362          --      8,362
     Reclassification adjustment for gains
       included in net income (net of
       tax of$115)                                   --          --      --        --        --        (170)         --       (170)
                                                                                                                          --------
     Net unrealized gain on securities
      available for sale (net of tax
      of $5,488)                                                                                                             8,192
                                                                                                                          --------
         Total comprehensive income                                                                                         34,648
                                                                                                                          --------
Cash dividends declared:
     3% Preferred - $3.00 per share                  --          --      --        --        (5)         --          --         (5)
     8.48% Preferred - $8.48 per share               --          --      --        --    (1,491)         --          --     (1,491)
     Common - $0.58 per share                        --          --      --        --    (6,426)         --          --     (6,426)
                                              ---------   ---------  ------  --------  --------     -------     -------   --------
Balance - December 31, 2002                   $     167   $  17,575  $  113  $ 19,728  $131,320     $10,368     $  (977)  $178,294
Purchase of 72 shares of 8.48%
   preferred stock                                   --          (7)     --        (1)       --          --          --         (8)
Purchase of 22,000 shares of
   common stock                                      --          --      --        --        --          --        (417)      (417)
Issue 2,440 shares of common stock -
   directors plan                                    --          --      --        34        --          --          16         50
Issue 21,669 shares of common stock -
   exercised stock options                           --          --      --       259        --          --         138        397
Issue 62,387 shares of common stock -
   Burke Group, Inc. acquisition
     and earnout                                     --          --      --     1,035        --          --         305      1,340
Comprehensive income:
     Net income                                      --          --      --        --    14,247          --          --     14,247
     Unrealized loss on securities
       available for sale (net of
       tax of ($1,120))                              --          --      --        --        --      (1,545)         --     (1,545)
     Reclassification adjustment for
       gains included in net income
       (net of tax of $415)                          --          --      --        --        --        (626)         --       (626)
                                                                                                                          --------
     Net unrealized loss on securities
       available for sale (net of
       tax of ($1,535))                                                                                                     (2,171)
                                                                                                                          --------
         Total comprehensive income                                                                                         12,076
                                                                                                                          --------
Cash dividends declared:
     3% Preferred - $3.00 per share                  --          --      --        --        (5)         --          --         (5)
     8.48% Preferred - $8.48 per share               --          --      --        --    (1,490)         --          --     (1,490)
     Common - $0.64 per share                        --          --      --        --    (7,134)         --          --     (7,134)
                                              ---------   ---------  ------  --------  --------     -------     -------   --------
Balance - December 31, 2003                   $     167   $  17,568  $  113  $ 21,055  $136,938     $ 8,197     $  (935)  $183,103
                                              =========   =========  ======  ========  ========     =======     =======   ========


          See accompanying notes to consolidated financial statements.


                                       53


                  FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



(Dollars in thousands)                                                          2003        2002        2001
                                                                              ---------   ---------   ---------
                                                                                             
Cash flows from operating activities:
     Net income                                                               $  14,247   $  26,456   $  21,213
     Adjustments to reconcile net income to net cash
       provided by operating activities:
         Depreciation and amortization                                            7,548       5,697       5,984
         Provision for loan losses                                               22,526       6,119       4,958
         Deferred income tax benefit                                             (1,971)     (1,060)       (112)
         Proceeds from sale of loans held for sale                              192,295     139,426     117,446
         Origination of loans held for sale                                    (190,205)   (140,569)   (119,994)
         Gain on sale and call of securities                                     (1,041)       (285)       (531)
         Gain on sale of loans held for sale                                     (3,153)     (1,542)     (1,513)
         (Gain) loss on sale of other assets                                        (25)         54         131
         Minority interest in net income of subsidiaries                             31         175         104
         Decrease (increase) in other assets                                      2,372      (2,609)     (1,518)
         (Decrease) increase in accrued expenses
           and other liabilities                                                 (3,946)        698        (625)
                                                                              ---------   ---------   ---------
                  Net cash provided by operating activities                      38,678      32,560      25,543

Cash flows from investing activities:
     Purchase of securities:
         Available for sale                                                    (425,849)   (425,269)   (377,111)
         Held to maturity                                                       (32,890)    (35,152)    (21,933)
     Proceeds from maturity and call of securities:
         Available for sale                                                     329,359     232,379     200,315
         Held to maturity                                                        32,812      43,419      37,381
     Proceeds from sale and call of securities                                   82,906      45,059      91,412
     Loan originations less principal payments                                  (37,483)   (143,622)    (87,814)
     Proceeds from sales of premises and equipment                                   81          73         174
     Purchase of premises and equipment                                         (10,439)     (5,251)     (4,359)
     Net cash paid in equity method investment                                       --      (2,400)         --
     Net cash acquired (paid) in purchase acquisitions                               --      42,156     (49,072)
                                                                              ---------   ---------   ---------
                  Net cash used in investing activities                         (61,503)   (248,608)   (211,007)

Cash flows from financing activities:
     Net increase in deposits                                                   110,368     213,913     124,080
     Net (decrease) increase in short-term borrowings                           (37,164)    (16,581)     46,497
     Proceeds from long-term borrowings                                          29,000      23,056      28,912
     Repayment of long-term borrowings                                          (33,570)     (1,386)       (179)
     Proceeds from trust preferred securities, net of costs                          --          --      15,713
     Purchase of preferred and common shares                                       (425)       (581)        (16)
     Issuance of preferred and common shares                                        447         463          27
     Dividends paid                                                              (8,619)     (7,578)     (6,551)
                                                                              ---------   ---------   ---------
                  Net cash provided by financing activities                      60,037     211,306     208,483
                                                                              ---------   ---------   ---------

Net increase (decrease) in cash and cash equivalents                             37,212      (4,742)     23,019

Cash and cash equivalents at the beginning of the year                           48,429      53,171      30,152
                                                                              ---------   ---------   ---------

Cash and cash equivalents at the end of the year                              $  85,641   $  48,429   $  53,171
                                                                              =========   =========   =========

Supplemental disclosure of cash flow information: Cash paid during year for:
       Interest                                                               $  37,466   $  44,309   $  46,912
       Income taxes                                                               7,935      14,295      10,793
     Noncash investing and financing activities:
       Fair value of noncash assets acquired in purchase acquisitions         $      --   $  19,020   $ 282,534
       Fair value of liabilities assumed in purchase acquisitions                    --      61,603     271,644
       Issuance of common stock in purchase acquisitions/earnouts                 1,340       2,499         800


          See accompanying notes to consolidated financial statements.


                                       54


FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

Basis of Presentation

Financial Institutions, Inc. ("FII"), a bank holding company organized under the
laws of New York State, and subsidiaries (the "Company") provide 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, 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 2002, the Company completed a geographic realignment of the
subsidiary banks, which involved the merger of the subsidiary formerly known as
The Pavilion State Bank ("PSB") into NBG and transfer of other branch offices
between subsidiary banks. The merger and transfers were accounted for at
historical cost as a combination of entities under common control.

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.

The Company formerly qualified as a financial holding company under the
Gramm-Leach-Bliley Act, which allowed FII to expand business operations to
include financial services businesses. The Company currently 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, "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 2003 consolidated statement of
financial position.

The consolidated financial information included herein combines the results of
operations, the assets, liabilities and shareholders' equity of the Company and
its subsidiaries. All significant inter-company transactions and balances have
been eliminated in consolidation.

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.


                                       55


Amounts in the prior years' consolidated financial statements are reclassified
when necessary to conform to the current year's presentation.

Cash Equivalents

For purposes of the consolidated statements of cash flows, interest-bearing
deposits and federal funds sold are considered cash equivalents.

Securities

The Company classifies its debt securities as either available for sale or held
to maturity. Debt securities, which the Company has the ability and positive
intent to hold to maturity, are carried at amortized cost and classified as held
to maturity. Investments in other debt and equity securities are classified as
available for sale and are carried at estimated fair value. Unrealized gains or
losses related to securities available for sale are included in accumulated
other comprehensive income, a component of shareholders' equity, net of the
related deferred income tax effect.

A decline in the fair value of any security below cost that is deemed other than
temporary is charged to income resulting in the establishment of a new cost
basis for the security. Interest income includes interest earned on the
securities adjusted for amortization of premiums and accretion of discounts on
the related securities using the interest method. Realized gains or losses from
the sale of available for sale securities are recognized on the trade date using
the specific identification method.

Loans and Mortgage Banking Activities

Loans are stated at the principal amount outstanding, net of discounts and
deferred loan origination fees and costs, which are recorded in interest income
based on the interest method. Interest income on loans is recognized based on
loan principal amounts outstanding at applicable interest rates. Accrual of
interest on loans is suspended and all unpaid accrued interest is reversed when
management believes, after considering collection efforts and the period of time
past due, that reasonable doubt exists with respect to the collectibility of
interest.

Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days (120 days for consumer loans), unless such loans are
well-collateralized and in the process of collection. If a loan or a portion of
a loan is internally classified as doubtful or is partially charged-off, the
loan is classified as nonaccrual. Loans that are on a current payment status or
past due less than 90 days may also be classified as nonaccrual if repayment in
full of principal and/or interest is in doubt.

Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment and
there is a sustained period of repayment performance (generally a minimum of six
months) in accordance with the contractual terms of the loan.

While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is uncertain, any payments received are generally used to
reduce the principal balance. When the future collectibility of the recorded
loan balance is expected, interest income may be recognized on a cash basis. In
the case where a nonaccrual loan had been partially charged-off, recognition of
interest on a cash basis is limited to that which would have been recognized on
the recorded loan balance at the contractual interest rate. Interest collections
in excess of that amount are recorded as recoveries to the allowance for loan
losses until prior charge-offs have been fully recovered.

The Company originates and sells certain residential real estate loans in the
secondary market. The Company typically retains the right to service the loan
upon sale. The Company makes the determination of whether or not to identify a
loan as held for sale at the time the application is received from the borrower.
Loans held for sale are evaluated on an aggregate basis to determine if fair
value is less than carrying value. If necessary, a valuation allowance is
recorded by a charge to income for unrealized losses attributable to changes in
market interest rates. There was no valuation allowance necessary at December
31, 2003 or 2002. Gains and losses on the disposition of loans held for sale are
determined on the specific identification method. Loan servicing fees are
recognized when payments are received.


                                       56


Capitalized mortgage servicing rights are recorded at their fair value at the
time a loan is sold and servicing rights are retained. Capitalized mortgage
servicing rights are reported in other assets and are amortized to noninterest
income in proportion to and over the period of estimated net servicing income.
The Company uses a valuation model that calculates the present value of future
cash flows to determine the fair value of servicing rights. In using this
valuation method, the Company incorporates assumptions that market participants
would use in estimating future net servicing income, which include estimates of
the cost to service the loan, the discount rate, an inflation rate and
prepayment speeds. The carrying value of originated mortgage servicing rights is
periodically evaluated for impairment. Impairment is determined by stratifying
rights by predominant risk characteristics, such as interest rates and terms,
using discounted cash flows and market-based assumptions. Impairment is
recognized through a valuation allowance, to the extent that fair value is less
than the capitalized asset.

The Company also has rate lock commitments extended to borrowers that relate to
the origination of residential mortgage loans ("rate locks"). To mitigate the
interest rate risk inherent in rate locks, as well as closed mortgage loans held
for sale ("loans held for sale"), the Company enters into forward commitments to
sell individual mortgage loans ("forward commitments"). Rate locks and forward
commitments are considered derivatives under SFAS No. 133. The impact of the
estimated fair value of the rate locks and forward commitments was not
significant to the consolidated financial statements.

Mortgage banking activities (a component of noninterest income) consist of fees
earned for servicing mortgage loans sold to third parties, gains (or losses)
recognized on sales of mortgages, and amortization and impairment losses
recognized on capitalized mortgage servicing assets.

Allowance for Loan Losses

The Company periodically evaluates the allowance for loan losses in order to
maintain the allowance at a level that represents management's estimate of
probable losses in the loan portfolio at the balance sheet date. Management's
evaluation of the allowance is based on the Company's past loan loss experience,
adverse circumstances that may affect the ability of borrowers to repay, the
estimated value of collateral, and an analysis of the levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan categories.
Other factors such as the level and trend of interest rates and the condition of
the national and local economies are also considered.

The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. When a loan or portion of a loan is
determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.

A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts of principal
and interest under the original terms of the agreement. Accordingly, the Company
evaluates impaired commercial and agricultural loans individually based on the
present value of future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. The Company collectively
evaluates large groups of small balance, homogeneous loans for impairment
including commercial and agricultural loans less than $250,000, all residential
mortgages, home equity and consumer loans.


                                       57


Federal Home Loan Bank (FHLB) Stock

As a member of the FHLB system, the Company is required to maintain a specified
investment in FHLB stock. This non-marketable investment, which is carried at
cost, must be at an amount at least equal to the greater of 5% of the
outstanding advance balance or 1% of the aggregate outstanding residential
mortgage loans held by the Company. Included in other assets is FHLB stock
totaling $6.0 million and $6.3 million, at December 31, 2003 and 2002,
respectively.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using straight-line and accelerated
methods over estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of lease terms or the useful lives of the assets.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net
assets acquired in accordance with the purchase method of accounting for
business combinations. Goodwill is not being amortized, but is required to be
tested for impairment at least annually. Other intangible assets are being
amortized on the straight-line method, over the expected periods to be
benefited. Intangible assets are periodically reviewed for impairment or when
events or changed circumstances may affect the underlying basis of the assets.

Equity Method Investment

During 2002, the Company made a $2.4 million cash investment to acquire a 50%
interest in Mercantile Adjustment Bureau, LLC, a full-service accounts
receivable management firm located in Rochester, New York. The Company has
accounted for this investment using the equity method and the investment is
included in other assets on the consolidated statements of financial condition.

Stock Compensation

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."


                                       58


Pro forma disclosure for the years ended December 31, 2003, 2002 and 2001,
utilizing the estimated fair value of the options granted under SFAS No. 123, is
as follows:



                                                       Years ended December 31
(Dollars in thousands, except per share amounts)     2003       2002       2001
                                                   --------   --------   --------
                                                                
Reported net income                                $ 14,247   $ 26,456   $ 21,213

Deduct: Total stock-based compensation expense
     determined under fair value based method for
     all awards, net of related tax effects            (336)      (274)      (288)
                                                   --------   --------   --------

Pro forma net income                               $ 13,911   $ 26,182   $ 20,925
                                                   ========   ========   ========

Basic earnings per share:
     Reported                                      $   1.14   $   2.26   $   1.79
     Pro forma                                     $   1.11   $   2.23   $   1.77

Diluted earnings per share:
     Reported                                      $   1.13   $   2.23   $   1.77
     Pro forma                                     $   1.10   $   2.20   $   1.75


The weighted-average fair value of options granted during the years ended
December 31, 2003, 2002, and 2001 amounted to $10.61, $11.90 and $5.53,
respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model and the following
weighted-average assumptions:

                                        For the years ended December 31
                                       ---------------------------------
                                         2003        2002        2001
                                       --------   ----------  ----------

          Dividend yield                 2.89%       1.94%       2.43%
          Expected life (in years)      10.00       10.00       10.00
          Expected volatility           50.96%      38.14%      20.00%
          Risk-free interest rate        3.96%       4.98%       4.99%

The Company's stock options have characteristics significantly different from
those of traded options for which the Black-Scholes model was developed. Since
changes in the subjective input assumptions can materially affect the fair value
estimates, the existing model, in management's opinion, does not necessarily
provide a single reliable measure of the fair value of its stock options. In
addition, the pro forma effect on reported net income and earnings per share for
the years ended December 31, 2003, 2002 and 2001, may not be representative of
the pro forma effects on reported net income and earnings per share for future
years.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and the respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Financial Instruments With Off-Balance Sheet Risk

The Company's financial instruments with off-balance sheet risk are commercial
letters of credit and mortgage, commercial and credit card loan commitments.
These financial instruments are reflected in the statement of financial
condition upon funding.


                                       59


Financial Services Group Fees and Commissions and Trust Department Assets

Financial services group fees and commissions consist of commissions from sales
of investment products and services to customers, fees and commissions from
trust services provided to customers, and fees and commissions earned from
design, consulting, administrative and actuarial services provided to employee
benefits plans and their sponsors. Fees and commissions are recorded on the
accrual basis of accounting. Assets held in fiduciary or agency capacities for
customers are not included in the accompanying consolidated statements of
condition, since such items are not assets of the Company.

New Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance could
be accounted for as equity, be accounted for as liabilities. Financial
instruments affected include mandatorily redeemable securities, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for all other financial instruments. The Company adopted the provisions of
SFAS No. 150 on July 1, 2003. The adoption did not have a material impact on the
Company's consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". The objective of this
interpretation is to provide guidance on how to identify a variable interest
entities ("VIE") and determine when the assets, liabilities, non-controlling
interests, and results of operations of a VIE need to be included in a company's
consolidated financial statements. FIN 46 was effective for all VIEs created
after January 31, 2003. However, the FASB postponed that effective date to
December 31, 2003. In December 2003, the FASB issued a revised FIN 46 ("FIN
46R') which further delayed the effective date until March 31, 2004 for VIE's
created prior to February 1, 2003. The requirements of FIN 46R resulted in the
deconsolidation of the Company's wholly-owned subsidiary trust, formed to issue
mandatorily redeemable preferred securities ("trust preferred securities"). The
deconsolidation, as of December 31, 2003, results in the derecognition of the
$16.2 million of trust preferred securities and the recognition of junior
subordinated debentures of $16.7 million and investment in the subsidiary trust
of $502,000 in the Company's 2003 consolidated statement of financial position.

In December 2003, the FASB issued SFAS No. 132, "Employers Disclosure about
Pensions and Other Postretirement Benefits" to expand disclosure requirements to
include descriptions of plan assets, investment strategy, measurement dates,
plan obligations, cash flows and components of net periodic benefit cost
recognized during interim periods. The Company adopted the provisions of SFAS
No. 132, as revised, on December 31, 2003. The required disclosures are included
in Note 12.

(2) Mergers and Acquisitions

On December 13, 2002, BNB acquired the two Chemung County branch offices of BSB
Bank & Trust Company of Binghamton, New York. The two offices purchased, located
in Elmira and Elmira Heights, had deposit liabilities totaling $44.2 million at
the time of acquisition. The acquisition was accounted for as a business
combination using the purchase method of accounting, and accordingly, the excess
of the purchase price over the fair value of identifiable tangible and
intangible assets acquired, less liabilities assumed, of approximately $1.5
million has been recorded as goodwill. In accordance with SFAS No. 142, the
Company is not required to amortize goodwill. The Company also recorded a $2.0
million intangible asset attributable to core deposits, which is being amortized
using the straight-line method over seven years.

On May 1, 2002, FII acquired all of the common stock of the Bank of Avoca
("BOA") in exchange for 47,036 shares of FII common stock. BOA was a community
bank with its main office located in Avoca, New York, as well as a branch office
in Cohocton, New York. Subsequent to the acquisition, BOA was merged with BNB.
The acquisition was accounted for as a business combination using the purchase
method of accounting, and accordingly, the excess of the purchase price ($1.5
million) over the fair value


                                       60


of identifiable tangible and intangible assets acquired ($18.4 million), less
liabilities assumed ($17.3 million), of approximately $0.4 million has been
recorded as goodwill. In accordance with SFAS No. 142, the Company is not
required to amortize goodwill recognized in this acquisition. The Company
recorded a $146,000 core deposit intangible asset, which is being amortized
using the straight-line method over seven years. The results of operations for
BOA are included in the income statements from the date of acquisition (May 1,
2002).

On October 22, 2001, the Company acquired the Burke Group, Inc. ("BGI"); an
employee benefits administration and compensation consulting firm, with offices
in Honeoye Falls and Syracuse, New York. BGI's expertise includes design and
consulting for retirement and employee welfare plans, administrative services
for defined contribution and benefit plans, actuarial services and post
employment benefits. The agreement provided for merger consideration of
$1,500,000 to BGI shareholders. Merger consideration payments of $200,000 in
cash and 34,452 shares of FII common stock (valued at $800,000 in accordance
with merger agreement) were made on October 22, 2001. The balance of the merger
consideration of $500,000 was paid on October 22, 2002 in the form of 18,852
shares of FII common stock as provided for in the agreement. In addition the
agreement provided for the payment of earned amount consideration based on
achievement of financial performance targets. For the period ending December 31,
2001 those targets were achieved and $500,000 in earned amount consideration was
paid on April 1, 2002 in the form of 17,848 shares of FII common stock. For the
period ending December 31, 2002 financial performance targets were also achieved
and $750,000 in the form of 34,918 shares of FII common stock was paid on April
1, 2003. The agreement further provides for payment of contingent consideration
in the form of FII common stock based on other financial performance targets for
the periods ending December 31, 2002, 2003, and 2004 with the maximum amount of
payment for 2004 being $2,500,000. For the year ended December 31, 2002
financial performance for contingent consideration was achieved and $590,000 was
paid on April 1, 2003 in the form of 27,469 shares of FII common. For the year
ended December 31, 2003 financial performance for contingent consideration was
not achieved. The acquisition was accounted for as a business combination using
the purchase method of accounting, and accordingly, the excess of the purchase
price ($3.3 million including earned amounts and contingent amounts to date)
over the fair value of identifiable tangible and intangible assets acquired
($1.7 million), less liabilities assumed ($1.7 million), of approximately $3.3
million has been recorded as goodwill. In accordance with SFAS No. 142, the
Company is not required to amortize goodwill recognized in this acquisition. The
Company also recorded a $500,000 intangible asset for a customer list that is
being amortized using the straight-line method over five years. The results of
operations for BGI are included in the income statements from the date of
acquisition (October 22, 2001).

On May 1, 2001, the Company acquired all of the common stock of Bath National
Corporation ("BNC"), and its wholly owned subsidiary bank, Bath National Bank.
BNB is a full service community bank headquartered in Bath, New York, which has
9 branch locations in Steuben, Yates, Ontario and Schuyler Counties. The Company
paid $48.00 per share in cash for each of the outstanding shares of BNC common
stock with an aggregate purchase price of approximately $62.6 million. The
acquisition was accounted for under the purchase method of accounting, and
accordingly, the excess of the purchase price ($62.6 million) over the fair
value of identifiable tangible and intangible assets acquired ($295.4 million),
less liabilities assumed ($269.9 million), of approximately $37.1 million has
been recorded as goodwill. Goodwill was amortized in 2001 using the
straight-line method over 15 years, since the transaction was consummated prior
to June 30, 2001, the effective date of SFAS No. 142. However, in accordance
with SFAS No. 142, the Company ceased goodwill amortization on January 1, 2002.
The results of operations for BNB are included in the income statements from the
date of acquisition (May 1, 2001).


                                       61


(3) Securities

The aggregate amortized cost and fair value of securities available for sale and
securities held to maturity follow:



                                                                    December 31, 2003
                                                  ------------------------------------------------------
                                                                    Gross Unrealized
                                                  Amortized      ------------------------        Fair
(Dollars in thousands)                              Cost           Gains         Losses          Value
                                                  ---------      ---------      ---------      ---------
                                                                                   
Securities Available for Sale:
     U.S. Treasury and agency                     $ 210,570      $   1,882      $     583      $ 211,869
     Mortgage-backed securities                     189,913          3,199            454        192,658
     State and municipal obligations                186,328          9,166             83        195,411
     Corporate bonds                                  4,020             70             --          4,090
     Equity securities                                   81            855             --            936
                                                  ---------      ---------      ---------      ---------

         Total securities available for sale      $ 590,912      $  15,172      $   1,120      $ 604,964
                                                  =========      =========      =========      =========

Securities Held to Maturity:
     State and municipal obligations              $  47,131      $   1,006      $      16      $  48,121
                                                  ---------      ---------      ---------      ---------

         Total securities held to maturity        $  47,131      $   1,006      $      16      $  48,121
                                                  =========      =========      =========      =========



                                                                     December 31, 2002
                                                  ------------------------------------------------------
                                                                    Gross Unrealized
                                                  Amortized      ------------------------        Fair
(Dollars in thousands)                              Cost           Gains         Losses          Value
                                                  ---------      ---------      ---------      ---------
                                                                                   
Securities Available for Sale:
     U.S. Treasury and agency                     $ 117,581      $   3,058      $      13      $ 120,626
     Mortgage-backed securities                     277,747          5,809             79        283,477
     State and municipal obligations                166,981          7,959             17        174,923
     Corporate bonds                                 13,775            203             55         13,923
     Equity securities                                3,010            903             --          3,913
                                                  ---------      ---------      ---------      ---------

         Total securities available for sale      $ 579,094      $  17,932      $     164      $ 596,862
                                                  =========      =========      =========      =========

Securities Held to Maturity:
     State and municipal obligations              $  47,125      $     969      $       5      $  48,089
                                                  ---------      ---------      ---------      ---------

         Total securities held to maturity        $  47,125      $     969      $       5      $  48,089
                                                  =========      =========      =========      =========


Information on temporarily impaired securities at December 31, 2003, segregated
according to the period of time such securities were in a continuous unrealized
loss position, is summarized as follows:



                                                    Less than               12 months
                                                    12 months               or longer                    Total
                                             ----------------------------------------------------------------------------
                                               Fair       Unrealized      Fair      Unrealized      Fair      Unrealized
(Dollars in thousands)                         Value        Losses       Value        Losses       Value        Losses
                                             ----------   ----------   ----------   ----------   ----------   ----------
                                                                                            
Securities available for sale:
     U.S. Treasury and agency                $   96,483   $      583   $       --   $       --   $   96,483   $      583
     Mortgage-backed securities                  44,200          437        8,763           17       52,963          454
     State and municipal obligations              7,582           83           --           --        7,582           83
                                             ----------   ----------   ----------   ----------   ----------   ----------

       Total securities available for sale   $  148,265   $    1,103   $    8,763   $       17   $  157,028   $    1,120
                                             ==========   ==========   ==========   ==========   ==========   ==========


The table above represents 114 investment securities where the current fair
value is less than the related amortized cost. These unrealized losses do not
reflect any deterioration in the credit worthiness of the issuing securities and
result primarily from fluctuations in market interest rates.


                                       62


The amortized cost and fair value of debt securities by contractual maturity are
as follows:



                                                    December 31, 2003
                                  ------------------------------------------------------
                                     Available for Sale              Held to Maturity
                                  ------------------------      ------------------------
                                  Amortized        Fair         Amortized        Fair
(Dollars in thousands)              Cost           Value          Cost           Value
                                  ---------      ---------      ---------      ---------
                                                                   
Due in one year or less           $  56,325      $  56,690      $  33,458      $  33,574
Due in one to five years            153,950        160,617         10,654         11,241
Due in five to ten years            189,868        194,962          2,220          2,423
Due after ten years                 190,688        191,759            799            883
                                  ---------      ---------      ---------      ---------

                                  $ 590,831      $ 604,028      $  47,131      $  48,121
                                  =========      =========      =========      =========


Maturities of mortgage-backed securities are classified in accordance with the
contractual repayment schedules. Expected maturities will differ from
contractual maturities since issuers generally have the right to prepay
obligations.

Proceeds from the sale and call of securities during 2003 were $82,906,000;
realized gross gains were $1,042,000 and gross losses were $1,000. Proceeds from
the sale and call of securities during 2002 were $45,059,000; realized gross
gains were $615,000 and gross losses were $330,000. Proceeds from the sale and
call of securities during 2001 were $91,412,000; realized gross gains were
$617,000 and gross losses were $86,000. Gains and losses were computed using the
specific identification method. There were no transfers between held to maturity
and available for sale securities in 2003, 2002 or 2001.

Securities held to maturity and available for sale with carrying values of
$465,083,000 and $475,567,000 were pledged as collateral for municipal deposits
and repurchase agreements at December 31, 2003 and 2002, respectively.

(4) Loans

Loans outstanding at December 31, 2003 and 2002 are summarized as follows:

(Dollars in thousands)                  2003              2002
                                    -----------       -----------

Commercial                          $   248,313       $   262,630
Commercial real estate                  369,712           332,134
Agricultural                            235,199           233,769
Residential real estate                 251,502           251,898
Consumer and home equity                240,591           241,461
                                    -----------       -----------
     Loans, gross                     1,345,317         1,321,892

     Allowance for loan losses          (29,064)          (21,660)
                                    -----------       -----------

     Loans, net                     $ 1,316,253       $ 1,300,232
                                    ===========       ===========


                                       63


The following table sets forth the changes in the allowance for loan losses for
the years indicated.

                                               Years ended December 31
(Dollars in thousands)                      2003         2002         2001
                                          -------      -------      -------

Balance at beginning of year              $21,660      $19,074      $13,883

Addition resulting from acquisitions           --          174        2,686

Charge-offs:
     Commercial                             8,891        1,771        1,003
     Commercial real estate                 2,953          944          394
     Agricultural                           1,876          106           58
     Residential real estate                  215           98          178
     Consumer and home equity               2,107        1,499        1,319
                                          -------      -------      -------
         Total charge-offs                 16,042        4,418        2,952

Recoveries:
     Commercial                               525          210           58
     Commercial real estate                    35           69           23
     Agricultural                               3           36           --
     Residential real estate                   11           67           19
     Consumer and home equity                 346          329          399
                                          -------      -------      -------
         Total recoveries                     920          711          499
                                          -------      -------      -------

Net charge-offs                            15,122        3,707        2,453

Provision for loan losses                  22,526        6,119        4,958
                                          -------      -------      -------

Balance at end of year                    $29,064      $21,660      $19,074
                                          =======      =======      =======

The following table sets forth information regarding nonaccrual loans and other
nonperforming assets at December 31:

(Dollars in thousands)                          2003         2002
                                               -------      -------

Nonaccrual loans:
   Commercial                                  $12,983      $12,760
   Commercial real estate                       11,745        8,407
   Agricultural                                 18,870        8,739
   Residential real estate                       2,496        1,065
   Consumer and home equity                        578          915
                                               -------      -------
     Total nonaccrual loans                     46,672       31,886

Restructured loans                               3,069        4,129

Accruing loans 90 days or more delinquent        1,709        1,091
                                               -------      -------

     Total nonperforming loans                  51,450       37,106

Other real estate owned                            653        1,251
                                               -------      -------

         Total nonperforming assets            $52,103      $38,357
                                               =======      =======

The recorded investment in impaired loans that have been evaluated individually
for impairment totaled $21,990,000 and $24,626,000 at December 31, 2003 and
2002, respectively. The allowance for loan losses related to impaired loans
amounted to $4,324,000 and $4,462,000 at December 31, 2003 and 2002,
respectively. The average recorded investment in impaired loans during 2003,
2002 and 2001 was $28,650,000, $25,332,000 and $10,842,000, respectively.
Interest income recognized on impaired loans, while such loans were impaired,
during 2003, 2002 and 2001 was approximately $218,000, $455,000 and $392,000,
respectively.


                                       64


In the normal course of business there are various outstanding commitments to
extend credit that are not reflected in the accompanying consolidated financial
statements. Loan commitments have off-balance-sheet credit risk until
commitments are fulfilled or expire. The credit risk amounts are equal to the
contractual amounts, assuming that the amounts are ultimately advanced in full
and that the collateral or other security is of no value. The Company's policy
generally requires customers to provide collateral, usually in the form of
customers' operating assets or property, prior to the disbursement of approved
loans. At December 31, 2003, letters of credit totaling $11,789,000 and unused
loan commitments and lines of credit of $271,874,000 were contractually
available. Comparable amounts for these letters of credit and commitments at
December 31, 2002 were $13,359,000 and $316,595,000, respectively. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without funding, the total commitment amounts do not necessarily represent
future cash requirements.

Loans outstanding by subsidiary banks to certain officers, directors, or
companies in which they have 10% or more beneficial ownership, including
officers and directors of the Company, as well as its subsidiaries ("Insiders"),
approximated $25,651,000 and $36,406,000 at December 31, 2003 and 2002,
respectively.

An analysis of activity with respect to insider loans during the year ended
December 31, 2003 is as follows:

(Dollars in thousands)

Balance as of December 31, 2002        $ 36,406

New loans to insiders                     3,913
Repayments received from insiders        (1,063)
Other changes *                         (13,605)
                                       --------

Balance as of December 31, 2003        $ 25,651
                                       ========

* Other changes relate primarily to changes in director status during 2003.

These loans were made on substantially the same terms, including interest rate
and collateral, as comparable transactions with other customers.

As of December 31, 2003, the Company had no significant concentration of credit
risk in the loan portfolio other than normal geographic concentration pertaining
to the communities that the Company serves and the dairy industry in Western,
New York. At December 31, 2003, the Company had $119.3 million, or 8.9% of the
portfolio, in loans to borrowers operating in the dairy industry, of which $16.5
million, or 13.8% were in nonperforming status. There is no significant exposure
to highly leveraged transactions and there are no foreign credits in the loan
portfolio.

Loans serviced for others amounting to $439,450,000 and $356,419,000 at December
31, 2003 and 2002, respectively, are not included in the consolidated statements
of financial condition. The Company had capitalized mortgage servicing rights of
$2,073,000 and $1,243,000 as of December 31, 2003 and 2002, respectively.
Proceeds from the sale of loans were $192,295,000, $139,426,000 and $117,446,000
in 2003, 2002 and 2001, respectively. Net gain on the sale of loans included in
mortgage banking activities on the income statement, was $3,153,000, $1,542,000
and $1,513,000 in 2003, 2002 and 2001, respectively. Included in net loans are
loans held for sale totaling $4,881,000 and $6,971,000 at December 31, 2003 and
2002, respectively. The Company enters into forward contracts for future
delivery of residential mortgage loans at a specified yield to reduce the
interest rate risk associated with fixed rate residential mortgage loans held
for sale and commitments to fund residential mortgages. Credit risk arises from
the possible inability of the other parties to comply with the contract terms.
Substantially all of the Company's contracts are with government-sponsored
enterprises or government agencies (FHLMC and FHA).


                                       65


(5) Premises and Equipment

A summary of premises and equipment at December 31, 2003 and 2002 follows:

(Dollars in thousands)                             2003           2002
                                                 --------       --------

Land and land improvements                       $  4,101       $  3,320
Buildings and leasehold improvements               29,946         24,275
Furniture, fixtures, equipment and vehicles        22,833         19,129
                                                 --------       --------
Premises and equipment, gross                      56,880         46,724

Accumulated depreciation and amortization         (22,641)       (19,470)
                                                 --------       --------

Premises and equipment, net                      $ 34,239       $ 27,254
                                                 ========       ========

Depreciation and amortization expense amounted to $3,434,000, $2,879,000 and
$2,403,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

(6) Goodwill and Other Intangible Assets

As discussed in Note 1, the Company adopted the provisions of SFAS No. 142,
"Goodwill and Other Intangible Assets," on January 1, 2002. Under SFAS No. 142,
goodwill is no longer amortized, but is reviewed for impairment at least
annually. Identifiable intangible assets acquired in a business combination are
amortized over their useful lives.

The following table presents the pro forma effects of applying the
non-amortization provisions of SFAS No. 142 to the results of operations for
2001. There was no impact to the results of operations for 2003 and 2002.



                                                              Years ended December 31
(Dollars in thousands, except per share amounts)         2003           2002           2001
                                                      ---------      ---------      ---------
                                                                           
Reported net income                                   $  14,247      $  26,456      $  21,213
Goodwill amortization add-back                               --             --          1,653
                                                      ---------      ---------      ---------
Adjusted net income                                   $  14,247      $  26,456      $  22,866
                                                      =========      =========      =========

Basic earnings per share:
     Reported                                         $    1.14      $    2.26      $    1.79
     Goodwill amortization add-back                          --             --           0.15
                                                      ---------      ---------      ---------
     Adjusted                                         $    1.14      $    2.26      $    1.94
                                                      =========      =========      =========

Diluted earnings per share:
     Reported                                         $    1.13      $    2.23      $    1.77
     Goodwill amortization add-back                          --             --           0.15
                                                      ---------      ---------      ---------
     Adjusted                                         $    1.13      $    2.23      $    1.92
                                                      =========      =========      =========


Goodwill resulting from the previously disclosed mergers and acquisitions (see
Note 2) amounted to $40.6 million at December 31, 2003 and 2002. Goodwill
amortization expense included in the results of operations for 2001 amounted to
$1.7 million, which was non-deductible for income tax purposes. In accordance
with SFAS No. 142, there is no goodwill amortization included in 2003 or 2002.


                                       66


The following table presents the change in the carrying amount of goodwill
allocated by business segment for the years ended December 31, 2003 and 2002:

                                                    Financial Services
                                              BNB          Group
(Dollars in thousands)                      Segment       Segment       Total
                                           --------       ------      --------

Balance as of December 31, 2001            $ 35,535       $1,294      $ 36,829

Goodwill acquired during the period           1,925           --         1,925
Contingent earnout                               --        1,840         1,840
Goodwill adjustments                           (119)         118            (1)
                                           --------       ------      --------

Balance as of December 31, 2002            $ 37,341       $3,252      $ 40,593

Goodwill adjustments                             28           --            28
                                           --------       ------      --------

Balance as of December 31, 2003            $ 37,369       $3,252      $ 40,621
                                           ========       ======      ========

During 2003, in accordance with SFAS No. 142, the Company evaluated goodwill for
impairment using a discounted cash flow analysis and determined no impairment
existed.

A summary of the major classes of amortizable intangible assets (included in
other assets on the consolidated statements of financial condition) at December
31, 2003 and 2002 follows:

(Dollars in thousands)                2003           2002
                                    --------       --------

Core deposits                       $ 11,452       $ 11,452
Customer list                            500            500
                                    --------       --------
Other intangible assets, gross        11,952         11,952

Accumulated amortization              (9,224)        (7,998)
                                    --------       --------

Other intangible assets, net        $  2,728       $  3,954
                                    ========       ========

Intangible amortization expense for these other intangible assets amounted to
$1,226,000, $898,000 and $728,000 for the years ended December 31, 2003, 2002
and 2001, respectively. Amortization of other intangible assets was computed
using the straight-line method over the estimated lives of the respective assets
(primarily 5 and 7 years). Based on the current level of intangible assets,
estimated amortization expense for other intangible assets is as follows:

Year ending December 31,
(Dollars in thousands)

                  2004                            $   809
                  2005                                530
                  2006                                498
                  2007                                303
                  2008                                307
                  Thereafter                          281
                                                  -------

                                                  $ 2,728
                                                  =======


                                       67


(7) Deposits

Scheduled maturities for certificates of deposit at December 31, 2003 are as
follows:

Mature in year ending December 31,
(Dollars in thousands)

                  2004                            $525,547
                  2005                             165,348
                  2006                              31,243
                  2007                              26,152
                  2008                              21,034
                  Thereafter                           358
                                                  --------

                                                  $769,682
                                                  ========

Certificates of deposit greater than $100,000 totaled $267,116,000 and
$201,751,000 at December 31, 2003 and 2002, respectively. Interest expense on
certificates of deposit greater than $100,000 amounted to $6,846,000, $7,682,000
and $15,922,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.

As of December 31, 2003 and 2002, overdrawn deposits included in loans on the
consolidated statements of financial condition amounted to $1,054,000 and
$3,459,000, respectively.

(8) Borrowings

Outstanding borrowings at December 31, 2003 and 2002 are summarized as follows:

(Dollars in thousands)                           2003         2002
                                               -------      -------

Short-term borrowings:
   Federal funds purchased and securities
     sold under repurchase agreements          $22,525      $60,679
   FHLB advances                                26,500       26,000
   Other                                         1,000          510
                                               -------      -------

       Total short-term borrowings             $50,025      $87,189
                                               =======      =======

Long-term borrowings:
   FHLB advances                               $62,469      $86,822
   Other                                        25,051        5,268
                                               -------      -------

       Total long-term borrowings              $87,520      $92,090
                                               =======      =======

Information related to Federal funds purchased and securities sold under
repurchase agreements as of and for the years ended December 31, 2003, 2002 and
2001 is summarized as follows:

(Dollars in thousands)                            2003       2002        2001
                                                -------    -------     -------

Weighted average interest rate at year-end         0.89%      1.50%       1.88%
Maximum outstanding at any month-end            $36,414    $61,951     $65,474
Average amount outstanding during the year      $30,284    $47,924     $33,157

The average amounts outstanding are computed using daily average balances.
Related interest expense for 2003, 2002 and 2001 was $376,000, $951,000 and
$1,108,000, respectively.

At December 31, 2003, the Company had outstanding various short and long-term
FHLB advances with maturity dates extending through 2014. The FHLB advances bear
interest at fixed rates ranging from 2.41% to 7.80% and the weighted average
interest rate amounted to 4.47% as of December 31, 2003.


                                       68


The Company's FHLB advances include $20.0 million in fixed-rate callable
borrowings, which can be called by the FHLB on a quarterly basis. FHLB advances
are collateralized by $6.0 million of FHLB stock, mortgage loans with a carrying
value of $84.2 million at December 31, 2003 and investment securities with a
fair market value of $37.8 million at December 31, 2003. At December 31, 2003,
the Company had remaining credit available of $27.8 million under lines of
credit with the FHLB. The Company also had $74.3 million of remaining credit
available under unsecured lines of credit with various banks at December 31,
2003. The Company also has available lines of credit with Farmer Mac permitting
borrowings to a maximum of $25.0 million. Advances outstanding against the
Farmer Mac lines at December 31, 2003 amounted to $1.0 million.

During 2003, FII expanded the terms of an existing credit agreement with M&T
Bank and infused approximately $15 million of the financing proceeds as capital
to the NBG and BNB subsidiaries allowing those banks to meet higher capital
ratios required in agreements imposed by their regulator. The credit agreement
includes a $25.0 million term loan facility and a $5.0 million revolving loan
facility. The term loan requires monthly payments of interest only, at a
variable interest rate of London Interbank Offered Rate ("LIBOR") plus 1.75%,
which was 2.98% as of December 31, 2003. The $25.0 million term loan is included
in long-term borrowings on the consolidated statements of financial condition as
principal installments are due as follows: $5.0 million in December 2006, $10.0
million in December 2007 and $10.0 million in December 2008. The $5.0 million
revolving loan accrues interest at a rate of LIBOR plus 1.50%. There were no
advances outstanding on the revolving loan as of December 31, 2003. The credit
agreement includes affirmative financial covenants, all of which were met as of
December 31, 2003. FII pledged the stock of its subsidiary banks as collateral
for the credit facility.

The aggregate maturities of long-term borrowings at December 31, 2003 are as
follows:

Mature in year ending December 31,
(Dollars in thousands)

                  2005                                   $  7,282
                  2006                                     15,139
                  2007                                     14,098
                  2008                                     30,232
                  2009                                     20,529
                  Thereafter                                  240
                                                         --------

                                                         $ 87,520
                                                         ========

(9) Trust Preferred Securities and Junior Subordinated Debentures

On February 22, 2001, the Company established FISI Statutory Trust I (the
"Trust"), which is a statutory business trust formed under Connecticut law. The
Trust exists for the exclusive purposes of (i) issuing and selling 30 year
guaranteed preferred beneficial interests in the trust assets ("trust preferred"
or "capital" securities) in the aggregate amount of $16.2 million at a fixed
rate of 10.20%, (ii) using the proceeds from the sale of the capital securities
to acquire the junior subordinated debentures issued by the Company and (iii)
engaging in only those other activities necessary, advisable or incidental
thereto.

The Company's junior subordinated debentures are the primary assets of the Trust
and, accordingly, payments under the corporation obligated junior debentures are
the sole revenue of the Trust. The capital securities of the Trust are
non-voting. The Company owns all of the common securities of the Trust. The
Company used the net proceeds from the sale of the capital securities to
partially fund the BNB acquisition. The capital securities qualified as Tier 1
capital under regulatory definitions as of December 31, 2003 and 2002.

The Company's primary sources of funds to pay interest on the debentures held by
the Trust are current dividends from its subsidiary banks. Accordingly, the
Company's ability to service the debentures is dependent upon the continued
ability of the subsidiary banks to pay dividends to the Company. Since the
junior subordinated obligations and trust preferred securities at December 31,
2003 and 2002,


                                       69


respectively are classified as debt for financial statement purposes, the
associated tax-deductible expense has been recorded as interest expense in the
consolidated statements of income.

The Company incurred $487,000 in costs to issue the securities and the costs are
being amortized over 20 years using the straight-line method

As of December 31, 2003, the Company deconsolidated the subsidiary Trust, which
had issued trust preferred securities, and replaced the presentation of such
instruments with the Company's junior subordinated debentures issued to the
subsidiary Trust. Such presentation reflects the adoption of FASB Interpretation
No. 46 ("FIN 46 R"), "Consolidation of Variable Interest Entities."

(10) Income Taxes

Total income taxes for the years ended December 31, 2003, 2002 and 2001 were
allocated as follows:



(Dollars in thousands)                                     2003        2002        2001
                                                         --------    --------    --------
                                                                        
Income from operations                                   $  3,977    $ 12,419    $ 11,033
Additional paid-in capital for stock options exercised        (87)       (148)         --
Shareholders' equity for unrealized gain (loss)
     on securities available for sale                      (1,535)      5,488       1,588
                                                         --------    --------    --------

                                                         $  2,355    $ 17,759    $ 12,621
                                                         ========    ========    ========


Income tax expense (benefit) attributable to operations for the years ended
December 31, 2003, 2002 and 2001 consists of:



(Dollars in thousands)                                     2003        2002        2001
                                                         --------    --------    --------
                                                                        
Current:
     Federal                                             $  5,245    $ 10,828    $  8,676
     State                                                    703       2,651       2,469
                                                         --------    --------    --------
         Total current                                      5,948      13,479      11,145
Deferred:
     Federal                                               (1,909)       (908)        (68)
     State                                                    (62)       (152         (44)
                                                         --------    --------    --------
         Total deferred                                    (1,971)     (1,060)       (112)
                                                         --------    --------    --------

Total income taxes                                       $  3,977    $ 12,419    $ 11,033
                                                         ========    ========    ========


The following is a reconciliation of the actual and statutory tax rates
applicable to income from operations for the years ended December 31, 2003, 2002
and 2001:



                                                           2003        2002        2001
                                                         --------    --------    --------
                                                                            
Statutory rate                                               35.0%       35.0%       35.0%
Increase (decrease) resulting from:
     Tax exempt interest income                             (16.3)       (7.8)       (8.1)
     State taxes, net of federal income tax benefit           2.3         4.2         4.9
     Goodwill amortization                                     --          --         1.8
     Other                                                    0.8         0.5         0.6
                                                         --------    --------    --------

Total                                                        21.8%       31.9%       34.2%
                                                         ========    ========    ========



                                       70


The tax effects of temporary differences that give rise to the deferred tax
assets and deferred tax liabilities at December 31, 2003 and 2002 are presented
as follows:



(Dollars in thousands)                                              2003        2002
                                                                  --------    --------
                                                                        
Deferred tax assets:
     Allowance for loan losses                                    $ 11,106    $  8,216
     Core deposit intangible                                           965         822
     Interest on nonaccrual loans                                    1,178         869
     Other                                                           1,106         946
                                                                  --------    --------

         Total gross deferred tax assets                            14,355      10,853

Deferred tax liabilities:
     Prepaid pension costs                                           1,046       1,017
     Unrealized gain on securities available for sale                5,441       6,976
     Depreciation of premises and equipment                          1,591         917
     Loan servicing assets                                             826         479
     Other                                                           1,178         697
                                                                  --------    --------

         Total gross deferred tax liabilities                       10,082      10,086
                                                                  --------    --------

Net deferred tax asset, at year-end *                             $  4,273    $    767

Net deferred tax asset, at beginning of year                           767       4,922
                                                                  --------    --------

Decrease (increase) in net deferred tax asset                       (3,506)      4,155

Net deferred tax asset acquired                                         --         368

Initial purchase accounting adjustments, net                            --         (95)

Change in unrealized gain/loss on securities available for sale      1,535      (5,488)
                                                                  --------    --------

Deferred tax benefit                                              $ (1,971)   $ (1,060)
                                                                  ========    ========


*     Included in other assets on the consolidated statements of financial
      condition

Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carry-back period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable income
and projected future taxable income over the periods in which the temporary
differences comprising the deferred tax assets will be deductible. Based on its
assessment, management determined that no valuation allowance is necessary at
December 31, 2003 and 2002.

The Company has Federal and state net operating loss carryforwards of $434,000
that expire in 2021. The utilization of the tax net operating carryforwards is
subject to limitations imposed by the Internal Revenue Code. The Company
believes these limitations will not prevent the carryforward benefits from being
utilized.


                                       71


(11) Lease Commitments

At December 31, 2003, the Company was obligated under a number of noncancellable
operating leases for land, buildings and equipment. Certain of these leases
provide for escalation clauses and contain renewal options calling for increased
rentals if the lease is renewed. Future minimum lease payments on operating
leases at December 31, 2003 were as follows:

Operating lease payments in year ending December 31,
(Dollars in thousands)

                  2004                              $   651
                  2005                                  591
                  2006                                  514
                  2007                                  484
                  2008                                  458
                  Thereafter                          2,842
                                                    -------

                                                    $ 5,540
                                                    =======

(12) Retirement Plans and Postretirement benefits

Defined Benefit Plan

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 annually an actuarially determined amount to cover
current service cost plus amortization of prior service costs.

The following table sets forth the defined benefit pension plan's change in
benefit obligation and change in plan assets using the most recent actuarial
data measured at September 30:



(Dollars in thousands)                                     2003        2002        2001
                                                         --------    --------    --------
                                                                        
Change in benefit obligation:
     Benefit obligation at beginning of year             $(16,282)   $(13,608)   $(12,114)
     Service cost                                          (1,282)     (1,071)     (1,249)
     Interest cost                                         (1,079)       (968)       (890)
     Actuarial (loss) gain                                 (2,136)     (1,303)         72
     Benefits paid                                            590         559         470
     Plan expenses                                            109         109         103
                                                         --------    --------    --------
         Benefit obligation at end of year                (20,080)    (16,282)    (13,608)

Change in plan assets:
     Fair value of plan assets at beginning of year        14,294      15,240      17,180
     Actual (loss) return on plan assets                    2,544        (830)     (1,367)
     Employer contributions                                 1,421         552          --
     Benefits paid                                           (590)       (559)       (470)
     Plan expenses                                           (109)       (109)       (103)
                                                         --------    --------    --------
         Fair value of plan assets at end of year          17,560      14,294      15,240
                                                         --------    --------    --------

Funded status                                              (2,520)     (1,988)      1,632
Unamortized net asset at transition                          (103)       (141)       (179)
Unrecognized net loss subsequent to transition              5,362       4,722       1,292
Unamortized prior service cost                                231         322         345
                                                         --------    --------    --------

Prepaid benefit cost, included in other assets           $  2,970    $  2,915    $  3,090
                                                         ========    ========    ========



                                       72


Net periodic pension cost consists of the following components for the years
ended December 31:



(Dollars in thousands)                                     2003        2002        2001
                                                         --------    --------    --------
                                                                        
Service cost                                             $  1,351    $  1,071    $    850
Interest cost on projected benefit obligation               1,079         968         890
Expected return on plan assets                             (1,251)     (1,297)     (1,429)
Amortization of net transition asset                          (38)        (38)        (38)
Amortization of unrecognized loss                             201          --          --
Amortization of unrecognized prior service cost                22          22          (3)
                                                         --------    --------    --------

Net periodic pension cost                                $  1,364    $    726    $    270
                                                         ========    ========    ========


Weighted-average assumptions used to determine the net periodic pension cost for
the years ended December 31:

                                         2003        2002        2001
                                       --------    --------    --------

Weighted average discount rate           6.00%       6.75%       7.25%
Expected long-term rate of return        8.00%       8.50%       8.50%
Rate of compensation increase            3.00%       4.00%       5.00%

The expected long-term rate-of-return on plan assets reflects long-term earnings
expectations on existing plan assets and those contributions expected to be
received during the current plan year. In estimating that rate, appropriate
consideration was given to historical returns earned by plan assets in the fund
and the rates of return expected to be available for reinvestment. Average rates
of return over the past 1,3,5 and 10 year periods were determined and
subsequently adjusted to reflect current capital market assumptions and changes
in investment allocations.

The pension plan weighted-average asset allocations at September 30, 2003 and
2002, by asset category are as follows:

(Dollars in thousands)          2003           2002
                                ----           ----

Asset category:
   Equity securities            59.7%          55.3%
   Debt securities              34.5           36.3
   Other                         5.8            8.4
                                ----           ----

       Total                    100.0%         100.0%
                                ====           ====

The New York State Bankers Retirement System (the "System") was established in
1938 to provide for the payment of benefits to employees of participating banks.
A Board of Trustees meets quarterly to set the investment policy guidelines and
oversee the System.

The System utilizes two investment management firms, (which will be referred to
as Firm I and Firm II) each investing approximately 50% of the total portfolio.
The System's investment objective is to exceed the investment benchmarks in each
asset category. Each firm operates under a separate written investment policy
approved by the Trustees and designed to achieve an allocation approximating 60%
invested in equity securities and 40% invested in debt securities.

Each Firm reports at least quarterly to the Investment Committee and
semi-annually to the Board.

Equities: The target allocation percentage for equity securities is 60% but may
vary from 50%-70% at the investment manager's discretion.

Fixed Income: For both investment portfolios, the target allocation percentage
for debt securities is 40% but may vary from 30%-50% at the investment manager's
discretion.


                                       73


The Company expects to contribute approximately $1,406,000 to the pension plan
prior to June 15, 2004.

Defined Contribution Plan

The Company also sponsors a defined contribution profit sharing (401(k)) plan
covering substantially all employees. The Company matches certain percentages of
each eligible employee's contribution to the plan. Expense for the plan amounted
to $299,000, $1,057,000 and $708,000 in 2003, 2002 and 2001, respectively.

Postretirement Benefits

Prior to December 31, 2001, BNB provided health and dental care benefits to
retired employees who met specified age and service requirements through a
postretirement health and dental care plan in which both BNB and the retiree
shared the cost. The plan provided for substantially the same medical insurance
coverage as for active employees until their death and was integrated with
Medicare for those retirees aged 65 or older. In 2001, the plan's eligibility
requirements were amended to curtail eligible benefit payments to only retired
employees and active participants who were fully vested under the Plan. In 2003,
retirees under age 65 began contributing to health coverage at the same
cost-sharing level as that of active employees. The retirees aged 65 or older
were offered new Medicare supplemental plans as alternatives to the plan
historically offered. The cost sharing of medical coverage was standardized
throughout the group of retirees aged 65 or older. In addition, to be consistent
with the administration of the Company's dental plan for active employees, all
retirees who continued dental coverage began paying the full monthly premium.
The accrued liability related to this plan amounted to $828,000 and $844,000 as
of December 31, 2003 and 2002, respectively. Expense for the plan amounted to
$108,000 and $172,000 for the years ended December 31, 2003 and 2002,
respectively.

(13) Stock Compensation Plans

The Company has a Management Stock Incentive Plan and a Directors' Stock
Incentive Plan. Under the plans, the Company may grant stock options to its
directors, directors of its subsidiaries, and key employees to purchase shares
of common stock, shares of restricted stock and stock appreciation rights.
Grants under the plans may be made to up to 10% of the number of shares of
common stock issued, including treasury shares. The exercise price of each
option equals the market price of the Company's stock on the date of the grant.
The maximum term of each option is ten years and the options' generally vest
between three and five years.


                                       74


The following is a summary of the status of the Company's stock option plans as
of December 31, 2003, 2002 and 2001, as well as changes in the plans during the
years then ended:

                                                       Weighted
                                     Stock              Average
                                    Options            Exercise
                                  Outstanding            Price
                                  -----------          ---------
Balance December 31, 2000          $ 384,518           $   13.90
Granted                              115,637               18.94
Cancelled                             (3,474)             (13.65)
                                   ---------           ---------

Balance December 31, 2001          $ 496,681           $   15.08
Granted                               52,353               27.41
Exercised                            (19,955)             (13.95)
Cancelled                            (74,792)             (13.99)
                                   ---------           ---------

Balance December 31, 2002            454,287               16.73
Granted                               65,831               22.16
Exercised                            (21,669)             (14.30)
Cancelled                            (66,173)             (15.31)
                                   ---------           ---------

Balance December 31, 2003          $ 432,276           $   17.89
                                   =========           =========

Exercisable at:
     December 31, 2003             $ 260,225           $   15.83
     December 31, 2002               224,284               14.75
     December 31, 2001               153,826               13.92

The following table summarizes information about stock options outstanding and
exercisable at December 31, 2003:



                                                         Outstanding                     Exercisable
                                            ------------------------------------    -----------------------
                                                          Weighted     Weighted                  Weighted
                                              Number       Average      Average      Number       Average
            Range of                         of Stock     Exercise       Life       of Stock     Exercise
         Exercise Price                       Options       Price     (in years)     Options       Price
     -----------------------                ----------  -----------   ----------    ---------   -----------
                                                                                  
        $11.75 to $14.13                      253,146     $  13.91        5.72        208,159    $ 13.89
        $20.50 to $22.50                       80,400        21.57        7.89         31,923      21.61
        $22.51 to $25.00                       50,772        22.75        8.96          4,002      22.99
        $25.33 to $26.45                       38,041        25.48        8.16         12,838       25.47
        $33.15 to $36.00                        9,917        35.74        8.36          3,303       35.74
                                              -------     --------        ----        -------     -------

                                              432,276     $  17.89        6.78        260,225     $ 15.83
                                              =======     ========        ====        =======     =======



                                       75


(14) 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:



                                                                 Years Ended December 31
                                                            ------------------------------------
(Dollars and shares in thousands)                             2003          2002          2001
                                                            --------      --------      --------
                                                                               
Net income                                                  $ 14,247      $ 26,456      $ 21,213

Less: Preferred stock dividends                                1,495         1,496         1,496
                                                            --------      --------      --------

Net income available to common shareholders                 $ 12,752      $ 24,960      $ 19,717
                                                            ========      ========      ========

Weighted average number of common shares outstanding
     used to calculate basic earnings per common share        11,148        11,068        10,994

Add: Effect of dilutive options                                   98           150           132
                                                            --------      --------      --------

Weighted average number of common shares used to
     calculate diluted earnings per common share              11,246        11,218        11,126
                                                            ========      ========      ========


(15) Regulatory Capital

The Company is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material impact on the
Company's financial statements.

For evaluating regulatory capital adequacy, companies are required to determine
capital and assets under regulatory accounting practices. Quantitative measures
established by regulation to ensure capital adequacy require the Company to
maintain minimum amounts and ratios. The leverage ratio requirement is based on
period-end capital to average total assets during the previous three months.
Compliance with risk-based capital requirements is determined by dividing
regulatory capital by the sum of a company's weighted asset values. Risk
weightings are established by the regulators for each asset category according
to the perceived degree of risk. As of December 31, 2003 and 2002, the Company
and each subsidiary bank met all capital adequacy requirements to which they are
subject.

As of December 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation ("FDIC") categorized the Company and its subsidiary banks
as well capitalized under the regulatory framework for prompt corrective action.
For purposes of determining the annual deposit insurance assessment rate for
insured depository institutions, each insured institution is assigned an
assessment risk classification. Each institution's assigned risk classification
is composed of a group and subgroup assignment based on capital group and
supervisory subgroup. Although the NBG and BNB subsidiaries remain assigned to
the well capitalized capital group, these two subsidiaries received notification
of a downgrade in supervisory subgroup based on the formal agreements in place
with the OCC.

Payments of dividends by the subsidiary banks to FII are limited or restricted
in certain circumstances under banking regulations. At December 31, 2003, an
aggregate of $13,233,000 was available for payment of dividends by the
subsidiary banks to FII without the approval from the appropriate regulatory
authorities.


                                       76


The following is a summary of the actual capital amounts and ratios for the
Company and its subsidiary banks as of December 31:



                                                                     2003
                                -------------------------------------------------------------------------------
                                     Actual Regulatory
                                          Capital             Minimum Requirements         Well-Capitalized
                                -------------------------  -------------------------  -------------------------
(Dollars in thousands)              Amount        Ratio        Amount        Ratio       Amount        Ratio
                                    ------        -----        ------        -----       ------        -----
                                                                                      
Leverage capital (Tier 1) as percent of three-month average assets:
     Company                    $  147,722         7.03%    $  84,082         4.00%   $  105,103        5.00%
     BNB                            34,202         8.02        17,065         4.00        21,332        5.00
     FTB                            13,550         6.09         8,901         4.00        11,126        5.00
     NBG                            58,593         8.04        29,162         4.00        36,452        5.00
     WCB                            48,215         6.71        28,738         4.00        35,923        5.00

As percent of risk-weighted, period-end assets: Core capital (Tier 1):
     Company                       147,722        10.18        58,033         4.00        87,050        6.00
     BNB                            34,202        13.69         9,995         4.00        14,993        6.00
     FTB                            13,550        10.90         4,971         4.00         7,456        6.00
     NBG                            58,593        11.15        21,027         4.00        31,540        6.00
     WCB                            48,215         8.91        21,655         4.00        32,483        6.00

Total capital (Tiers 1 and 2):
     Company                       165,992        11.44       116,067         8.00       145,084       10.00
     BNB                            37,343        14.94        19,991         8.00        24,989       10.00
     FTB                            15,108        12.16         9,942         8.00        12,427       10.00
     NBG                            65,233        12.41        42,053         8.00        52,566       10.00
     WCB                            55,027        10.16        43,310         8.00        54,138       10.00



                                                                     2002
                                -------------------------------------------------------------------------------
                                     Actual Regulatory
                                          Capital            Minimum Requirements         Well-Capitalized
                                -------------------------  -------------------------  -------------------------
(Dollars in thousands)              Amount        Ratio        Amount        Ratio       Amount        Ratio
                                    ------        -----        ------        -----       ------        -----
                                                                                      
Leverage capital (Tier 1) as percent of three-month average assets:
     Company                    $  139,620         6.96%    $  80,233         4.00%   $  100,292        5.00%
     BNB                            24,505         5.93        16,527         4.00        20,658        5.00
     FTB                            11,356         5.67         8,017         4.00        10,022        5.00
     NBG                            48,420         6.71        28,870         4.00        36,087        5.00
     WCB                            44,175         6.64        26,592         4.00        33,240        5.00

As percent of risk-weighted, period-end assets: Core capital (Tier 1):
     Company                       139,620         9.82        56,846         4.00        85,270        6.00
     BNB                            24,505         9.70        10,110         4.00        15,165        6.00
     FTB                            11,356         9.45         4,807         4.00         7,210        6.00
     NBG                            48,420         8.90        21,758         4.00        32,637        6.00
     WCB                            44,175         8.94        19,761         4.00        29,642        6.00

Total capital (Tiers 1 and 2):
     Company                       157,433        11.08       113,693         8.00       142,116       10.00
     BNB                            27,669        10.95        20,220         8.00        25,275       10.00
     FTB                            12,861        10.70         9,613         8.00        12,017       10.00
     NBG                            55,243        10.16        43,515         8.00        54,394       10.00
     WCB                            50,369        10.20        39,522         8.00        49,403       10.00


The formal agreements entered into by NBG and BNB with their primary regulator
required both banks to develop capital plans enabling them to achieve, by March
31, 2004, a Tier 1 leverage capital ratio equal to 8%, a Tier 1 risk-based
capital ratio equal to 10%, and a total risk-based capital ratio of 12%. As
indicated in the table above, each of the banks meets the required levels at
December 31, 2003.


                                       77


(16) Fair Value of Financial Instruments

The "fair value" of a financial instrument is defined as the price a willing
buyer and a willing seller would exchange in other than a distressed sale
situation. The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 2003 and 2002:



                                                    2003                            2002
                                         --------------------------      --------------------------
                                          Carrying          Fair          Carrying          Fair
(Dollars in thousands)                     Amount          Value           Amount          Value
                                         ----------      ----------      ----------      ----------
                                                                             
Financial Assets
Cash and cash equivalents                $   45,635      $   45,635      $   48,429      $   48,429
Securities                                  652,095         653,085         643,987         644,951
FHLB and FRB stock                            8,351           8,351           8,558           8,558
Loans, net                                1,316,253       1,355,654       1,300,232       1,345,314

Financial Liabilities
Deposits:
     Interest Bearing:
         Savings and interest
              bearing demand                784,219         784,219         779,772         779,772
         Time deposits                      769,682         769,682         687,996         691,020
     Non-interest bearing demand            264,990         264,990         240,755         240,755
                                         ----------      ----------      ----------      ----------
     Total deposits                       1,818,891       1,818,891       1,708,523       1,711,547
Borrowings:
     Short-term                              50,025          50,223          87,189          88,027
     Long-term                               87,520          86,635          92,090         101,772
     Junior subordinated debentures          16,702          19,959              --              --
     Trust preferred securities                  --              --          16,200          19,082


The following methods and assumptions were used to estimate the fair value of
each class of financial instruments.

Cash and cash equivalents: The carrying amounts reported in the consolidated
statements of financial condition for cash, due from banks, interest-bearing
deposits and Federal funds sold approximate the fair value of those assets.

Securities: Fair value is based on quoted market prices, where available. Where
quoted market prices are not available, fair value is based on quoted market
prices of comparable instruments.

FHLB and FRB stock: The carrying amounts reported in the consolidated statements
of financial condition for FHLB and FRB stock approximate the fair value of
those assets.

Loans: For variable rate loans that reprice frequently, fair value approximates
carrying amount. The fair value for fixed rate loans is estimated through
discounted cash flow analysis using interest rates currently being offered on
loans with similar terms and credit quality. The fair value of loans held for
sale is based on quoted market prices and investor commitments. For
nonperforming loans, fair value is estimated by discounting expected cash flows
at a rate commensurate with the risk associated with the estimated cash flows.

Deposits: The fair value for savings, interest bearing and non-interest bearing
demand accounts is equal to the carrying amount because of the customer's
ability to withdraw funds immediately. The fair value of time deposits is
estimated using a discounted cash flow approach that applies prevailing market
interest rates for similar maturity instruments.


                                       78


Borrowings: Carrying value approximates fair value for short-term borrowings.
The fair value for long-term borrowings is estimated using a discounted cash
flow approach that applies prevailing market interest rates for similar maturity
instruments.

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

(17) Segment Information

Reportable segments are comprised of WCB, NBG, BNB and FTB as the Company
evaluates performance on an individual bank basis. As stated in Note 1, during
2002 the Company completed a geographic realignment of the subsidiary banks,
which involved the merger of the subsidiary formerly known as PSB into NBG and
subsequent transfer of branches between NBG and WCB. Accordingly, the Company
restated segment results to reflect the merger and transfers for each of the
years presented. All of the revenue, expenses, assets and liabilities of PSB
have been reallocated to the WCB and NBG segments. The reportable segment
information as of and for the years ended December 31, 2003, 2002 and 2001
follows:



(Dollars in thousands)                              2003              2002              2001
                                                -----------       -----------       -----------
                                                                           
Net interest income
     WCB                                        $    28,384       $    28,577       $    27,039
     NBG                                             25,642            26,853            24,732
     BNB                                             15,019            14,048             8,184
     FTB                                              8,207             8,175             6,041
     Financial Services Group                            --                --                --
                                                -----------       -----------       -----------
         Total segment net interest income           77,252            77,653            65,996

     Parent and eliminations, net                    (1,751)           (1,799)           (1,222)
                                                -----------       -----------       -----------

         Total net interest income              $    75,501       $    75,854       $    64,774
                                                ===========       ===========       ===========

Net income
     WCB                                        $     9,042       $    10,565       $     9,643
     NBG                                                151             9,765             9,777
     BNB                                              4,108             5,001             1,142
     FTB                                              2,117             2,775             1,827
     Financial Services Group                          (115)              246               143
                                                -----------       -----------       -----------
         Total segment net income                    15,303            28,352            22,532

     Parent and eliminations, net                    (1,056)           (1,896)           (1,319)
                                                -----------       -----------       -----------

         Total net income                       $    14,247       $    26,456       $    21,213
                                                ===========       ===========       ===========

Assets
     WCB                                        $   754,639       $   674,755       $   632,058
     NBG                                            721,374           721,090           642,827
     BNB                                            462,113           495,055           362,645
     FTB                                            225,080           203,382           161,763
     Financial Services Group                         5,135             5,052             2,788
                                                -----------       -----------       -----------
         Total segment assets                     2,168,341         2,099,334         1,802,081

     Parent and eliminations, net                     5,391             5,700            (7,785)
                                                -----------       -----------       -----------

         Total assets                           $ 2,173,732       $ 2,105,034       $ 1,794,296
                                                ===========       ===========       ===========



                                       79


(18) Condensed Parent Company Only Financial Statements

The following are the condensed statements of condition of FII as of December
31, 2003 and 2002, and the condensed statements of income and cash flows for the
years ended December 31, 2003, 2002 and 2001:

Condensed Statements of Condition

(Dollars in thousands)                                     2003          2002
                                                         --------      --------

Assets:
     Cash and due from subsidiaries                      $ 13,698      $ 14,267
     Securities available for sale, at fair value           1,436         1,268
     Investment in subsidiaries                           209,788       186,703
     Other assets                                           5,098         5,099
                                                         --------      --------

         Total assets                                    $230,020      $207,337
                                                         ========      ========

Liabilities and shareholders' equity
     Junior subordinated debentures                      $ 16,702      $ 16,702
     Short-term borrowings                                     --           500
     Long-term borrowings                                  25,000         5,000
     Other liabilities                                      5,215         6,841
     Shareholders' equity                                 183,103       178,294
                                                         --------      --------

         Total liabilities and shareholders' equity      $230,020      $207,337
                                                         ========      ========

Condensed Statements of Income



(Dollars in thousands)                                  2003          2002          2001
                                                      --------      --------      --------
                                                                         
Dividends from subsidiaries                           $  6,058      $ 22,015      $ 16,643
Other income                                            10,542         8,542         7,577
                                                      --------      --------      --------
     Total income                                       16,600        30,557        24,220

Expenses                                                12,341        11,477         9,602
                                                      --------      --------      --------

Income before income taxes and equity in
   undistributed earnings of subsidiaries                4,259        19,080        14,618

Income tax benefit                                         723         1,160           788
                                                      --------      --------      --------

Income before effect of subsidiaries'
   earnings and dividends                                4,982        20,240        15,406

Equity in undistributed earnings of subsidiaries         9,265         6,216         5,807
                                                      --------      --------      --------

Net income                                            $ 14,247      $ 26,456      $ 21,213
                                                      ========      ========      ========



                                       80


Condensed Statements of Cash Flows



(Dollars in thousands)                                        2003           2002           2001
                                                            --------       --------       --------
                                                                                 
Cash flows from operating activities:
   Net income                                               $ 14,247       $ 26,456       $ 21,213
   Adjustments to reconcile net income to net
     cash provided by operating activities:
       Depreciation and amortization                             851            878            711
       Equity in undistributed earnings of
         subsidiaries                                         (9,265)        (6,216)        (5,807)
       Deferred income tax expense (benefit)                      70           (176)          (102)
       Gain on sale of securities                                 --           (161)            --
       Decrease in accrued dividends
         receivable from subsidiaries                             --             --         22,962
       Increase in other assets                                 (588)        (4,953)        (1,139)
       (Decrease) increase in other liabilities                 (442)         1,393          1,562
                                                            --------       --------       --------

           Net cash provided by
              operating activities                             4,873         17,221         39,400
                                                            --------       --------       --------

Cash flows from investing activities:
   Purchase of available for sale securities                      --            (26)            --
   Proceeds from sale of available for sale securities            --            256             --
   Investment in Mercantile Adjustment Bureau, LLC                --         (2,400)            --
   Equity investment in subsidiaries, net                    (15,700)            --        (63,381)
   Purchase of premises and equipment, net                      (645)          (274)        (1,109)
                                                            --------       --------       --------

           Net cash used in
              investing activities                           (16,345)        (2,444)       (64,490)
                                                            --------       --------       --------

Cash flows from financing activities:
   Proceeds from short-term borrowings                            --             --            500
   Proceeds from long-term borrowings                         25,000             --          5,000
   Repayment on long-term borrowings                          (5,000)            --             --
   Repayment of short-term borrowings                           (500)            --             --
   Proceeds from issuance of trust
     preferred securities                                         --             --         16,200
   Purchase of preferred and common shares                      (425)          (581)           (16)
   Issuance of preferred and common shares                       447            463             27
   Dividends paid                                             (8,619)        (7,578)        (6,551)
                                                            --------       --------       --------

           Net cash provided by (used in)
              financing activities                            10,903         (7,696)        15,160
                                                            --------       --------       --------

Net (decrease) increase in cash and
     cash equivalents                                           (569)         7,081         (9,930)

Cash and cash equivalents at the
     beginning of the year                                    14,267          7,186         17,116
                                                            --------       --------       --------

Cash and cash equivalents at the
     end of the year                                        $ 13,698       $ 14,267       $  7,186
                                                            ========       ========       ========



                                       81


INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Financial Institutions, Inc.:

We have audited the accompanying consolidated statements of financial condition
of Financial Institutions, Inc. and subsidiaries as of December 31, 2003 and
2002, and the related consolidated statements of income, changes in
shareholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2003. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
the significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Financial
Institutions, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.

As discussed in Notes 1 and 6 to the consolidated financial statements, the
Company changed its method of accounting for goodwill in 2002 upon adoption of
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."


/s/ KPMG LLP

Buffalo, New York
February 6, 2004


                                       82


Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

Item 9A. Controls and Procedures

As of December 31, 2003 the Company, under the supervision of its Chief
Executive Officer and Chief Financial Officer conducted an evaluation of the
effectiveness of disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended).
As part of a similar review, in early 2003, the Company identified two control
issues at a subsidiary bank that if not corrected could impact the effectiveness
of the Company's internal disclosure controls and procedures. The two areas of
concern at the subsidiary bank were disclosure controls over the timing of
problem loan identification and disclosure controls over lending to insiders
under Regulation O. Since the identification of these issues, new procedures
have been put in place to evaluate and assess the process of loan grading and
problem loan identification at each subsidiary bank. The Company has also added
credit administration and loan workout personnel at the holding company level to
improve insider loan reporting and to facilitate earlier intervention with
respect to problem loans. Based on their evaluation of the effectiveness of
disclosure controls and procedures, and following the implementation of the
above described actions, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
ensuring that all material information required to be filed in the Company's
periodic SEC reports is made known to them in a timely fashion. Except as
described herein, there has been no change in the Company's internal control
over financial reporting that occurred during the fourth quarter of the year
ended December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.

PART III

Item 10. Directors and Executive Officers of the Registrant

Certain information required by this item is incorporated by reference from the
Company's Proxy Statement for its 2004 Annual Meeting of Shareholders to be
filed with the U.S. Securities and Exchange Commission.

The Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The Code of Ethics is
located on the Company's internet website at www.fiiwarsaw.com. In addition, the
Company will provide a copy of the Code of Ethics to anyone, without charge,
upon request addressed to Director of Human Resources at Financial Institutions,
Inc., 220 Liberty Street, Warsaw, NY 14569. The Company intends to disclose any
amendment to, or waiver from, a provision of its Code of Ethics that applies to
the Company's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, and that relates to any element of the Code of Ethics definition
enumerated in Item 406 of Regulation S-K, by posting such information on the
Company's website.

The following table sets forth current information about the executive officers
of FII.


                                       83





======================================================================================================================
             Name     Age   Starting In                   Positions/Offices with FII and Subsidiaries
======================================================================================================================
                                  
Peter G. Humphrey     49        1983       Chairman of the Board, President and Chief Executive Officer of FII
                                           (since 1994). Chairman of the Boards of Wyoming County Bank, The
                                           National Bank of Geneva, Bath National Bank and First Tier Bank & Trust.
                                           Director of Burke Group, Inc. and The F. I. Group, Inc.
- ----------------------------------------------------------------------------------------------------------------------
Jon J. Cooper         51        1997       Senior Vice President of FII. President and Chief Executive Officer of
                                           Wyoming County Bank. Director of Wyoming County Bank.
- ----------------------------------------------------------------------------------------------------------------------
Douglas L. McCabe     56        2001       Senior Vice President of FII. President and Chief Executive Officer of
                                           Bath National Bank since 1998. Director of Bath National Bank.
- ----------------------------------------------------------------------------------------------------------------------
Randolph C. Brown     50        1991       Senior Vice President of FII. President and Chief Executive Officer of
                                           The National Bank of Geneva since 2003.  From 1991 - 2003 was President
                                           and CEO of First Tier Bank & Trust. Director of The National Bank of
                                           Geneva.
- ----------------------------------------------------------------------------------------------------------------------
Patrick C. Burke      43        2001       Senior Vice President of FII. President and Chief Executive Officer of
                                           The Burke Group, Inc. since 2001. Previous owner/partner of Burke
                                           Group. Director of The Burke Group, Inc. and The FI Group, Inc.
- ----------------------------------------------------------------------------------------------------------------------
Gary M. Rougeau       54        1993       Senior Vice President of FII. President and Chief Executive Officer of
                                           First Tier Bank & Trust since 2003. From 1993 to 2003 was the Sr. Loan
                                           Administrator for First Tier Bank. Director of First Tier Bank & Trust.
- ----------------------------------------------------------------------------------------------------------------------
Ronald A. Miller      55        1996       Senior Vice President and Chief Financial Officer of FII.  Corporate
                                           Secretary of FII.
- ----------------------------------------------------------------------------------------------------------------------
Thomas D. Grover      56        2002       Senior Vice President and Chief Risk Officer of FII. From 2001 - 2002
                                           was the Executive Director for Canisius College Center for
                                           Entrepreneurship. From 1999 - 2001 was Executive Vice President of Fleet
                                           Bank Small Business Services.
- ----------------------------------------------------------------------------------------------------------------------
Matthew T. Murtha     49        2000       Senior Vice President and Director of Marketing of FII. From 1995 - 2000
                                           was Small Business Segment Manager at HSBC.
- ----------------------------------------------------------------------------------------------------------------------


Item 11. Executive Compensation

Information regarding executive compensation on pages 10 through 14 of the
Registrant's Proxy Statement for its 2004 Annual Meeting of Shareholders to be
filed with the U.S. Securities and Exchange Commission is incorporated herein by
reference thereto.

Item 12. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters

Information regarding security ownership of certain beneficial owners of the
Company's management on pages 6, 7 and 17 of the Registrant's Proxy Statement
for its 2004 Annual Meeting of Shareholders to be filed with the U.S. Securities
and Exchange Commission is incorporated herein by reference thereto.


                                       84


The following table provides information as of December 31, 2003, regarding the
Company's equity compensation plans.



                                Number of Securities to be        Weighted Average            Number of Securities
                                 Issued Upon Exercise of          Exercise Price of         Remaining Available for
                                   Oustanding Options,           Oustanding Options,         Future Issuance Under
      Plan Category                Warrants and Rights           Warrants and Rights       Equity Compensation Plans
- ---------------------------    -----------------------------    ----------------------    -----------------------------
                                                                                          
                                         432,276                        17.89                      1,198,077
Equity Compensation Plans
Approved by Shareholders

Equity Compensation Plans
not Approved by
Shareholders                                  --                           --                             --


Item 13. Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions on page 16
of the Registrant's Proxy Statement for its 2004 Annual Meeting of Shareholders
to be filed with the U.S. Securities and Exchange Commission is incorporated
herein by reference thereto.


                                       85


Item 14. Principal Accountant Fees and Services

Information regarding principal accountant fees and services and pre-approval
policies and procedures on pages 9 and 10 of the Registrant's Proxy Statement
for its 2004 Annual Meeting of Shareholders to be filed with the U.S. Securities
and Exchange Commission is incorporated herein by reference thereto.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

      (a)   List of Documents Filed as Part of this Report

            (1)   Financial Statements.

                  The financial statements listed below and the Independent
                  Auditors' Report are included in this Annual Report on Form
                  10-K:

                        Independent Auditors' Report

                        Consolidated Statements of Financial Condition as of
                        December 31, 2003 and 2002

                        Consolidated Statements of Income for the years ended
                        December 31, 2003, 2002 and 2001

                        Consolidated Statements of Changes in Shareholders'
                        Equity and Comprehensive Income for the years ended
                        December 31, 2003, 2002 and 2001

                        Consolidated Statements of Cash Flows the years ended
                        December 31, 2003, 2002 and 2001

                        Notes to Consolidated Financial Statements

            (2)   Schedules.

                  All schedules are omitted since the required information is
                  either not applicable, not required, or is contained in the
                  respective financial statements or in the notes thereto.


                                       86


            (3)   Exhibits.

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



  Exhibit No.                      Description                                      Location
- -------------     --------------------------------------------         -----------------------------------
                                                                 
      1.1         Term and Revolving Credit Loan Agreements            Filed Herewith
                  between the Company and M&T Bank, dated
                  December 15, 2003

      3.1         Amended and Restated Certificate of                  Contained in Exhibit 3.1 of the
                  Incorporation                                        Registrant's Registration Statement
                                                                       on Form S-1 dated June 25, 1999
                                                                       (File No. 333-76865)
                                                                       (The "S-1 Registration Statement")

      3.2         Amended and Restated Bylaws dated                    Contained in Exhibit 3.2 of the Form 10-K
                  May 23 ,2001                                         for the year ended December 31, 2001
                                                                       dated March 11, 2002

      3.3         Amended and Restated Bylaws dated                    Filed Herewith
                  February 18, 2004

     10.1         1999 Management Stock Incentive Plan                 Contained in Exhibit 10.1
                                                                       of the S-1 Registration Statement

     10.2         1999 Directors Stock Incentive Plan                  Contained in Exhibit 10.2
                                                                       of the S-1 Registration Statement

      11          Statement of Computation of Per Share Earnings       Contained in Note 14 of the
                                                                       Registrant's Consolidated
                                                                       Financial Statements Under
                                                                       Item 8 Filed Herewith

      21          Subsidiaries of Financial Institutions, Inc.         Filed Herewith

      23          Independent Accountants' Consent                     Filed Herewith

      24          Power of Attorney                                    Filed Herewith

     31.1         Certification of Annual Report on Form 10-K          Filed Herewith
                  pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002 -CEO

     31.2         Certification of Annual Report on Form 10-K          Filed Herewith
                  pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002 -CFO

     32.1         Certification of Annual Report on Form 10-K          Filed Herewith
                  pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002 -CEO

     32.2         Certification of Annual Report on Form 10-K          Filed Herewith
                  pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002 -CFO


(b)   Reports on Form 8-K

      The Company furnished a Current Report on Form 8-K dated October 16, 2003
      relating to a press release to announce the Company's third quarter 2003
      financial results.


                                       87


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                         FINANCIAL INSTITUTIONS, INC.

Date: March 12, 2004                  By: /s/ Peter G. Humphrey
                                         ------------------------------------

                                         Peter G. Humphrey
                                         President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
date indicated have signed this report below.



         Signatures                             Title                                     Date
         ----------                             -----                                     ----
                                                                              
/s/ Peter G. Humphrey                 President, Chief Executive Officer            March 12, 2004
- -------------------------------       (Principal Executive Officer),
Peter G. Humphrey                     Chairman of the Board and Director


/s/ Ronald A. Miller                  Senior Vice President and                     March 12, 2004
- -------------------------------       Chief Financial Officer
Ronald A. Miller                      (Principal Accounting Officer)


*                                     Director                                      March 12, 2004
- -------------------------------
John E. Benjamin

*                                     Director and Senior Vice President            March 12, 2004
- -------------------------------
Jon J. Cooper

*                                     Director                                      March 12, 2004
- -------------------------------
Barton P. Dambra

*                                     Director                                      March 12, 2004
- -------------------------------
Samuel M. Gullo

*                                     Director                                      March 12, 2004
- -------------------------------
Pamela Davis Heilman

                                      Director                                      March 12, 2004
- -------------------------------
Joseph F. Hurley

*                                     Director                                      March 12, 2004
- -------------------------------
Susan R. Holliday

*                                     Director                                      March 12, 2004
- -------------------------------
W.J. Humphrey, Jr.

*                                     Director                                      March 12, 2004
- -------------------------------
James E. Stitt

*                                     Director                                      March 12, 2004
- -------------------------------
John R. Tyler, Jr.

*                                     Director                                      March 12, 2004
- -------------------------------
James H. Wyckoff


*     The undersigned, acting pursuant to a power of attorney, has signed this
      Annual Report on Form 10-K for and on behalf of the persons indicated
      above as such persons' true and lawful attorney-in-fact and their names,
      places and stead, in the capacities and on the date indicated above.

/s/ Ronald A. Miller
- -------------------------------
        Ronald A. Miller
        Attorney-in-fact


                                       88

EX-1.1

EX-1.1
(Exhibit 1.1)     Term and Revolving Credit Loan Agreements between the Company
                  and M&T Bank, dated December 15, 2003

                           TERM LOAN CREDIT AGREEMENT

                          Dated as of December 15, 2003

                                     between

                 MANUFACTURERS AND TRADERS TRUST COMPANY ("M&T")

                                       and

                      FINANCIAL INSTITUTIONS, INC. ("FII")



                                TABLE OF CONTENTS

                                                                            Page

SECTION I DEFINITIONS .....................................................    1

      1.1    Definitions ..................................................    1
      1.2.   Accounting Terms .............................................    4

SECTION II DESCRIPTION OF CREDIT ..........................................    4

      2.1.   The Term Loan ................................................    4
      2.2.   Fees .........................................................    4
      2.3.   The Term Note ................................................    5
      2.4.   Duration of Interest Periods .................................    5
      2.5.   Interest Rates and Payments of Interest ......................    5
      2.6.   Changed Circumstances ........................................    5
      2.7.   Illegality ...................................................    6
      2.8.   Prepayments of the Term Loan .................................    6
      2.9.   Method of Payment ............................................    6
      2.10.  Overdue Payments .............................................    6
      2.11.  Computation of Interest and Fees .............................    6

SECTION III CONDITIONS OF LOANS ...........................................    7

      3.1.   Conditions Precedent to Term Loan ............................    7
      3.2.   Conditions Precedent to Conversion of Interest Rate ..........    7

SECTION IV REPRESENTATIONS AND WARRANTIES .................................    8

      4.1.   Organization and Qualification ...............................    8
      4.2.   Corporate Authority ..........................................    8
      4.3.   Valid Obligations ............................................    8
      4.4.   Consents or Approvals ........................................    9
      4.5.   Title to Properties; Absence of Encumbrances .................    9
      4.6.   Financial Statements .........................................    9
      4.7.   Changes ......................................................    9
      4.8.   Defaults .....................................................    9
      4.9.   Taxes ........................................................    9
      4.10.  Litigation ...................................................   10
      4.11.  Use of Proceeds ..............................................   10
      4.12.  Subsidiaries .................................................   10
      4.13.  Investment Company Act, etc...................................   10
      4.14.  Compliance with ERISA ........................................   10
      4.15.  Environmental Matters ........................................   10


                                       i


SECTION V AFFIRMATIVE COVENANTS ...........................................   11

      5.1.   Financial Statements and other Reporting Requirements ........   11
      5.2.   Conduct of Business ..........................................   13
      5.3.   Maintenance and Insurance ....................................   13
      5.4.   Taxes ........................................................   13
      5.5.   Inspection by the Bank .......................................   13
      5.6.   Maintenance of Books and Records .............................   14
      5.7.   Further Assurances ...........................................   14

SECTION VI NEGATIVE COVENANTS .............................................   14

      6.1.   Encumbrances .................................................   15
      6.2.   Merger; Consolidation; Sale or Lease of Assets ...............   16
      6.3.   Stock of Subsidiaries ........................................   16
      6.4.   Investments ..................................................   17
      6.5.   Acquisitions .................................................   17
      6.6.   ERISA ........................................................   17
      6.7.   Nonperforming Assets to Total Loans and Other Real Estate
               Ratio ......................................................   17
      6.8.   Capitalization of Borrower and Material Subsidiaries .........   17
      6.9.   Minimum Tangible Common Equity ...............................   17
      6.10.  Debt Service Coverage Ratio ..................................   17

SECTION VII DEFAULTS ......................................................   18

      7.1.   Events of Default ............................................   18
      7.2.   Remedies .....................................................   20

SECTION VIII MISCELLANEOUS ................................................   21

      8.1.   Notices ......................................................   21
      8.2.   Expenses .....................................................   22
      8.3.   Set-Off ......................................................   22
      8.4.   Term of Agreement ............................................   22
      8.5.   No Waivers ...................................................   22
      8.6.   Governing Law ................................................   23
      8.7.   Amendments ...................................................   23
      8.8.   Binding Effect of Agreement ..................................   23
      8.9.   Counterparts .................................................   23
      8.10.  Partial Invalidity ...........................................   23
      8.11.  Captions .....................................................   23
      8.12.  Waiver Of Jury Trial .........................................   23
      8.13   Entire Agreement .............................................   24


                                       ii


                                    EXHIBITS

EXHIBIT A - Form of Libor Term Note

EXHIBIT B - Encumbrances

EXHIBIT C - Litigation; Environmental Matters

EXHIBIT D - Material Subsidiaries

EXHIBIT E - Form of Report of Chief Financial Officer

EXHIBIT F - Form of Opinion of Counsel to the Borrower

EXHIBIT G - Form of Pledge Agreement


                                      iii


                           TERM LOAN CREDIT AGREEMENT

                          Dated as of December 15, 2003

      THIS TERM LOAN CREDIT AGREEMENT is made as of December 15, 2003, by and
between Financial Institutions, Inc. (the "Borrower"), a New York corporation
having its head office at 220 Liberty Street, Warsaw, New York 14569 and
Manufacturers and Traders Trust Company (the "Bank"), a New York banking
corporation having its principal banking office at One M&T Plaza, Buffalo, New
York 14203.

                                    SECTION I

                                   DEFINITIONS

      1.1 Definitions

      All capitalized terms used in this Agreement or in the Term Note or in any
certificate, report or other document made or delivered pursuant to this
Agreement (unless otherwise defined therein) shall have the meanings assigned to
them below:

      Account. See Section 2.1.

      Agreement. This Agreement, as the same may be supplemented or amended from
time to time.

      Bank. See Preamble.

      Base Rate. The Base Rate as defined in the Term Note.

      Borrower. See Preamble.

      Business Day. Shall have the meaning set forth in the Term Note.

      Code. The Internal Revenue Code of 1986 and the rules and regulations
thereunder, collectively, as the same may from time to time be supplemented or
amended.

      Consolidated, Consolidating or Consolidated Basis. The consolidation of
the accounts of Borrower and its Subsidiaries in accordance with generally
accepted accounting principles, consistently applied and maintained throughout
the relevant periods and from period to period, including principles of
consolidation.


                                       1


      Controlled Group. All trades or businesses (whether or not incorporated)
under common control that, together with the Borrower, are treated as a single
employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA.

      Controlled Subsidiary. Any corporation, association, joint stock company,
business trust or other similar organization of which more than 50% of the
ordinary voting power for the election of a majority of the members of the board
of directors or other governing body of such entity is held or controlled by the
Borrower; or any other such entity the management of which is directly or
indirectly controlled by the Borrower through the exercise of voting power or
otherwise; or any joint venture, whether incorporated or not, in which the
Borrower has an ownership interest of more than 50%.

      Default. An Event of Default or event or condition that, but for the
requirement that time elapse or notice be given, or both, would constitute an
Event of Default.

      Encumbrances. See Section 6.1.

      ERISA. The Employee Retirement Income Security Act of 1974 and the rules
and regulations thereunder, collectively, as the same may from time to time be
supplemented or amended.

      Environmental Laws. All applicable foreign, federal, state and local
environmental, health or safety statutes, laws, regulations, rules, ordinances,
policies and rules or common law whether now existing or hereafter enacted or
promulgated, relating to injury to, or the protection of, real or personal
property or human health or the environment.

      Event of Default. Any event described in Section 7.1.

      Federal Banking Agency - means any of the Federal Deposit Insurance
Corporation, Comptroller of Currency, Board of Governors of the Federal Reserve
System or Office of Thrift Supervision.

      FFIEC. The Federal Financial Institutions Examination Council, or such
other regulatory agency or authority having jurisdiction over financial
reporting by banks and bank holding companies.

      Fixed Rate. The Fixed Rate as defined in the Term Note.

      Floating Rate. Either the Base Rate or the LIBOR Rate.

      Hazardous Material. Any substance which is or becomes defined as a
"hazardous waste," "hazardous material," "hazardous substance," "controlled
industrial waste," "pollutant" or "contaminant" under any Environmental Law or
which is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic or otherwise hazardous and is or becomes


                                      -2-


regulated by any governmental authority or instrumentality or which contains
gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated
biphenyls ('PCB's").

      Interest Period. With respect to each period during which the Libor Rate
is in effect, the period defined in the Term Note.

      Investment. The purchase or acquisition of any share of capital stock,
partnership interest, evidence of indebtedness or other equity security of any
other person or entity, any loan, advance or extension of credit to, or
contribution to the capital of, any other person or entity, any real estate held
for sale or investment, any commodities futures contracts held other than in
connection with bona fide hedging transactions, any other investment in any
other person or entity, and the making of any commitment or acquisition of any
option to make an Investment.

      LIBOR Rate. The LIBOR Rate as defined in the Term Note.

      Material Subsidiary. Those Subsidiaries listed on Exhibit D hereto, and
any other Subsidiary of the Borrower that is a federally-insured depository
institution (and collectively, the "Material Subsidiaries").

      Maturity Date. December 14, 2008 or such earlier date on which the Loan is
terminated in accordance with the terms hereof.

      Nonperforming Assets. As defined in Section 6.7.

      Obligations. All obligations of the Borrower to the Bank hereunder of
every kind and description, direct or indirect, absolute or contingent, primary
or secondary, due or to become due, now existing or hereafter arising,
regardless of how they arise or by what agreement or instrument, if any, and
including obligations to perform acts and refrain from taking action as well as
obligations to pay money.

      PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding to
any or all of its actions under ERISA

      Permitted Encumbrances. See Section 6.1.

      Plan. An employee pension or other benefit plan that is subject to Title
IV of ERISA or subject to the minimum funding standards under Section 412 of the
Code and is either (i) maintained by the Borrower or any member of the
Controlled Group for employees of the Borrower or any member of the Controlled
Group or (ii) if such Plan is established, maintained pursuant to a collective
bargaining agreement or any other arrangement under which more than one employer
makes contributions and to which the Borrower or any member of the Controlled
Group is then making or accruing an obligation to make contributions or has
within the preceding five Plan years made contributions.


                                      -3-


      Pledge Agreement. A Pledge of Securities by the Borrower, substantially in
the form of Exhibit G hereto, evidencing the pledge of the stock held by the
Borrower of each of its Material Subsidiaries to the Bank as security for the
Term Loan (and collectively, the "Pledge Agreements").

      Subsidiary. Any corporation, association, joint stock company, business
trust or other similar organization of which 50% or more of the ordinary voting
power for the election of a majority of the members of the board of directors or
other governing body of such entity is held or controlled by the Borrower or a
Subsidiary of the Borrower; or any other such entity the management of which is
directly or indirectly controlled by the Borrower or a Subsidiary of the
Borrower through the exercise of voting power or otherwise; or any joint
venture, whether incorporated or not, in which the Borrower has an ownership
interest of 50% or more (and, collectively, the "Subsidiaries").

      Term Loan. The loan made to the Borrower by the Bank pursuant to Section
II of this Agreement.

      Term Note. A Libor Term Note of the Borrower, substantially in the form of
Exhibit A hereto, evidencing the obligation of the Borrower to the Bank to repay
the Term Loan.

      1.2. Accounting Terms. All terms of an accounting character shall have the
meanings assigned thereto by generally accepted accounting principles or
regulatory accounting principles, as applicable, as applied on a basis
consistent with the financial statements referred to in Section 4.6 of this
Agreement, but as herein specifically modified.

                                   SECTION II

                              DESCRIPTION OF CREDIT

      2.1. The Term Loan. (a) Subject to the terms and conditions hereof, and in
reliance upon the representations and warranties set forth in this Agreement,
the Bank shall loan to the Borrower Twenty-Five Million Dollars ($25,000,000.00)
on the date hereof (the "Term Loan"), and the Borrower shall borrow the Term
Loan from the Bank. The Term Loan shall be credited by the Bank to Account No.
8890769956 at the Bank, for the credit of the Borrower (the "Account").

      (b) Provided that no Default shall have occurred and be continuing, the
Borrower may make and effectuate the conversion elections as described in
Section 3 of the Term Note by giving the Bank prior notice of each such
conversion (which notice shall be effective upon receipt) in accordance with the
provisions.

      2.2. Fees. On or before the effective date of this Agreement, the Borrower
shall pay to the Bank a commitment fee of $135,000.


                                      -4-


      2.3. The Term Note. The Loan shall be evidenced by the Term Note, payable
to the order of the Bank and having a final maturity on the Maturity Date. The
Term Note shall be dated on or before the date of the Term Loan and shall have
the blanks therein appropriately completed. The Bank shall, and is hereby
irrevocably authorized by the Borrower to, enter on the schedule forming a part
of the Term Note or otherwise in its records appropriate notations evidencing
the date and the amount of the Term Loan, the applicable interest rate and the
date and amount of each payment of principal made by the Borrower with respect
thereto; and in the absence of manifest error, such notations shall constitute a
rebuttable presumption of the correctness thereof; provided that no failure on
the part of the Bank to make any such notation shall in any way affect the Term
Loan or the rights or obligations of the Bank or the Borrower with respect
thereto.

      2.4 Duration of Interest Periods. (a) The duration of each Interest Period
applicable to the LIBOR Rate shall be as specified in the Term Note.

      (b) Notwithstanding the foregoing, the Borrower may not select an Interest
Period that would end, but for the provisions of the definition of Interest
Period, after the Maturity Date.

      2.5 Interest Rates and Payments of Interest. Each period during which the
Term Loan is accruing interest at the Fixed Rate or a Floating Rate shall bear
interest on the outstanding principal amount thereof at a rate per annum as
provided in the Term Note.

      2.6. Changed Circumstances.

      (a) If the Bank shall determine that, due to either (i) the introduction
of any change (other than any change by way of imposition of or increase in
reserve requirements included in the calculation of the LIBOR Rate) in or in the
interpretation of any requirement of law or (ii) the compliance with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law), there shall be any increase in the
cost to the Bank of agreeing to make or making, funding or maintaining any LIBOR
Rate, then Borrower shall be liable for, and shall from time to time, upon
demand therefor by the Bank and pay to the Bank such additional amounts as are
sufficient to compensate the Bank for such increased costs.

      (b) If the Bank shall determine that for any reason adequate and
reasonable means do not exist for ascertaining the LIBOR Rate for any requested
Interest Period, the Bank will give notice of such determination to Borrower.
Thereafter, the Bank may not charge or maintain the LIBOR Rate, as the case may
be, hereunder until the Bank revokes such notice in writing. Upon receipt of
such notice, Borrower may revoke any request for a LIBOR Rate then submitted by
it. If Borrower does not revoke such notice the Bank may make, or continue the
Term Loan, as proposed by Borrower, but the Term Loan shall be made or continued
at the Base Rate instead of the LIBOR Rate, as the case may be, provided
Borrower may elect to convert the interest rate to the Fixed Rate in accordance
with Section 3 of the Term Note.

      2.7. Illegality. If the Bank shall determine that the introduction of any
law (statutory or common), treaty, rule, regulation, guideline or determination
of an arbitrator or of a


                                      -5-


governmental authority or in the interpretation or administration thereof, has
made it unlawful, or that any central bank or other governmental authority has
asserted that it is unlawful for the Bank to charge the LIBOR Rate, then, on
notice thereof by the Bank to Borrower, the Bank may suspend the charging of the
LIBOR Rate until the Bank shall have notified Borrower that the circumstances
giving rise to such determination shall no longer exist. If the Bank shall
determine that it is unlawful to maintain the LIBOR Rate, Borrower shall prepay
in full the Term Loan then outstanding, together with accrued interest, either
on the last date of the Interest Period thereof if the Bank may lawfully
continue to maintain the LIBOR Rate to such day, or immediately, if the Bank may
not lawfully continue to maintain the LIBOR Rate. If Borrower is required to
prepay the Term Loan as set forth in this subsection, then concurrently with
such prepayment, Borrower may re-borrow from the Bank, in the amount of such
repayment, the Term Loan at a annual rate of interest equal to the Base Rate,
provided Borrower may elect to convert the interest rate to the Fixed Rate in
accordance with Section 3 of the Term Note.

      2.8. Prepayments of the Term Loan.

            (a) The Term Loan, when subject to the Base Rate, may be prepaid at
any time, without premium or penalty, in minimum amounts of $100,000 but with
accrued interest to the date of payment.

            (b) The Term Loan, when subject to the LIBOR Rate or the Fixed Rate,
may be prepaid in a manner consistent with and subject to provisions contained
in the Term Note.

      2.9. Method of Payment. All payments and prepayments of principal and all
payments of interest, fees and other amounts payable hereunder shall be made by
the Borrower to the Bank at its head office in immediately available funds, on
or before 1:00 p.m. (Buffalo, New York time) on the due date thereof, free and
clear of, and without any deduction or withholding for, any taxes or other
payments. The Bank may, and the Borrower hereby authorizes the Bank to, debit
the amount of any payment not made by such time to the Account of the Borrower
with the Bank.

      2.10. Overdue Payments. Overdue principal (whether at maturity, by reason
of acceleration or otherwise) and, to the extent permitted by applicable law,
overdue interest and fees or any other amounts payable hereunder or under the
Term Note shall bear interest from and including the due date until paid as set
forth in the Term Note.

      2.11. Computation of Interest and Fees. Interest and all fees payable
hereunder shall be computed daily and paid for the actual number of days for
which due in a manner consistent with the terms and conditions of the Term Note.


                                      -6-


                                   SECTION III

                             CONDITIONS OF TERM LOAN

      3.1. Conditions Precedent to Term Loan. The obligation of the Bank to make
the Term Loan is subject to the condition precedent that the Bank shall have
received, in form and substance satisfactory to the Bank and its counsel, the
following:

      (a) this Agreement, the Term Note, the Pledge Agreements, and that certain
Second Amendment to Revolving Credit Agreement, of even date herewith, amending
that certain Revolving Credit Agreement, both by and between the Bank and the
Borrower (such Revolving Credit Agreement as so amended, the "Second
Amendment"), duly executed by the Borrower;

      (b) a certificate of the Secretary or an Assistant Secretary of the
Borrower with respect to resolutions of the Board of Directors of the Borrower
authorizing the execution and delivery of this Agreement, the Term Note, and the
Pledge Agreements, and identifying the officer(s) authorized to execute, deliver
and take all other actions required under this Agreement, and providing specimen
signatures of such officers;

      (c) the certificate of incorporation of the Borrower and all amendments
and supplements thereto, filed in the office of the Secretary of State of New
York, each certified by the Secretary or an Assistant Secretary of the Borrower
as being a true and correct copy thereof;

      (d) the Bylaws of the Borrower and all amendments and supplements thereto,
certified by the Secretary or an Assistant Secretary as being a true and correct
copy thereof as currently in effect;

      (e) a current Certificate of Good Standing showing Borrower to be a
corporation in good standing in the State of New York;

      (f) an opinion addressed to it from Counsel of the Borrower, substantially
in the form of Exhibit F hereto; and

      (g) such other documents, and completion of such other matters, as counsel
for the Bank may deem necessary or appropriate.

      3.2. Conditions Precedent to Conversion of Interest Rate. The obligation
of the Bank to continue the Term Loan, or continue or convert the Base Rate or
LIBOR Rate, or fix or continue the Fixed Rate, applicable thereto, as the case
may be, is further subject to the following conditions:

      (a) timely receipt by the Bank of the Borrower's request for a Notice of
Conversion as provided in the Term Note;

      (b) the representations and warranties contained in Section IV shall be
true and accurate in all material respects on and as of the date of any request
for a conversion election as described in Section 3 of the Term Note and on the
effective date of the making, continuation or conversion of the Term Loan or
interest rate applicable thereto, as though made at and as of each such date
(except to the extent that such representations and warranties expressly relate
to an


                                      -7-


earlier date), and no Default shall have occurred and be continuing, or would
result from such conversion;

      (c) the resolutions referred to in Section 3.1(b) shall remain in full
force and effect; and

      (d) no change shall have occurred in any law or regulation or
interpretation thereof that, in the opinion of counsel for the Bank, would make
it illegal or against the policy of any governmental agency or authority for the
Bank to make the Term Loan hereunder, provided that the Bank shall so advise the
Borrower in writing, setting forth the basis of such opinion (but only if the
Bank in its sole discretion believes that it may then disclose such
information). The making of the Term Loan or any conversion of the interest rate
applicable thereto shall be deemed to be a representation and warranty by the
Borrower on the date of the making, continuation or conversion of the Term Loan
as to the accuracy of the statements referred to in subsection (b) of this
Section 3.2.

                                   SECTION IV

                         REPRESENTATIONS AND WARRANTIES

In order to induce the Bank to enter into this Agreement and to make the Term
Loan hereunder, the Borrower represents and warrants to the Bank that:

      4.1. Organization and Qualification. Each of the Borrower and its
Subsidiaries (a) is (i) a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation; or (ii) a
trust duly created and properly organized under the laws of its jurisdiction of
formation, (b) has all requisite corporate or trust powers to own its property
and conduct its business as now conducted and as presently contemplated and (c)
is duly qualified and to the extent applicable in good standing as a foreign
corporation and is duly authorized to do business in each jurisdiction where the
nature of its properties or business requires such qualification.

      4.2. Corporate Authority. The execution, delivery and performance of this
Agreement, the Term Note, the Pledge Agreements and the transactions
contemplated hereby are within the corporate power and authority of the Borrower
and have been authorized by all necessary corporate proceedings, and do not and
will not (a) require any consent or approval of the stockholders of the
Borrower, (b) contravene any provision of the charter documents or by-laws of
the Borrower or any law, rule or regulation applicable to the Borrower, (c)
contravene any provision of, or constitute an event of default or event that,
but for the requirement that time elapse or notice be given, or both, would
constitute an event of default under, any other agreement, instrument, order or
undertaking binding on the Borrower, or (d) result in or require the imposition
of any Encumbrance on any of the properties, assets or rights of the Borrower,
other than in favor of the Bank.


                                      -8-


      4.3. Valid Obligations. This Agreement, the Term Note, the Pledge
Agreements and all of their respective terms and provisions are the legal, valid
and binding obligations of the Borrower, enforceable in accordance with their
respective terms except as limited by bankruptcy, insolvency, reorganization,
moratorium or other laws affecting the enforcement of creditors' rights
generally, and except as the remedy of specific performance or of injunctive
relief is subject to the discretion of the court before which any proceeding
therefor may be brought.

      4.4. Consents or Approvals. The execution, delivery and performance of
this Agreement, the Term Note, the Pledge Agreements and the transactions
contemplated herein do not require any approval or consent of, or filing or
registration with, any governmental or other agency or authority, or any other
party.

      4.5. Title to Properties; Absence of Encumbrances. Each of the Borrower
and its Subsidiaries has good and marketable title to all of the properties,
assets and rights of every kind and nature now purported to be owned by it,
including, without limitation, such properties, assets and rights as are
reflected in the financial statements referred to in Section 4.6 (except such
properties, assets or rights as have been disposed of in the ordinary course of
business since the date thereof), free from all Encumbrances except Permitted
Encumbrances and, except for such Permitted Encumbrances, free from all defects
of title that might materially adversely affect such properties, assets or
rights, taken as a whole.

      4.6. Financial Statements. The Borrower has furnished the Bank its
Consolidated balance sheet as of December 31, 2002 and its Consolidated
statements of income, changes in stockholders' equity and cash flow for the
fiscal year then ended, and related footnotes, audited and certified by KPMG,
LLP. All such financial statements were prepared in accordance with generally
accepted accounting principles or regulatory accounting principles, as
applicable, applied on a consistent basis throughout the periods specified and
present fairly the financial position of the Borrower and its Subsidiaries as of
such dates and the results of the operations of the Borrower and its
Subsidiaries for such periods. There are no liabilities, contingent or
otherwise, of the Borrower and its Subsidiaries not disclosed in such financial
statements that involve a material amount.

      4.7. Changes. Since the date of the most recent financial statements
referred to in Section 4.6, there have been no changes in the assets,
liabilities, financial condition, business or prospects of the Borrower or any
of its Subsidiaries other than changes in the ordinary course of business, the
effect of which has not, in the aggregate, been materially adverse, or as have
been publicly disclosed in the Borrower's filings with the Securities and
Exchange Commission ("SEC") .

      4.8. Defaults. As of the date of this Agreement, no Default exists.

      4.9. Taxes. The Borrower and each Subsidiary have filed all federal, state
and other tax returns required to be filed, within the applicable filing due
dates (including any extensions of such dates); and all taxes, assessments and
other governmental charges due from the Borrower


                                      -9-


and each Subsidiary have been fully paid. The Borrower and each Subsidiary have
established on their books reserves adequate for the payment of all federal,
state and other tax liabilities.

      4.10. Litigation. Except as set forth on Exhibit C hereto, there is no
litigation, arbitration, proceeding or investigation pending, or, to the
knowledge of the Borrower's or any Subsidiary's officers, threatened, against
the Borrower or any Subsidiary that, if adversely determined, could, singly or
in the aggregate, result in a judgment in excess of $5,000,000.00 not adequately
covered by insurance or as to which adequate reserves are not being maintained,
could result in a forfeiture of all or any substantial part of the property of
the Borrower or its Subsidiaries, or could otherwise have a material adverse
effect on the assets, business or prospects of the Borrower or any Material
Subsidiary.

      4.11. Use of Proceeds. No portion of the Term Loan is to be used for the
"purpose of purchasing or carrying" any "margin stock" as such terms are used in
Regulations U and X of the Board of Governors of the Federal Reserve System, 12
C.F.R. 221 and 224, as amended; and following the application of the proceeds of
the Term Loan, the value of all "margin stock" of the Borrower will not exceed
25% of the value of the total assets of the Borrower that are subject to the
restrictions set forth in Section 6.1 and 6.2.

      4.12. Subsidiaries. As of the date of this Agreement, all the Material
Subsidiaries of the Borrower are listed on Exhibit D hereto. As of the date of
this Agreement, the Borrower or a Subsidiary of the Borrower is the owner, free
and clear of all liens and encumbrances, other than in favor of the Bank, of the
specified percentage of the issued and outstanding voting securities of each
Subsidiary as listed on Exhibit D hereto. All such voting securities have been
validly issued and are fully paid and nonassessable, and no rights to subscribe
to any additional voting securities have been granted, and no options, warrants
or similar rights are outstanding, except as listed on Exhibit D hereto.

      4.13. Investment Company Act, etc. Neither the Borrower nor any of its
Subsidiaries is subject to regulation under the Investment Company Act of 1940,
as amended, the Public Utility Holding Company Act of 1935, as amended, or any
other statute or regulation that limits its ability to incur indebtedness for
money borrowed.

      4.14. Compliance with ERISA. The Borrower and each member of the
Controlled Group have fulfilled their obligations under the minimum funding
standards of ERISA and the Code with respect to each Plan and are in compliance
in all material respects with the applicable provisions of ERISA and the Code,
and have not incurred any liability to the PBGC or a Plan under Title N of
ERISA; and no "prohibited transaction" or "reportable event" (as such terms are
defined in ERISA) has occurred with respect to any Plan which could have a
material adverse effect on the assets, business or prospects of the Borrower or
any Material Subsidiary.

      4.15. Environmental Matters. The Borrower and each of its Subsidiaries are
in compliance, in all material respects, with all Environmental Laws. No demand,
claim, notice, suit, suit in equity, action, administrative action,
investigation or inquiry arising under, relating to or in connection with any
Environmental Laws is pending or threatened against the Borrower or any of its
Subsidiaries, any real property in which the Borrower or


                                      -10-


any such Subsidiary holds or, to the Borrower's knowledge, has held, an interest
or any past or present operation of the Borrower or any such Subsidiary, other
than any such proceedings that will not, individually or in the aggregate, have
an adverse effect of more than $5,000,000.00, not covered by insurance, on the
financial condition, business, operations or prospects of the Borrower or the
Borrower and its Subsidiaries on a Consolidated Basis. Neither the Borrower nor
any of its Subsidiaries (i) is the subject of any federal or state investigation
evaluating whether any remedial action is needed to respond to a release of any
Hazardous Materials or other wastes into the environment, (ii) has received any
notice of any Hazardous Materials or other wastes in or upon any of its
properties in violation of any Environmental Laws, or (iii) knows of any basis
for any such investigation, notice or violation, except as disclosed to the Bank
on Exhibit C and as to such matters disclosed on such Exhibit, none will,
individually or in the aggregate, have an adverse effect of more than
$5,000,000.00, not covered by insurance, on the financial condition, business,
operations or prospects of the Borrower or the Borrower and its Subsidiaries on
a Consolidated Basis.

                                    SECTION V

                              AFFIRMATIVE COVENANTS

So long as the Bank has any commitment to lend hereunder or any Loan or other
Obligation hereunder remains outstanding, the Borrower covenants as follows:

      5.1. Financial Statements and other Reporting Requirements. The Borrower
shall furnish to the Bank:

      (a) as soon as available to the Borrower, but in any event within 100 days
after the end of each of its fiscal years, a Consolidated balance sheet as of
the end of such year, and the related Consolidated and Consolidating statements
of income, changes in stockholders' equity and cash flow for such year, audited
and certified by KMPG, LLP, (or other independent certified public accountants
of national standing selected by the Borrower);

      (b) as soon as available to the Borrower, but in any event within 55 days
after the end of each of its fiscal quarters, (i) the Consolidated balance sheet
as of the end of such quarter, and a related Consolidated statements of income
and cash flow for the period then ended, certified by the chief financial
officer of the Borrower but subject, however, to normal, recurring year-end
adjustments that shall not in the aggregate be material in amount, (ii) Forms
FRY-9, FRY-11 and a Call Report (as applicable) for the Borrower (on a parent
only basis) and for each of the Borrower's banking subsidiaries for the period
then ended, certified by the cashier or other authorized officer of each such
Subsidiary, in the forms required to be filed by the Borrower and each such
Subsidiary by the FFIEC; and (iii) SEC Forms 10K and 10Q, as applicable for the
Borrower on a Consolidated Basis.

      (c) concurrently with the delivery of each financial statement pursuant to
subsections (a) and (b) of this Section 5.1, a report in substantially the form
of Exhibit E, hereto signed on behalf of the Borrower by its chief financial
officer;

                                      -11-


      (d) promptly after the same are available, copies of all proxy statements,
financial statements and reports as the Borrower shall send to its stockholders
or as the Borrower may file with the Securities and Exchange Commission;

      (e) if and when the Borrower gives or is required to give notice to the
PBGC of any "Reportable Event" (as defined in Section 4043 of ERISA) with
respect to any Plan that might constitute grounds for a termination of such Plan
under Title IV of ERISA, or knows that any member of the Controlled Group or the
plan administrator of any Plan has given or is required to give notice of any
such Reportable Event, a copy of the notice of such Reportable Event given or
required to be given to the PBGC;

      (f) within five (5) Business Days of the Chief Executive Officer or the
Chief Financial Officer of the Borrower becoming aware of the existence of any
condition or event that constitutes a Default, written notice thereof specifying
the nature and duration thereof and the action being or proposed to be taken
with respect thereto;

      (g) promptly upon becoming aware of any litigation or of any investigative
proceedings by a governmental agency or authority commenced or threatened
against the Borrower or any of its Subsidiaries, the outcome of which, singly or
in the aggregate, could have an adverse effect of more than $5,000,000.00, not
covered by insurance, on the assets, business or prospects of the Borrower or
the Borrower and its Subsidiaries on a Consolidated Basis, written notice
thereof and the action being or proposed to be taken with respect thereto;

      (h) promptly upon becoming aware of any investigative proceedings by a
governmental agency or authority commenced or threatened against the Borrower or
any of its Subsidiaries regarding any violation of Environmental Laws or any
spill, release, discharge or disposal of any Hazardous Material, the outcome of
which, singly or in the aggregate, could have an adverse effect of more than
$5,000,000.00, not covered by insurance, on the assets, business or prospects of
the Borrower or the Borrower and its Subsidiaries on a Consolidated Basis,
written notice thereof and the action being or proposed to be taken with respect
thereto; and

      (i) from time to time, such other financial data and information about the
Borrower or its Subsidiaries as the Bank may reasonably request. Notwithstanding
the preceding, the Bank and the Borrower acknowledge that they are each engaged
in the business of banking and certain incidental activities, and that they
compete from time to time for, among other things, consumer and commercial loan
customers and depositors. As such, the Borrower and its Subsidiaries shall not
be obligated to furnish to the Bank any information that constitutes
confidential or proprietary information, a trade secret or any other form of
material non-public information, the absence of which would not have a material
adverse effect upon the Bank's ability to monitor or collect the indebtedness
evidenced by the Term Note ("Confidential Information"). In the event that the
Borrower or a Subsidiary does supply Confidential Information to the Bank, the
Bank shall maintain the Confidential Information in strict confidence and shall
only disclose Confidential Information to Permitted Transferees to the extent
permitted by Section 5.5 hereof. Moreover, the Bank hereby confirms that it is
aware, and that any Permitted Transferees of such


                                      -12-


information shall be advised, that the United States securities laws prohibit
any person who has material non-public information about a company from
purchasing or selling securities of such company or tipping or advising others
regarding trading in such securities. Accordingly, the Bank agrees that it shall
not use, or knowingly cause or permit any Permitted Transferee or third party to
use, any Confidential Information in contravention of such securities laws or
any similar rules or regulations.

      5.2. Conduct of Business. The Borrower shall and shall cause its Material
Subsidiaries to:

      (a) duly observe and comply in all material respects with all applicable
laws and valid requirements of any governmental authorities relative to its
corporate existence, rights and franchises, to the conduct of its business and
to its property and assets (including without limitation all Environmental Laws
and ERISA), and shall maintain and keep in full force and effect all licenses
and permits necessary in any material respect to the proper conduct of its
business; and

      (b) maintain its corporate or organizational existence, provided that
Borrower may, subject to the provisions of Sections 6.2 through 6.5, reorganize
its Subsidiaries provided that Borrower's ownership interest in its subsidiaries
or its subsidiaries' assets is not diluted; and

      (c) engage only in business activities permitted for bank holding
companies and their subsidiaries under applicable law.

      5.3. Maintenance and Insurance. Each of the Borrower and its Material
Subsidiaries shall maintain its properties in good repair, working order and
condition as required for the normal conduct of its business, and shall at all
times maintain liability and casualty insurance with financially sound and
reputable insurers in such amounts as the officers of the Borrower in the
exercise of their reasonable judgment deem to be adequate.

      5.4. Taxes. The Borrower shall pay or cause to be paid all taxes,
assessments or governmental charges on or against it or any of its Subsidiaries
or its or their properties on or prior to the time when late charges or other
penalties accrue with respect thereto; provided that this covenant shall not
apply to any tax, assessment or charge that is being contested in good faith by
appropriate proceedings and with respect to which adequate reserves have been
established and are being maintained in accordance with generally accepted
accounting principles.

      5.5. Inspection by the Bank. The Borrower shall permit the Bank or its
designees, at reasonable times and upon reasonable notice (or if an Event of
Default shall have occurred and is continuing, at any time and without prior
notice), to (i) visit and inspect the properties of the Borrower and its
Subsidiaries, (ii) examine and make copies of and take abstracts from the
financial records of the Borrower and its Subsidiaries, and (iii) discuss the
affairs, finances and accounts of the Borrower and its Subsidiaries, as the same
relate to Borrower's ability to repay the Term Loan, with their appropriate
officers, employees and accountants. Notwithstanding the


                                      -13-


preceding, the Borrower and its Subsidiaries shall not be obligated to furnish
to the Bank any information that is Confidential Information (as defined in
Section 5.1(i)). In handling such Confidential Information that is disclosed and
identified as such by Borrower or any Subsidiary, the Bank shall exercise the
same degree of care that it exercises with respect to its own proprietary
information of the same types to maintain the confidentiality of any non-public
information thereby received or received pursuant to this Agreement except that
disclosure of such information may be made (i) to the subsidiaries or affiliates
of the Bank in connection with their present or prospective business relations
with the Borrower, subject to the same degree of care and confidentiality
required of the Bank by this Section 5.5, (ii) to prospective permitted
transferees or purchasers of an interest in the Term Loan, (iii) as required by
law, regulation, rule or order, subpoena, judicial order or similar order and
(iv) as may be required in connection with the examination, audit or similar
investigation of the Bank (any person or entity receiving such information
pursuant to the foregoing being referred to herein as a ("Permitted
Transferee"). Moreover, the Bank hereby confirms that it is aware, and that any
Permitted Transferees of such information shall be advised, that the United
States securities laws prohibit any person who has material non-public
information about a company from purchasing or selling securities of such
company or tipping or advising others regarding trading in such securities.
Accordingly, the Bank agrees that it shall not use, or knowingly cause or permit
any Permitted Transferee or third party to use, any Confidential Information in
contravention of such securities laws or any similar rules or regulations.

      5.6. Maintenance of Books and Records. Each of the Borrower and its
Subsidiaries shall keep adequate books and records of account, in which true and
complete entries will be made reflecting all of its business and financial
transactions, and such entries will be made in accordance with generally
accepted accounting principles or regulatory accounting principles, as
applicable, consistently applied and applicable law.

      5.7. Further Assurances. At any time and from time to time the Borrower
shall, and shall cause each of its Subsidiaries to, execute and deliver such
further instruments and take such further action as may reasonably be requested
by the Bank to effect the purposes of this Agreement, the Term Note and the
Pledge Agreements.

                                   SECTION VI

                               NEGATIVE COVENANTS

So long as the Bank has any commitment to lend hereunder or the Term Loan or
other Obligation hereunder remains outstanding, the Borrower covenants as
follows:

      6.1. Encumbrances. Neither the Borrower nor any of its Material
Subsidiaries shall create, incur, assume or suffer to exist any mortgage,
pledge, security interest, lien or other charge or encumbrance, including the
lien or retained security title of a conditional vendor upon or with respect to
any of its property or assets ("Encumbrances"), or assign or otherwise convey
any right to receive income, including the sale or discount of accounts
receivable with or without recourse, except the following ("Permitted
Encumbrances"):


                                      -14-


      (a) Encumbrances in favor of the Bank or any of its affiliates;

      (b) Encumbrances existing as of the date of this Agreement, not otherwise
described in Section 6.1, and disclosed in Exhibit B hereto;

      (c) liens for taxes, fees, assessments and other governmental charges to
the extent that payment of the same may be postponed or is not required in
accordance with the provisions of Section 5.4;

      (d) landlords' and lessors' liens in respect of rent not in default or
liens in respect of pledges or deposits under workmen's compensation,
unemployment insurance, social security laws, or similar legislation (other than
ERISA) or in connection with appeal and similar bonds incidental to litigation;
mechanics', laborers' and materialmen's and similar liens, if the obligations
secured by such liens are not then delinquent; liens securing the performance of
bids, tenders, contracts (other than for the payment of money); and statutory
obligations incidental to the conduct of its business and that do not in the
aggregate materially detract from the value of its property or materially impair
the use thereof in the operation of its business;

      (e) judgment and other similar liens, singly or in the aggregate in excess
of $5,000,000.00, arising in connection with court proceedings, provided that
the execution or other enforcement of such judgment or similar lien has been in
existence for less than 30 days or is effectively stayed and the claims secured
thereby are being actively contested in good faith and by appropriate
proceedings;

      (f) rights of lessors under capitalized leases;

      (g) Encumbrances securing indebtedness for borrowed money incurred in
connection with the purchase of real or personal property used in its business,
provided that any such Encumbrances shall not extend to assets of the Borrower
or any such Subsidiary not financed by such indebtedness;

      (h) easements, rights of way, restrictions and other similar charges or
Encumbrances relating to real or personal property and not interfering in a
material way with the ordinary conduct of its business;

      (i) other than as permitted in accordance with Section 6.1(j),
Encumbrances on its assets created in connection with the refinancing of
indebtedness secured by Permitted Encumbrances on such assets, provided that the
amount of indebtedness secured by any such Encumbrance shall not be increased as
a result of such refinancing and no such Encumbrance shall extend to property
and assets of the Borrower or any such Subsidiary not encumbered prior to any
such refinancing;

      (j) Encumbrances incurred in connection with repurchase agreements; liens
incurred in connection with asset securitizations; Encumbrances incurred in
connection with the holding


                                      -15-


of municipal deposits subject to the New York State Comptroller's guidelines for
collateralization; Encumbrances granted to a Federal Reserve Bank, a Federal
Home Loan Bank or the Federal Agricultural Mortgage Corporation to secure
advances or other transactions incidental to the conduct of the banking business
of the Borrower or any such Subsidiary, including loans to meet liquidity
requirements;

      (k) Encumbrances securing obligations of a Subsidiary to the Borrower or
another Subsidiary; and

      (l) other Encumbrances which are incidental to the conduct of its business
on an ongoing basis and that do not in the aggregate have a material adverse
effect on its assets, business or prospects.

      6.2. Merger; Consolidation; Sale or Lease of Assets. The Borrower shall
not, in a single transaction or a series of transactions, sell or otherwise
dispose of all or any substantial part of its shares of the capital stock of any
of Borrower's Material Subsidiaries; neither the Borrower nor any of its
Material Subsidiaries shall sell, lease or otherwise dispose of all or any
portion of any other assets, , in a single transaction or a series of
transactions, in excess of $5,000,000.00, provided that with respect to a
Material Subsidiary such a sale will be permitted if it is in the ordinary
course of business and does not represent more than 10% of such Material
Subsidiary's assets; and neither the Borrower nor any of its Material
Subsidiaries shall liquidate, merge or consolidate with any other person or
entity; provided that the Borrower may merge or consolidate into or with another
person or entity if no Default has occurred and is continuing or would result
from such merger or consolidation and if the Borrower is the surviving company;
and provided, further, that any Subsidiary of the Borrower may merge or
consolidate into or with (i) the Borrower if the Borrower is the surviving
company, or (ii) any other Subsidiary of the Borrower; or (iii) any other person
if the Subsidiary is the surviving company in, and remains a Controlled
Subsidiary following, such merger or consolidation; and provided further, that
any Subsidiary that is not a Material Subsidiary may be liquidated, merged or
consolidated into or with another person or entity if the assets of such
Subsidiary do not represent more than 10% of the consolidated total assets of
the Borrower.

      6.3. Stock of Subsidiaries. Neither the Borrower nor any of its Material
Subsidiaries shall sell, transfer or otherwise dispose of any of the capital
stock or other equity securities of a Material Subsidiary which contain general
voting powers, except (i) to the Borrower or any of its Material Subsidiaries,
(ii) in connection with a transaction permitted by Section 6.2; (iii) to an
officer, employee or director of the Borrower or any Material Subsidiary; or
(iv) to other persons or entities, provided that such dispositions do not,
singly or in the aggregate, constitute more than 10% of the total number of
shares of capital stock or other equity securities outstanding of such
Subsidiary which contain general voting powers.

      6.4. Investments. Neither the Borrower nor any of its Material
Subsidiaries shall make or maintain any Investments other than (i) investments
permitted by applicable banking laws, regulations or regulatory pronouncements;
(ii) existing Investments in Subsidiaries and


                                      -16-


new Investments in such Subsidiaries in the ordinary course of its business; and
(iii) acquisitions of new Subsidiaries permitted by Section 6.5.

      6.5. Acquisitions. Neither the Borrower nor any of its Material
Subsidiaries shall acquire, in a single transaction or a series of transactions,
all or a majority of the voting shares or all or a substantial portion of the
assets of any person or entity unless (i) the Consolidated total assets of the
Borrower (as would be reported in the Borrower's financial statements prepared
in accordance with FFIEC requirements) before giving effect to such acquisition
would constitute at least 70% of the Consolidated total assets of the Borrower
after giving effect to such acquisition or (ii) the Consolidated total assets of
the Borrower before giving effect to such acquisition would constitute less than
70% but at least 50% of the Consolidated total assets of the Borrower and the
Borrower is able to demonstrate to the Bank's reasonable satisfaction that the
Consolidated total assets of the Borrower before giving effect to such
acquisition would constitute at least 70% of the Consolidated total assets of
the Borrower at any time within six months after giving effect to such
acquisition.

      6.6. ERISA. Neither the Borrower nor any member of the Controlled Group
shall permit any Plan maintained by it to (i) engage in any non-exempt
"prohibited transaction" (as defined in Section 4975 of the Code in excess,
singly or in the aggregate, of $5,000,000.00, (ii) incur any "accumulated
funding deficiency" (as defined in Section 302 of ERISA) whether or not waived,
or (iii) terminate any Plan in a manner that could result in the imposition of a
lien or encumbrance on the assets of the Borrower or any of its Subsidiaries
pursuant to Section 4068 of ERISA

      6.7. Nonperforming Assets to Total Loans and Other Real Estate Ratio. The
Borrower shall not permit its Nonperforming Assets to Total Loans and Other Real
Estate Ratio to be less than 6.00%. As used in this Section 6.7, "Nonperforming
Assets to Total Loans and Other Real Estate Ratio" means the ratio of (A)
"Nonperforming Assets" to (B) the sum of (i) "Total Loans", plus (ii) "Other
Real Estate"; "Nonperforming Assets" means the Consolidated loans, leases and
other assets of the Borrower that are not accruing interest or are 90 days or
more past due in the payment of principal or interest, plus Consolidated "other
real estate owned" by the Borrower ("Other Real Estate"); and "Total Loans"
means the Consolidated principal of loans made by Borrower to unrelated third
parties; in each case as shown on the Consolidated financial statements of
Borrower, prepared in accordance with FFIEC requirements.

      6.8. Capitalization of Borrower and Material Subsidiaries. The Borrower
and its Material Subsidiaries, including any other federally-insured depository
institution that may be acquired after the date hereof and prior to the Maturity
Date, will maintain total "Risk-Based Capital Ratios", "Tier I Risk-Based
Capital Ratios", and "Leverage Ratios, as defined in applicable FDIC
regulations, as follows:

                  Leverage Ratio:                    not less than  5.00%;
                  Tier I Risk-Based Capital Ratio:   not less than  8.75%; and
                  total Risk-Based Capital Ratio:    not less than 10.00%.


                                      -17-


      6.9. Minimum Tangible Common Equity. The Borrower shall not permit its
Tangible Common Equity to be less than $100,000,000.00. As used in this Section
6.9, "Tangible Common Equity" means the difference between (A) the Consolidated
stockholder equity in the Borrower, including, but not limited to, accumulated
other comprehensive income accounted for under FASB 115 as gains or losses on
securities held for sale, minus (B) the sum of (i) the Consolidated preferred
stockholder equity in the Borrower, and (ii) the Consolidated goodwill and
intangibles of the Borrower; in each case as shown on the Consolidated financial
statements of Borrower, prepared in accordance with FFIEC requirements

      6.10. Debt Service Coverage Ratio. The Borrower shall not permit, on a
"Rolling Four-Quarter Basis", the ratio of (A) the Consolidated net income of
the Borrower, during any such fiscal period, as shown on the Consolidated
financial statements of Borrower, prepared in accordance with FFIEC
requirements, to (B) the total of (i) the installments of all principal payable
by the Borrower in connection with any indebtedness or other obligation required
to be paid during the next four fiscal quarters and arising from the borrowing
of any money or the deferral of the purchase price of any asset and (ii) the
total interest expense of the Borrower thereon during such next four fiscal
quarters, calculated on the basis of the interest rate(s) applicable to such
principal obligations as of the end of the last fiscal quarter included in the
Rolling Four-Quarter Basis, in each case as shown on the financial statements of
Borrower, prepared in accordance with FFIEC requirements, to be less than 1.25
to 1.00. As used in this Section 6.10, "Rolling Four-Quarter Basis" means a
basis using the most recently completed four (4) full consecutive fiscal
quarters of Borrower which precede and include the date on which the Debt
Service Coverage Ratio is calculated.

                                   SECTION VII

                                    DEFAULTS

      7.1. Events of Default. There shall be an Event of Default hereunder if
any of the following events occurs:

      (a) the Borrower shall fail to pay within five days after the same becomes
due and payable (i) any amount of principal of the Term Loan, or (ii) any amount
of interest thereon or any fees or expenses payable hereunder or under the Term
Note; or

      (b) The Borrower shall fail to perform any term, covenant or agreement
contained in Sections 5.1(f), 5.5, 6.2, 6.3, 6.5, 6.8, 6.9 or 6.10; or

      (c) the Borrower shall fail to perform any covenant contained in Sections
5.1(e), 5.1(g), 5.1(h), 5.2, 6.1, 6.4, 6.6 or 6.7 and such failure shall
continue for 30 days; or

      (d) the Borrower shall fail to perform any term, covenant or agreement
(other than in respect of subsections 7.1(a) through (c) hereof contained in
this Agreement or the Term Note


                                      -18-


and such default shall continue for 60 days after notice thereof has been sent
to the Borrower by the Bank; or

      (e) any representation or warranty of the Borrower made in this Agreement,
in the Term Note, in the Pledge Agreements or any other documents or agreements
executed in connection with the transactions contemplated by this Agreement or
in any certificate delivered hereunder shall prove to have been false in any
material respect upon the date when made or deemed to have been made; or

      (f) the Borrower or any of its Material Subsidiaries shall fail to pay at
maturity (or upon demand, if a demand facility), or within any applicable period
of grace, any indebtedness, to a party other than the Bank, in excess, singly or
in the aggregate, of $5,000,000.00 for borrowed money or for the use of real or
personal property, or fail to observe or perform any term, covenant or agreement
evidencing or securing such indebtedness, or relating to such use of real or
personal property, the result of which failure is to permit the holder or
holders of such obligations to cause such indebtedness to become due prior to
its stated maturity upon delivery of required notice, if any; or

      (g) the Borrower or any of its Material Subsidiaries shall (i) apply for
or consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, liquidator or similar official of itself or of all or a
substantial part of its property, (ii) be generally not paying its debts as such
debts become due, (iii) make a general assignment for the benefit of its
creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as
now or hereafter in effect), (v) take any action or commence any case or
proceeding under any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts, or any other law providing for
the relief of debtors, (vi) fail to contest in a timely or appropriate manner,
or acquiesce in writing to, any petition filed against it in an involuntary case
under the Federal Bankruptcy Code or other law, (vii) take any action under the
laws of its jurisdiction of incorporation or organization similar to any of the
foregoing, or (viii) take any corporate action for the purpose of effecting any
of the foregoing; or

      (h) a proceeding or case shall be commenced, without the application or
consent of the Borrower or any of its Material Subsidiaries in any court of
competent jurisdiction, seeking (i) the liquidation, reorganization,
dissolution, winding up, or composition or readjustment of its debts, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of it or
of all or any substantial part of its assets, or (iii) similar relief in respect
of it, under any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts or any other law providing for
the relief of debtors, and such proceeding or case shall continue undismissed,
or unstayed and in effect, for a period of 90 days; or an order for relief shall
be entered in an involuntary case under the Federal Bankruptcy Code, against the
Borrower or such Subsidiary; or action under the laws of the jurisdiction of
incorporation or organization of the Borrower or any of its Material
Subsidiaries similar to any of the foregoing shall be taken with respect to the
Borrower or such Subsidiary and shall continue unstayed and in effect for any
period of 90 days; or


                                      -19-


      (i) a judgment or order for the payment of money shall be entered against
the Borrower or any of its Subsidiaries by any court, or a warrant of attachment
or execution or similar process shall be issued or levied against property of
the Borrower or such Subsidiary, that, singly or in the aggregate, exceeds
$5,000,000.00 in value and such judgment, order, warrant or process shall
continue undischarged or unstayed for 30 days; or

      (j) the Borrower or any member of the Controlled Group shall fail to pay
when due an amount, singly or in the aggregate, in excess of $5,000,000.00 that
it shall have become liable to pay to the PBGC or to a Plan under Title IV of
ERISA; or notice of intent to terminate a Plan or Plans shall be filed under
Title IV of ERISA by the Borrower, any member of the Controlled Group, any plan
administrator or any combination of the foregoing; or the PBGC shall institute
proceedings under Title IV of ERISA to terminate or to cause a trustee to be
appointed to administer any such Plan or Plans or a proceeding shall be
instituted by a fiduciary of any such Plan or Plans against the Borrower and
such proceedings shall not have been dismissed within 45 days thereafter; or a
condition shall exist by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any such Plan or Plans must be terminated; or

      (k) any banking Subsidiary shall cease to be insured under the Federal
Deposit Insurance Act and any rules and regulations issued thereunder, as from
time to time supplemented or amended; or a cease and desist order shall be
issued against the Borrower or any banking Subsidiary pursuant to 12 U.S.C.
1818(b) or (c) or any similar applicable provision of state law and any rules
and regulations issued thereunder, as from time to time supplemented or amended;
or

      (l) the acquisition by any person or entity, or two or more persons or
entities acting in concert, of beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934) of 25% or more of the outstanding shares of voting stock of the
Borrower; provided that this provision shall not apply to acquisitions of
beneficial ownership by any director, officer, employee or employee benefit plan
of the Borrower or any Subsidiary, nor to any of the foregoing who act in
concert with any other person or entity, or

      (m) there occurs an Event of Default as defined in the Term Note, the
Pledge Agreements or the Second Amendment, or with respect to the promissory
note issued pursuant to the Second Amendment.

      7.2. Remedies. Upon the occurrence of an Event of Default described in
subsections 7.1(g) and (h), immediately and automatically, and upon the
occurrence of any other Event of Default, at any time thereafter while such
Event of Default is continuing, at the Bank's option and upon the Bank's written
declaration:

      (a) the unpaid principal amount of the Term Loan together with accrued
interest and all other Obligations hereunder shall become immediately due and
payable without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived; and


                                      -20-


      (b) the Bank may exercise any and all rights it has under this Agreement,
the Term Note , the Pledge Agreements, the Second Amendment or any other
documents or agreements executed in connection herewith, or at law or in equity,
and proceed to protect and enforce the Bank's rights by any action at law, in
equity or other appropriate proceeding.

                                  SECTION VIII

                                  MISCELLANEOUS

      8.1. Notices. Unless otherwise specified herein, all notices hereunder to
any party hereto shall be in writing and shall be deemed to have been given when
given in a manner consistent with Section 9 of the Term Note, in each case
addressed to such party at its address indicated below:

         If to the Borrower, at

                  FINANCIAL INSTITUTIONS, INC.
                  220 Liberty Street
                  Warsaw, New York 14569
                  Attention:........Ronald A. Miller, Senior Vice President and
                                    Chief Financial Officer
                  Telephone:........(716) 786-1102
                  Facsimile:........(716) 786-7108

         If to the Bank, at

                  MANUFACTURERS AND TRADERS TRUST COMPANY
                  Financial Institutions Division
                  12th Floor, One Fountain Plaza
                  Buffalo, New York 14203
                  Attention:........Richard R. Stiller, Vice President
                  Telephone:........716-848-7332
                  Facsimile:........716-848-7318

or at any other address specified by such party in writing.

      8.2. Expenses. The Borrower will pay on demand the reasonably allocated
fees and costs of the Bank's outside legal counsel and all disbursements of said
legal counsel in connection with the preparation of this Agreement, the Term
Note, the Pledge Agreements or any other documents or agreements executed in
connection therewith. The Borrower will also pay on demand the reasonable
expenses of the Bank in connection with the waiver or amendment of this
Agreement, the Term Note, the Pledge Agreements or any other documents or
agreements executed in connection therewith, or the administration, default or
collection of the


                                      -21-


Term Loan or other Obligations or in connection with the Bank's exercise,
preservation or enforcement of any of its rights, remedies or options
thereunder, including, without limitation, fees and expenses of outside legal
counsel, accounting, consulting, brokerage or other similar professional fees or
expenses, and any fees or expenses associated with any travel or other costs
relating to any appraisals or examinations conducted in connection with the
Obligations.

      8.3. Set-Off..(a) Regardless of the adequacy of any collateral or other
means of obtaining repayment of the Obligations, any deposits, balances or other
sums credited by or due from the head office of the Bank or any of its branch
offices to the Borrower may, to the extent permitted by law, at any time and
from time to time after the occurrence of an Event of Default hereunder, without
notice to the Borrower or compliance with any other condition precedent now or
hereafter imposed by statute, rule of law, or otherwise (all of which are hereby
expressly waived) be set off, appropriated, and applied by the Bank against any
and all Obligations of the Borrower to the Bank in such manner as the head
office of the Bank or any of its branch offices in their sole discretion may
determine, and the Borrower hereby grants the bank a continuing security
interest in such deposits, balances or other sums for the payment and
performance of all such Obligations.

      (b) In the event that the Bank is placed in receivership or enters a
similar proceeding, the Borrower may, to the extent permitted by law, make any
payment due to the Bank hereunder to the extent of finally collected
unrestricted deposits of the Borrower held by the Bank, by giving notice to the
Bank to apply such deposits to such Obligations. If the amount of such deposits
is insufficient to pay such Obligations in full, the Borrower shall pay the
balance of such deficiency in accordance with this Agreement.

      8.4. Term of Agreement. This Agreement shall continue in full force and
effect so long as the Term Loan or any Obligation hereunder shall be
outstanding.

      8.5. No Waivers. No failure or delay by the Bank in exercising any right,
power or privilege hereunder or under the Note or under any other documents or
agreements executed in connection herewith shall operate as a waiver thereof;
nor shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies provided herein, in the Term Note, in the Pledge Agreements
and such other documents and agreements are cumulative and not exclusive of any
rights or remedies otherwise provided by agreement or law.

      8.6. Governing Law. This Agreement, the Term Note and the Pledge
Agreements shall be deemed to be contracts made under seal and shall be
construed in accordance with and governed by the laws of the State of New York
(without giving effect to any conflicts of laws provisions contained therein).

      8.7. Amendments. Neither this Agreement, the Note, the Pledge Agreements
nor any provision hereof or thereof may be amended, waived, discharged or
terminated except by a written instrument signed by the Bank and, in the case of
amendments, by the Borrower.


                                      -22-


      8.8. Binding Effect of Agreement. This Agreement shall be binding upon and
inure to the benefit of the Borrower and the Bank and their respective
successors and assigns; provided that the Borrower may not assign or transfer
its rights or obligations hereunder. The Bank may sell or transfer its interests
hereunder, under the Term Note and under the Pledge Agreements without the
consent of the Borrower, or grant participations therein to participants without
such consent. In the case of any such participation, the Borrower agrees that
any such participant shall be entitled to the benefits of Sections 2.6, 2.7, and
8.3 to the same extent as if such transferee or participant were the Bank
hereunder, but only if the Bank would then be entitled to such benefits;
provided the Borrower may, for all purposes of this Agreement, treat the Bank as
the person entitled to exercise all rights hereunder and under the Note and to
receive all payments with respect thereto.

      8.9. Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures hereto and thereto were
upon the same instrument.

      8.10. Partial Invalidity. The invalidity or unenforceability of any one or
more phrases, clauses or sections of this Agreement shall not affect the
validity or enforceability of the remaining portions of it.

      8.11. Captions. The captions and headings of the various sections and
subsections of this Agreement are provided for convenience only and shall not be
construed to modify the meaning of such sections or subsections.

      8.12. WAIVER OF JURY TRIAL. THE BANK AND THE BORROWER AGREE THAT NEITHER
OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY
LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT
OF, THIS AGREEMENT, THE NOTE, ANY RELATED DOCUMENTS OR AGREEMENTS OR THE
DEALINGS OR THE RELATIONS BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO
CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED. NEITHER THE BANK NOR THE BORROWER HAS AGREED WITH OR
REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY
ENFORCED IN ALL INSTANCES.

      8.13 Entire Agreement. This Agreement, the Note and the documents and
agreements executed in connection herewith constitute the final agreement of the
parties hereto and supersede any prior agreement or understanding, written or
oral, with respect to the matters contained herein and therein.

      IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the day and year first above written.


                                      -23-


                                     FINANCIAL INSTITUTIONS, INC.


                                     By:      /s/ Ronald A. Miller
                                              --------------------------------
                                     Its:     SVP & CFO
                                              --------------------------------

                                     MANUFACTURERS AND TRADERS
                                     TRUST COMPANY


                                     By:      /s/ Richard R. Stiller
                                              --------------------------------
                                     Its:     Vice President
                                              --------------------------------


                                      -24-


                                    EXHIBIT A

                                 LIBOR Term Note

                                See Attached Note




                                    EXHIBIT B

                          FINANCIAL INSTITUTIONS, INC.

                                  ENCUMBRANCES

                                      NONE


                                      -26-


                                    EXHIBIT C

                          FINANCIAL INSTITUTIONS, INC.

                                   LITIGATION

                                      NONE


                                      -27-


                                    EXHIBIT D

                          FINANCIAL INSTITUTIONS, INC.

                              MATERIAL SUBSIDIARIES

                  Name                           Percentage of Ownership
                  ----                           -----------------------
         Wyoming County Bank                              99.66%
         National Bank of Geneva                         100.00%
         Bath National Bank                              100.00%
         First Tier Bank & Trust                         100.00%


                                      -28-


                                    EXHIBIT E
         FINANCIAL INSTITUTIONS, INC. REPORT OF CHIEF FINANCIAL OFFICER

      Financial Institutions, Inc. (the "Borrower") hereby certifies that:

      This Report is furnished pursuant to Section 5.1(c) of the Term Loan
Credit Agreement dated as of December 15, 2003, and Section 5.1(c) of the
Revolving Credit Agreement dated as of December 15, 2003 (collectively, the
"Credit Agreements") between the Borrower and MANUFACTURERS AND TRADERS TRUST
COMPANY. Unless otherwise defined herein, the terms used in this Report have the
meanings given to them in the Credit Agreements.

      As required by Section 5.1(a) and (b) of the Credit Agreements, the
Consolidated financial statements of the Borrower for the [year/quarter] ended
_________________, 200__ (the "Financial Statements"), prepared in accordance
with generally accepted accounting principles consistently applied, accompany
this Report. The Financial Statements present fairly the Consolidated financial
position of the Borrower as at the date thereof and the Consolidated results of
operations of the Borrower for the period covered thereby (subject only to
normal recurring year-end adjustments which will not in the aggregate be
material in amount).

      The figures set forth in Schedule A for determining compliance by the
Borrower with the financial covenants contained in Sections 6.7, 6.9 and 6.10 of
the Credit Agreement are true and complete as of the date hereof.

      As of the date hereof, Borrower and its Material Subsidiaries, including
any other federally-insured depository institution that was acquired after
December 15, 2003 and prior to the Maturity Date, have total "Risk-Based Capital
Ratios", "Tier I Risk-Based Capital Ratios", and "Leverage Ratios", as defined
in applicable FDIC regulations, as required by Section 6.8 of the Credit
Agreements.

      The activities of the Borrower and its Subsidiaries during the period
covered by the Financial Statements have been reviewed by me as Borrower's Chief
Financial Officer or by employees or agents of Borrower under my immediate
supervision. Based on such review, to my best knowledge and belief, and as of
the date of this Report, no Default has occurred. *

                           WITNESS my hand this ___ day of_________ 200___.

                                           FINANCIAL INSTITUTIONS, INC.


                                           By:
                                               -------------------------------
                                                    Chief Financial Officer

*If a Default has occurred, this paragraph is to be modified with an appropriate
statement as to the nature thereof, the period of existence thereof and what
action the Borrower has taken, is taking, or proposes to take with respect
thereto.


                                      -29-


                                   SCHEDULE A
                                       to
                                    EXHIBIT E

                        AFFIRMATIVE (FINANCIAL) COVENANTS

Nonperforming Assets to Total Loans and Other Real Estate Ratio (Section 6.7)

                                                                                  
MAXIMUM PERMITTED:                                                                      6.0%

ACTUAL:

         (i)      Non accrual and other loans and
                  leases past due 90 days or more
                  and still accruing                          $
                                                              ------------

         (ii)     Other real estate owned                     $
                                                              ------------

         (iii)    Nonperforming Assets:
                  line (i) plus line(ii)                                                $
                                                                                        ------------

         (iv)     Total Loans                                                           $
                                                                                        ------------

         (v)      Other real estate owned                                               $
                                                                                        ------------

         (vi)     Nonperforming Assets to Total Loans
                  and Other Real Estate Ratio:
                  [line (iii) divided by (line (iv) plus line (v)] times 100                   %
                                                                                        -------

Minimum Tangible Common Equity (Section 6.9)

REQUIRED:                                                                               $100,000,000

ACTUAL:

         (i)      Consolidated stockholders' equity                                     $
                                                                                        ------------
         (ii)     Consolidated stockholders' preferred equity                           $
                                                                                        ------------
         (iii)    Consolidated goodwill and intangibles

         (iv)     Total Tangible Common Equity:
                  line (i) minus line (ii) minus line (iii)                             $
                                                                                        ------------




                                      -30-


Debt Service Coverage Ratio (Section 6.10)

MINIMUM PERMITTED:                                                 1.25 : 1.00

ACTUAL:

         (i)      Consolidated net income on
                  Rolling-Four Quarter Basis                       $
                                                                   ------------

         (ii)     Total principal payable by Borrower
                  during next four fiscal quarters                 $
                                                                   ------------

         (iii)    Total interest accruing on total
                  principal payable by Borrower
                  during next four quarters                        $
                                                                   ------------

         (iv)     Debt Service Coverage Ratio:
                  line (i) divided by [line (ii)
                  plus line (iii)]                                      : 1.00
                                                                   -----  ----

         WITNESS my hand this ______ day of ____________, 20__.

                                    FINANCIAL INSTITUTIONS, INC.


                                    By:
                                       --------------------------------------
                                             Chief Financial Officer


                                      -31-


                                    EXHIBIT F

                       OPINION OF COUNSEL TO THE BORROWER


                                      -32-


                                    EXHIBIT G

                                Pledge Agreement

                          See attached Pledge Agreement


                                      -33-


[LOGO] M&T Bank
       Manufacturers and Traders Trust Company

                                 LIBOR TERM NOTE
                                    New York

Buffalo, New York             December 15, 2003                 $ 25,000,000.00

BORROWER: FINANCIAL INSTITUTIONS, INC.

a(n) individual(s) partnership |X| corporation trust __________ organized under
the laws of New York

Address of residence/chief executive office: 220 Liberty Street, Warsaw, New
York 14569

BANK: MANUFACTURERS AND TRADERS TRUST COMPANY, a New York banking corporation
      with its principal banking office at One M&T Plaza, Buffalo, New York
      14240, Attention: Office of General Counsel

1. DEFINITIONS. As used in this Note, each capitalized term shall have the
meaning specified in the Note or as it appears in initial capitalization.
Additionally, the following terms shall have the indicated meanings:

      a.    "Authorized Person" shall mean, each individually, Ronald A. Miller.
            Mention of the Authorized Person's name is for reference purposes
            only and the Bank may rely on a person's title to ascertain whether
            someone is an Authorized Person.

      b.    "Applicable Rate" shall mean either the LIBOR Rate, the Base Rate,
            or the Fixed Rate as the case may be.

      c.    "Adjustment Date" shall mean two (2) Business Days before the last
            day of the Interest Period selected below (see LIBOR Rate
            definition).

      d.    "Base Rate" shall mean 0 percentage points above the rate of
            interest announced by the Bank as its prime rate of interest.

      e.    "Business Day" shall mean any day of the year on which banking
            institutions in New York, New York are not authorized or required by
            law or other governmental action to close and, in connection with
            the LIBOR Rate, on which dealings are carried on in the London
            interbank market.

      f.    "Continuation Date" shall mean the last day of each Interest Period.

      g.    "Conversion Date" shall mean the date on which Borrower's election
            to convert the LIBOR Rate applicable to this Note to a Fixed Rate
            becomes effective in accordance with this Note.

      h.    "Fixed Rate" shall mean 1.75 percentage points above the most recent
            yield on the United States Treasury Obligations adjusted to a
            constant maturity having a term most nearly corresponding to, but
            not greater than, the unexpired portion of the term of this Note, in
            effect two (2) Business Days prior to the Conversion Date, as
            published by the Board of Governors of the Federal Reserve System in
            the Federal Reserve Statistical Release H15(519), or by such other
            quoting service, index or commonly available source utilized by the
            Bank, plus the "ask" side of the swap spread most nearly
            corresponding to, but not greater than, the unexpired portion of the
            term of this Note, in effect two (2) Business Days prior to the
            Conversion Date, as set forth in Bloomberg, L.P., or by such other
            quoting service, index or commonly available source utilized by the
            Bank.

      i.    "Interest Period" shall mean, as to the LIBOR Rate, the period
            commencing on the date of this Note or Continuation Date (as the
            case may be) and ending on, with respect thereto, the numerically
            corresponding day (or, if there is no numerically corresponding day,
            on the last day) of the calendar month that is one (1), two (2),
            three (3) or six (6) months thereafter (as selected by Borrower
            below); provided, however, that if an Interest Period would end on a
            day that is not a Business Day, such Interest Period shall be
            extended to the next succeeding Business Day unless such next
            succeeding Business Day would fall in the next calendar month, in
            which case such Interest Period shall end on the immediately
            preceding Business Day.

      j.    "LIBOR" shall mean the rate obtained by dividing (i) the one, two,
            three or six month interest period London Interbank Offered Rate (as
            selected by Borrower), fixed by the British Bankers Association for
            United States dollar deposits in the London Interbank Eurodollar
            Market at approximately 11:00 a.m. London, England time (or as soon
            thereafter as practicable) as determined by the Bank from any
            broker, quoting service or commonly available source utilized by the
            Bank by (ii) a percentage equal to 100% minus the stated maximum
            rate of all reserves required to be maintained against "Eurocurrency
            Liabilities" as specified in Regulation D (or against any other
            category of liabilities which includes deposits by reference to
            which the interest rate on LIBOR Rate loans is determined or any
            category of extensions of credit or other assets which includes
            loans by a non-United States' office of a bank to United States
            residents) on such date to any member bank of the Federal Reserve
            System.

      k.    "LIBOR Rate" shall mean 1.75 percentage points above LIBOR with an
            Interest Period duration of one month, two months, three months or
            six months. (Select applicable Interest Period. If no interest
            period is selected, the one month interest period shall apply.)

      l.    "Maturity Date" is the Payment Due Day in December, 2008.

      m.    "Payment Due Day" shall mean the same day of the calendar month as
            the date of this Note (or if there is no numerically corresponding
            day in a month, on the last day of such month); provided, however,
            if that day is not a Business Day, the Payment Due Day shall be
            extended to the next succeeding Business Day unless such next
            succeeding Business Day would fall in the next calendar month, in
            which case such Payment Due Day shall end on the immediately
            preceding Business Day.

      n.    "Principal Amount" shall mean Twenty-Five Million and 00/100 Dollars
            ($ 25,000,000.00).


                                       1


2.    PAYMENT OF PRINCIPAL, INTEREST AND EXPENSES.

      a. Promise to Pay. For value received, and intending to be legally bound,
Borrower promises to pay to the order of the Bank on the dates set forth below,
the Principal Amount, plus interest as agreed below and all fees and costs
(including without limitation attorneys' fees and disbursements whether for
internal or outside counsel) the Bank incurs in order to collect any amount due
under this Note, to negotiate or document a workout or restructuring, or to
preserve its rights or realize upon any guaranty or other security for the
payment of this Note ("Expenses").

      b. Initial Applicable Rate. The initial Applicable Rate shall be the LIBOR
Rate based on the Interest Period (with the duration selected by Borrower) in
effect two (2) Business Days before the date of this Note. The initial Interest
Period shall start on the date of this Note.

      c. Interest. Interest shall accrue on the outstanding Principal Amount
calculated on the basis of a 360-day year for the actual number of days of each
year (365 or 366) at the Applicable Rate that on each day shall be:

      i.    If the LIBOR Rate is the Applicable Rate. Interest shall accrue on
            the Principal Amount from and including the first day of the
            Interest Period (with the duration selected by Borrower) until, but
            not including, the last day of such Interest Period or the day the
            Principal Amount is paid in full (if sooner) at a rate per annum
            equal to the LIBOR Rate in effect on the each Adjustment Date.

      ii.   If the Base Rate is the Applicable Rate. Interest shall accrue on
            the Principal Amount from and including the first date the Base Rate
            is the Applicable Rate to but not including, the day such Principal
            Amount is paid in full or the Applicable Rate is converted to the
            LIBOR Rate or the Fixed Rate, at the rate per annum equal to the
            Base Rate. Any change in the Base Rate resulting from a change in
            the Bank's prime rate shall be effective on the date of such change.

      iii.  If the Fixed Rate is the Applicable Rate. Interest shall accrue on
            the Principal Amount from and including the first date the Fixed
            Rate is the Applicable Rate to but not including, the day such
            Principal Amount is paid in full, at the rate per annum equal to the
            Fixed Rate in effect on the Conversion Date.

      d. Payment Schedule. Borrower shall pay the outstanding Principal Amount
in the following installments: (i) Five Million and 00/100 Dollars
($5,000,000.00) on December 15, 2006; (ii) Ten Million and 00/100 Dollars
($10,000,000.00) on December 15, 2007; and (iii) ONE (1) FINAL INSTALLMENT on
the Maturity Date in an amount equal to the outstanding Principal Amount at that
time together with all other amounts outstanding hereunder including, without
limitation, accrued interest, costs and Expense. In addition, until the
outstanding Principal Amount is paid in full, Borrower shall pay all accrued and
unpaid interest, in amounts which may vary, as follows: (i) if the LIBOR Rate is
the Applicable Rate, on the last day of each Interest Period; (ii) if the Base
Rate is the Applicable Rate, on the Payment Due Date for each month; (iii) if
the Fixed Rate is the Applicable Rate, on the Payment Due Date for each month;
and (iv) at maturity (whether by acceleration or otherwise) and, after such
maturity, on demand.

      e. Maximum Legal Rate. It is the intent of the Bank and Borrower that in
no event shall interest be payable at a rate in excess of the maximum rate
permitted by applicable law (the "Maximum Legal Rate"). Solely to the extent
necessary to prevent interest under this Note from exceeding the Maximum Legal
Rate, any amount that would be treated as excessive under a final judicial
interpretation of applicable law shall be deemed to have been a mistake and
automatically canceled, and, if received by the Bank, shall be refunded to
Borrower.

      f. Default Rate. If an Event of Default (defined below) occurs, the
interest rate on the unpaid Principal Amount shall immediately be automatically
increased to 5 percentage points per year above the higher of the LIBOR Rate or
the Base Rate, and any judgment entered hereon or otherwise in connection with
any suit to collect amounts due hereunder shall bear interest at such default
rate.

      g. Repayment of Principal and Interest; Late Charge. Payments shall be
made in immediately available United States funds at any banking office of the
Bank. Interest will continue to accrue until payment is actually received. If
payment is not received within five days of its due date, Borrower shall pay a
late charge equal to the greatest of (a) $50.00, (b) 5% of the delinquent amount
or (c) the Bank's then current late charge as announced from time to time.
Payments may be applied in any order in the sole discretion of the Bank but,
prior to default, shall be applied first to past due interest, Expenses, late
charges and principal, then to current interest, Expenses, late charges and
principal, and last to remaining principal.

      h. Prepayment.

      i.    Subject to the following, during the term of this Note, Borrower
            shall have the option of paying the Principal Amount to the Bank in
            advance of the Maturity Date, in whole or in part, at any time and
            from time to time upon written notice received by the Bank at least
            three (3) business days prior to making such payment.

            (A)   If (i) Borrower pays, in whole or in part, any Principal
                  Amount when the Applicable Rate is the LIBOR Rate, before the
                  expiration of its respective Interest Rate Period, (ii) fails
                  to draw down, in whole or in part, any Principal Amount when
                  the Applicable Rate is the LIBOR Rate after giving a request
                  therefor, (iii) otherwise tries to revoke any LIBOR Rate, in
                  whole or in part, or (iv) there occurs a "Bankruptcy Event "
                  as hereinafter defined, or the Applicable Rate is converted
                  from the LIBOR Rate to the Base Rate pursuant to Section 3(b),
                  then Borrower shall be liable for and shall pay the Bank, on
                  demand, the actual amount of the liabilities, expenses, costs
                  or funding losses that are a direct or indirect result of such
                  prepayment, failure to draw, early termination of an Interest
                  Period, revocation, bankruptcy or otherwise, whether such
                  liability, expense, cost or loss is by reason of (a) any
                  reduction in yield, by reason of the liquidation or
                  reemployment of any deposit or other funds acquired by the
                  Bank, or (b) the fixing of the interest rate payable on any
                  LIBOR Rate Loans. The determination by the Bank of the
                  foregoing amount shall, in the absence of manifest error, be
                  conclusive and binding upon Borrower.


                                       2


            (B)   If Borrower prepays, in whole or in part, any Principal Amount
                  when the Applicable Rate is the Fixed Rate, then Borrower
                  shall be liable for and shall pay to the Bank, on demand, an
                  amount equal to the present value of the positive difference
                  between (i) the amount of interest that would have accrued on
                  the Principal Amount during the original remaining term of
                  this Note, at the Applicable Rate in effect on the date of
                  prepayment, minus 1.75 percentage points, and (ii) the amount
                  of interest that would have accrued on the Principal Amount
                  during the original remaining term of this Note at the Current
                  Market Rate. "Current Market Rate" shall mean the most recent
                  yield on United States Treasury Obligations adjusted to a
                  constant maturity having a term most nearly corresponding to,
                  but not greater than, the term remaining from the date of
                  prepayment to the original Maturity Date, in effect two (2)
                  business days prior to the date of prepayment as published by
                  the Board of Governors of the Federal Reserve System in the
                  Federal Reserve Statistical Release H.15 (519), or by such
                  other quoting service, index or commonly available source
                  utilized by the Bank, plus the "ask" side of the swap spread
                  most nearly corresponding to, but not greater than, the term
                  remaining form the date of prepayment to the original Maturity
                  Date, in effect two (2) Business Days prior to the date of
                  prepayment, as set forth in Bloomberg, L.P., or by such other
                  quoting service, index or commonly available source utilized
                  by the Bank. The present value calculation used herein shall
                  use the Current Market Rate as the discount rate and shall be
                  calculated as if each installment of the Principal Amount had
                  been made during the original remaining term of this Note.
                  Each partial prepayment of the Principal shall be applied in
                  inverse order of maturity.

      ii.   Upon making any prepayment of the Principal Amount in whole,
            Borrower shall pay to the Bank all interest and Expenses owing
            pursuant to the Note and remaining unpaid. Each partial prepayment
            of the Principal Amount shall be applied in inverse order of
            maturity to the principal included in the installments provided
            herein.

      iii.  In the event the Maturity Date is accelerated following an Event of
            Default by Borrower, any tender of payment of the amount necessary
            to satisfy the entire indebtedness made after such Event of Default
            shall be expressly deemed a voluntary prepayment. In such a case, to
            the extent permitted by law, the Bank shall be entitled to the
            amount necessary to satisfy the entire indebtedness, plus the
            appropriate prepayment premium calculated in accordance with this
            Section 2(h).

3.    CONTINUATIONS AND CONVERSIONS.

      a. Expiration of Interest Period. Subject to Section 3(b) and Section
3(c), upon the expiration of the first Interest Period and each Interest Period
thereafter, on the Continuation Date the LIBOR Rate will be automatically
continued with an Interest Period of the same duration as the Interest Period
duration initially selected by Borrower.

      b. Conversion Upon Default. Unless the Bank shall otherwise consent in
writing, if (i) Borrower has failed to pay when due, in whole or in part, the
indebtedness under the Note (whether upon maturity, acceleration or otherwise),
or (ii) there exists a condition or event which with the passage of time, the
giving of notice or both shall constitute an Event of Default, the Bank, in its
sole discretion, may (i) permit the LIBOR Rate to continue until the last day of
the applicable Interest Period at which time such the Applicable Rate shall
automatically be converted to the Base Rate or (ii) convert the LIBOR Rate to
the Base Rate before the end of the applicable Interest Period. Notwithstanding
the foregoing, if Borrower commences, or has commenced against it, any
proceeding or request for relief under any bankruptcy, insolvency or similar
laws now or hereafter in effect in the United States of America or any state or
territory thereof or any foreign jurisdiction or any formal or informal
proceeding for the dissolution or liquidation of, settlement of claims against
or winding up of affairs of Borrower (a "Bankruptcy Event"), the Applicable Rate
shall be automatically converted to the Base Rate without further action by the
Bank and Borrower shall have no right to have the Applicable Rate converted from
the Base Rate to the LIBOR Rate. Nothing herein shall be construed to be a
waiver by the Bank to have the Principal Amount accrue interest at the Default
Rate or the right of the Bank to the amounts set forth in Section 2(h) of this
Note.

      c. Conversion To Fixed Rate. During the term of this Note, Borrower shall
have a one (1) time option to convert the Applicable Rate to the Fixed Rate, for
the whole of the then remaining term of this Note and with respect to the then
total outstanding Principal Amount, subject to all of the following conditions:

      i)    an Authorized Person must deliver to the Bank by 2:00 p.m. (Eastern
            Time) on a Business Day a Notice of Conversion ("Notice of
            Conversion") for an election under this Section 3(c) .

      ii)   The Continuation Date shall be the later of (A) two (2) Business
            Days from the Business Day the Bank receives the Notice of
            Conversion in accordance with the foregoing Section or (B) the last
            day of the relevant Interest Period if a Notice of Conversion is
            received by the Bank more than two (2) Business Days before the last
            day of an Interest Period. If a Notice of Conversion is received
            after 2:00 p.m. (Eastern Time), the Notice of Conversion will be
            deemed to have been received on the next Business Day. Notice of
            Conversion received more than two (2) Business Days before the end
            of an Interest Period shall be deemed to have been received two (2)
            Business Days before the end of such Interest Period for purposes of
            determining the Fixed Rate for the remaining term of this Note
            pursuant to Section 1(h). Accordingly, if, for example, Borrower has
            a LIBOR Rate Loan with a one month Interest Period ending on June 15
            and wants to convert the LIBOR Rate to the Fixed Rate, Borrower must
            deliver its Notice of Conversion to the Bank by 2:00 p.m. (Eastern
            Time) on June 13 (provided that June 13 and June 14 are Business
            Days).

      iii)  The Bank may take action in reliance upon any oral, telephonic,
            written or teletransmitted Notice of Conversion that the Bank in
            good faith believes to be valid and to have been made by Borrower or
            on behalf of Borrower by an Authorized Person. No Notice of
            Conversion may be delivered by e-mail. The Bank may act on the
            Notice of Conversion from any Authorized Person until the Bank shall
            have received from Borrower, and had a reasonable time to act on,
            written notice revoking the authority of such Authorized Person. The
            Bank shall incur no liability to Borrower or to any other person as
            a direct or indirect result of acting on any Notice of Conversion
            under this Note. The Bank, in its sole discretion, may reject any
            Notice of Conversion that is incomplete.


                                       3


      iv)   If the Bank shall determine that for any reason adequate and
            reasonable means do not exist for ascertaining the Fixed Rate with
            respect to this Note, the Bank will give notice of such
            determination to Borrower and the Applicable Rate shall remain equal
            to the interest rate in effect prior to the Notice of Conversion.

      v)    Nothing herein shall be construed to be a waiver by the Bank of the
            right to accrue interest at the default rate, or of any other rights
            of the Bank set forth in this Note.

4. REPRESENTATIONS, WARRANTIES AND COVENANTS. The Borrower agrees that the
representations and warranties contained in that certain Term Loan Credit
Agreement, of even date herewith, by and between the Borrower and the Bank (the
"Term Loan Credit Agreement"), are hereby incorporated herein by reference as if
fully set forth herein, which representations and warranties shall continue from
the date hereof until this Note is paid in full.

5. EVENTS OF DEFAULT; ACCELERATION. Upon the occurrence of an "Event of Default"
under the Term Loan Credit Agreement , the Bank shall be entitled to the
remedies set forth in Section 7.2 of the Term Loan Credit Agreement.

6. RIGHT OF SETOFF. After the occurrence of a "Default" as defined in the Term
Loan Credit Agreement, the Bank shall have the right to set off against the
amounts owing under this Note any property held in a deposit or other account
with the Bank or any Affiliate or otherwise owing by the Bank or any Affiliate
in any capacity to Borrower or any guarantor or endorser of this Note. Such
set-off shall be deemed to have been exercised immediately at the time the Bank
or such Affiliate elect to do so.

7. INABILITY TO DETERMINE LIBOR RATES, INCREASED COSTS, ILLEGALITY.

      a. Increased Costs. If the Bank shall determine that, due to either (a)
the introduction of any change (other than any change by way of imposition of or
increase in reserve requirements included in the calculation of the LIBOR) in or
in the interpretation of any requirement of law or (b) the compliance with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law), there shall be any increase in the
cost to the Bank of agreeing to make or making, funding or maintaining any loans
based on LIBOR, then Borrower shall be liable for, and shall from time to time,
upon demand therefor by the Bank and pay to the Bank such additional amounts as
are sufficient to compensate the Bank for such increased costs.

      b. Inability to Determine Rates. If the Bank shall determine that for any
reason adequate and reasonable means do not exist for ascertaining LIBOR for the
Interest Period specified above, the Bank will give notice of such determination
to Borrower. Thereafter, the Bank may not maintain the loan hereunder at the
LIBOR Rate until the Bank revokes such notice in writing and, until such
revocation, the Bank may convert the Applicable Rate from the LIBOR Rate to the
Base Rate.

      c. Illegality. If the Bank shall determine that the introduction of any
law (statutory or common), treaty, rule, regulation, guideline or determination
of an arbitrator or of a governmental authority or in the interpretation or
administration thereof, has made it unlawful, or that any central bank or other
governmental authority has asserted that it is unlawful for the Bank to make
loans at based on LIBOR then, on notice thereof by the Bank to Borrower, the
Bank may suspend the maintaining of the loan hereunder at the LIBOR Rate until
the Bank shall have notified Borrower that the circumstances giving rise to such
determination shall no longer exist. If the Bank shall determine that it is
unlawful to maintain the loan hereunder based on LIBOR, the Bank may convert the
Applicable Rate from the LIBOR Rate to the Base Rate.

8. MISCELLANEOUS. This Note, together with any related loan and security
agreements and guaranties, contains the entire agreement between the Bank and
Borrower with respect to the Note, and supersedes every course of dealing, other
conduct, oral agreement and representation previously made by the Bank. All
rights and remedies of the Bank under applicable law and this Note or amendment
of any provision of this Note are cumulative and not exclusive. No single,
partial or delayed exercise by the Bank of any right or remedy shall preclude
the subsequent exercise by the Bank at any time of any right or remedy of the
Bank without notice. No waiver or amendment of any provision of this Note shall
be effective unless made specifically in writing by the Bank. No course of
dealing or other conduct, no oral agreement or representation made by the Bank,
and no usage of trade, shall operate as a waiver of any right or remedy of the
Bank. No waiver of any right or remedy of the Bank shall be effective unless
made specifically in writing by the Bank. Borrower agrees that in any legal
proceeding, a copy of this Note kept in the Bank's course of business may be
admitted into evidence as an original. This Note is a binding obligation
enforceable against Borrower and its successors and assigns and shall inure to
the benefit of the Bank and its successors and assigns. If a court deems any
provision of this Note invalid, the remainder of the Note shall remain in
effect. Section headings are for convenience only. Borrower hereby waives
protest, presentment and notice of any kind in connection with this Note.
Singular number includes plural and neuter gender includes masculine and
feminine as appropriate.

9. NOTICES. Any demand or notice hereunder or under any applicable law
pertaining hereto shall be in writing and duly given if delivered to Borrower
(at its address on the Bank's records) or to the Bank (at the address on page
one and separately to the Bank officer responsible for Borrower's relationship
with the Bank). Such notice or demand shall be deemed sufficiently given for all
purposes when delivered (i) by personal delivery and shall be deemed effective
when delivered, or (ii) by mail or courier and shall be deemed effective three
(3) business days after deposit in an official depository maintained by the
United States Post Office for the collection of mail or one (1) business day
after delivery to a nationally recognized overnight courier service (e.g.,
Federal Express). Notice by e-mail is not valid notice under this or any other
agreement between Borrower and the Bank.

10. JOINT AND SEVERAL. If there is more than one Borrower, each of them shall be
jointly and severally liable for all amounts which become due under this Note
and the term "Borrower" shall include each as well as all of them.

11. GOVERNING LAW; JURISDICTION. This Note has been delivered to and accepted by
the Bank and will be deemed to be made in the State of New York. This Note will
be interpreted in accordance with the laws of the State of New York excluding
its conflict of laws rules.


                                       4


BORROWER HEREBY IRREVOCABLY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE
OR FEDERAL COURT IN ERIE COUNTY, NEW YORK; PROVIDED THAT NOTHING CONTAINED IN
THIS NOTE WILL PREVENT THE BANK FROM BRINGING ANY ACTION, ENFORCING ANY AWARD OR
JUDGMENT OR EXERCISING ANY RIGHTS AGAINST BORROWER INDIVIDUALLY, AGAINST ANY
SECURITY OR AGAINST ANY PROPERTY OF BORROWER WITHIN ANY OTHER COUNTY, STATE OR
OTHER FOREIGN OR DOMESTIC JURISDICTION. Borrower acknowledges and agrees that
the venue provided above is the most convenient forum for both the Bank and
Borrower. Borrower waives any objection to venue and any objection based on a
more convenient forum in any action instituted under this Note.

12. WAIVER OF JURY TRIAL. BORROWER AND THE BANK HEREBY KNOWINGLY, VOLUNTARILY,
AND INTENTIONALLY WAIVE ANY RIGHT TO TRIAL BY JURY BORROWER AND THE BANK MAY
HAVE IN ANY ACTION OR PROCEEDING, IN LAW OR IN EQUITY, IN CONNECTION WITH THIS
NOTE OR THE TRANSACTIONS RELATED HERETO. BORROWER REPRESENTS AND WARRANTS THAT
NO REPRESENTATIVE OR AGENT OF THE BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT THE BANK WILL NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THIS JURY
TRIAL WAIVER. BORROWER ACKNOWLEDGES THAT THE BANK HAS BEEN INDUCED TO ENTER INTO
THIS NOTE BY, AMONG OTHER THINGS, THE PROVISIONS OF THIS SECTION.

Preauthorized Transfers from Deposit Account. If a deposit account number is
provided in the following blank Borrower hereby authorizes the Bank to debit
Borrower's deposit account # 8890769956 with the Bank automatically for any
amount which becomes due under this Note.

Acknowledgment. Borrower acknowledges that it has read and understands all the
provisions of this Note, including the Governing Law, Jurisdiction and Waiver of
Jury Trial, and has been advised by counsel as necessary or appropriate.

TAX ID/SS #  16-0816610             FINANCIAL INSTITUTIONS, INC.
            ----------------------  ----------------------------------
                                    BORROWER


                                    By:/s/ Ronald A. Miller
                                       -------------------------------

                                    Name: Ronald A. Miller
                                    ----------------------------------

                                    Its: Senior Vice President & CFO
                                    ----------------------------------

                                 ACKNOWLEDGMENT

STATE OF NEW YORK)
                            : SS.
COUNTY OF WYOMING)

      On the 15th day of December, in the year 2003, before me, the
undersigned, a Notary Public in and for said State, personally appeared Ronald
A. Miller, personally known to me or proved to me on the basis of satisfactory
evidence to be the individual(s) whose name(s) is (are) subscribed to the within
instrument and acknowledged to me that he/she/they executed the same in
his/her/their capacity(ies), and that by his/her/their signature(s) on the
instrument, the individual(s), or the person upon behalf of which the
individual(s) acted, executed the instrument.

                                                  /s/ Roger Cominsky
                                             -----------------------------
                                                      Notary Public

#196723 v3

- --------------------------------------------------------------------------------

                                FOR BANK USE ONLY

Authorization Confirmed:
                        --------------------------------------------------------
Product Code:  22660
Disbursement of Funds:

Credit A/C    #            Off Ck   #          Payoff Obligation   #
               -----------           ---------                      ------------

              $                     $                              $
               -----------           ---------                      ------------


                                       5


[LOGO] M&T Bank
       Manufacturers and Traders Trust Company

                              PLEDGE OF SECURITIES
                                    New York

Pledgor:  FINANCIAL INSTITUTIONS, INC.

A(n) individual(s) |X| corporation partnership _________ organized and
registered under the laws of the State of New York

Organizational Identification Number (if any): _______________ (Note: this
number is not the same as the Taxpayer Identification Number.)

Chief executive office/principal residence: 220 Liberty Street, Warsaw, New York
14569.

Borrower (if not same as Pledgor):______________________________________________

A(n) individual(s) corporation partnership__________organized under the laws
of the State of_________________________________________________________________

Chief executive office/principal residence:_____________________________________
_______________________________________________________________________________.
Bank: Manufacturers and Traders Trust Company (the "Bank"), a New York banking
corporation with its principal office at One M&T Plaza, Buffalo, New York 14240
Attention: Office of General Counsel.

THIS SECURITY AGREEMENT is granted to the Bank by Pledgor in consideration of
and as further security for payment of the Obligations, and for other valuable
consideration, the receipt and sufficiency of which is acknowledged. Pledgor,
intending to be legally bound, agrees with the Bank as follows:

2) DEFINITIONS. All terms unless otherwise defined in this Agreement shall have
the meanings assigned in the Uniform Commercial Code, as the same may be in
effect in the State of New York, as amended from time to time ("UCC").

      a) "Brokerage Account" means any securities account or commodity account
included in the Collateral at any time together with all credit balances and
money credited to the account, all investment property carried in the account,
and, except as otherwise agreed by the Bank in writing, all other securities
accounts and commodity accounts maintained by Pledgor with the same Institution.

      b) "Collateral" means collectively, whether now owned or hereafter
acquired or existing and wherever located all Pledgor's investment property
described on Schedule A, which Pledgor has delivered to the Bank or agrees to
deliver (or cause to be delivered or appropriate book-entries made) or otherwise
identified on any Institution's books and records as being subject to the Bank's
security interest, whether or not described in any schedule delivered to the
Bank, together with all Brokerage Accounts and all Income and Proceeds. In
addition, the word "Collateral" includes all property of Pledgor (however owned)
in the possession of, or subject to the control of, the Bank (or in the
possession of, or subject to the control of, a third party subject to the
control of the Bank including any Institution), whether now owned or hereafter
existing and whether tangible or intangible in character.

      c) "Control Agreement" means an agreement, in form and substance
acceptable to the Bank in its sole discretion, among Pledgor, the Bank and an
Institution for the purpose of perfecting the security interest granted to the
Bank by Pledgor herein.

      d) Any of the following events or conditions shall constitute an "Event of
Default": (i) the occurrence of an "Event of Default" under that certain e Term
Loan Credit Agreement, of even date herewith, by and between the Pledgor and the
Bank ("Term Loan Agreement"); (ii) Pledgor defaults in the performance of any
covenant or other provision with respect to any Control Agreement; or (iii) any
Control Agreement is terminated without the consent of the Bank.

      e) "Income and Proceeds" mean all present and future income, proceeds,
earnings, increases, and substitutions from or for the Collateral of every kind
and nature, whether direct or indirect, including without limitation all
payments, interest, profits, distributions, benefits, rights, options, warrants,
dividends, stock dividends, stock splits, stock rights, regulatory dividends,
distributions, subscriptions, monies, claims for money due and to become due,
proceeds of any insurance on the Collateral, shares of stock of different par
value or no par value issued in substitution or exchange for shares included in
the Collateral (whether voluntary or involuntary, by agreement or by operation
of law), proceeds of any sale, transfer, surrender, redemption, exchange or
other disposition of the Collateral (whether merger, dissolution or liquidation
of the issuer of the Collateral) and all other property Pledgor is entitled to
receive on account of such Collateral, including accounts, documents,
instruments, chattel paper, investment property, and general intangibles.

      f) "Institution" means any (i) securities intermediary (ii) broker; (iii)
issuer; or (iv) any other entity holding or who has issued any of the Collateral
to or on behalf of Pledgor, including, without limitation, any fiduciary.

      g) "Obligations" means collectively, any and all indebtedness and other
liabilities or obligations of Pledgor (or if Pledgor is a partnership, any
general partner of Pledgor) to the Bank of every kind and character and all
extensions, refinancings, renewals, modifications and replacements thereof,
including, without limitation, all unpaid accrued interest thereon and all of
the costs and expenses payable as hereinafter provided: (i) whether now existing
or hereafter incurred; (ii) whether direct, indirect, primary, absolute,
secondary, contractual, tortious, liquidated, unliquidated, contingent, secured,
unsecured, matured or unmatured, by guarantee or otherwise; (iii) whether such
indebtedness or obligations are from time to time reduced and thereafter
increased, or entirely extinguished and thereafter reincurred; (iv) whether such
indebtedness was originally contracted with the Bank or with another or others;
(v) whether or not such indebtedness or obligations are evidenced by a
negotiable or non-negotiable instrument or any other writing; (vi) whether such
indebtedness is contracted by Pledgor alone or jointly or severally with another
or others; and (vii) all indebtedness incurred prior to, during or after any
filing by or against Pledgor of any petition or request for liquidation,
reorganization, arrangement, adjudication as a bankrupt, relief as a debtor, or
other relief under bankruptcy, insolvency, or similar laws now or hereafter in
effect in the United States of America or any state or territory thereof or any
foreign jurisdiction, notwithstanding Pledgor's legal status as a debtor or a
debtor-in-possession or Pledgor's discharge in any such proceeding. Obligations
also include, without limitation, all payments recovered from the Bank such as
sums claimed as impermissible set-offs, diversion of trust funds or as a
preference or fraudulent transfer. Such recovered sums shall be reinstated as
Obligations of Pledgor as of the date they arose, but for purposes of any
statute limiting action by the Bank under this Agreement or relating to the
Obligations, as of the date of recovery from the Bank. As used in this Section,
if Pledgor and Borrower are not the same person or entity, then any reference to
"Pledgor" shall be deemed to include a reference to "Borrower".

      h) "Pledgor" means each of the persons or entities identified above as
Pledgor in any capacity, and each legal representative, successor or assign of
any thereof.

3) SECURITY INTEREST.

      a) Grant of Security Interest. As security for payment and performance of
the Obligations, Pledgor grants a security interest in, and assigns, pledges and
hypothecates to the Bank all of its rights, title and interest in and to the
Collateral, whether now or hereafter acquired or existing and wheresoever
located.


                                       1


      b) Continuing and Unconditional Pledge. This Agreement is absolute and
unconditional and shall continue, notwithstanding any interim payment in full of
the Obligations, until released in writing by the Bank.

      c) Control Agreement. If any of the Collateral is, or is maintained in, a
Brokerage Account or with an Institution, Pledgor agrees that it shall before,
or at the same time as, it has executed and delivered this Agreement to the
Bank, execute and deliver to the Bank, and cause any Institution at which the
Brokerage Account is maintained or any of the Collateral is held to execute and
deliver to the Bank, a Control Agreement. If the Institution refuses to execute
a Control Agreement that is acceptable to the Bank in its sole discretion,
Pledgor shall transfer the Collateral to a Brokerage Account maintained by M&T
Securities, Inc. with National Financial Services Corporation or if the
Collateral is in certificated form, cause the Collateral to be delivered to the
Bank, duly endorsed in blank without restrictions and with all signatures
guaranteed with medallion signature guaranty acceptable to the Bank and with all
necessary transfer tax stamps affixed, if applicable. If any of the Collateral
is held in a Brokerage Account with National Financial Services Corporation
through M&T Securities, Inc., Pledgor authorizes and consents to such portion of
the Collateral being subject to a Master Control Agreement between the Bank,
National Financial Services Corporation, M&T Securities, Inc. and other
Affiliates dated as of January 1, 1997, as such agreement may be amended,
modified or replaced from time to time. Pledgor acknowledges that such Master
Control Agreement provides, among other things, that the Bank has the ability
and right to have such portion of the Collateral sold, transferred or otherwise
disposed of without further action or consent by Pledgor.

      d) Delivery of Certificated and Uncertificated Securities Not in Brokerage
Account. If the Collateral is not maintained in a Brokerage Account, then
contemporaneously with the execution and delivery of this Agreement to the Bank,
Pledgor shall:

            i) Certificated Securities. If certificated securities, deliver such
certificated securities to the Bank, duly endorsed in blank without restrictions
and with all signatures guaranteed with medallion signature guaranty acceptable
to the Bank and with all necessary transfer tax stamps affixed.

            ii) Uncertificated Securities. If uncertificated securities, either
(x) procure the issuance of security certificates to represent such
uncertificated securities and endorse and deliver such certificates as required
above; (y) cause the issuer thereof to register the Bank as the registered owner
of such uncertificated securities; or (z) cause the issuer of the uncertificated
securities to enter into a Control Agreement with the Bank and Pledgor.

4) REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants to the
Bank that now and until this Agreement is terminated:

      a) Enforceability. Pledgor, if an entity, (i) is duly organized, validly
existing and in good standing under the law of the jurisdiction in which it was
formed; (ii) is duly authorized to do business in each jurisdiction in which
failure to be so qualified might have a material adverse effect on its business
or assets; and (iii) has the power, authority and approvals necessary to own the
Collateral and grant a security interest in the Collateral under this Agreement
and execute and deliver this Agreement and each Control Agreement (if
applicable). This Agreement and each Control Agreement (if applicable) have been
duly executed and delivered by Pledgor, constitute valid and legally binding
obligations of Pledgor and are enforceable in accordance with their respective
terms against Pledgor.

      b) No Conflicts. The execution, delivery and performance by Pledgor of
this Agreement and each Control Agreement (if applicable), the grant of the
security interest in the Collateral hereunder and the consummation of the
transactions contemplated hereby and thereby do not and will not (i) violate any
statute, regulation or other law applicable to Pledgor; (ii) violate any
judgment, order or award of any court, agency or other governmental authority or
of any arbitrator applicable to Pledgor; (iii) if an entity, violate Pledgor's
certificate of incorporation, by-laws, partnership agreement, operating
agreement or other applicable governing documents; (iv) constitute a default
under any agreement binding on Pledgor or result in a lien or encumbrance on any
assets of Pledgor; or (v) violate any restriction on the transfer of any of the
Collateral.

      c) No Consents. No consent, approval, license, permit or other
authorization of any third-party (other than an Institution) or any governmental
body or office is required for the valid and lawful execution and delivery of
this Agreement and each Control Agreement, the creation and perfection of the
Bank's security interest in the Collateral or the valid and lawful exercise by
the Bank of the remedies available to it under this Agreement, any Control
Agreement or applicable law or of the voting and other rights granted to the
Bank in this Agreement or any Control Agreement except as may be required for
the offer of sale of those items of the Collateral that are securities under
applicable law.

      d) Sole Owner; No Other Lien. Pledgor is sole record and beneficial owner
of the Collateral free and clear of all liens, security interests, pledges
encumbrances and adverse claims (other than those created under this Agreement),
has the unrestricted right to grant the security interest granted under this
Agreement and has granted to the Bank a valid security interest in the
Collateral free of all liens, encumbrances and adverse claims. There are no
restrictions applicable to the transfer of any of the Collateral, unless fully
and accurately described in an exhibit to this Agreement. The Collateral is held
or registered in Pledgor's legal name.

      e) Brokerage Account. If any of the Collateral is, or is maintained in, a
Brokerage Account, such Brokerage Account is a valid and legally binding
obligation of the Institution with which such Brokerage Account is maintained,
the securities entitlements credited thereto are valid and genuine and are
enforceable in accordance with their terms and Pledgor has provided the Bank
with a complete and accurate statement of the financial assets and money
credited to such Brokerage Account as of the date hereof.

      f) Certificates Genuine. If any of the Collateral is certificated
securities, each certificate or other document evidencing such portion of the
Collateral is genuine, has been duly authorized and validly issued by each of
the respective Issuers, is in all respects what it purports to be and is
enforceable in accordance with its terms.

      g) Judgments and Litigation. There is no pending or threatened claim,
audit, investigation, action or other legal proceeding or judgment, order or
award of any court, agency or other governmental authority or arbitrator that
involves Pledgor or any of the Collateral and might have a material adverse
effect upon, or threaten the validity of, this Agreement or any of the
Collateral. Pledgor shall immediately notify the Bank upon acquiring knowledge
of such an action.

      h) Name, Address and Organizational Information. Pledgor's full legal
name, its principal residence or its chief executive office (if a business)
address, and its state of registration and organizational identification number
(if any) are correctly set forth at the beginning of this Agreement.

      i) Mutual Funds Held for 30 Days. If any of the Collateral consists of
mutual fund shares or any other interest in a mutual fund, such shares or
interest shall have been owned by Pledgor for more than thirty (30) days prior
to the date of this Agreement.

5) COVENANTS. Pledgor hereby covenants and agrees with the Bank that now and
until this Agreement is terminated Pledgor shall:

      a) Defend Title. Defend its title to the Collateral and the security
interest of the Bank therein against the claims of any person claiming rights in
the Collateral against or through Pledgor and maintain and preserve such
security and its priority.

      b) Intentionally omitted.

      c) No Transfer. Neither sell, offer to sell nor otherwise transfer or
encumber any of the Collateral and if any of the Collateral is, or is in, a
Brokerage Account or subject to a Control Agreement, withdraw any money or
property from such Brokerage Account or enter into a control agreement with any
third-party relating to the foregoing. If any of the Collateral is, or is
maintained in, a Brokerage Account, this provision shall not prohibit Pledgor
from making trades in such Brokerage Account before the occurrence of an Event
of Default provided that (i) the Bank has agreed in a writing (acceptable to the
Bank in its sole discretion), signed by a duly authorized officer of the Bank
and the Institution, that Pledgor is authorized to engage in such trading; (ii)
the proceeds of such trades remain in the Brokerage Account; and (iii) the
trades do not have a material adverse effect on the value of all or any part of
the Collateral and are not otherwise inconsistent with the provisions of this
Agreement or any Control Agreement.


                                       2


      d) Control and Customer Agreements. If the Collateral is held in a
Brokerage Account, neither attempt to modify or attempt to terminate any Control
Agreement or the customer agreement with the Institution under which such
Brokerage Account was established.

      e) Later Deliveries. Pledgor shall promptly deliver or transfer to the
Bank (with respect to any of the Collateral in the physical possession of the
Bank) or to an Institution (with respect to any of the Collateral held by such
Institution) for credit to the Brokerage Account and/or coverage by the Control
Agreement with such Institution, such portion of the Collateral (including,
without limitation, any certificate or instrument constituting or representing
such portion of the Collateral and any replacement or related certificates or
instruments, transaction statements, option contracts, warrants or related
documents evidencing transactions or proceeds thereof) that Pledgor may obtain
possession of after the date hereof, free and clear of all liens, encumbrances,
transfer restrictions and adverse claims so that the Bank has a first priority
interest in such portion of the Collateral. All such certificates, instruments
and the like shall be duly endorsed in blank without restriction and with all
signatures guaranteed with a medallion signature guaranty acceptable to the
Bank. Until such delivery or transfer, Pledgor shall hold each such item in
trust for the Bank.

      f) Recordkeeping and Financial Statements. Maintain, or cause each agent
to maintain, accurate and complete records in conformity with generally accepted
accounting principles consistently applied and furnish to the Bank financial
statements in accordance with the Term Loan Agreement.

      g) Taxes to be Paid. Pay when due every tax, assessment, fee and charge
and file each report required by any taxing authority for Pledgor or its assets,
including without limitation the Collateral.

      h) Intentionally omitted..

      i) Notice of Changes. Immediately notify the Bank of (i) any Event of
Default; (ii) any event or condition that might have a material adverse effect
upon Pledgor (or Borrower, if not same) the Institution, the value of the
Collateral or the security interest of the Bank; or (iii) any encumbrance upon
or claim asserted against any of the Collateral. Pledgor shall notify the Bank
at least ninety (90) days in advance of any change in (i) the name, identity or
structure of Pledgor (or Borrower, if not same) or (ii) the location of (A) any
of the Collateral, (B) any record concerning any of the Collateral, or (C)
Pledgor's (or Borrower's, if not same) state of registration, chief executive
office or principal residence.

      j) Intentionally omitted.

      k) Further Assurances.

            i) At Pledgor's expense, Pledgor shall do such further acts and
execute and deliver to the Bank all such additional conveyances, financing
statements, certificates, stock or bond powers, instruments, legal opinions and
other assurances as the Bank may from time to time request or require to
protect, assure or enforce its interests, rights and remedies under this
Agreement. All endorsements must be in blank without restriction and with all
signatures guaranteed with a medallion signature guaranty acceptable to the
Bank.

            ii) Pledgor will promptly deliver to the Bank (with respect to any
of the Collateral in the physical possession of the Bank) or to an Institution
(with respect to any of the Collateral held by such Institution), all
endorsements and instruments that could be necessary or convenient to transfer
any financial asset in the physical possession of the Bank or an Institution,
that are registered in the name of, payable to the order of or specially
endorsed to Pledgor, to such Institution or one of their respective nominees.

6) POWER OF ATTORNEY, IRREVOCABLE PROXY.

      a) Pledgor irrevocably and unconditionally appoints the Bank as its
attorney-in-fact with full power to perform in the name of Pledgor each of
Pledgor's obligations under this Agreement or any Control Agreement and take any
action or execute any instrument that the Bank deems necessary or convenient for
such purpose including, without limitation, the power to endorse or execute and
deliver all stock or bond powers, pledges, instruments of assignment,
certificates, orders for transfer, financing statements, releases and other
writings relating to any of the Collateral in the Bank's or Pledgor's name. Such
power of attorney is coupled with an interest in favor of the Bank, and shall
not be terminated or otherwise affected by the death, bankruptcy, disability or
incompetence of Pledgor or by lapse of time. The Bank may receive and open any
mail addressed to Pledgor, retain any enclosure constituting or relating to any
of the Collateral, and take any other action deemed necessary in the Bank's sole
discretion to perfect or protect the Bank's interests pursuant to this Agreement
or any Control Agreement. Pledgor authorizes (both prospectively and
retroactively) the Bank to file in any public office financing statements, and
any continuations and amendments thereof, regarding any of the Collateral
without the signature of Pledgor. A photocopy or other reproduction of this
Agreement or any financing statement relating to any of the Collateral shall be
sufficient as a financing statement. Pledgor hereby consents and agrees that the
issuers of or obligors of the Collateral or any registrar or transfer agent or
trustee for any of the Collateral shall be entitled to accept the provisions
hereof as conclusive evidence of the rights of the Bank to effect any transfer
pursuant to this Agreement and the authority granted to the Bank herein,
notwithstanding any other notice or direction to the contrary heretofore or
hereafter given by Pledgor or any other person to any of such issuers, obligors,
registrars, transfer agents and trustees.

      b) Pledgor irrevocably consents and appoints the Bank, whether or not any
of the Collateral has been transferred into the name of the Bank or its nominee,
as Pledgor's proxy with full power, in the same manner, to the same extent and
with the same effect as if Pledgor were to do the same: (i) to attend all
meetings of stockholders of the issuer of any financial asset which comprises
the Collateral (the "Company") held from the date hereof and to vote such
portion of the Collateral at such meeting in such manner as the Bank shall, in
its sole discretion, deem appropriate, including, without limitation, in favor
of the liquidation of the Company; (ii) to consent, in the sole discretion of
the Bank, to any and all action by or with respect to the Company for which the
consent of the stockholders of the Company is or may be necessary or
appropriate; and (iii) without limitation, to do all things which Pledgor can or
could do as a stockholder of the Company, giving to the Bank full power of
substitution and revocation. Such proxy shall not be exercisable by the Bank and
Pledgor alone shall have the foregoing powers (whether or not any of the
Collateral has been transferred into the name of the Bank or its nominee) until
the occurrence of an Event of Default; provided, however, Pledgor shall not
exercise or, as the case may be, shall not refrain from exercising such rights
if, in the Bank's judgment, such action would impair or otherwise have a
material adverse effect on the value of the Collateral or would otherwise be
inconsistent with this Agreement. The Bank, in its sole discretion, may elect to
postpone having such proxy become exercisable notwithstanding the occurrence of
any Event of Default which would otherwise cause such proxy to become
exercisable. Such proxy shall terminate when this Agreement is no longer in full
force and effect as hereinafter provided. Any expenses incurred with the
exercise of any of the rights hereunder shall constitute part of the
Obligations.

      c) Pledgor hereby revokes for the duration of this Agreement each power of
attorney, authorization and proxy granted by Pledgor to any other person (other
than any Institution acting as safekeeping agent, if any) with respect to the
Collateral.

7) PLEDGOR'S WAIVERS. Neither Pledgor's obligations under this Agreement nor
Bank's interest in the Collateral shall be released, impaired or affected in any
way by (i) Pledgor's (or Borrower's, if not same) bankruptcy, reorganization or
insolvency under any law or that of any other party, or any action of a trustee
in any such proceeding; (ii) failure of any other party to perform its
obligations to the Bank; or (iii) any other circumstance that might constitute a
legal or equitable defense to Pledgor's (or Borrower's, if not same) obligations
under this Agreement, including without limitation: (A) any new agreements or
obligations of Pledgor (or Borrower, if not same) with or to the Bank,
amendments, changes in rate of interest, extensions of time for payments,
modifications, renewals or the existence of or waivers of default as to any
existing or future agreements of Pledgor (or Borrower, if not same) or any other
party with the Bank; (B) any adjustment, compromise or release of any of the
Obligations by the Bank or any other party; the existence or nonexistence or
order of any filings, exchanges, releases, impairment or sale of any security
for the Obligations or any part thereof or the order in which payments and
proceeds of collateral are applied; or acceptance by the Bank of any writing
intended by any other party to create an accord and satisfaction with respect to
any of the Obligations; (C) any delay in or failure to call for, take, hold,
continue, collect, preserve or protect, replace, assign, sell, lease, exchange,
convert or otherwise transfer or dispose of, perfect a security interest in,
realize upon or enforce any security interest in


                                       3


any security for the Obligations or any part thereof, regardless of its value;
(D) any exercise, delay in the exercise or waiver of, any failure to exercise,
or any forbearance or other indulgence relating to, any right or remedy of the
Bank against Pledgor (or Borrower, if not same) or other person or relating to
the Obligations, any part thereof or any security for the Obligations; (E) any
fictitiousness, incorrectness, invalidity or unenforceability, for any reason,
of any instrument or other agreement, or act of commission or omission by the
Bank or Pledgor (or Borrower, if not same); (F) any composition, extension,
moratoria or other statutory relief granted to Pledgor (or Borrower, if not
same); or (G) any interruption in the business relations between the Bank and
Pledgor (or Borrower, if not same), or any dissolution or change in form of
organization, name or ownership of Pledgor (or Borrower, if not same) or death
or declaration of Pledgor or Borrower (if not same) if an individual as
incompetent. Further, Pledgor (or Borrower, if not same) waives without notice
each demand, presentment, protest and other act or thing upon which any of
Pledgor's (or Borrower's, if not same) obligations or the Bank's rights or
remedies pursuant to this Agreement or otherwise would or might be conditioned.

8) INCOME AND PROCEEDS OF THE COLLATERAL.

      a) Cash Income. Until the occurrence of an Event of Default, Pledgor
reserves the right to request to receive all cash income and cash dividends that
comprise the Income and Proceeds (except cash income or cash dividends paid or
payable in respect of the total or partial liquidation or dissolution of an
issuer) paid on the Collateral; provided, however, until actually paid, all
rights to such cash income or cash dividends shall remain subject to the Bank's
security interest granted hereunder. Any other Income and Proceeds shall be
delivered to the Bank immediately upon receipt (but not later than the next
business day), in the exact form received and without commingling with other
property which may be received by, paid or delivered to Pledgor or for Pledgor's
account, whether as an addition to, in discharge of, in substitution of, or in
exchange of any of the Collateral.

      b) Bond Coupons. If the Collateral consists of bonds with coupons, Pledgor
authorizes the Bank to remove all coupons from such bonds when interest is due
and send them for collection on Pledgor's behalf. The proceeds of such bonds
will be applied as directed by Pledgor in writing. The Bank shall have no
responsibility or liability for failure to process such coupons in a timely
fashion. If any coupon is returned unpaid, the Bank may either debit any of
Pledgor's deposit accounts with the Bank or reverse the loan credit, as
appropriate, in the amount of each such coupon previously credited, plus the
Bank expenses incurred in the attempted collection. If Pledgor's deposit
accounts have insufficient funds to pay any or all such amounts, each such
unpaid amount shall be added to the Obligations, and shall be secured by the
Collateral.

      c) Cash Income After Event of Default. Upon the occurrence of an Event of
Default, Pledgor shall not demand or receive any cash income or cash dividends
with regard to the Collateral, and if Pledgor receives any such cash income or
cash dividends, the same shall be held by Pledgor in trust for the Bank in the
same medium in which received, shall not be commingled with any assets of
Pledgor and shall be delivered to the Bank in the form received, properly
endorsed to permit collection, not later than the next business day following
the day of its receipt. The Bank may apply the net cash receipts from such
income or cash dividends to payment of the Obligations or any part thereof,
provided that the Bank shall account for and pay over to Pledgor any such income
or interest remaining after payment in full of the Obligations.

      d) Increases and Profits. Whether or not an Event of Default has occurred,
Pledgor authorizes the Bank to receive Income and Proceeds on the Collateral and
to hold the same as part of the Collateral and agrees to deliver the Income and
Proceeds (except as provided in 7(a) above) to the Bank immediately upon receipt
(but not later than the next business day), in the exact form received and
without commingling with other property which may be received by, paid or
delivered to Pledgor or for Pledgor's account, whether as an addition to, in
discharge of, in substitution of, or in exchange of any of the Collateral.

9) ADDITIONAL DUTIES OF PLEDGOR AND RIGHTS OF THE BANK.

      a) Compliance with Securities Laws.

            i) Pledgor has not acquired or transferred any of the Collateral in
any manner that would result in a violation of any applicable law, including
without limitation federal and state securities laws. Pledgor shall execute and
deliver or file each form and other writing (including without limitation any
application for exemption or notice of proposed sale pursuant to any securities
laws) and take each other action (including without limitation making public any
non-public material adverse information with respect to the issuer of any
Security), that the Bank deems necessary or desirable to permit the sale or
other disposition of any portion of the Collateral with or without registration.
Pledgor shall upon the request of the Bank cause the Collateral to be registered
and take each other action including, without limitation, compliance with all
applicable "blue sky" and other securities laws and regulations to permit
transfer or registration of those items of the Collateral in each jurisdiction
which the Bank shall select; and Pledgor shall execute and deliver in form and
substance satisfactory to the Bank its indemnity of each underwriter of such
Security against all of its liabilities, costs and expenses in connection with
the transfer, including attorneys' fees and disbursements.

            ii) Pledgor acknowledges that compliance with the Securities Act of
1933, as amended, the rules and regulations thereunder (collectively, the "Act")
may impose limitations on the right of the Bank to sell or otherwise dispose of
securities included in the Collateral. For this reason, Pledgor hereby
authorizes the Bank to sell any securities included in the Collateral in such
manner and to such person as would, in the sole discretion of the Bank, help to
ensure the prompt transfer or sale of such securities and shall not require any
of such securities to be registered or qualified under any applicable securities
law. Without limiting the generality of the foregoing, in any such event the
Bank in its sole discretion may (i) proceed to make a private sale
notwithstanding that a registration statement for the purpose of registering any
of such securities could be or shall have been filed under the Act; (ii)
approach and negotiate with a single possible purchaser to effect such sale;
(iii) restrict such sale to a purchaser who will represent and agree that such
purchaser is purchasing for its own account, for investment and not with a view
to the distribution or sale of any of such securities; or (iv) require that any
sale hereunder (including a sale at auction) be conducted subject to
restrictions (A) as to the financial sophistication and ability of any person
permitted to bid or purchase at sale, (B) as to the content of legends to be
placed upon any certificates representing the securities sold in such sale,
including restrictions on future transfer thereof, (C) as to the representations
required to be made by each person bidding or purchasing at such sale relating
to that person's access to financial information about Pledgor or any issuer of
any of such securities, such person's intentions as to the holding of any of
such securities so sold for investment, for its own account, and not with a view
to the distribution thereof, and (D) as to such other matters as the Bank may,
in its sole discretion, deem necessary or appropriate in order that such sale
(notwithstanding any failure so to register) may be effected in compliance with
the UCC and other laws affecting the enforcement of creditors' rights under the
Act and all applicable state securities laws. Pledgor understands that a sale
under the above circumstances may yield a substantially lower price for such
securities than would otherwise be obtainable if the same were registered and
sold in the open market, and Pledgor shall not attempt to hold the Bank
responsible for sale of any of such securities at an inadequate price even if
the Bank accepts the first offer received or if only one potential purchaser
appears or bids at any such sale. If the Bank shall sell any securities included
in the Collateral at a sale, the Bank shall have the right to rely upon the
advice and opinion of any qualified appraiser, investment banker or broker as to
the commercially reasonable price obtainable on the sale thereof but shall not
be obligated to obtain such advice or opinion. Pledgor acknowledges that,
notwithstanding the legal availability of a private sale or a sale subject to
restrictions of the character described above, the Bank may, in its sole
discretion, elect to seek registration of any securities included in the
Collateral under the Act (or any applicable state securities laws). Pledgor
hereby assigns to the Bank any registration rights or similar rights Pledgor may
have from time to time with respect to any securities included in the
Collateral.

      b) Substitution of Collateral. Prior to an Event of Default, Pledgor may
request the Bank in writing to liquidate an item of the Collateral held by the
Bank and use the Proceeds thereof to purchase substitute items of the
Collateral. If the Bank grants such request, the items purchased with the
Proceeds shall constitute part of the Collateral without the need for any
additional notice or action by the Bank or Pledgor.

      c) Subsequent Changes Affecting Collateral. Pledgor acknowledges that it
has made its own arrangements for keeping informed of changes or potential
changes affecting the Collateral including, but not limited to, conversions,
subscriptions, exchanges, reorganizations, dividends, tender offers, mergers,
consolidations, maturity of bonds or other financial assets and shareholder
meetings. Pledgor agrees that the Bank has no responsibility to inform Pledgor
of such matters or to take any action with respect thereto even if any of the
Collateral has been registered in the name of the Bank or its agent or nominee.

      d) Tax Reporting. All items of income, gain, expense and loss recognized
in any Brokerage Account or any Collateral in the possession of the Bank shall
be reported to the Internal Revenue Service and all state and local taxing
authorities under the name and taxpayer identification number of Pledgor.


                                       4


      e) Right to Cure. The Bank has the right, but not the obligation, to
perform at Pledgor's expense any of Pledgor's obligations with respect to the
Collateral under this Agreement. Further, at its option, the Bank may pay and
discharge taxes, liens, securities interest or other encumbrances on or adverse
claim against the Collateral and Pledgor agrees to reimburse the Bank for any
payment made or any expenses incurred (including attorneys' fees) by the Bank
pursuant to the foregoing.

10) DEFAULT.

      a) Remedies Upon Default. At any time, and from time to time, after the
occurrence or existence of any Event of Default the Bank may take one or more of
the following remedies:

            i) Term Loan Agreement. The Bank shall be entitled to the remedies
set forth in Section 7.2 of the Term Loan Credit Agreement.

            ii) Sale of Collateral.

                  (1) The Bank may, in its sole discretion, transfer and realize
upon its interest in any portion of the Collateral by public or private sale or
otherwise, without notice to Pledgor including, without limitation, (i) deliver
a notice under any Control Agreement to an Institution for the sale or other
disposition of the financial assets in a Brokerage Account, (ii) remove any
financial asset in a Brokerage Account and register such asset in the Bank's
name or the name of the Bank's Institution or nominee or any other nominee;
(iii) exchange certificates representing any of the Collateral for certificates
of larger or smaller denominations; (iv) collect, including by legal action, any
notes, checks or other instruments for the payment of money included in the
Collateral and compromise or settle with any obligor of any such instrument.

                  (2) If notice of the time and place of any public sale of any
of the Collateral or the time after which any private sale or other intended
disposition thereof is required by the UCC, Pledgor acknowledges that five (5)
days advance notice shall constitute reasonable notice. The Bank shall not be
obligated to make any sale of any of the Collateral regardless of notice of sale
having been given. The Bank may adjourn any public or private sale from time to
time by announcing at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.

                  (3) If, under the UCC, the Bank may purchase any portion of
the Collateral, it may in payment of any part of the purchase price thereof,
cancel any part of the Obligations.

                  (4) If any portion of the Collateral is sold on credit or for
future delivery, it need not be retained by the Bank until the purchase price is
paid and the Bank shall incur no liability if the purchaser fails to take up or
pay for such portion of the Collateral. In case of any such failure, such
portion of the Collateral may be sold again.

                  (5) Pledgor shall execute and deliver to the purchasers of any
portion of the Collateral all instruments and other documents necessary or
proper to sell, convey and transfer title to such portion of the Collateral and,
if approval of any sale of such portion of the Collateral by any governmental
body or officer is required, Pledgor shall prepare or cooperate fully in the
preparation of and cause to be filed with such governmental body or officer all
necessary or proper applications, reports, registration statements and forms and
do all other things necessary or proper to expeditiously obtain such approval.

            iii) Set-off. The Bank shall have the right but not the obligation
to set off against the Obligations any amount owing by the Bank or any of its
Affiliates in any capacity to any Pledgor in any capacity. Such set-off shall be
deemed to have been exercised immediately at the time the Bank or such Affiliate
elect to do so.

            iv) Termination of Commitments. Any commitment of the Bank to grant
any financial accommodation to Pledgor (or Borrower, if not same) shall
terminate.

      b) Application of Proceeds. Any cash held by the Bank as part of the
Collateral and all cash Proceeds of any sale of, collection from or other
realization upon any portion of the Collateral may, in the sole discretion of
the Bank, be held by the Bank as collateral for, or then or at any time be
applied, after payment of the Bank's Costs (defined below), in whole or in part
against, the Obligations or any part thereof in such order as the Bank may
elect, in its sole discretion. Any surplus of such cash or cash Proceeds held by
the Bank and remaining after the Bank's Costs and the Obligations have been
indefeasibly paid in full shall be paid over to Pledgor or to whomever may be
lawfully entitled to receive such surplus.

      c) Consent to Change Collateral to Book-Entry or Uncertificated Form.
Pledgor authorizes the Bank and each Institution to take, at Pledgor's expense,
all steps necessary to change to appropriate form each certificated item of the
Collateral which is eligible for safekeeping in uncertificated form, to be
maintained in a Brokerage Account subject to a Control Agreement (if held with
an Institution) or to be held by the Bank (subject to the delivery requirements
in Section 2(d) hereof). Pledgor understands that there may be some delay and
expense in release of uncertificated items of the Collateral if Pledgor requires
its reissue in certificated form and that change to book-entry form for U.S.
Treasury securities may not be reversible.

      d) Registered Holder of Collateral. Pledgor authorizes the Bank to
transfer any of the Collateral into its own name or that of its nominee so that
the Bank or its nominee may appear on record as the sole owner thereof;
provided, however, notwithstanding such a transfer, the Bank shall refrain from
exercising its rights under Section 9 hereof until the occurrence of an Event of
Default.

11) STANDARD OF CARE. Other than the exercise of reasonable care in the custody
of the Collateral in the Bank's physical possession, the Bank shall have no
responsibility or duty with respect to any of the Collateral or any matter or
proceeding arising out of or relating thereto and shall have no liability to
Pledgor (or Borrower, if not same) arising from any failure or delay by the
Bank. The Bank shall be deemed to have exercised reasonable care in the custody
and preservation of any portion of the Collateral which is in its possession if
the Bank affords such portion of the Collateral treatment substantially equal to
the treatment that the Bank accords its own assets of a similar nature;
provided, however, that the Bank shall have no duty to sell or convert any of
the Collateral whose market value is declining. In no event shall the Bank be
obligated to (a) preserve any right or remedy of Pledgor against any party with
respect to any of the Collateral; (b) ascertain any maturity, call, exchange,
conversion, redemption, offer, tender or similar matter relating to any of the
Collateral or provide notice of any such matter to Pledgor; or (c) provide to
Pledgor any communication received by the Bank or its nominee. Pledgor
acknowledges that Pledgor is not looking to the Bank to provide it with
investment advice.

12) COSTS AND EXPENSES; INDEMNITY.

      a) Bank Costs. Pledgor agrees to pay on demand all costs and expenses
incurred by the Bank in enforcing this Agreement, in realizing upon or
protecting any of the Collateral (including preserving the value of any of the
Collateral) and in enforcing and collecting any of the Obligations or any
guaranty thereof, including, without limitation, if the Bank retains counsel for
advice, suit, appeal, insolvency or other proceedings under the Federal
Bankruptcy Code or otherwise, or for any of the above purposes, the actual
attorneys' fees incurred by the Bank (collectively "Bank Costs"). Payment of all
Bank Costs is secured by the Collateral. Bank Costs shall accrue interest at the
highest legal rate from the date of demand until payment is received by the
Bank.

      b) Indemnity. Pledgor shall indemnify the Bank and its directors, officers
and employees, agents and attorneys against, and hold them harmless from, all
liabilities, costs or expenses, including attorneys' fees, incurred by any of
them under the corporate or securities laws applicable to holding, registering
or selling any of the Collateral, except for liability, costs or expenses
arising out of the recklessness or willful misconduct of the Bank.


                                       5


13) MISCELLANEOUS.

      a) Remedies Cumulative; Non-Waiver. The Bank shall have all of the rights
and remedies of a secured party under the UCC and other applicable law as well
as those specified by agreement with Pledgor or Borrower. All rights and
remedies of the Bank are cumulative, and no right or remedy shall be exclusive
of any other right or remedy. No single, partial or delayed exercise by the Bank
of any right or remedy shall preclude full and timely exercise at any time of
any right or remedy of the Bank without notice. No course of dealing or other
conduct, no oral agreement or representation made by the Bank, and no usage of
trade, shall operate as a waiver of any right or remedy of the Bank. No waiver
of any right or remedy of the Bank shall be effective unless made specifically
in writing by the Bank.

      b) Construction This Agreement and any agreement executed in connection
herewith contains the entire agreement between the Bank and Pledgor with respect
to the Collateral, and supersedes every course of dealing, other conduct, oral
agreement and representation previously made by the Bank. Pledgor expressly
disclaims any reliance on any oral representation of the Bank with respect to
the subject matter of this Agreement or otherwise. No change in this Agreement
shall be effective unless made in a writing duly executed by the Bank. This
Agreement is a binding obligation enforceable against Pledgor and its successors
and assigns and shall inure to the benefit of the Bank and its successors and
assigns. Each provision of this Agreement shall be interpreted as consistent
with existing law and shall be deemed amended to the extent necessary to comply
with any conflicting law. If a court deems any provision invalid, the remainder
of this Agreement shall remain in effect. Pledgor agrees that, in any legal
proceeding, a copy of this Agreement kept in the course of the Bank's business
may be admitted into evidence as an original. Unless the context otherwise
clearly requires, references to plural includes the singular and references to
the singular include the plural and "or" has the inclusive meaning represented
by the phrase "and/or". Section headings are for convenience only. Neuter
pronouns shall be construed as masculine or feminine, and singular forms as
plural, as appropriate.

      c) Guaranty of Obligations. Solely to the extent required by applicable
law to make the Collateral available for payment of the Obligations, Pledgor
guarantees the payment of the Obligations, without set-off, counterclaim or
other deduction and without limitation as to amount.

      d) Waiver of Subrogation. Pledgor hereby waives any claim, right or remedy
which Pledgor may now have or hereafter acquire against Borrower that arises
hereunder or from the performance by Pledgor hereunder including, without
limitation, any claim, remedy or right of subrogation, reimbursement,
exoneration, indemnification, contribution or participation in any claim, right
or remedy of the Bank against Borrower or any security which the Bank now has or
hereafter acquires, whether or not such claim, right or remedy arises in equity,
under contract, by statute, under common law or otherwise.

      e) Notices. Any demand or notice hereunder or under any applicable law
pertaining hereto shall be in writing and duly given if delivered to Pledgor (at
its address on the Bank's records) or to the Bank (at the address on page one
and separately to the Bank officer responsible for Borrower's relationship with
the Bank). Such notice or demand shall be deemed sufficiently given for all
purposes when delivered (i) by personal delivery and shall be deemed effective
when delivered, or (ii) by mail or courier and shall be deemed effective three
(3) business days after deposit in an official depository maintained by the
United States Post Office for the collection of mail or one (1) business day
after delivery to a nationally recognized overnight courier service (e.g.,
Federal Express). Notice by e-mail is not valid notice under this or any other
agreement between Pledgor and the Bank.

      f) Joint and Several Liability. If there is more than one Pledgor, each of
them shall be jointly and severally liable pursuant to this Agreement and the
term "Pledgor" shall include each as well as all of them.

      g) Governing Law and Jurisdiction. This Agreement has been delivered to
and accepted by the Bank and will be deemed to be made in the State of New York.
Except as otherwise provided under federal law, this Agreement will be
interpreted in accordance with the laws of the State of New York excluding its
conflict of laws rules. PLEDGOR HEREBY IRREVOCABLY CONSENTS TO THE EXCLUSIVE
JURISDICTION OF ANY STATE OR FEDERAL COURT IN ERIE COUNTY, NEW YORK; provided
that nothing contained in this Note will prevent the Bank from bringing any
action, enforcing any award or judgment or exercising any rights against
Borrower individually, against any security or against any property of Borrower
within any other county, state or other foreign or domestic jurisdiction.
Pledgor acknowledges and agrees that the venue provided above is the most
convenient forum for both the Bank and Pledgor. Pledgor waives any objection to
venue and any objection based on a more convenient forum in any action
instituted under this Agreement.

      h) WAIVER OF JURY TRIAL. PLEDGOR AND THE BANK HEREBY KNOWINGLY,
VOLUNTARILY, AND INTENTIONALLY WAIVE ANY RIGHT TO TRIAL BY JURY PLEDGOR AND THE
BANK MAY HAVE IN ANY ACTION OR PROCEEDING, IN LAW OR IN EQUITY, IN CONNECTION
WITH THIS AGREEMENT OR THE TRANSACTIONS RELATED HERETO. PLEDGOR REPRESENTS AND
WARRANTS THAT NO REPRESENTATIVE OR AGENT OF THE BANK HAS REPRESENTED, EXPRESSLY
OR OTHERWISE, THAT THE BANK WILL NOT, IN THE EVENT OF LITIGATION, SEEK TO
ENFORCE THIS JURY TRIAL WAIVER. PLEDGOR ACKNOWLEDGES THAT THE BANK HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE PROVISIONS OF
THIS SECTION.

- --------------------------------------------------------------------------------

14) TIN CERTIFICATION. Under penalties of perjury, Pledgor certifies that: (1)
the taxpayer number set forth below is Pledgor's correct social security or
employer identification number (or I am waiting for a number to be issued to
me); and (2) Pledgor is not subject to backup withholding because (a) Pledgor is
exempt from backup withholding; (b) Pledgor has not been notified by the
Internal Revenue Service ("IRS") that it is subject to backup withholding as a
result of a failure to report all interest or dividends; or (c) the IRS has
notified Pledgor that it is no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS: Pledgor must cross out item (2) if it has been
notified by the IRS that Pledgor is currently subject to backup withholding
because of under-reporting interest or dividends on Pledgor's tax return.

(Please check here only if you are subject to backup withholding.)

The IRS does not require your consent to any provision of this document other
than the certifications required to avoid backup withholding.

- --------------------------------------------------------------------------------

15) RELEASE OF SECURITY INTEREST, TERMINATION OF PLEDGE. Notwithstanding any
other provision of this Agreement or the Term Loan Agreement, the Bank agrees to
release the Collateral from the security interest granted hereunder, and
terminate this Agreement in writing, upon the concurrent satisfaction of all of
the following conditions:

      a.    Capitalization. The Pledgor and its subsidiaries, are in compliance
            with the capital ratios required by Section 6.8 of the Term Loan
            Agreement ;

      b.    Net Income. The consolidated net income of the Pledgor, calculated
            in accordance with Section 6.10 (A) of the Term Loan Agreement, for
            the previous four fiscal quarters of the Pledgor, shall not be less
            than Twenty Million Dollars ($20,000,000.00);

      c.    Nonperforming Assets to Total Loans and Other Real Estate Ratio. The
            Pledgor's Nonperforming Assets to Total Loans and Other Real Estate
            Ratio, calculated in accordance with Section 6.7 of the Term Loan
            Agreement, does not exceed 2.0%;

      d.    Regulatory Enforcement. Neither Pledgor nor any of its subsidiaries
            is the subject of any pending or , to Pledgor's or any of its
            subsidiaries knowledge, threatened, regulatory enforcement action,
            proceeding or investigation; and

      e.    Other Default. No other default under this Agreement exists.


                                       6


16) REINSTATEMENT OF SECURITY INTEREST AND PLEDGE. In the event that, after the
release of the security interest granted hereunder and the termination of this
Agreement pursuant to Section 14 hereof, Pledgor shall, at any time during the
effective period of the Term Loan Agreement, fail to satisfy the conditions
contained in Section 14(a) or Section 14(d) hereof, Pledgor covenants and agrees
that it shall promptly execute another pledge of securities, in substantially
the same form as this Agreement and acceptable to the Bank, once again
subjecting the Collateral to a security interest and pledge in favor of the
Bank. At Pledgor's expense, Pledgor shall do such further acts and execute and
deliver to the Bank all such additional conveyances, financing statements,
certificates, stock or bond powers, instruments, legal opinions and other
assurances as the Bank may from time to time request or require to protect,
assure or enforce its interests, rights and remedies under this Section 15. The
provisions of this Section 15 shall survive any termination of this Agreement.

Dated:  12/15/03
        ------------------------------

TAX ID/SS #        16-0816610           FINANCIAL INSTITUTIONS, INC.
            --------------------------  -----------------------------------
                                        PLEDGOR


                                        By:/s/ Ronald A. Miller
                                           --------------------------------

                                        Name: Ronald A. Miller
                                        -----------------------------------

                                        Its: Senior Vice President & CFO
                                        -----------------------------------

                                 ACKNOWLEDGMENT

STATE OF NEW YORK)
                            : SS.
COUNTY OF WYOMING)

      On the 15th day of December, in the year 2003, before me, the undersigned,
a Notary Public in and for said State, personally appeared Ronald A. Miller,
personally known to me or proved to me on the basis of satisfactory evidence to
be the individual(s) whose name(s) is (are) subscribed to the within instrument
and acknowledged to me that he/she/they executed the same in his/her/their
capacity(ies), and that by his/her/their signature(s) on the instrument, the
individual(s), or the person upon behalf of which the individual(s) acted,
executed the instrument.

                                                   /s/ Roger Cominsky
                                                --------------------------
                                                     Notary Public


                                       7


                          FINANCIAL INSTITUTIONS, INC.
                              PLEDGE OF SECURITIES
                                   SCHEDULE A

                        DESCRIPTION OF PLEDGED SECURITIES

Wyoming County Bank

- -------------------------------------------------------------------------------
      CERTIFICATE NUMBER                             SHARES
- -------------------------------------------------------------------------------
             C686                                     150
- -------------------------------------------------------------------------------
             C689                                     150
- -------------------------------------------------------------------------------
             C690                                   87,213 3/4
- -------------------------------------------------------------------------------
             C696                                     375
- -------------------------------------------------------------------------------
             C698                                      10
- -------------------------------------------------------------------------------
             C699                                      10
- -------------------------------------------------------------------------------
             C700                                      10
- -------------------------------------------------------------------------------
             C701                                      10
- -------------------------------------------------------------------------------
             C702                                    562 1/2
- -------------------------------------------------------------------------------
             C703                                    562 1/2
- -------------------------------------------------------------------------------
             C706                                     150
- -------------------------------------------------------------------------------
             C707                                     150
- -------------------------------------------------------------------------------
             C708                                     150
- -------------------------------------------------------------------------------
             C709                                     150
- -------------------------------------------------------------------------------
             C710                                      10
- -------------------------------------------------------------------------------
             C712                                      20
- -------------------------------------------------------------------------------
             C713                                      10
- -------------------------------------------------------------------------------

National Bank of Geneva

- -------------------------------------------------------------------------------
      CERTIFICATE NUMBER                             SHARES
- -------------------------------------------------------------------------------
              86                                     4,000
- -------------------------------------------------------------------------------
              87                                      770
- -------------------------------------------------------------------------------
              95                                     4,800
- -------------------------------------------------------------------------------
              112                                     170
- -------------------------------------------------------------------------------
              113                                      10
- -------------------------------------------------------------------------------
              114                                      10
- -------------------------------------------------------------------------------
              115                                      10
- -------------------------------------------------------------------------------
              120                                      10
- -------------------------------------------------------------------------------
              121                                      10
- -------------------------------------------------------------------------------
              122                                      10
- -------------------------------------------------------------------------------
              123                                      10
- -------------------------------------------------------------------------------
              126                                      10
- -------------------------------------------------------------------------------
              127                                      10
- -------------------------------------------------------------------------------
              128                                      10
- -------------------------------------------------------------------------------
              135                                      10
- -------------------------------------------------------------------------------
              138                                      10
- -------------------------------------------------------------------------------
              140                                      20
- -------------------------------------------------------------------------------
              141                                      10
- -------------------------------------------------------------------------------
              143                                      10
- -------------------------------------------------------------------------------
              144                                      10
- -------------------------------------------------------------------------------
              145                                      20
- -------------------------------------------------------------------------------
              147                                      70
- ----------------------------------------- -------------------------------------

CLB-149-NY (RFC Revised 12/03)  8  Manufacturers and Traders Trust Company, 2001



First Tier Bank and Trust (formerly Salamanca Trust Company)

- -------------------------------------------------------------------------------
       CERTIFICATE NUMBER                      SHARES
- -------------------------------------------------------------------------------
              1447                             16,000
- -------------------------------------------------------------------------------

Bath National Bank

- -------------------------------------------------------------------------------
       CERTIFICATE NUMBER                      SHARES
- -------------------------------------------------------------------------------
To be delivered no later than 12/30/03           TBD
- -------------------------------------------------------------------------------


CLB-149-NY (RFC Revised 12/03)  8  Manufacturers and Traders Trust Company, 2001



                                SECOND AMENDMENT
                                       TO
                           REVOLVING CREDIT AGREEMENT

      THIS SECOND AMENDMENT is dated December 15, 2003 and made by and between
Financial Institutions, Inc., a New York corporation having its head office at
220 Liberty Street, Warsaw, New York 14569 (the "Borrower") and Manufacturers
and Traders Trust Company, a New York banking corporation, having its principal
banking office at One M&T Plaza, Buffalo, New York 14023 (the "Bank").

      WHEREAS, Bank, at Borrower's request, has made available to Borrower a
Five Million Dollar ($5,000,000.00) revolving credit facility (the "Revolving
Loan"), which Loan was made pursuant to the terms and conditions contained in
that certain Revolving Credit Agreement, dated as of April 25, 2001, by and
between Borrower and Bank (the "Original Agreement"); and

      WHEREAS, Bank, at Borrower's request, agreed to extend the term of the
Original Agreement and increase the amount of the Loan to Ten Million Dollars in
accordance with the provisions of that certain First Amendment to Revolving
Credit Agreement, dated as of July 3, 2003, by and between Borrower and Bank
(the Original Agreement, as amended by the First Amendment to Revolving Credit
Agreement, the "Amended Agreement"); and

      WHEREAS, Bank, at Borrower's request, agreed to make available to Borrower
a Twenty-Five Million Dollar ($25,000,000.00) term loan facility (the "Term
Loan") pursuant to the terms and conditions of contained in that certain Term
Loan Agreement, of even date herewith, by and between Borrower and Bank (the
"Term Loan Agreement"), subject to a decrease in the amount of the Revolving
Loan and the amendment of certain covenants contained in the Amended Agreement,
in accordance with the provisions of this Second Amendment as set forth herein;

      NOW, THEREFORE, in consideration of the premises herein contained, and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:

      17) The definition of "Commitment Amount" contained in Section 1.1 of the
Amended Agreement is hereby amended in its entirety as follows:

      "Commitment Amount. $5,000,000."

      2. The definition of "Nonperforming Asset" contained in Section 1.1 of the
Amended Agreement is hereby amended to refer to "Nonperforming Assets", and the
reference to "6.8" therein, is hereby amended to refer to "6.7".

      3. Section 4.7 of the Amended Agreement is hereby amended by adding the
following to the end thereof:


                                      -1-


      ", or as have been publicly disclosed in the Borrower's filings with the
      Securities and Exchange Commission ("SEC")".

      4. The references to $250,000 in Sections 4.10, 5.1(g), 5.1 (h), 6.1(e),
6.2, 6.6, 7.1(f) and 7.1(i), are all hereby amended to refer to $5,000,000.00.

      5. Section 4.15 of the Amended Agreement is hereby deleted and replaced in
its entirety as follows:

      "4.15. Environmental Matters. The Borrower and each of its Subsidiaries
      are in compliance, in all material respects, with all Environmental Laws.
      No demand, claim, notice, suit, suit in equity, action, administrative
      action, investigation or inquiry arising under, relating to or in
      connection with any Environmental Laws is pending or threatened against
      the Borrower or any of its Subsidiaries, any real property in which the
      Borrower or any such Subsidiary holds or, to the Borrower's knowledge, has
      held, an interest or any past or present operation of the Borrower or any
      such Subsidiary, other than any such proceedings that will not,
      individually or in the aggregate, have an adverse effect of more than
      $5,000,000.00, not covered by insurance, on the financial condition,
      business, operations or prospects of the Borrower or the Borrower and its
      Subsidiaries on a consolidated basis. Neither the Borrower nor any of its
      Subsidiaries (i) is the subject of any federal or state investigation
      evaluating whether any remedial action is needed to respond to a release
      of any Hazardous Materials or other wastes into the environment, (ii) has
      received any notice of any Hazardous Materials or other wastes in or upon
      any of its properties in violation of any Environmental Laws, or (iii)
      knows of any basis for any such investigation, notice or violation, except
      as disclosed to the Bank on Exhibit C and as to such matters disclosed on
      such Exhibit, none will, individually or in the aggregate, have an adverse
      effect of more than $5,000,000.00, not covered by insurance, on the
      financial condition, business, operations or prospects of the Borrower or
      the Borrower and its Subsidiaries on a consolidated basis."

      6. Section 5.1(f) of the Amended Agreement is hereby deleted and replaced
in its entirety as follows:

      "(f) within five (5) Business Days of the Chief Executive Officer or the
      Chief Financial Officer of the Borrower becoming aware of the existence of
      any condition or event that constitutes a Default, written notice thereof
      specifying the nature and duration thereof and the action being or
      proposed to be taken with respect thereto;"

      7. The first sentence of Section 6.1(i) of the Amended Agreement is hereby
amended by adding the following to the beginning thereof:


                                      -2-


      "other than as permitted in accordance with Section 6.1(j),".

      8. Section 6.1(j) of the Amended Agreement is hereby deleted and replaced
in its entirety as follows:

      "(j) Encumbrances incurred in connection with repurchase agreements; liens
      incurred in connection with asset securitizations; Encumbrances incurred
      in connection with the holding of municipal deposits subject to the New
      York State Comptroller's guidelines for collateralization; Encumbrances
      granted to a Federal Reserve Bank, a Federal Home Loan Bank or the Federal
      Agricultural Mortgage Corporation to secure advances or other transactions
      incidental to the conduct of the banking business of the Borrower or any
      such Subsidiary, including loans to meet liquidity requirements;"

      9. The first sentence of Section 6.3 of the Amended Agreement is hereby
deleted in its entirety.

      10. Section 6.7 of the Amended Agreement is hereby deleted and replaced in
its entirety as follows:

      "6.7. Nonperforming Assets to Total Loans and Other Real Estate Ratio. The
      Borrower shall not permit its Nonperforming Assets to Total Loans and
      Other Real Estate Ratio to be less than 6.00%. As used in this Section
      6.7, "Nonperforming Assets to Total Loans and Other Real Estate Ratio"
      means the ratio of (A) "Nonperforming Assets" to (B) the sum of (i) "Total
      Loans", plus (ii) "Other Real Estate"; "Nonperforming Assets" means the
      Consolidated loans, leases and other assets of the Borrower that are not
      accruing interest or are 90 days or more past due in the payment of
      principal or interest, plus Consolidated "other real estate owned" by the
      Borrower ("Other Real Estate"); and "Total Loans" means the Consolidated
      principal of loans made by Borrower to unrelated third parties; in each
      case as shown on the Consolidated financial statements of Borrower,
      prepared in accordance with FFIEC requirements."

      11. Section 6.8 of the Amended Agreement is hereby deleted and replaced in
its entirety as follows:

      "6.8. Capitalization of Borrower and Material Subsidiaries. The Borrower
      and its Material Subsidiaries, including any other federally-insured
      depository institution that may be acquired after the date hereof and
      prior to the Termination Date, will maintain total "Risk-Based Capital
      Ratios", "Tier I Risk-Based Capital Ratios", and "Leverage Ratios, as
      defined in applicable FDIC regulations, as follows:


                                      -3-


                  Leverage Ratio:                    not less than  5.00%;
                  Tier I Risk-Based Capital Ratio:   not less than  8.75%; and
                  total Risk-Based Capital Ratio:    not less than 10.00%."

      12. Section 6.9 of the Amended Agreement is hereby deleted and replaced in
its entirety as follows:

      "6.9. Minimum Tangible Common Equity. The Borrower shall not permit its
      Tangible Common Equity to be less than $100,000,000.00. As used in this
      Section 6.9, "Tangible Common Equity" means the difference between (A) the
      consolidated stockholder equity in the Borrower, including, but not
      limited to, accumulated other comprehensive income accounted for under
      FASB 115 as gains or losses on securities held for sale, minus (B) the sum
      of (i) the consolidated preferred stockholder equity in the Borrower, and
      (ii) the consolidated goodwill and intangibles of the Borrower; in each
      case as shown on the consolidated financial statements of Borrower and its
      Subsidiaries, prepared in accordance with FFIEC requirements"

      13. Section 6.10 of the Amended Agreement is hereby deleted and replaced
in its entirety as follows:

      "6.10. Debt Service Coverage Ratio. The Borrower shall not permit, on a
      "Rolling Four-Quarter Basis", the ratio of (A) the consolidated net income
      of the Borrower, during any such fiscal period, as shown on the
      consolidated financial statements of Borrower, prepared in accordance with
      FFIEC requirements, to (B) the total of (i) the installments of all
      principal payable by the Borrower in connection with any indebtedness or
      other obligation required to be paid during the next four fiscal quarters
      and arising from the borrowing of any money or the deferral of the
      purchase price of any asset and (ii) the total interest expense of the
      Borrower thereon during such next four fiscal quarters, calculated on the
      basis of the interest rate(s) applicable to such principal obligations as
      of the end of the last fiscal quarter included in the Rolling Four-Quarter
      Basis, in each case as shown on the financial statements of Borrower,
      prepared in accordance with FFIEC requirements, to be less than 1.25 to
      1.00. As used in this Section 6.10, "Rolling Four-Quarter Basis" means a
      basis using the most recently completed four (4) full consecutive fiscal
      quarters of Borrower which precede and include the date on which the Debt
      Service Coverage Ratio is calculated."

      14. Section 7.1(a) of the Amended Agreement is hereby deleted and replaced
in its entirety as follows:

      "(a) the Borrower shall fail to pay within five days after the same
      becomes due and payable (i) any amount of principal of the Term Loan, or
      (ii) any amount of


                                      -4-


      interest thereon or any fees or expenses payable hereunder or under the
      Term Note; or"

      15. Section 7.1(b) of the Amended Agreement is hereby deleted and replaced
in its entirety as follows:

      "(b) The Borrower shall fail to perform any term, covenant or agreement
      contained in Sections 5.1(f), 5.5, 6.2, 6.3, 6.5, 6.8, 6.9 or 6.10; or"

      16. Section 7.1(c) of the Amended Agreement is hereby deleted and replaced
in its entirety as follows:

      "(c) the Borrower shall fail to perform any covenant contained in Sections
      5.1(e), 5.1(g), 5.1(h), 5.2, 6.1, 6.4, 6.6 or 6.7 and such failure shall
      continue for 30 days; or"

      17. The two references to "45" contained in Section 7.1(h) of the Amended
Agreement are each hereby amended to refer to "90".

      18. Exhibit D to the Amended Agreement is hereby deleted, in its entirety,
and replaced with the Exhibit D attached to this Second Amendment.

      19. Exhibit E to the Amended Agreement is hereby deleted, in its entirety,
and replaced with the Exhibit E attached to this Second Amendment.

      20. As a material inducement to Bank to enter into this Second Amendment,
the Borrower hereby:

            (a)   represents that no "Event of Default" specified in Section VII
                  of the Amended Agreement, as further amended by this Second
                  Amendment, nor any event which with notice or lapse of time or
                  both would become such an Event of Default, has occurred,
                  except as has been disclosed to Bank in writing;

            (b)   covenants that the representations and warranties contained in
                  Section IV of the Amended Agreement, as further amended by
                  this Second Amendment, continue to be true and correct in all
                  respects on and as of the date of this Second Amendment, with
                  the same force and effect as if made on and as of the date of
                  this Second Amendment; and

            (c)   represents and warrants that there has been no violation of
                  any of the affirmative covenants contained in Section V of the
                  Amended Agreement, as further amended by this Second
                  Amendment, nor of any of the negative covenants contained in
                  Section VI of the Amended Agreement, ,


                                      -5-


                  as further amended by this Second Amendment, except as has
                  been disclosed to Bank in writing.

      21. Except to the extent specifically modified by this Second Amendment,
all the terms and provisions contained in the Amended Agreement remain in full
force and effect.

      IN WITNESS WHEREOF, the parties hereto have signed this Second Amendment
on the date first above written.

                                  FINANCIAL INSTITUTIONS, INC.


                                  By: /s/ Ronald A. Miller
                                      -----------------------------------------
                                      Ronald A. Miller, Senior Vice President
                                      & CFO

                                  MANUFACTURERS AND TRADERS
                                  TRUST COMPANY


                                  By: /s/ Richard R. Stiller
                                      -----------------------------------
                                      Richard R. Stiller, Vice President


                                      -6-


                                    EXHIBIT D

                          FINANCIAL INSTITUTIONS, INC.

                              MATERIAL SUBSIDIARIES

                  Name                         Percentage of Ownership
                  ----                         -----------------------
         Wyoming County Bank                            99.66%
         National Bank of Geneva                       100.00%
         Bath National Bank                            100.00%
         First Tier Bank & Trust                       100.00%


                                      -7-


                                    EXHIBIT E
         FINANCIAL INSTITUTIONS, INC. REPORT OF CHIEF FINANCIAL OFFICER

      Financial Institutions, Inc. (the "Borrower") hereby certifies that:

      This Report is furnished pursuant to Section 5.1(c) of the Term Loan
Credit Agreement dated as of December 15, 2003, and Section 5.1(c) of the
Revolving Credit Agreement dated as of December 15, 2003 (collectively, the
"Credit Agreements") between the Borrower and MANUFACTURERS AND TRADERS TRUST
COMPANY. Unless otherwise defined herein, the terms used in this Report have the
meanings given to them in the Credit Agreements.

      As required by Section 5.1(a) and (b) of the Credit Agreements, the
Consolidated financial statements of the Borrower for the [year/quarter] ended
_________________, 200__ (the "Financial Statements"), prepared in accordance
with generally accepted accounting principles consistently applied, accompany
this Report. The Financial Statements present fairly the Consolidated financial
position of the Borrower as at the date thereof and the Consolidated results of
operations of the Borrower for the period covered thereby (subject only to
normal recurring year-end adjustments which will not in the aggregate be
material in amount).

      The figures set forth in Schedule A for determining compliance by the
Borrower with the financial covenants contained in Sections 6.7, 6.9 and 6.10 of
the Credit Agreement are true and complete as of the date hereof.

      As of the date hereof, Borrower and its Material Subsidiaries, including
any other federally-insured depository institution that was acquired after
December 15, 2003 and prior to the Maturity Date, have total "Risk-Based Capital
Ratios", "Tier I Risk-Based Capital Ratios", and "Leverage Ratios", as defined
in applicable FDIC regulations, as required by Section 6.8 of the Credit
Agreements.

      The activities of the Borrower and its Subsidiaries during the period
covered by the Financial Statements have been reviewed by me as Borrower's Chief
Financial Officer or by employees or agents of Borrower under my immediate
supervision. Based on such review, to my best knowledge and belief, and as of
the date of this Report, no Default has occurred. *

                         WITNESS my hand this ___ day of_________ 200___.

                                           FINANCIAL INSTITUTIONS, INC.


                                           By:
                                               -------------------------------
                                                    Chief Financial Officer

*If a Default has occurred, this paragraph is to be modified with an appropriate
statement as to the nature thereof, the period of existence thereof and what
action the Borrower has taken, is taking, or proposes to take with respect
thereto.


                                      -8-


                                   SCHEDULE A
                                       to
                                    EXHIBIT E

                        AFFIRMATIVE (FINANCIAL) COVENANTS

Nonperforming Assets to Total Loans and Other Real Estate Ratio (Section 6.7)

                                                                                  
MAXIMUM PERMITTED:                                                                      6.0%

ACTUAL:

         (i)      Non accrual and other loans and
                  leases past due 90 days or more
                  and still accruing                          $
                                                              -------------

         (ii)     Other real estate owned                     $
                                                              -------------
         (iii)    Nonperforming Assets:
                  line (i) plus line(ii)                                                $
                                                                                        ------------

         (iv)     Total Loans                                                           $
                                                                                        ------------
         (v)      Other real estate owned                                               $
                                                                                        ------------
         (vii)    Nonperforming Assets to Total Loans
                  and Other Real Estate Ratio:
                  [line (iii) divided by (line (iv) plus line (v)] times 100                     %
                                                                                        ---------

Minimum Tangible Common Equity (Section 6.9)

REQUIRED:                                                                               $100,000,000

ACTUAL:

         (i)      Consolidated stockholders' equity                                     $
                                                                                        ------------
         (ii)     Consolidated stockholders' preferred equity                           $
                                                                                        ------------
         (iii)    Consolidated goodwill and intangibles

         (v)      Total Tangible Common Equity:
                  line (i) minus line (ii) minus line (iii)                             $
                                                                                        ------------



                                      -9-


Debt Service Coverage Ratio (Section 6.10)

MINIMUM PERMITTED:                                                 1.25 : 1.00

ACTUAL:

         (i)      Consolidated net income on
                  Rolling-Four Quarter Basis                       $
                                                                   ------------

         (iv)     Total principal payable by Borrower
                  during next four fiscal quarters                 $
                                                                   ------------

         (v)      Total interest accruing on total
                  principal payable by Borrower
                  during next four quarters                        $
                                                                   ------------

         (iv)     Debt Service Coverage Ratio:
                  line (i) divided by [line (ii) plus line (iii)]        : 1.00
                                                                   -----  -----

         WITNESS my hand this ______ day of ____________, 20__.


                                         FINANCIAL INSTITUTIONS, INC.


                                         By:
                                         ---------------------------------------
         `                                      Chief Financial Officer


                                      -10-


[LOGO] M&T Bank
       Manufacturers and Traders Trust Company

                                                        STANDARD LIBOR GRID NOTE
                                                                        New York

Buffalo, New York               December 15, 2003                 $5,000,000.00

BORROWER: FINANCIAL INSTITUTIONS, INC.

a(n) |_| individual(s) |_| partnership |X| corporation |_| __________ organized
under the laws of New York

Address of residence/chief executive office: 220 Liberty Street, Warsaw, New
York 14569

BANK: MANUFACTURERS AND TRADERS TRUST COMPANY, a New York banking corporation
      with its principal banking office at One M & T Plaza, Buffalo, NY 14240.
      Attention: Office of General Counsel

18) DEFINITIONS. Each capitalized term shall have the meaning specified herein
and the following terms shall have the indicated meanings:

      a)    "Authorized Person" shall mean, each individually, Ronald A. Miller
            Mention of the Authorized Person's name is for reference purposes
            only and the Bank may rely on a person's title to ascertain whether
            someone is an Authorized Person.

      b)    "Automatic Adjustment Date" shall mean two (2) Business Days before
            the last day of the Interest Period initially selected by the
            Borrower for a LIBOR Rate Loan that is subject to the Automatic
            Continuation Option.

      c)    "Automatic Continuation Option" shall mean the option to have the
            Interest Period for a LIBOR Rate Loan to automatically continue at
            the same Interest Period duration initially selected by the Borrower
            for such LIBOR Rate Loan as of the last day such Interest Period.

      d)    "Base Rate" shall mean 0 percentage points above the rate of
            interest announced by the Bank as its prime rate of interest
            ("Prime"). If the prior blank is not completed, the Base Rate shall
            be one (1) percentage point above Prime.

      e)    "Base Rate Loan" shall mean a Loan which bears interest at the Base
            Rate.

      f)    "Business Day" shall mean any day of the year on which banking
            institutions in New York, New York are not authorized or required by
            law or other governmental action to close and, in connection with
            the LIBOR Rate, on which dealings are carried on in the London
            interbank market.

      g)    "Continuation Date" shall mean the date on which Borrower's election
            to continue a LIBOR Rate Loan for another Interest Period becomes
            effective in accordance with this Note.

      h)    "Conversion Date" shall mean the date on which Borrower's election
            to convert a Base Rate Loan to a LIBOR Rate Loan or a LIBOR Rate
            Loan to a Base Rate Loan becomes effective in accordance with this
            Note.

      i)    "Interest Period" shall mean, as to any LIBOR Rate Loan, the period
            commencing on the Draw Date, the Conversion Date or Continuation
            Date for such LIBOR Rate Loan and ending on the numerically
            corresponding day (or, if there is no numerically corresponding day,
            on the last day) of the calendar month that is one (1), two (2),
            three (3) or six (6)months thereafter, in each case as Borrower may
            elect; provided, however, that if an Interest Period would end on a
            day that is not a Business Day, such Interest Period shall be
            extended to the next succeeding Business Day unless such next
            succeeding Business Day would fall in the next calendar month, in
            which case such Interest Period shall end on the immediately
            preceding Business Day.

      j)    "Draw Date" shall mean, in relation to any Loan, the Business Day on
            which such Loan is made, or to be made, to Borrower pursuant to the
            Note.

      k)    "LIBOR Rate Loan" shall mean a Loan which bears interest at the
            LIBOR Rate.

      l)    "LIBOR" shall mean the rate obtained by dividing (i) the one, two,
            three or six month interest period London Interbank Offered Rate (as
            selected by Borrower) as fixed by the British Bankers Association
            for United States dollar deposits in the London Interbank Eurodollar
            Market at approximately 11:00 a.m. London, England time (or as soon
            thereafter as practicable) as determined by the Bank from any
            broker, quoting service or commonly available source utilized by the
            Bank by (ii) a percentage equal to 100% minus the stated maximum
            rate of all reserves required to be maintained against "Eurocurrency
            Liabilities" as specified in Regulation D (or against any other
            category of liabilities which includes deposits by reference to
            which the interest rate on LIBOR Rate Loan or Loans is determined or
            any category of extensions of credit or other assets which includes
            loans by a non-United States' office of a bank to United States'
            residents) on such date to any member bank of the Federal Reserve
            System.

      m)    "LIBOR Rate" shall mean 1.50 percentage points above LIBOR with an
            Interest Period selected by Borrower.

      n)    "Loan" means a loan made to Borrower by the Bank pursuant to this
            Note.

      o)    "Maximum Principal Amount" shall mean Five Million and 00/100
            Dollars ($ 5,000,000.00).

      p)    "Minimum Borrowing Amount" shall mean (i) for Base Rate Loans, any
            whole dollar increment and (ii) for LIBOR Rate Loans, $ 100,000.00
            with minimum increments thereafter of $ 100,000.00 ; provided,
            however, in no event shall the Minimum Borrowing Amount for a LIBOR
            Rate Loan be less than $100,000.00 with minimum increments
            thereafter of $100,000.00.

      q)    "Outstanding Principal Amount" shall mean the actual outstanding
            principal amount under this Note at any time.

19) PAYMENT OF PRINCIPAL, INTEREST AND EXPENSES

      a) Promise to Pay. For value received, and intending to be legally bound,
Borrower promises to pay to the order of the Bank on or before the "Termination
Date", as defined in that certain Revolving Credit Agreement (the " Credit
Agreement") of even date herewith between the Borrower and the Bank, the Maximum
Principal Amount or the Outstanding Principal Amount, if less; plus interest as
set forth below and all fees and costs (including, without limitation,
reasonable attorneys' fees and disbursements, for outside counsel) the Bank
incurs in order to collect any amount due under this Note, to negotiate or
document a workout or restructuring, or to preserve its rights or realize upon
any guaranty or other security for the payment of this Note ("Expenses").

      b) Interest. Each Loan shall earn interest on the Outstanding Principal
Amount thereof calculated on the basis of a 360-day year for the actual number
of days of each year (365 or 366) that on each day shall be:

            i) LIBOR Rate Loans. Interest shall accrue on a LIBOR Rate Loan from
            and including the first day of the Interest Period applicable
            thereto until, but not including, the last day of such Interest
            Period or the day the LIBOR Rate Loan is paid in full (if sooner) at
            a rate per annum equal to the LIBOR Rate in effect on the following
            dates (depending on the circumstance): (i) for new LIBOR Rate Loans,
            the Business Day the Bank receives (or is deemed to receive) a
            Request for a LIBOR Rate Loan; (ii) for

                                      1

CLB-171 NY (RFC Revised 6/02)


            conversions and continuations of LIBOR Rate Loans pursuant to
            Section 4, the Business Day the Bank receives (or is deemed to
            receive) the Notice of Conversion or Notice of Continuation, as the
            case may be, in accordance with Section 4(b); for LIBOR Rate Loans
            where the Automatic Continuation Option is selected, the Automatic
            Adjustment Date for such LIBOR Rate Loan.

            ii) Base Rate Loans. Interest shall accrue on a Base Rate Loan from
            and including the first date the Base Rate Loan was made (i.e., the
            Draw Date or the Conversion Date, as the case may be) to, but not
            including, the day such Base Rate Loan is paid in full or converted,
            at the rate per annum equal to the Base Rate. Any change in the Base
            Rate resulting from a change in the Bank's prime rate shall be
            effective on the date of such change.

      c) Maximum Legal Rate. It is the intent of the Bank and of Borrower that
in no event shall interest be payable at a rate in excess of the maximum rate
permitted by applicable law (the "Maximum Legal Rate"). Solely to the extent
necessary to prevent interest under this Note from exceeding the Maximum Legal
Rate, any amount that would be treated as excessive under a final judicial
interpretation of applicable law shall be deemed to have been a mistake and
automatically canceled, and, if received by the Bank, shall be refunded to
Borrower.

      d) Payments; Late Charge; Default Rate. Payments shall be made in
immediately available United States funds at any banking office of the Bank.
Interest shall be due and payable as follows: (i) in respect to each Base Rate
Loan, monthly when invoiced and (ii) in respect to each LIBOR Rate Loan, on the
last day of each Interest Period applicable thereto. If payment is not received
within five days of its due date, Borrower shall pay a late charge equal to the
greatest of (a) 5% of the delinquent amount, (b) the Bank's then current late
charge as announced by the Bank from time to time, or (c) $50.00. In addition,
if the Bank has not actually received any payment under this Note within thirty
days after its due date, from and after such thirtieth day the interest rate for
all amounts outstanding under this Note shall automatically increase to 5
percentage points above the higher of the Base Rate or the highest LIBOR Rate
(the "Default Rate"), and any judgment entered hereon or otherwise in connection
with any suit to collect amounts due hereunder shall bear interest at the
Default Rate. Payments may be applied in any order in the sole discretion of the
Bank but, prior to demand, shall be applied first to past due interest,
Expenses, late charges, and principal payments, if any, which are past due, then
to current interest and Expenses and late charges, and last to remaining
principal.

      e) Prepayment of LIBOR Rate Loans. If (i) Borrower pays, in whole or in
part, any LIBOR Rate Loan, before the expiration of its respective Interest Rate
Period, (ii) fails to draw down, in whole or in part, a LIBOR Rate Loan after
giving a Request therefor, (iii) otherwise tries to revoke any LIBOR Rate Loan,
in whole or in part, or (iv) there occurs a Bankruptcy Event or the applicable
rate is converted from the LIBOR Rate to the Base Rate pursuant to Section 4(d),
then Borrower shall be liable for and shall pay the Bank, on demand, the actual
amount of the liabilities, expenses, costs or funding losses that are a direct
or indirect result of such prepayment, failure to draw, early termination of an
Interest Period, revocation, bankruptcy or otherwise, whether such liability,
expense, cost or loss is by reason of (a) any reduction in yield, by reason of
the liquidation or reemployment of any deposit or other funds acquired by the
Bank, or (b) the fixing of the interest rate payable on any LIBOR Rate Loans.
The determination by the Bank of the amount of foregoing amount shall, in the
absence of manifest error, be conclusive and binding upon Borrower.

20) LOANS.

      a) General. Any Loan hereunder shall either be in the form of a Base Rate
Loan or a LIBOR Rate Loan. No Loan, or any portion thereof, shall be made to the
extent that the sum of the (i) principal amount of the requested Loan, or any
portion thereof and (ii) the Outstanding Principal Amount of all Loans under the
Note exceeds the Maximum Principal Amount under this Note. The Bank may make any
Loan in reliance upon any oral, telephonic, written, teletransmitted or other
request (the "Request(s)") that the Bank in good faith believes to be valid and
to have been made by Borrower or on behalf of Borrower by an Authorized Person.
The Bank may act on the Request of any Authorized Person until the Bank shall
have received from Borrower, and had a reasonable time to act on, written notice
revoking the authority of such Authorized Person. The Bank shall incur no
liability to Borrower or to any other person as a direct or indirect result of
making any Loan pursuant to this paragraph.

      b) Request for LIBOR Rate Loans. Borrower shall give the Bank its
irrevocable Request for a LIBOR Rate Loan specifying:

            i)    the Draw Date for the LIBOR Rate Loan, which shall be two (2)
                  Business Days after the date of the Request; provided, however
                  if a Request is received by the Bank after 2:00 p.m. (Eastern
                  Time), the Request for the LIBOR Rate Loan shall be deemed to
                  have been received on the next Business Day;

            ii)   the aggregate amount of such LIBOR Rate Loan, which amount
                  shall not be less than the Minimum Borrowing Amount;

            iii)  the applicable Interest Period (i.e., 1, 2, 3 or 6 month
                  Interest Period); and

            iv)   whether Borrower is electing the Automatic Continuation Option
                  for such LIBOR Rate Loan.

      c) Requests for Base Rate Loans. Borrower may request any Base Rate Loan
not later than 2:00 p.m. (Eastern Time) on any proposed Draw Date specifying the
aggregate amount of such Base Rate Loan.

      d) Delivery of Requests Delivery of a Notice or Request for a LIBOR Rate
Loan or a Base Rate Loan shall be made to the Bank as follows, or such other
contact point designated by the Bank from time to time:

                   Manufacturers and Traders Trust Company

                   Attn: Richard R. Stiller
                        --------------------------

                   Fax No. (716) 848-7318
                          ------------------------

                   Telephone No. (716) 848-7332
                                ------------------

21) CONTINUATION and CONVERSION ELECTIONS.

      a) Election. An Authorized Person of Borrower may, upon irrevocable
Request to the Bank,

            i)    elect to convert on any Business Day any Base Rate Loan into a
                  LIBOR Rate Loan provided the amount converted is not less than
                  the Minimum Borrowing Amount; or


                                       2


            ii)   elect to convert any or a part of LIBOR Rate Loan as of the
                  last day of the applicable Interest Period into a Base Rate
                  Loan provided no partial conversion of a LIBOR Rate Loan shall
                  reduce the outstanding principal amount of such LIBOR Rate
                  Loan to less than the Minimum Borrowing Amount; or

            iii)  elect to continue all or a part (subject to the Minimum
                  Borrowing Amount limitation) of any LIBOR Rate Loan as of the
                  last day of the Interest Period applicable to such LIBOR Rate
                  Loan with the same or a different Interest Period provided no
                  partial continuation of a LIBOR Rate Loan with a different
                  Interest Period shall reduce the outstanding principal amount
                  of the LIBOR Rate Loan with the same Interest Period to less
                  than the Minimum Borrowing Amount.

      b) Notice of Conversion/Continuation.

            i)    For an election under Section 4(a)(i) or 4(a)(iii), an
                  Authorized Person must deliver to the Bank by 2:00 p.m.
                  (Eastern Time) on a Business Day a Notice of Conversion
                  ("Notice of Conversion") for an election under Section 4(a)(i)
                  or a Notice of Continuation ("Notice of Continuation") for an
                  election under Section 4(a)(iii) specifying:

                  (a)   the aggregate amount of the Loans to be converted or
                        continued;

                  (b)   the duration of the requested Interest Period (i.e., 1,
                        2, 3 or 6 month Interest Period); and

                  (c)   whether the Automatic Continuation Option will be
                        activated for such LIBOR Rate Loan.

            ii)   The Continuation Date or Conversion Date (as the case may be)
                  shall be the later of (A) two (2) Business Days from the
                  Business Day the Bank receives the Notice of Conversion or
                  Notice of Continuation (either, a "Notice") in accordance with
                  the foregoing Section or (B) the last day of the relevant
                  Interest Period if a Notice is received by the Bank more than
                  two (2) Business Days before the last day of an Interest
                  Period. If a Notice is received after 2:00 p.m. (Eastern
                  Time), the Notice will be deemed to have been received on the
                  next Business Day. Notice of Continuation received more than
                  two (2) Business Days before the end of an Interest Period
                  shall be deemed to have been received two (2) Business Days
                  before the end of such Interest Period for purposes of
                  determining the LIBOR Rate for the next Interest Period per
                  Section 2(b)(i). Accordingly, if, for example, Borrower has a
                  LIBOR Rate Loan with a one month Interest Period ending on
                  June 15 and wants to continue the LIBOR Rate Loan with a two
                  month Interest Period, Borrower must deliver its Notice of
                  Continuation identifying the new two month Interest Period to
                  the Bank by 2:00 p.m. (Eastern Time) on June 13 (provided that
                  June 13 and June 14 are Business Days).

            iii)  For LIBOR Rate Loans where Borrower has elected to activate
                  the Automatic Continuation Option, the Bank shall
                  automatically continue such LIBOR Rate Loan with an same
                  Interest Period initially selected by the Borrower. Once the
                  Automatic Continuation Option has been activated for a LIBOR
                  Rate Loan, the submission of a Notice of Conversion or a
                  Notice of Continuation with a different Interest Period shall
                  result in the cancellation of the Automatic Continuation
                  Option for such LIBOR Rate Loan.

            iv)   For an election under Section 4(a)(ii), an Authorized Person
                  may deliver to the Bank a Notice of Conversion at any time
                  during an Interest Period up to the last day of such Interest
                  Period or may have the LIBOR Rate Loan automatically convert
                  to a Base Rate Loan pursuant to Section 4(c). Any such Notice
                  of Conversion delivered during an Interest Period shall be
                  effective on the last day of the Interest Period.

            v)    The Bank may take action in reliance upon any oral,
                  telephonic, written or teletransmitted Notice that the Bank in
                  good faith believes to be valid and to have been made by
                  Borrower or on behalf of Borrower by an Authorized Person. No
                  Notice may be delivered by e-mail. The Bank may act on the
                  Notice from any Authorized Person until the Bank shall have
                  received from Borrower, and had a reasonable time to act on,
                  written notice revoking the authority of such Authorized
                  Person. The Bank shall incur no liability to Borrower or to
                  any other person as a direct or indirect result of acting on
                  any Notice under this Note. The Bank, in its sole discretion,
                  may reject any Notice that is incomplete.

      c) Expiration of Interest Period. Unless Borrower has elected the
Automatic Continuation Option with respect to a LIBOR Rate Loan, if Borrower
does not submit a Notice of Continuation in accordance with Section 4(b)(i) and
4(b)(ii) so that the Bank receives the Notice of Continuation at least two (2)
Business Days before the end of an Interest Period with respect to such LIBOR
Rate Loan, such LIBOR Rate Loan shall automatically be converted into a Base
Rate Loan and such Loan shall accrue interest at the Base Rate until two (2)
Business Days after the Bank receives a Notice of Conversion pursuant to Section
4(b)(i) and 4(b)(ii) electing to convert the Loan from a Base Rate Loan to a
LIBOR Rate Loan pursuant to Section 4(a)(i). A Notice of Continuation received
one (1) Business Day before the end of an Interest Period will not effect a
continuation of such Loan as a LIBOR Rate Loan. Rather, such LIBOR Rate Loan
shall automatically convert to a Base Rate Loan on the last day of the Interest
Period. The late Notice of Continuation, however, will be deemed to be a Notice
of Conversion that will be effective two (2) Business Days from the date
received by the Bank.

      d) Conversion upon Default. Unless the Bank shall otherwise consent in
writing, if (i) Borrower has failed to pay when due, in whole or in part, the
indebtedness under the Note, or (ii) there exists a condition or event which
with the passage of time, the giving of notice or both shall constitute an event
of default under any of Borrower's agreement with the Bank, if any, Borrower may
not elect to have a Loan converted or continued as a LIBOR Rate Loan or have any
Loan made as a LIBOR Rate Loan. Further, the Bank, in its sole discretion, may
(i) permit any outstanding LIBOR Rate Loans to continue until the last day of
the applicable Interest Period at which time such Loan shall automatically be
converted into a Base Rate Loan or (ii) convert any outstanding LIBOR Rate Loans
into a Base Rate Loan before the end of the applicable Interest Period
applicable to such LIBOR Rate Loan. Notwithstanding the foregoing, if Borrower
commences, or has commenced against it, any proceeding or request for relief
under any bankruptcy, insolvency or similar laws now or hereafter in effect in
the United States of America or any state or territory thereof or any foreign
jurisdiction or any formal or informal proceeding for the dissolution or
liquidation of, settlement of claims against or winding up of affairs of
Borrower (a "Bankruptcy Event"), any outstanding LIBOR Rate Loans shall be
automatically converted to Base Rate Loans without further action by the Bank
and Borrower's rights to have Base Rate Loans converted under Section 4 shall be
automatically terminated. Nothing herein shall be construed to be a waiver by
the Bank to have any Loan accrue interest at the Default Rate of interest (which
shall be calculated from the higher of the LIBOR Rate or the Base Rate) or the
right of the Bank to the amounts set forth in Section 2(e) of this Note.

      22) SETOFF. After the occurrence of any "Default," as defined in the
Credit Agreement, the Bank shall have the right to set off against the amounts
owing under this Note any property held in a deposit or other account with the
Bank or any of its affiliates or otherwise owing by the Bank or any of its
affiliates in any capacity to Borrower or any guarantor or endorser of this
Note. Such set-off shall be deemed to have been exercised immediately at the
time the Bank or such affiliate elect to do so.


                                       3


23) DEFAULT. Upon the occurrence of an "Event of Default" under the Credit
Agreement, the Bank shall be entitled to the remedies set forth in Section 7.2
of the Credit Agreement.

24) BANK RECORDS CONCLUSIVE. The Bank shall set forth on a schedule attached to
this Note or maintained on computer, the date and original principal amount of
each Loan and the date and amount of each payment to be applied to the
Outstanding Principal Amount of this Note. The Outstanding Principal Amount set
forth on any such schedule shall be presumptive evidence of the Outstanding
Principal Amount of this Note and of all Loans. No failure by the Bank to make,
and no error by the Bank in making, any annotation on any such schedule shall
affect the Borrower's obligation to pay the principal and interest of each Loan
or any other obligation of Borrower to the Bank pursuant to this Note.

25) PURPOSE. Borrower certifies (a) that no Loan will be used to purchase margin
stock except with the Bank's express prior written consent for each such
purchase and (b) that all Loans shall be used for a business purpose, and not
for any personal, family or household purpose.

26) AUTHORIZATION. Borrower, if a corporation, partnership, limited liability
company, trust or other entity, represents that it is duly organized and in good
standing or duly constituted in the state of its organization and is duly
authorized to do business in all jurisdictions material to the conduct of its
business; that the execution, delivery and performance of this Note have been
duly authorized by all necessary regulatory and corporate or partnership action
or by its governing instrument; that this Note has been duly executed by an
authorized officer, partner or trustee and constitutes a binding obligation
enforceable against Borrower and not in violation of any law, court order or
agreement by which Borrower is bound; and that Borrower's performance is not
threatened by any pending or threatened litigation.

27) INABILITY TO DETERMINE LIBOR RATES, INCREASED COSTS, ILLEGALITY.

      a) Increased Costs. If the Bank shall determine that, due to either (a)
the introduction of any change (other than any change by way of imposition of or
increase in reserve requirements included in the calculation of the LIBOR) in or
in the interpretation of any requirement of law or (b) the compliance with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law), there shall be any increase in the
cost to the Bank of agreeing to make or making, funding or maintaining any LIBOR
Rate Loans, then Borrower shall be liable for, and shall from time to time, upon
demand therefor by the Bank and pay to the Bank such additional amounts as are
sufficient to compensate the Bank for such increased costs.

      b) Inability to Determine Rates. If the Bank shall determine that for any
reason adequate and reasonable means do not exist for ascertaining LIBOR for any
requested Interest Period with respect to a proposed LIBOR Rate Loan, the Bank
will give notice of such determination to Borrower. Thereafter, the Bank may not
make or maintain LIBOR Rate Loans, as the case may be, hereunder until the Bank
revokes such notice in writing. Upon receipt of such notice, Borrower may revoke
any request for a LIBOR Rate Loan or Notice then submitted by it. If Borrower
does not revoke such notice the Bank may make, or continue the Loans, as
proposed by Borrower, in the amount specified in the applicable request
submitted by Borrower, but such Loans shall be made or continued as Base Rate
Loans instead of LIBOR Rate Loans, as the case may be.

      c) Illegality. If the Bank shall determine that the introduction of any
law (statutory or common), treaty, rule, regulation, guideline or determination
of an arbitrator or of a governmental authority or in the interpretation or
administration thereof, has made it unlawful, or that any central bank or other
governmental authority has asserted that it is unlawful for the Bank to make
LIBOR Rate Loans, then, on notice thereof by the Bank to Borrower, the Bank may
suspend the making of LIBOR Rate Loans until the Bank shall have notified
Borrower that the circumstances giving rise to such determination shall no
longer exist. If the Bank shall determine that it is unlawful to maintain any
LIBOR Rate Loans, Borrower shall prepay in full all LIBOR Rate Loans then
outstanding, together with accrued interest, either on the last date of the
Interest Period thereof if the Bank may lawfully continue to maintain such LIBOR
Rate Loans to such day, or immediately, if the Bank may not lawfully continue to
maintain such LIBOR Rate Loans. If Borrower is required to prepay any LIBOR Rate
Loan immediately as set forth in this subsection, then concurrently with such
prepayment, Borrower may borrow from the Bank, in the amount of such repayment,
a Base Rate Loan.

28) MISCELLANEOUS. This Note, together with any related loan and security
agreements and guaranties, contains the entire agreement between the Bank and
Borrower with respect to the Note, and supersedes every course of dealing, other
conduct, oral agreement and representation previously made by the Bank. All
rights and remedies of the Bank under applicable law and this Note or amendment
of any provision of this Note are cumulative and not exclusive. No single,
partial or delayed exercise by the Bank of any right or remedy shall preclude
the subsequent exercise by the Bank at any time of any right or remedy of the
Bank without notice. No waiver or amendment of any provision of this Note shall
be effective unless made specifically in writing by the Bank. No course of
dealing or other conduct, no oral agreement or representation made by the Bank,
and no usage of trade, shall operate as a waiver of any right or remedy of the
Bank. No waiver of any right or remedy of the Bank shall be effective unless
made specifically in writing by the Bank. Borrower agrees that in any legal
proceeding, a copy of this Note kept in the Bank's course of business may be
admitted into evidence as an original. This Note is a binding obligation
enforceable against Borrower and its successors and assigns and shall inure to
the benefit of the Bank and its successors and assigns. If a court deems any
provision of this Note invalid, the remainder of the Note shall remain in
effect. Section headings are for convenience only. Singular number includes
plural and neuter gender includes masculine and feminine as appropriate.

29) NOTICES. Any demand or notice hereunder or under any applicable law
pertaining hereto shall be in writing and duly given if delivered to Borrower
(at its address on the Bank's records) or to the Bank (at the address on page
one and separately to the Bank officer responsible for Borrower's relationship
with the Bank). Such notice or demand shall be deemed sufficiently given for all
purposes when delivered (i) by personal delivery and shall be deemed effective
when delivered, or (ii) by mail or courier and shall be deemed effective three
(3) business days after deposit in an official depository maintained by the
United States Post Office for the collection of mail or one (1) business day
after delivery to a nationally recognized overnight courier service (e.g.,
Federal Express). Notice by e-mail is not valid notice under this or any other
agreement between Borrower and the Bank.

30) JOINT AND SEVERAL. If there is more than one Borrower, each of them shall be
jointly and severally liable for all amounts which become due under this Note
and the term "Borrower" shall include each as well as all of them.

31) GOVERNING LAW; JURISDICTION. This Note has been delivered to and accepted by
the Bank and will be deemed to be made in the State of New York. This Note will
be interpreted in accordance with the laws of the State of New York excluding
its conflict of laws rules. BORROWER HEREBY IRREVOCABLY CONSENTS TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT IN ERIE COUNTY, NEW YORK;
PROVIDED THAT NOTHING CONTAINED IN THIS NOTE WILL PREVENT THE BANK FROM BRINGING
ANY ACTION, ENFORCING ANY AWARD OR JUDGMENT OR EXERCISING ANY RIGHTS AGAINST
BORROWER INDIVIDUALLY, AGAINST ANY SECURITY OR AGAINST ANY PROPERTY OF


                                       4


BORROWER WITHIN ANY OTHER COUNTY, STATE OR OTHER FOREIGN OR DOMESTIC
JURISDICTION. Borrower acknowledges and agrees that the venue provided above is
the most convenient forum for both the Bank and Borrower. Borrower waives any
objection to venue and any objection based on a more convenient forum in any
action instituted under this Note.

32) WAIVER OF JURY TRIAL. BORROWER AND THE BANK HEREBY KNOWINGLY, VOLUNTARILY,
AND INTENTIONALLY WAIVE ANY RIGHT TO TRIAL BY JURY BORROWER AND THE BANK MAY
HAVE IN ANY ACTION OR PROCEEDING, IN LAW OR IN EQUITY, IN CONNECTION WITH THIS
NOTE OR THE TRANSACTIONS RELATED HERETO. BORROWER REPRESENTS AND WARRANTS THAT
NO REPRESENTATIVE OR AGENT OF THE BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT THE BANK WILL NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THIS JURY
TRIAL WAIVER. BORROWER ACKNOWLEDGES THAT THE BANK HAS BEEN INDUCED TO ENTER INTO
THIS NOTE BY, AMONG OTHER THINGS, THE PROVISIONS OF THIS SECTION.

Preauthorized Transfers from Deposit Account. If a deposit account number is
provided in the following blank Borrower hereby authorizes the Bank to debit
available funds in Borrower's deposit account #8890769956 with the Bank
automatically for any amount which becomes due under this Note or as directed by
an Authorized Person, by telephone.

Acknowledgment. Borrower acknowledges that it has read and understands all the
provisions of this Note, including the Governing Law, Jurisdiction and Waiver of
Jury Trial, and has been advised by counsel as necessary or appropriate.

Replacement Note. This Note is given in replacement of and in substitution for,
but not in payment of, a note dated on or about July 3, 2002 in the original
principal amount of $10,000,000.00 issued by Borrower to the Bank.

TAX ID/SS #        16-0816610                   FINANCIAL INSTITUTIONS, INC.
            --------------------------------    --------------------------------
                                                BORROWER


                                                By:/s/ Ronald A. Miller
                                                   -----------------------------

                                                Name: Ronald A. Miller
                                                --------------------------------

                                                Its: Senior Vice President & CFO
                                                --------------------------------

                                 ACKNOWLEDGMENT

STATE OF NEW YORK)
                            : SS.
COUNTY OF WYOMING)

      On the 15th day of December, in the year 2003, before me, the
undersigned, a Notary Public in and for said State, personally appeared Ronald
A. Miller, personally known to me or proved to me on the basis of satisfactory
evidence to be the individual(s) whose name(s) is (are) subscribed to the within
instrument and acknowledged to me that he/she/they executed the same in
his/her/their capacity(ies), and that by his/her/their signature(s) on the
instrument, the individual(s), or the person upon behalf of which the
individual(s) acted, executed the instrument.

                                                   /s/ Roger Cominsky
                                              ------------------------------
                                                       Notary Public


- --------------------------------------------------------------------------------

                                FOR BANK USE ONLY

Authorization Confirmed:________________________________________________________

Product Code:  11900

Disbursement of Funds:

Credit A/C #            Off Ck #               Payoff Obligation #
             ---------           -----------                       ----------

           $                   $                                 $
             ---------           -----------                       ----------


                                       5
CLB-171 NY (RFC Revised 6/02)


                                 FIRST AMENDMENT
                                       TO
                           REVOLVING CREDIT AGREEMENT

      THIS FIRST AMENDMENT is dated July 3, 2002 and made by and between
Financial Institutions, Inc., a New York corporation having its head office at
220 Liberty Street, Warsaw, New York 14569 (the "Borrower") and Manufacturers
and Traders Trust Company, a New York banking corporation, having its principal
banking office at One M&T Plaza, Buffalo, New York 14023 (the "Bank").

      WHEREAS, Bank, at Borrower's request, has made available to Borrower a
Five Million Dollar ($5,000,000.00) revolving credit facility (the "Loan"),
which Loan was made pursuant to the terms and conditions contained in that
certain Revolving Credit Agreement, dated as of April 25, 2001, by and between
Borrower and Bank (the "Original Agreement"); and

      WHEREAS, Bank, at Borrower's request, agreed to extend the term of the
Original Agreement and increase the amount of the Loan in accordance with the
provisions of this First Amendment as set forth herein;

      NOW, THEREFORE, in consideration of the premises herein contained, and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereto hereby agree as follows:

      33) The definition of "Termination Date" contained in Section 1.1 of the
Original Agreement is hereby amended in its entirety as follows:

      "Termination Date. April 30, 2005 or such earlier date on which the
      commitment to make loans is terminated or the Commitment Amount is reduced
      to zero in accordance with the terms hereof."

      34) The definition of "Commitment Amount" contained in Section 1.1 of the
Original Agreement is hereby amended in its entirety as follows:

      "Commitment Amount. $10,000,000."

      35) As a material inducement to Bank to enter into this First Amendment,
the Borrower hereby:


                                       1


            (a)   represents that no "Event of Default" specified in Section VII
                  of the Original Agreement, nor any event which with notice or
                  lapse of time or both would become such an Event of Default,
                  has occurred;

            (b)   covenants that the representations and warranties contained in
                  Section IV of the Original Agreement continue to be true and
                  correct in all respects on and as of the date of this First
                  Amendment, with the same force and effect as if made on and as
                  of the date of this First Amendment;

            (c)   represents and warrants that there has been no violation of
                  any of the affirmative covenants contained in Section V of the
                  Original Agreement nor of any of the negative covenants
                  contained in Section VI of the Original Agreement; and

            (d)   agrees to pay Bank an extension fee of $5,000 upon execution
                  of this First Amendment, together with its reasonable
                  out-of-pocket costs and expenses incurred in connection with
                  this First Amendment (including, but not limited to,
                  reasonable attorneys' fees and expenses).

      36) Except to the extent specifically modified by this First Amendment,
all the terms and provisions contained in the Original Agreement remain in full
force and effect.

      IN WITNESS WHEREOF, the parties hereto have signed this First Amendment on
the date first above written.

                                  FINANCIAL INSTITUTIONS, INC.


                                  By: /s/ Ronald A. Miller
                                      ------------------------------------------

                                      Name:    Ronald A. Miller

                                      Title:   Senior Vice President & CFO

                                  MANUFACTURERS AND TRADERS
                                  TRUST COMPANY


                                  By: /s/ Richard R. Stiller
                                      ------------------------------------------

                                      Name:    Richard R. Stiller

                                      Title:   Vice President


                                       2


                           REVOLVING CREDIT AGREEMENT

                           Dated as of April 25, 2001

                                     between

                 MANUFACTURERS AND TRADERS TRUST COMPANY ("M&T")

                                       and

                      FINANCIAL INSTITUTIONS, INC. ("FII")



                                TABLE OF CONTENTS

                                                                            Page
- --------------------------------------------------------------------------------

SECTION I  DEFINITIONS ....................................................    1
         1.1      Definitions .............................................    1
         1.2.     Accounting Terms ........................................    4

SECTION II  DESCRIPTION OF CREDIT .........................................    4
         2.1.     The Loans ...............................................    4
         2.2.     Fees ....................................................    5
         2.3.     The Note ................................................    5
         2.4      Duration of Interest Periods ............................    5
         2.5      Interest Rates and Payments of Interest .................    5
         2.6.     Changed Circumstances ...................................    5
         2.7.     Illegality ..............................................    6
         2.8.     Prepayments of the Loans ................................    6
         2.9.     Method of Payment .......................................    6
         2.10.    Overdue Payments ........................................    6
         2.11.    Computation of Interest and Fees ........................    7

SECTION III  CONDITIONS OF LOANS ..........................................    7
         3.1.     Conditions Precedent to Initial Loan ....................    7
         3.2.     Conditions Precedent to all Loans .......................    7

SECTION IV  REPRESENTATIONS AND WARRANTIES ................................    8
         4.1.     Organization and Qualification ..........................    8
         4.2.     Corporate Authority .....................................    8
         4.3.     Valid Obligations .......................................    9
         4.4.     Consents or Approvals ...................................    9
         4.5.     Title to Properties; Absence of Encumbrances ............    9
         4.6.     Financial Statements ....................................    9
         4.7.     Changes .................................................    9
         4.8.     Defaults ................................................    9
         4.9.     Taxes ...................................................   10
         4.10.    Litigation ..............................................   10
         4.11.    Use of Proceeds .........................................   10
         4.12.    Subsidiaries ............................................   10
         4.13.    Investment Company Act, etc .............................   10
         4.14.    Compliance with ERISA ...................................   10
         4.15.    Environmental Matters ...................................   11

SECTION V  AFFIRMATIVE COVENANTS ..........................................   11



         5.1.     Financial Statements and other Reporting Requirements ...   11
         5.2.     Conduct of Business .....................................   13
         5.3.     Maintenance and Insurance ...............................   13
         5.4.     Taxes ...................................................   13
         5.5.     Inspection by the Bank ..................................   14
         5.6.     Maintenance of Books and Records ........................   14
         5.7.     Further Assurances ......................................   14

SECTION VI  NEGATIVE COVENANTS ............................................   15
         6.1.     Encumbrances ............................................   15
         6.2.     Merger; Consolidation; Sale or Lease of Assets ..........   16
         6.3.     Stock of Subsidiaries ...................................   16
         6.4.     Investments .............................................   17
         6.5.     Acquisitions ............................................   17
         6.6.     ERISA ...................................................   17
         6.7.     Double Leverage Ratio ...................................   17
         6.8.     Nonperforming Asset Coverage Ratio ......................   17
         6.9.     Capitalization of Borrower and Material Subsidiaries ....   18
         6.10.    Minimum Tangible Net Worth ..............................   18

SECTION VII  DEFAULTS .....................................................   18
         7.1.     Events of Default .......................................   18
         7.2.     Remedies ................................................   20

SECTION VIII  MISCELLANEOUS ...............................................   21
         8.1.     Notices .................................................   21
         8.2.     Expenses ................................................   21
         8.3.     Set-Off .................................................   22
         8.4.     Term of Agreement .......................................   22
         8.5.     No Waivers ..............................................   22
         8.6.     Governing Law ...........................................   22
         8.7.     Amendments ..............................................   23
         8.8.     Binding Effect of Agreement .............................   23
         8.9.     Counterparts ............................................   23
         8.10.    Partial Invalidity ......................................   23
         8.11.    Captions ................................................   23
         8.12.    Waiver of Jury Trial ....................................   23
         8.13     Entire Agreement ........................................   23



                                    EXHIBITS

EXHIBIT A - Form of Standard Libor Grid Note

EXHIBIT B - Encumbrances

EXHIBIT C - Litigation; Environmental Matters

EXHIBIT D - Material Subsidiaries

EXHIBIT E - Form of Report of Chief Financial Officer

EXHIBIT F - Form of Opinion of Counsel to the Borrower



                           REVOLVING CREDIT AGREEMENT

                           Dated as of April 25, 2001

      THIS REVOLVING CREDIT AGREEMENT is made as of April 25, 2001 by and
between Financial Institutions, Inc. (the "Borrower"), a New York corporation
having its head office at 220 Liberty Street, Warsaw, New York 14569 and
Manufacturers and Traders Trust Company (the "Bank"), a New York banking
corporation having its principal banking office at One M&T Plaza, Buffalo, New
York 14203.

                                    SECTION I

                                   DEFINITIONS

      1.1 Definitions

      All capitalized terms used in this Agreement or in the Note or in any
certificate, report or other document made or delivered pursuant to this
Agreement (unless otherwise defined therein) shall have the meanings assigned to
them below:

      Account. See Section 2.1

      Agreement. This Agreement, as the same may be supplemented or amended from
time to time.

      Bank. See Preamble.

      Base Rate. The rate of interest announced from time to time by the Bank at
its prime rate of interest.

      Base Rate Loan. Any Loan bearing interest at the Base Rate.

      Borrower. See Preamble.

      Business Day. Shall have the meaning set forth in the Note.

      Code. The Internal Revenue Code of 1986 and the rules and regulations
thereunder, collectively, as the same may from time to time be supplemented or
amended.

      Commitment Amount. $5,000,000.



      Controlled Group. All trades or businesses (whether or not incorporated)
under common control that, together with the Borrower, are treated as a single
employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA

      Controlled Subsidiary. Any corporation, association, joint stock company,
business trust or other similar organization of which more than 50% of the
ordinary voting power for the election of a majority of the members of the board
of directors or other governing body of such entity is held or controlled by the
Borrower; or any other such entity the management of which is directly or
indirectly controlled by the Borrower through the exercise of voting power or
otherwise; or any joint venture, whether incorporated or not, in which the
Borrower has an ownership interest of more than 50%.

      Default. An Event of Default or event or condition that, but for the
requirement that time elapse or notice be given, or both, would constitute an
Event of Default.

      Encumbrances. See Section 6.1.

      ERISA. The Employee Retirement Income Security Act of 1974 and the rules
and regulations thereunder, collectively, as the same may from time to time be
supplemented or amended.

      Environmental Laws. All applicable foreign, federal, state and local
environmental, health or safety statutes, laws, regulations, rules, ordinances,
policies and rules or common law whether now existing or hereafter enacted or
promulgated, relating to injury to, or the protection of, real or personal
property or human health or the environment.

      Event of Default. Any event described in Section 7.1.

      Federal Banking Agency - means any of the Federal Deposit Insurance
Corporation, Comptroller of Currency, Board of Governors of the Federal Reserve
System or Office of Thrift Supervision.

      FFIEC. The Federal Financial Institutions Examination Council, or such
other regulatory agency or authority having jurisdiction over financial
reporting by banks and bank holding companies.

      Hazardous Material. Any substance which is or becomes defined as a
"hazardous waste," "hazardous material," "hazardous substance," "controlled
industrial waste," "pollutant" or "contaminant" under any Environmental Law or
which is toxic, explosive, corrosive, flammable, infectious, radioactive,
carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by
any governmental authority or instrumentality or which contains gasoline, diesel
fuel or other petroleum products, asbestos or polychlorinated biphenyls
('PCB's").

      Interest Period. With respect to each Libor Rate Loan, the period defined
in the Note.


                                       2


      Investment. The purchase or acquisition of any share of capital stock,
partnership interest, evidence of indebtedness or other equity security of any
other person or entity, any loan, advance or extension of credit to, or
contribution to the capital of, any other person or entity, any real estate held
for sale or investment, any commodities futures contracts held other than in
connection with bona fide hedging transactions, any other investment in any
other person or entity, and the making of any commitment or acquisition of any
option to make an Investment.

      LIBOR Rate Loan. Any Loan bearing interest at the LIBOR Rate as defined in
the Note.

      Loan. A loan made to the Borrower by the Bank pursuant to Section II of
this Agreement, and "Loans" means all of such loans, collectively.

      Material Subsidiary. Those Subsidiaries listed on Exhibit D hereto, and
any other Subsidiary of the Borrower that is a federally-insured depository
institution.

      Nonperforming Asset. As defined in Section 6.8.

      Note. A Standard Libor Grid Note of the Borrower, substantially in the
form of Exhibit A hereto, evidencing the obligation of the Borrower to the Bank
to repay the Loans.

      Obligations. All obligations of the Borrower to the Bank hereunder of
every kind and description, direct or indirect, absolute or contingent, primary
or secondary, due or to become due, now existing or hereafter arising,
regardless of how they arise or by what agreement or instrument, if any, and
including obligations to perform acts and refrain from taking action as well as
obligations to pay money.

      PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding to
any or all of its actions under ERISA

      Permitted Encumbrances. See Section 6.1.

      Plan. An employee pension or other benefit plan that is subject to Title
IV of ERISA or subject to the minimum funding standards under Section 412 of the
Code and is either (i) maintained by the Borrower or any member of the
Controlled Group for employees of the Borrower or any member of the Controlled
Group or (ii) if such Plan is established, maintained pursuant to a collective
bargaining agreement or any other arrangement under which more than one employer
makes contributions and to which the Borrower or any member of the Controlled
Group is then making or accruing an obligation to make contributions or has
within the preceding five Plan years made contributions.

      Subsidiary. Any corporation, association, joint stock company, business
trust or other similar organization of which 50% or more of the ordinary voting
power for the election of a


                                       3


majority of the members of the board of directors or other governing body of
such entity is held or controlled by the Borrower or a Subsidiary of the
Borrower; or any other such entity the management of which is directly or
indirectly controlled by the Borrower or a Subsidiary of the Borrower through
the exercise of voting power or otherwise; or any joint venture, whether
incorporated or not, in which the Borrower has an ownership interest of 50% or
more.

      Termination Date. April 24, 2003 or such earlier date on which the
commitment to make Loans is terminated in accordance with the terms hereof.

      1.2. Accounting Terms. All terms of an accounting character shall have the
meanings assigned thereto by generally accepted accounting principles or
regulatory accounting principles, as applicable, as applied on a basis
consistent with the financial statements referred to in Section 4.6 of this
Agreement, but as herein specifically modified.

                                   SECTION II

                              DESCRIPTION OF CREDIT

      2.1. The Loans. (a) Subject to the terms and conditions hereof, the Bank
will make Loans to the Borrower, from time to time until the close of business
on the Termination Date, in such sums as the Borrower may request, provided that
the aggregate principal amount of all Loans at any one time outstanding
hereunder may not exceed the Commitment Amount. All Loans hereunder shall be
credited by the Bank to Account No. __________ at the Bank, for the credit of
the Borrower (the "Account").

      (a) The Borrower may borrow, prepay pursuant to Section 2.8 and reborrow,
from the date of this Agreement until the Termination Date, the Commitment
Amount or any lesser sum subject to the Minimum Borrowing Amount limitations set
forth in the Note. Any Loan not repaid by the Termination Date shall be due and
payable on the Termination Date.

      (b) Provided that no Default shall have occurred and be continuing, the
Borrower may make and effectuate the conversion elections as described in
Section 4 of the Note by giving the Bank prior notice of each such conversion
(which notice shall be effective upon receipt) in accordance with the
provisions.

      (c) Subject to the terms and conditions hereof, the Bank shall make each
Loan on the effective date specified therefor by crediting the amount of such
Loan in immediately available funds to the Account, for the credit of the
Borrower.

      2.2. Fees. (a) The Borrower shall pay to the Bank a commitment fee on the
daily average unused portion of the Commitment Amount during each quarter or
portion thereof, computed at the rate of 1/4 of 1% per annum.


                                       4


      (b) Commitment fees shall be payable quarterly in arrears on the last day
of each calendar quarter commencing April 30, 2001 and ending on the Termination
Date.

      (c) Additionally Borrower shall pay Bank a one time facility fee, on or
before the effective date of this Agreement of $5,000.00.

      2.3. The Note. The Loans shall be evidenced by the Note, payable to the
order of the Bank and having a final maturity of the Termination Date. The Note
shall be dated on or before the date of the first Loan and shall have the blanks
therein appropriately completed. The Bank shall, and is hereby irrevocably
authorized by the Borrower to, enter on the schedule forming a part of the Note
or otherwise in its records appropriate notations evidencing the date and the
amount of each Loan, the applicable interest rate and the date and amount of
each payment of principal made by the Borrower with respect thereto; and in the
absence of manifest error, such notations shall constitute a rebuttable
presumption of the correctness thereof; provided that no failure on the part of
the Bank to make any such notation shall in any way affect any Loan or the
rights or obligations of the Bank or the Borrower with respect thereto.

      2.4 Duration of Interest Periods. (a) The duration of each Interest Period
applicable to a Loan shall be as specified in the Note.

      (b) Notwithstanding the foregoing, the Borrower may not select an Interest
Period that would end, but for the provisions of the definition of Interest
Period, after the Termination Date.

      2.5 Interest Rates and Payments of Interest. Each Base Rate Loan and Libor
Rate Loan shall bear interest on the outstanding principal amount thereof at a
rate per annum as provided in the Note.

      2.6. Changed Circumstances.

      (a) If the Bank shall determine that, due to either (i) the introduction
of any change (other than any change by way of imposition of or increase in
reserve requirements included in the calculation of the interest rate for LIBOR
Rate Loans) in or in the interpretation of any requirement of law or (ii) the
compliance with any guideline or request from any central bank or other
governmental authority (whether or not having the force of law), there shall be
any increase in the cost to the Bank of agreeing to make or making, funding or
maintaining any LIBOR Rate Loans, then Borrower shall be liable for, and shall
from time to time, upon demand therefor by the Bank and pay to the Bank such
additional amounts as are sufficient to compensate the Bank for such increased
costs.

      (b) If the Bank shall determine that for any reason adequate and
reasonable means do not exist for ascertaining the interest rate for any
requested Interest Period with respect to a proposed LIBOR Rate Loan, the Bank
will give notice of such determination to Borrower. Thereafter, the Bank may not
make or maintain LIBOR Rate Loans, as the case may be,


                                       5


hereunder until the Bank revokes such notice in writing. Upon receipt of such
notice, Borrower may revoke any request for a LIBOR Rate Loan or Notice then
submitted by it. If Borrower does not revoke such notice the Bank may make, or
continue the Loans, as proposed by Borrower, in the amount specified in the
applicable request submitted by Borrower, but such Loans shall be made or
continued as Base Rate Loans instead of LIBOR Rate Loans, as the case may be.

      2.7. Illegality. If the Bank shall determine that the introduction of any
law (statutory or common), treaty, rule, regulation, guideline or determination
of an arbitrator or of a governmental authority or in the interpretation or
administration thereof, has made it unlawful, or that any central bank or other
governmental authority has asserted that it is unlawful for the Bank to make
LIBOR Rate Loans, then, on notice thereof by the Bank to Borrower, the Bank may
suspend the making of LIBOR Rate Loans until the Bank shall have notified
Borrower that the circumstances giving rise to such determination shall no
longer exist. If the Bank shall determine that it is unlawful to maintain any
LIBOR Rate Loans, Borrower shall prepay in full all LIBOR Rate Loans then
outstanding, together with accrued interest, either on the last date of the
Interest Period thereof if the Bank may lawfully continue to maintain such LIBOR
Rate Loans to such day, or immediately, if the Bank may not lawfully continue to
maintain such LIBOR Rate Loans. If Borrower is required to prepay any LIBOR Rate
Loan immediately as set forth in this subsection, then concurrently with such
prepayment, Borrower may borrow from the Bank, in the amount of such repayment,
a Base Rate Loan.

      2.8. Prepayments of the Loans.

            (a) Base Rate Loans may be prepaid at any time, without premium or
penalty, in minimum amounts of $100,000 but with accrued interest to the date of
payment.

            (b) LIBOR Rate Loans may be prepaid in a manner consistent with and
subject to provisions contained in the Note.

      2.9. Method of Payment. All payments and prepayments of principal and all
payments of interest, fees and other amounts payable hereunder shall be made by
the Borrower to the Bank at its head office in immediately available funds, on
or before 1:00 p.m. (Buffalo, New York time) on the due date thereof, free and
clear of, and without any deduction or withholding for, any taxes or other
payments. The Bank may, and the Borrower hereby authorizes the Bank to, debit
the amount of any payment not made by such time to the Account of the Borrower
with the Bank.

      2.10. Overdue Payments. Overdue principal (whether at maturity, by reason
of acceleration or otherwise) and, to the extent permitted by applicable law,
overdue interest and fees or any other amounts payable hereunder or under the
Note shall bear interest from and including the due date until paid as set forth
in the Note.


                                       6


      2.11. Computation of Interest and Fees. Interest and all fees payable
hereunder shall be computed daily and paid for the actual number of days for
which due in a manner consistent with the terms and conditions of the Note.

                                   SECTION III

                               CONDITIONS OF LOANS

      3.1. Conditions Precedent to Initial Loan. The obligation of the Bank to
make its initial Loan is subject to the condition precedent that the Bank shall
have received, in form and substance satisfactory to the Bank and its counsel,
the following:

      (a) this Agreement and the Note, duly executed by the Borrower;

      (b) a certificate of the Secretary or an Assistant Secretary of the
Borrower with respect to resolutions of the Board of Directors of the Borrower
authorizing the execution and delivery of this Agreement and the Note and
identifying the officer(s) authorized to execute, deliver and take all other
actions required under this Agreement, and providing specimen signatures of such
officers;

      (c) the certificate of incorporation of the Borrower and all amendments
and supplements thereto, filed in the office of the Secretary of State of New
York, each certified by the Secretary or an Assistant Secretary of the Borrower
as being a true and correct copy thereof;

      (d) the Bylaws of the Borrower and all amendments and supplements thereto,
certified by the Secretary or an Assistant Secretary as being a true and correct
copy thereof as currently in effect;

      (e) a current Certificate of Good Standing showing Borrower to be a
corporation in good standing in the State of New York;

      (f) an opinion addressed to it from Counsel of the Borrower, substantially
in the form of Exhibit F hereto; and

      (g) such other documents, and completion of such other matters, as counsel
for the Bank may deem necessary or appropriate.

      3.2. Conditions Precedent to all Loans. The obligation of the Bank to make
each Loan, including the initial Loan, or continue or convert Loans to Loans of
another type, is further subject to the following conditions:

      (a) timely receipt by the Bank of the Borrower's request for a Loan or
Notice of Conversion as provided in the Note;


                                       7


      (b) the representations and warranties contained in Section IV shall be
true and accurate in all material respects on and as of the date of any request
for a Loan or conversion election as described in Section 4 of the Note and on
the effective date of the making, continuation or conversion of each Loan as
though made at and as of each such date (except to the extent that such
representations and warranties expressly relate to an earlier date), and no
Default shall have occurred and be continuing, or would result from such Loan;

      (c) the resolutions referred to in Section 3.1(b) shall remain in full
force and effect; and

      (d) no change shall have occurred in any law or regulation or
interpretation thereof that, in the opinion of counsel for the Bank, would make
it illegal or against the policy of any governmental agency or authority for the
Bank to make Loans hereunder, provided that the Bank shall so advise the
Borrower in writing, setting forth the basis of such opinion (but only if the
Bank in its sole discretion believes that it may then disclose such
information).

      The making of each Loan shall be deemed to be a representation and
warranty by the Borrower on the date of the making, continuation or conversion
of such Loan as to the accuracy of the statements referred to in subsection (b)
of this Section 3.2.

                                   SECTION IV

                         REPRESENTATIONS AND WARRANTIES

In order to induce the Bank to enter into this Agreement and to make Loans
hereunder, the Borrower represents and warrants to the Bank that:

      4.1. Organization and Qualification. Each of the Borrower and its
Subsidiaries (a) is (i) a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation; or (ii) a
trust duly created and properly organized under the laws of its jurisdiction of
formation, (b) has all requisite corporate or trust powers to own its property
and conduct its business as now conducted and as presently contemplated and (c)
is duly qualified and to the extent applicable in good standing as a foreign
corporation and is duly authorized to do business in each jurisdiction where the
nature of its properties or business requires such qualification.

      4.2. Corporate Authority. The execution, delivery and performance of this
Agreement and the Note and the transactions contemplated hereby are within the
corporate power and authority of the Borrower and have been authorized by all
necessary corporate proceedings, and do not and will not (a) require any consent
or approval of the stockholders of the Borrower, (b) contravene any provision of
the charter documents or by-laws of the Borrower or any law, rule or regulation
applicable to the Borrower, (c) contravene any provision of, or


                                       8


constitute an event of default or event that, but for the requirement that time
elapse or notice be given, or both, would constitute an event of default under,
any other agreement, instrument, order or undertaking binding on the Borrower,
or (d) result in or require the imposition of any Encumbrance on any of the
properties, assets or rights of the Borrower.

      4.3. Valid Obligations. This Agreement and the Note and all of their
respective terms and provisions are the legal, valid and binding obligations of
the Borrower, enforceable in accordance with their respective terms except as
limited by bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally, and except as the
remedy of specific performance or of injunctive relief is subject to the
discretion of the court before which any proceeding therefor may be brought.

      4.4. Consents or Approvals. The execution, delivery and performance of
this Agreement and the Note and the transactions contemplated herein do not
require any approval or consent of, or filing or registration with, any
governmental or other agency or authority, or any other party.

      4.5. Title to Properties; Absence of Encumbrances. Each of the Borrower
and its Subsidiaries has good and marketable title to all of the properties,
assets and rights of every kind and nature now purported to be owned by it,
including, without limitation, such properties, assets and rights as are
reflected in the financial statements referred to in Section 4.6 (except such
properties, assets or rights as have been disposed of in the ordinary course of
business since the date thereof), free from all Encumbrances except Permitted
Encumbrances and, except for such Permitted Encumbrances, free from all defects
of title that might materially adversely affect such properties, assets or
rights, taken as a whole.

      4.6. Financial Statements. The Borrower has furnished the Bank its
consolidated balance sheet as of December 31, 2000 and its consolidated
statements of income, changes in stockholders' equity and cash flow for the
fiscal year then ended, and related footnotes, audited and certified by KPMG,
LLP. All such financial statements were prepared in accordance with generally
accepted accounting principles or regulatory accounting principles, as
applicable, applied on a consistent basis throughout the periods specified and
present fairly the financial position of the Borrower and its Subsidiaries as of
such dates and the results of the operations of the Borrower and its
Subsidiaries for such periods. There are no liabilities, contingent or
otherwise, of the Borrower and its Subsidiaries not disclosed in such financial
statements that involve a material amount.

      4.7. Changes. Since the date of the most recent financial statements
referred to in Section 4.6, there have been no changes in the assets,
liabilities, financial condition, business or prospects of the Borrower or any
of its Subsidiaries other than changes in the ordinary course of business, the
effect of which has not, in the aggregate, been materially adverse.

      4.8. Defaults. As of the date of this Agreement, no Default exists.


                                       9


      4.9. Taxes. The Borrower and each Subsidiary have filed all federal, state
and other tax returns required to be filed, within the applicable filing due
dates (including any extensions of such dates); and all taxes, assessments and
other governmental charges due from the Borrower and each Subsidiary have been
fully paid. The Borrower and each Subsidiary have established on their books
reserves adequate for the payment of all federal, state and other tax
liabilities.

      4.10. Litigation. Except as set forth on Exhibit C hereto, there is no
litigation, arbitration, proceeding or investigation pending, or, to the
knowledge of the Borrower's or any Subsidiary's officers, threatened, against
the Borrower or any Subsidiary that, if adversely determined, could, singly or
in the aggregate, result in a judgment in excess of $250,000 not adequately
covered by insurance or as to which adequate reserves are not being maintained,
could result in a forfeiture of all or any substantial part of the property of
the Borrower or its Subsidiaries, or could otherwise have a material adverse
effect on the assets, business or prospects of the Borrower or any Material
Subsidiary.

      4.11. Use of Proceeds. No portion of any Loan is to be used for the
"purpose of purchasing or carrying" any "margin stock" as such terms are used in
Regulations U and X of the Board of Governors of the Federal Reserve System, 12
C.F.R. 221 and 224, as amended; and following the application of the proceeds of
each Loan, the value of all "margin stock" of the Borrower will not exceed 25%
of the value of the total assets of the Borrower that are subject to the
restrictions set forth in Section 6.1 and 6.2.

      4.12. Subsidiaries. As of the date of this Agreement, all the Material
Subsidiaries of the Borrower are listed on Exhibit D hereto. As of the date of
this Agreement, the Borrower or a Subsidiary of the Borrower is the owner, free
and clear of all liens and encumbrances, of the specified percentage of the
issued and outstanding voting securities of each Subsidiary as listed on Exhibit
D hereto. All such voting securities have been validly issued and are fully paid
and nonassessable, and no rights to subscribe to any additional voting
securities have been granted, and no options, warrants or similar rights are
outstanding, except as listed on Exhibit D hereto.

      4.13. Investment Company Act, etc. Neither the Borrower nor any of its
Subsidiaries is subject to regulation under the Investment Company Act of 1940,
as amended, the Public Utility Holding Company Act of 1935, as amended, or any
other statute or regulation that limits its ability to incur indebtedness for
money borrowed.

      4.14. Compliance with ERISA. The Borrower and each member of the
Controlled Group have fulfilled their obligations under the minimum funding
standards of ERISA and the Code with respect to each Plan and are in compliance
in all material respects with the applicable provisions of ERISA and the Code,
and have not incurred any liability to the PBGC or a Plan under Title N of
ERISA; and no "prohibited transaction" or "reportable event" (as such terms are
defined in ERISA) has occurred with respect to any Plan which could have a
material adverse effect on the assets, business or prospects of the Borrower or
any Material Subsidiary.


                                       10


      4.15. Environmental Matters. The Borrower and each of its Subsidiaries are
in compliance, in all material respects, with all Environmental Laws. No demand,
claim, notice, suit, suit in equity, action, administrative action,
investigation or inquiry arising under, relating to or in connection with any
Environmental Laws is pending or threatened against the Borrower or any of its
Subsidiaries, any real property in which the Borrower or any such Subsidiary
holds or, to the Borrower's knowledge, has held, an interest or any past or
present operation of the Borrower or any such Subsidiary, other than any such
proceedings that will not have a material adverse effect on the financial
condition, business, operations or prospects of the Borrower or the Borrower and
its Subsidiaries on a consolidated basis. Neither the Borrower nor any of its
Subsidiaries (i) is the subject of any federal or state investigation evaluating
whether any remedial action is needed to respond to a release of any Hazardous
Materials or other wastes into the environment, (ii) has received any notice of
any Hazardous Materials or other wastes in or upon any of its properties in
violation of any Environmental Laws, or (iii) knows of any basis for any such
investigation, notice or violation, except as disclosed to the Bank on Exhibit C
and as to such matters disclosed on such Exhibit, none will have a material
adverse effect on the financial condition, business, operations or prospects of
the Borrower or the Borrower and its Subsidiaries on a consolidated basis.

                                    SECTION V

                              AFFIRMATIVE COVENANTS

So long as the Bank has any commitment to lend hereunder or any Loan or other
Obligation hereunder remains outstanding, the Borrower covenants as follows:

      5.1. Financial Statements and other Reporting Requirements. The Borrower
shall furnish to the Bank:

      (a) as soon as available to the Borrower, but in any event within 100 days
after the end of each of its fiscal years, a consolidated balance sheet as of
the end of such year, and the related consolidated and consolidating statements
of income, changes in stockholders' equity and cash flow for such year, audited
and certified by KMPG, LLP, (or other independent certified public accountants
of national standing selected by the Borrower);

      (b) as soon as available to the Borrower, but in any event within 55 days
after the end of each of its fiscal quarters, (i) the consolidated balance sheet
as of the end of such quarter, and a related consolidated statements of income
and cash flow for the period then ended, certified by the chief financial
officer of the Borrower but subject, however, to normal, recurring year-end
adjustments that shall not in the aggregate be material in amount, (ii) Forms
FRY-9, FRY-11 and a Call Report (as applicable) for the Borrower (on a parent
only basis) and for each of the Borrower's banking subsidiaries for the period
then ended, certified by the cashier or other authorized officer of each such
Subsidiary, in the forms required to be filed by the Borrower and


                                       11


each such Subsidiary by the FFIEC; and (iii) SEC Forms 10K and 10Q, as
applicable for the Borrower on a consolidated basis.

      (c) concurrently with the delivery of each financial statement pursuant to
subsections (a) and (b) of this Section 5.1, a report in substantially the form
of Exhibit E, hereto signed on behalf of the Borrower by its chief financial
officer;

      (d) promptly after the same are available, copies of all proxy statements,
financial statements and reports as the Borrower shall send to its stockholders
or as the Borrower may file with the Securities and Exchange Commission;

      (e) if and when the Borrower gives or is required to give notice to the
PBGC of any "Reportable Event" (as defined in Section 4043 of ERISA) with
respect to any Plan that might constitute grounds for a termination of such Plan
under Title IV of ERISA, or knows that any member of the Controlled Group or the
plan administrator of any Plan has given or is required to give notice of any
such Reportable Event, a copy of the notice of such Reportable Event given or
required to be given to the PBGC;

      (f) immediately upon becoming aware of the existence of any condition or
event that constitutes a Default, written notice thereof specifying the nature
and duration thereof and the action being or proposed to be taken with respect
thereto;

      (g) promptly upon becoming aware of any litigation or of any investigative
proceedings by a governmental agency or authority commenced or threatened
against the Borrower or any of its Subsidiaries, the outcome of which, singly or
in the aggregate, could have an adverse effect of more than $250,000, not
covered by insurance, on the assets, business or prospects of the Borrower or
the Borrower and its Subsidiaries on a consolidated basis, written notice
thereof and the action being or proposed to be taken with respect thereto;

      (h) promptly upon becoming aware of any investigative proceedings by a
governmental agency or authority commenced or threatened against the Borrower or
any of its Subsidiaries regarding any violation of Environmental Laws or any
spill, release, discharge or disposal of any Hazardous Material, the outcome of
which, singly or in the aggregate, could have an adverse effect of more than
$250,000, not covered by insurance, on the assets, business or prospects of the
Borrower or the Borrower and its Subsidiaries on a consolidated basis, written
notice thereof and the action being or proposed to be taken with respect
thereto; and

      (i) from time to time, such other financial data and information about the
Borrower or its Subsidiaries as the Bank may reasonably request. Notwithstanding
the preceding, the Bank and the Borrower acknowledge that they are each engaged
in the business of banking and certain incidental activities, and that they
compete from time to time for, among other things, consumer and commercial loan
customers and depositors. As such, the Borrower and its Subsidiaries shall not
be obligated to furnish to the Bank any information that constitutes
confidential or proprietary information, a trade secret or any other form of
material non-public information, the


                                       12


absence of which would not have a material adverse effect upon the Bank's
ability to monitor or collect the indebtedness evidenced by the Note
("Confidential Information"). In the event that the Borrower or a Subsidiary
does supply Confidential Information to the Bank, the Bank shall maintain the
Confidential Information in strict confidence and shall only disclose
Confidential Information to Permitted Transferees to the extent permitted by
Section 5.5 hereof. Moreover, the Bank hereby confirms that it is aware, and
that any Permitted Transferees of such information shall be advised, that the
United States securities laws prohibit any person who has material non-public
information about a company from purchasing or selling securities of such
company or tipping or advising others regarding trading in such securities.
Accordingly, the Bank agrees that it shall not use, or knowingly cause or permit
any Permitted Transferee or third party to use, any Confidential Information in
contravention of such securities laws or any similar rules or regulations.

      5.2. Conduct of Business. The Borrower shall and shall cause its Material
Subsidiaries to:

      (a) duly observe and comply in all material respects with all applicable
laws and valid requirements of any governmental authorities relative to its
corporate existence, rights and franchises, to the conduct of its business and
to its property and assets (including without limitation all Environmental Laws
and ERISA), and shall maintain and keep in full force and effect all licenses
and permits necessary in any material respect to the proper conduct of its
business; and

      (b) maintain its corporate or organizational existence, provided that
Borrower may, subject to the provisions of sections 6.2 through 6.5, reorganize
its Subsidiaries provided that Borrower's ownership interest in its subsidiaries
or its subsidiaries' assets is not diluted; and

      (c) engage only in business activities permitted for bank holding
companies and their subsidiaries under applicable law.

      5.3. Maintenance and Insurance. Each of the Borrower and its Material
Subsidiaries shall maintain its properties in good repair, working order and
condition as required for the normal conduct of its business, and shall at all
times maintain liability and casualty insurance with financially sound and
reputable insurers in such amounts as the officers of the Borrower in the
exercise of their reasonable judgment deem to be adequate.

      5.4. Taxes. The Borrower shall pay or cause to be paid all taxes,
assessments or governmental charges on or against it or any of its Subsidiaries
or its or their properties on or prior to the time when late charges or other
penalties accrue with respect thereto; provided that this covenant shall not
apply to any tax, assessment or charge that is being contested in good faith by
appropriate proceedings and with respect to which adequate reserves have been
established and are being maintained in accordance with generally accepted
accounting principles.


                                       13


      5.5. Inspection by the Bank. The Borrower shall permit the Bank or its
designees, at reasonable times and upon reasonable notice (or if an Event of
Default shall have occurred and is continuing, at any time and without prior
notice), to (i) visit and inspect the properties of the Borrower and its
Subsidiaries, (ii) examine and make copies of and take abstracts from the
financial records of the Borrower and its Subsidiaries, and (iii) discuss the
affairs, finances and accounts of the Borrower and its Subsidiaries, as the same
relate to Borrower's ability to repay any Loan, with their appropriate officers,
employees and accountants. Notwithstanding the preceding, the Borrower and its
Subsidiaries shall not be obligated to furnish to the Bank any information that
is Confidential Information (as defined in Section 5.1(i)). In handling such
Confidential Information that is disclosed and identified as such by Borrower or
any Subsidiary, the Bank shall exercise the same degree of care that it
exercises with respect to its own proprietary information of the same types to
maintain the confidentiality of any non-public information thereby received or
received pursuant to this Agreement except that disclosure of such information
may be made (i) to the subsidiaries or affiliates of the Bank in connection with
their present or prospective business relations with the Borrower, subject to
the same degree of care and confidentiality required of the Bank by this Section
5.5, (ii) to prospective permitted transferees or purchasers of an interest in
the Loans, (iii) as required by law, regulation, rule or order, subpoena,
judicial order or similar order and (iv) as may be required in connection with
the examination, audit or similar investigation of the Bank (any person or
entity receiving such information pursuant to the foregoing being referred to
herein as a ("Permitted Transferee"). Moreover, the Bank hereby confirms that it
is aware, and that any Permitted Transferees of such information shall be
advised, that the United States securities laws prohibit any person who has
material non-public information about a company from purchasing or selling
securities of such company or tipping or advising others regarding trading in
such securities. Accordingly, the Bank agrees that it shall not use, or
knowingly cause or permit any Permitted Transferee or third party to use, any
Confidential Information in contravention of such securities laws or any similar
rules or regulations.

      5.6. Maintenance of Books and Records. Each of the Borrower and its
Subsidiaries shall keep adequate books and records of account, in which true and
complete entries will be made reflecting all of its business and financial
transactions, and such entries will be made in accordance with generally
accepted accounting principles or regulatory accounting principles, as
applicable, consistently applied and applicable law.

      5.7. Further Assurances. At any time and from time to time the Borrower
shall, and shall cause each of its Subsidiaries to, execute and deliver such
further instruments and take such further action as may reasonably be requested
by the Bank to effect the purposes of this Agreement and the Note.

                                   SECTION VI

                               NEGATIVE COVENANTS


                                       14


So long as the Bank has any commitment to lend hereunder or any Loan or other
Obligation hereunder remains outstanding, the Borrower covenants as follows:

      6.1. Encumbrances. Neither the Borrower nor any of its Material
Subsidiaries shall create, incur, assume or suffer to exist any mortgage,
pledge, security interest, lien or other charge or encumbrance, including the
lien or retained security title of a conditional vendor upon or with respect to
any of its property or assets ("Encumbrances"), or assign or otherwise convey
any right to receive income, including the sale or discount of accounts
receivable with or without recourse, except the following ("Permitted
Encumbrances"):

      (a) Encumbrances in favor of the Bank or any of its affiliates;

      (b) Encumbrances existing as of the date of this Agreement, not otherwise
described in Section 6.1, and disclosed in Exhibit B hereto;

      (c) liens for taxes, fees, assessments and other governmental charges to
the extent that payment of the same may be postponed or is not required in
accordance with the provisions of Section 5.4;

      (d) landlords' and lessors' liens in respect of rent not in default or
liens in respect of pledges or deposits under workmen's compensation,
unemployment insurance, social security laws, or similar legislation (other than
ERISA) or in connection with appeal and similar bonds incidental to litigation;
mechanics', laborers' and materialmen's and similar liens, if the obligations
secured by such liens are not then delinquent; liens securing the performance of
bids, tenders, contracts (other than for the payment of money); and statutory
obligations incidental to the conduct of its business and that do not in the
aggregate materially detract from the value of its property or materially impair
the use thereof in the operation of its business;

      (e) judgment and other similar liens, singly or in the aggregate in excess
of $250,000, arising in connection with court proceedings, provided that the
execution or other enforcement of such judgment or similar lien has been in
existence for less than 30 days or is effectively stayed and the claims secured
thereby are being actively contested in good faith and by appropriate
proceedings;

      (f) rights of lessors under capitalized leases;

      (g) Encumbrances securing indebtedness for borrowed money incurred in
connection with the purchase of real or personal property used in its business,
provided that any such Encumbrances shall not extend to assets of the Borrower
or any such Subsidiary not financed by such indebtedness;

      (h) easements, rights of way, restrictions and other similar charges or
Encumbrances relating to real or personal property and not interfering in a
material way with the ordinary conduct of its business;


                                       15


      (i) Encumbrances on its assets created in connection with the refinancing
of indebtedness secured by Permitted Encumbrances on such assets, provided that
the amount of indebtedness secured by any such Encumbrance shall not be
increased as a result of such refinancing and no such Encumbrance shall extend
to property and assets of the Borrower or any such Subsidiary not encumbered
prior to any such refinancing;

      (j) Encumbrances incurred in connection with repurchase agreements; liens
incurred in connection with asset securitizations; Encumbrances granted to a
Federal Reserve Bank or a Federal Home Loan Bank to secure advances or other
transactions incidental to the conduct of the banking business of the Borrower
or any such Subsidiary, including loans to meet liquidity requirements;

      (k) Encumbrances securing obligations of a Subsidiary to the Borrower or
another Subsidiary; and

      (l) other Encumbrances which are incidental to the conduct of its business
on an ongoing basis and that do not in the aggregate have a material adverse
effect on its assets, business or prospects.

      6.2. Merger; Consolidation; Sale or Lease of Assets. The Borrower shall
not, in a single transaction or a series of transactions, sell or otherwise
dispose of all or any substantial part of its shares of the capital stock of any
of Borrower's Material Subsidiaries; neither the Borrower nor any of its
Material Subsidiaries shall sell, lease or otherwise dispose of all or any
portion of any other assets, , in a single transaction or a series of
transactions, in excess of $250,000, provided that with respect to a Material
Subsidiary such a sale will be permitted if it is in the ordinary course of
business and does not represent more than 10% of such Material Subsidiary's
assets; and neither the Borrower nor any of its Material Subsidiaries shall
liquidate, merge or consolidate with any other person or entity; provided that
the Borrower may merge or consolidate into or with another person or entity if
no Default has occurred and is continuing or would result from such merger or
consolidation and if the Borrower is the surviving company; and provided,
further, that any Subsidiary of the Borrower may merge or consolidate into or
with (i) the Borrower if the Borrower is the surviving company, or (ii) any
other Subsidiary of the Borrower; or (iii) any other person if the Subsidiary is
the surviving company in, and remains a Controlled Subsidiary following, such
merger or consolidation; and provided further, that any Subsidiary that is not a
Material Subsidiary may be liquidated, merged or consolidated into or with
another person or entity if the assets of such Subsidiary do not represent more
than 10% of the consolidated total assets of the Borrower.

      6.3. Stock of Subsidiaries. The Borrower shall not permit any of its
Material Subsidiaries to issue any additional shares of their respective capital
stock or other equity securities which contain general voting powers, any
options therefor or any securities convertible thereto other than to the
Borrower or another Material Subsidiary. Neither the Borrower nor any of its
Material Subsidiaries shall sell, transfer or otherwise dispose of any of the
capital stock or


                                       16


other equity securities of a Material Subsidiary which contain general voting
powers, except (i) to the Borrower or any of its Material Subsidiaries, (ii) in
connection with a transaction permitted by Section 6.2; (iii) to an officer,
employee or director of the Borrower or any Material Subsidiary; or (iv) to
other persons or entities, provided that such dispositions do not, singly or in
the aggregate, constitute more than 10% of the total number of shares of capital
stock or other equity securities outstanding of such Subsidiary which contain
general voting powers.

      6.4. Investments. Neither the Borrower nor any of its Material
Subsidiaries shall make or maintain any Investments other than (i) investments
permitted by applicable banking laws, regulations or regulatory pronouncements;
(ii) existing Investments in Subsidiaries and new Investments in such
Subsidiaries in the ordinary course of its business; and (iii) acquisitions of
new Subsidiaries permitted by Section 6.5.

      6.5. Acquisitions. Neither the Borrower nor any of its Material
Subsidiaries shall acquire, in a single transaction or a series of transactions,
all or a majority of the voting shares or all or a substantial portion of the
assets of any person or entity unless (i) the consolidated total assets of the
Borrower (as would be reported in the Borrower's financial statements prepared
in accordance with FFIEC requirements) before giving effect to such acquisition
would constitute at least 70% of the consolidated total assets of the Borrower
after giving effect to such acquisition or (ii) the consolidated total assets of
the Borrower before giving effect to such acquisition would constitute less than
70% but at least 50% of the consolidated total assets of the Borrower and the
Borrower is able to demonstrate to the Bank's reasonable satisfaction that the
consolidated total assets of the Borrower before giving effect to such
acquisition would constitute at least 70% of the consolidated total assets of
the Borrower at any time within six months after giving effect to such
acquisition.

      6.6. ERISA. Neither the Borrower nor any member of the Controlled Group
shall permit any Plan maintained by it to (i) engage in any non-exempt
"prohibited transaction" (as defined in Section 4975 of the Code in excess,
singly or in the aggregate, of $250,000, (ii) incur any "accumulated funding
deficiency" (as defined in Section 302 of ERISA) whether or not waived, or (iii)
terminate any Plan in a manner that could result in the imposition of a lien or
encumbrance on the assets of the Borrower or any of its Subsidiaries pursuant to
Section 4068 of ERISA

      6.7. Double Leverage Ratio. The Borrower shall not permit its Double
Leverage Ratio to be greater than 1.35 to 1.0. As used in this Section 6.6,
"Double Leverage Ratio" means the ratio of (i) the amount of equity Investments
of the Borrower in its Subsidiaries to (ii) the consolidated stockholders'
equity of the Borrower, in each case as reported in the Borrower's financial
statements prepared in accordance with FFIEC requirements.

      6.8. Nonperforming Asset Coverage Ratio. The Borrower shall not permit its
Nonperforming Asset Coverage Ratio to be less than 8.5 to 1.0. As used in this
Section 6.7, "Nonperforming Asset Coverage Ratio"" means the ratio of (i)
consolidated stockholders' equity of the Borrower and its Subsidiaries plus Loan
Loss Reserves to (ii) Nonperforming Assets;


                                       17


"Loan Loss Reserves" means the loan loss reserves and allocated transfer risk
reserves of the Borrower, as shown on the financial statements of the Borrower
prepared in accordance with in accordance with FFIEC requirements; and
"Nonperforming Assets" means the loans, leases and other assets of the Borrower
that are not accruing interest or are 90 days or more past due in the payment of
principal or interest, plus "other real estate owned" by the Borrower, in each
case as shown on the financial statements of the Borrower prepared in accordance
with FFIEC requirements.

      6.9. Capitalization of Borrower and Material Subsidiaries. The Borrower
and its Material Subsidiaries, excluding any other federally-insured depository
institution that may be acquired after the date hereof and prior to the
Termination Date, will maintain total "Risk-Based Capital Ratios", "Tier I
Risk-Based Capital Ratios", and "Leverage Ratios", as defined in applicable FDIC
regulations, sufficient to cause each entity or consolidated entity described
herein to be considered "well capitalized" by the appropriate Federal Banking
Agency. Any other federally-insured depository institution that may be acquired
prior to the Termination Date shall maintain total "Risk-Based Capital Ratios",
"Tier I Risk-Based Capital Ratios", and "Leverage Ratios", as defined in
applicable FDIC regulations, sufficient to cause each such entity so acquired to
be considered no less than "adequately capitalized", and any entity with which
it is consolidated to be considered "well capitalized", by the appropriate
Federal Banking Agency.

      6.10. Minimum Tangible Net Worth. The Borrower shall not permit its
Tangible Net Worth to be less than $75,000,000. As used in this Section 6.10,
"Tangible Net Worth" means the consolidated net worth of the Borrower and its
Subsidiaries plus or minus any amounts attributable to those assets which are
permitted or required to be added to or deducted, respectively, from "tier 1
capital" in accordance with Section II.B.1 of Appendix A to Regulation Y of the
Board of Governors of the Federal Reserve System, 12 C.F.R. 225, as amended,
excluding therefrom: (i) any market value adjustments on available for sale
securities; and (ii) any value attributable to mortgage servicing rights.

                                   SECTION VII

                                    DEFAULTS

      7.1. Events of Default. There shall be an Event of Default hereunder if
any of the following events occurs:

      (a) the Borrower shall fail to pay when due (i) any amount of principal of
any Loans, or (ii) any amount of interest thereon or any fees or expenses
payable hereunder or under the Note within five days of the due date therefor;
or

      (b) The Borrower shall fail to perform any term, covenant or agreement
contained in Sections 5.1(f), 5.5, 6.2, 6.3, 6.5 or 6.7, 6.9, or 6.10; or


                                       18


      (c) the Borrower shall fail to perform any covenant contained in Sections
5.1(e), 5.1(g), 5.1(h), 5.2, 6.1, 6.4, 6.6 or 6.8 and such failure shall
continue for 30 days; or

      (d) the Borrower shall fail to perform any term, covenant or agreement
(other than in respect of subsections 7.1(a) through (c) hereof contained in
this Agreement or the Note and such default shall continue for 60 days after
notice thereof has been sent to the Borrower by the Bank; or

      (e) any representation or warranty of the Borrower made in this Agreement
or in the Note or any other documents or agreements executed in connection with
the transactions contemplated by this Agreement or in any certificate delivered
hereunder shall prove to have been false in any material respect upon the date
when made or deemed to have been made; or

      (f) the Borrower or any of its Material Subsidiaries shall fail to pay at
maturity (or upon demand, if a demand facility), or within any applicable period
of grace, any indebtedness in excess, singly or in the aggregate, of $250,000
for borrowed money or for the use of real or personal property, or fail to
observe or perform any term, covenant or agreement evidencing or securing such
indebtedness, or relating to such use of real or personal property, the result
of which failure is to permit the holder or holders of such obligations to cause
such indebtedness to become due prior to its stated maturity upon delivery of
required notice, if any; or

      (g) the Borrower or any of its Material Subsidiaries shall (i) apply for
or consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, liquidator or similar official of itself or of all or a
substantial part of its property, (ii) be generally not paying its debts as such
debts become due, (iii) make a general assignment for the benefit of its
creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code (as
now or hereafter in effect), (v) take any action or commence any case or
proceeding under any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts, or any other law providing for
the relief of debtors, (vi) fail to contest in a timely or appropriate manner,
or acquiesce in writing to, any petition filed against it in an involuntary case
under the Federal Bankruptcy Code or other law, (vii) take any action under the
laws of its jurisdiction of incorporation or organization similar to any of the
foregoing, or (viii) take any corporate action for the purpose of effecting any
of the foregoing; or

      (h) a proceeding or case shall be commenced, without the application or
consent of the Borrower or any of its Material Subsidiaries in any court of
competent jurisdiction, seeking (i) the liquidation, reorganization,
dissolution, winding up, or composition or readjustment of its debts, (ii) the
appointment of a trustee, receiver, custodian, liquidator or the like of it or
of all or any substantial part of its assets, or (iii) similar relief in respect
of it, under any law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or adjustment of debts or any other law providing for
the relief of debtors, and such proceeding or case shall continue undismissed,
or unstayed and in effect, for a period of 45 days; or an order for relief shall
be entered in an involuntary case under the Federal Bankruptcy Code, against the
Borrower or such Subsidiary; or action under the laws of the jurisdiction of
incorporation or organization of the


                                       19


Borrower or any of its Material Subsidiaries similar to any of the foregoing
shall be taken with respect to the Borrower or such Subsidiary and shall
continue unstayed and in effect for any period of 45 days; or

      (i) a judgment or order for the payment of money shall be entered against
the Borrower or any of its Subsidiaries by any court, or a warrant of attachment
or execution or similar process shall be issued or levied against property of
the Borrower or such Subsidiary, that, singly or in the aggregate, exceeds
$250,000 in value and such judgment, order, warrant or process shall continue
undischarged or unstayed for 30 days; or

      (j) the Borrower or any member of the Controlled Group shall fail to pay
when due an amount, singly or in the aggregate, in excess of $250,000 that it
shall have become liable to pay to the PBGC or to a Plan under Title IV of
ERISA; or notice of intent to terminate a Plan or Plans shall be filed under
Title IV of ERISA by the Borrower, any member of the Controlled Group, any plan
administrator or any combination of the foregoing; or the PBGC shall institute
proceedings under Title IV of ERISA to terminate or to cause a trustee to be
appointed to administer any such Plan or Plans or a proceeding shall be
instituted by a fiduciary of any such Plan or Plans against the Borrower and
such proceedings shall not have been dismissed within 45 days thereafter; or a
condition shall exist by reason of which the PBGC would be entitled to obtain a
decree adjudicating that any such Plan or Plans must be terminated; or

      (k) any banking Subsidiary shall cease to be insured under the Federal
Deposit Insurance Act and any rules and regulations issued thereunder, as from
time to time supplemented or amended; or a cease and desist order shall be
issued against the Borrower or any banking Subsidiary pursuant to 12 U.S.C.
1818(b) or (c) or any similar applicable provision of state law and any rules
and regulations issued thereunder, as from time to time supplemented or amended,

      (l) the acquisition by any person or entity, or two or more persons or
entities acting in concert, of beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities Exchange
Act of 1934) of 25% or more of the outstanding shares of voting stock of the
Borrower; provided that this provision shall not apply to acquisitions of
beneficial ownership by any director, officer, employee or employee benefit plan
of the Borrower or any Subsidiary, nor to any of the foregoing who act in
concert with any other person or entity, or

      (m) there occurs an Event of Default as defined in the Note.

      7.2. Remedies. Upon the occurrence of an Event of Default described in
subsections 7.1(h) and (i), immediately and automatically, and upon the
occurrence of any other Event of Default, at any time thereafter while such
Event of Default is continuing, at the Bank's option and upon the Bank's written
declaration:

      (a) the Bank's commitment to make any further Loans hereunder shall
terminate;


                                       20


      (b) the unpaid principal amount of the Loans together with accrued
interest and all other Obligations hereunder shall become immediately due and
payable without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived; and

      (c) the Bank may exercise any and all rights it has under this Agreement,
the Note or any other documents or agreements executed in connection herewith,
or at law or in equity, and proceed to protect and enforce the Bank's rights by
any action at law, in equity or other appropriate proceeding.

                                  SECTION VIII

                                  MISCELLANEOUS

      8.1. Notices. Unless otherwise specified herein, all notices hereunder to
any party hereto shall be in writing and shall be deemed to have been given when
given in a manner consistent with Section 12 of the Note, in each case addressed
to such party at its address indicated below:

         If to the Borrower, at

                  FINANCIAL INSTITUTIONS, INC.
                  220 Liberty Street
                  Warsaw, New York 14569

                  Attention:        Ronald A. Miller
                  Telephone:        (716) 786-1102
                  Facsimile:        (716) 786-7108

         If to the Bank, at

                  MANUFACTURERS AND TRADERS TRUST COMPANY
                  Commercial Lending Division
                  12th Floor, One Fountain Plaza
                  Buffalo, New York 14203

                  Attention:        Richard R. Stiller, Vice President
                  Telephone:        716-848-7332
                  Facsimile:        716-848-7318

or at any other address specified by such party in writing.


                                       21


      8.2. Expenses. The Borrower will pay on demand the reasonably allocated
fees and costs of the Bank's outside legal counsel and all disbursements of said
legal counsel in connection with the preparation of this Agreement, the Note or
any other documents or agreements executed in connection therewith. The Borrower
will also pay on demand the reasonable expenses of the Bank in connection with
the waiver or amendment of this Agreement, the Note or any other documents or
agreements executed in connection therewith, or the administration, default or
collection of the Loans or other Obligations or in connection with the Bank's
exercise, preservation or enforcement of any of its rights, remedies or options
thereunder, including, without limitation, fees and expenses of outside legal
counsel, accounting, consulting, brokerage or other similar professional fees or
expenses, and any fees or expenses associated with any travel or other costs
relating to any appraisals or examinations conducted in connection with the
Obligations.

      8.3. Set-Off. (a) Regardless of the adequacy of any collateral or other
means of obtaining repayment of the Obligations, any deposits, balances or other
sums credited by or due from the head office of the Bank or any of its branch
offices to the Borrower may, to the extent permitted by law, at any time and
from time to time after the occurrence of an Event of Default hereunder, without
notice to the Borrower or compliance with any other condition precedent now or
hereafter imposed by statute, rule of law, or otherwise (all of which are hereby
expressly waived) be set off, appropriated, and applied by the Bank against any
and all Obligations of the Borrower to the Bank in such manner as the head
office of the Bank or any of its branch offices in their sole discretion may
determine, and the Borrower hereby grants the bank a continuing security
interest in such deposits, balances or other sums for the payment and
performance of all such Obligations.

      (b) In the event that the Bank is placed in receivership or enters a
similar proceeding, the Borrower may, to the extent permitted by law, make any
payment due to the Bank hereunder to the extent of finally collected
unrestricted deposits of the Borrower held by the Bank, by giving notice to the
Bank to apply such deposits to such Obligations. If the amount of such deposits
is insufficient to pay such Obligations in full, the Borrower shall pay the
balance of such deficiency in accordance with this Agreement.

      8.4. Term of Agreement. This Agreement shall continue in full force and
effect so long as the Bank has any commitment to make Loans hereunder or any
Loan or any Obligation hereunder shall be outstanding.

      8.5. No Waivers. No failure or delay by the Bank in exercising any right,
power or privilege hereunder or under the Note or under any other documents or
agreements executed in connection herewith shall operate as a waiver thereof;
nor shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies provided herein and in the Note and such other documents and
agreements are cumulative and not exclusive of any rights or remedies otherwise
provided by agreement or law.


                                       22


      8.6. Governing Law. This Agreement and the Note shall be deemed to be
contracts made under seal and shall be construed in accordance with and governed
by the laws of the State of New York (without giving effect to any conflicts of
laws provisions contained therein).

      8.7. Amendments. Neither this Agreement nor the Note nor any provision
hereof or thereof may be amended, waived, discharged or terminated except by a
written instrument signed by the Bank and, in the case of amendments, by the
Borrower.

      8.8. Binding Effect of Agreement. This Agreement shall be binding upon and
inure to the benefit of the Borrower and the Bank and their respective
successors and assigns; provided that the Borrower may not assign or transfer
its rights or obligations hereunder. The Bank may sell or transfer its interests
hereunder and under the Note without the consent of the Borrower, or grant
participations therein to participants without such consent. In the case of any
such participation, the Borrower agrees that any such participant shall be
entitled to the benefits of Sections 2.6, 2.7, and 8.3 to the same extent as if
such transferee or participant were the Bank hereunder, but only if the Bank
would then be entitled to such benefits; provided the Borrower may, for all
purposes of this Agreement, treat the Bank as the person entitled to exercise
all rights hereunder and under the Note and to receive all payments with respect
thereto.

      8.9. Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signatures hereto and thereto were
upon the same instrument.

      8.10. Partial Invalidity. The invalidity or unenforceability of any one or
more phrases, clauses or sections of this Agreement shall not affect the
validity or enforceability of the remaining portions of it.

      8.11. Captions. The captions and headings of the various sections and
subsections of this Agreement are provided for convenience only and shall not be
construed to modify the meaning of such sections or subsections.

      8.12. WAIVER OF JURY TRIAL. THE BANK AND THE BORROWER AGREE THAT NEITHER
OF THEM NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY
LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT
OF, THIS AGREEMENT, THE NOTE, ANY RELATED DOCUMENTS OR AGREEMENTS OR THE
DEALINGS OR THE RELATIONS BETWEEN OR AMONG ANY OF THEM, OR (B) SEEK TO
CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT
BE OR HAS NOT BEEN WAIVED. NEITHER THE BANK NOR THE BORROWER HAS AGREED WITH OR
REPRESENTED TO THE OTHER THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY
ENFORCED IN ALL INSTANCES.

      8.13 Entire Agreement. This Agreement, the Note and the documents and
agreements executed in connection herewith constitute the final agreement of the
parties hereto


                                       23


and supersede any prior agreement or understanding, written or oral, with
respect to the matters contained herein and therein.

      IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized officers as of the day and year first above written.

                                   FINANCIAL INSTITUTIONS, INC.


                                   By:      /s/ Ronald A. Miller
                                            -----------------------------
                                   Its:     SVP & CFO
                                            -----------------------------

                                   MANUFACTURERS AND TRADERS
                                   TRUST COMPANY


                                   By:      /s/ Richard R. Stiller
                                            -----------------------------
                                   Its:     Vice President
                                            -----------------------------


                                       24


                                    EXHIBIT A

                            Standard LIBOR Grid Note

                                See Attached Note




[LOGO] M&T Bank
       Manufacturers and Traders Trust Company

                                                        STANDARD LIBOR GRID NOTE
                                                                        New York

Buffalo, New York                April 25, 2001                    $5,000,000.00

BORROWER: FINANCIAL INSTITUTIONS, INC.

a(n) |_| individual(s) |_| partnership |X| corporation |_|________ organized
under the laws of New York

Address of residence/chief executive office: 220 Liberty Street, Warsaw, New
York 14569

BANK: MANUFACTURERS AND TRADERS TRUST COMPANY, a New York banking corporation
      with its principal banking office at One M & T Plaza, Buffalo, NY 14240.
      Attention: Office of General Counsel

37) DEFINITIONS. Each capitalized term shall have the meaning specified herein
and the following terms shall have the indicated meanings:

      a)    "Authorized Person" shall mean, each individually, Ronald A. Miller
            Mention of the Authorized Person's name is for reference purposes
            only and the Bank may rely on a person's title to ascertain whether
            someone is an Authorized Person.

      b)    "Automatic Adjustment Date" shall mean two (2) Business Days before
            the last day of the Interest Period initially selected by the
            Borrower for a LIBOR Rate Loan that is subject to the Automatic
            Continuation Option.

      c)    "Automatic Continuation Option" shall mean the option to have the
            Interest Period for a LIBOR Rate Loan to automatically continue at
            the same Interest Period duration initially selected by the Borrower
            for such LIBOR Rate Loan as of the last day such Interest Period.

      d)    "Base Rate" shall mean 0 percentage points above the rate of
            interest announced by the Bank as its prime rate of interest
            ("Prime"). If the prior blank is not completed, the Base Rate shall
            be one (1) percentage point above Prime.

      e)    "Base Rate Loan" shall mean a Loan which bears interest at the Base
            Rate.

      f)    "Business Day" shall mean any day of the year on which banking
            institutions in New York, New York are not authorized or required by
            law or other governmental action to close and, in connection with
            the LIBOR Rate, on which dealings are carried on in the London
            interbank market.

      g)    "Continuation Date" shall mean the date on which Borrower's election
            to continue a LIBOR Rate Loan for another Interest Period becomes
            effective in accordance with this Note.

      h)    "Conversion Date" shall mean the date on which Borrower's election
            to convert a Base Rate Loan to a LIBOR Rate Loan or a LIBOR Rate
            Loan to a Base Rate Loan becomes effective in accordance with this
            Note.

      i)    "Interest Period" shall mean, as to any LIBOR Rate Loan, the period
            commencing on the Draw Date, the Conversion Date or Continuation
            Date for such LIBOR Rate Loan and ending on the numerically
            corresponding day (or, if there is no numerically corresponding day,
            on the last day) of the calendar month that is one (1), two (2),
            three (3) or six (6)months thereafter, in each case as Borrower may
            elect; provided, however, that if an Interest Period would end on a
            day that is not a Business Day, such Interest Period shall be
            extended to the next succeeding Business Day unless such next
            succeeding Business Day would fall in the next calendar month, in
            which case such Interest Period shall end on the immediately
            preceding Business Day.

      j)    "Draw Date" shall mean, in relation to any Loan, the Business Day on
            which such Loan is made, or to be made, to Borrower pursuant to the
            Note.

      k)    "LIBOR Rate Loan" shall mean a Loan which bears interest at the
            LIBOR Rate.

      l)    "LIBOR" shall mean the rate obtained by dividing (i) the one, two,
            three or six month interest period London Interbank Offered Rate (as
            selected by Borrower) as fixed by the British Bankers Association
            for United States dollar deposits in the London Interbank Eurodollar
            Market at approximately 11:00 a.m. London, England time (or as soon
            thereafter as practicable) as determined by the Bank from any
            broker, quoting service or commonly available source utilized by the
            Bank by (ii) a percentage equal to 100% minus the stated maximum
            rate of all reserves required to be maintained against "Eurocurrency
            Liabilities" as specified in Regulation D (or against any other
            category of liabilities which includes deposits by reference to
            which the interest rate on LIBOR Rate Loan or Loans is determined or
            any category of extensions of credit or other assets which includes
            loans by a non-United States' office of a bank to United States'
            residents) on such date to any member bank of the Federal Reserve
            System.

      m)    "LIBOR Rate" shall mean 1.50 percentage points above LIBOR with an
            Interest Period selected by Borrower.

      n)    "Loan" means a loan made to Borrower by the Bank pursuant to this
            Note.

      o)    "Maximum Principal Amount" shall mean Five Million and 00/100
            Dollars ($ 5,000,000.00).

      p)    "Minimum Borrowing Amount" shall mean (i) for Base Rate Loans, any
            whole dollar increment and (ii) for LIBOR Rate Loans, $ 100,000.00
            with minimum increments thereafter of $ 100,000.00 ; provided,
            however, in no event shall the Minimum Borrowing Amount for a LIBOR
            Rate Loan be less than $100,000.00 with minimum increments
            thereafter of $100,000.00.

      q)    "Outstanding Principal Amount" shall mean the actual outstanding
            principal amount under this Note at any time.

38) PAYMENT OF PRINCIPAL, INTEREST AND EXPENSES

      a) Promise to Pay. For value received, and intending to be legally bound,
Borrower promises to pay to the order of the Bank on or before the "Termination
Date", as defined in that certain Revolving Credit Agreement (the " Credit
Agreement") of even date herewith between the Borrower and the Bank, the Maximum
Principal Amount or the Outstanding Principal Amount, if less; plus interest as
set forth below and all fees and costs (including, without limitation,
reasonable attorneys' fees and disbursements, for outside counsel) the Bank
incurs in order to collect any amount due under this Note, to negotiate or
document a workout or restructuring, or to preserve its rights or realize upon
any guaranty or other security for the payment of this Note ("Expenses").



      b) Interest. Each Loan shall earn interest on the Outstanding Principal
Amount thereof calculated on the basis of a 360-day year for the actual number
of days of each year (365 or 366) that on each day shall be:

            i) LIBOR Rate Loans. Interest shall accrue on a LIBOR Rate Loan from
            and including the first day of the Interest Period applicable
            thereto until, but not including, the last day of such Interest
            Period or the day the LIBOR Rate Loan is paid in full (if sooner) at
            a rate per annum equal to the LIBOR Rate in effect on the following
            dates (depending on the circumstance): (i) for new LIBOR Rate Loans,
            the Business Day the Bank receives (or is deemed to receive) a
            Request for a LIBOR Rate Loan; (ii) for conversions and
            continuations of LIBOR Rate Loans pursuant to Section 4, the
            Business Day the Bank receives (or is deemed to receive) the Notice
            of Conversion or Notice of Continuation, as the case may be, in
            accordance with Section 4(b); for LIBOR Rate Loans where the
            Automatic Continuation Option is selected, the Automatic Adjustment
            Date for such LIBOR Rate Loan.

            ii) Base Rate Loans. Interest shall accrue on a Base Rate Loan from
            and including the first date the Base Rate Loan was made (i.e., the
            Draw Date or the Conversion Date, as the case may be) to, but not
            including, the day such Base Rate Loan is paid in full or converted,
            at the rate per annum equal to the Base Rate. Any change in the Base
            Rate resulting from a change in the Bank's prime rate shall be
            effective on the date of such change.

      c) Maximum Legal Rate. It is the intent of the Bank and of Borrower that
in no event shall interest be payable at a rate in excess of the maximum rate
permitted by applicable law (the "Maximum Legal Rate"). Solely to the extent
necessary to prevent interest under this Note from exceeding the Maximum Legal
Rate, any amount that would be treated as excessive under a final judicial
interpretation of applicable law shall be deemed to have been a mistake and
automatically canceled, and, if received by the Bank, shall be refunded to
Borrower.

      d) Payments; Late Charge; Default Rate. Payments shall be made in
immediately available United States funds at any banking office of the Bank.
Interest shall be due and payable as follows: (i) in respect to each Base Rate
Loan, monthly when invoiced and (ii) in respect to each LIBOR Rate Loan, on the
last day of each Interest Period applicable thereto. If payment is not received
within five days of its due date, Borrower shall pay a late charge equal to the
greatest of (a) 5% of the delinquent amount, (b) the Bank's then current late
charge as announced by the Bank from time to time, or (c) $50.00. In addition,
if the Bank has not actually received any payment under this Note within thirty
days after its due date, from and after such thirtieth day the interest rate for
all amounts outstanding under this Note shall automatically increase to 5
percentage points above the higher of the Base Rate or the highest LIBOR Rate
(the "Default Rate"), and any judgment entered hereon or otherwise in connection
with any suit to collect amounts due hereunder shall bear interest at the
Default Rate. Payments may be applied in any order in the sole discretion of the
Bank but, prior to demand, shall be applied first to past due interest,
Expenses, late charges, and principal payments, if any, which are past due, then
to current interest and Expenses and late charges, and last to remaining
principal.

      e) Prepayment of LIBOR Rate Loans. If (i) Borrower pays, in whole or in
part, any LIBOR Rate Loan, before the expiration of its respective Interest Rate
Period, (ii) fails to draw down, in whole or in part, a LIBOR Rate Loan after
giving a Request therefor, (iii) otherwise tries to revoke any LIBOR Rate Loan,
in whole or in part, or (iv) there occurs a Bankruptcy Event or the applicable
rate is converted from the LIBOR Rate to the Base Rate pursuant to Section 4(d),
then Borrower shall be liable for and shall pay the Bank, on demand, the actual
amount of the liabilities, expenses, costs or funding losses that are a direct
or indirect result of such prepayment, failure to draw, early termination of an
Interest Period, revocation, bankruptcy or otherwise, whether such liability,
expense, cost or loss is by reason of (a) any reduction in yield, by reason of
the liquidation or reemployment of any deposit or other funds acquired by the
Bank, or (b) the fixing of the interest rate payable on any LIBOR Rate Loans.
The determination by the Bank of the amount of foregoing amount shall, in the
absence of manifest error, be conclusive and binding upon Borrower.

39) LOANS.

      a) General. Any Loan hereunder shall either be in the form of a Base Rate
Loan or a LIBOR Rate Loan. No Loan, or any portion thereof, shall be made to the
extent that the sum of the (i) principal amount of the requested Loan, or any
portion thereof and (ii) the Outstanding Principal Amount of all Loans under the
Note exceeds the Maximum Principal Amount under this Note. The Bank may make any
Loan in reliance upon any oral, telephonic, written, teletransmitted or other
request (the "Request(s)") that the Bank in good faith believes to be valid and
to have been made by Borrower or on behalf of Borrower by an Authorized Person.
The Bank may act on the Request of any Authorized Person until the Bank shall
have received from Borrower, and had a reasonable time to act on, written notice
revoking the authority of such Authorized Person. The Bank shall incur no
liability to Borrower or to any other person as a direct or indirect result of
making any Loan pursuant to this paragraph.

      b) Request for LIBOR Rate Loans. Borrower shall give the Bank its
irrevocable Request for a LIBOR Rate Loan specifying:

            i)    the Draw Date for the LIBOR Rate Loan, which shall be two (2)
                  Business Days after the date of the Request; provided, however
                  if a Request is received by the Bank after 2:00 p.m. (Eastern
                  Time), the Request for the LIBOR Rate Loan shall be deemed to
                  have been received on the next Business Day;

            ii)   the aggregate amount of such LIBOR Rate Loan, which amount
                  shall not be less than the Minimum Borrowing Amount;

            iii)  the applicable Interest Period (i.e., 1, 2, 3 or 6 month
                  Interest Period); and

            iv)   whether Borrower is electing the Automatic Continuation Option
                  for such LIBOR Rate Loan.

      c) Requests for Base Rate Loans. Borrower may request any Base Rate Loan
not later than 2:00 p.m. (Eastern Time) on any proposed Draw Date specifying the
aggregate amount of such Base Rate Loan.



      d) Delivery of Requests Delivery of a Notice or Request for a LIBOR Rate
Loan or a Base Rate Loan shall be made to the Bank as follows, or such other
contact point designated by the Bank from time to time:

                   Manufacturers and Traders Trust Company


                   Attn: Richard R. Stiller
                        ------------------------------

                   Fax No. (716) 848-7318
                          ----------------------------

                   Telephone No. (716) 848-7332
                                ----------------------

40) CONTINUATION and CONVERSION ELECTIONS.

      a)    Election. An Authorized Person of Borrower may, upon irrevocable
            Request to the Bank,

            i)    elect to convert on any Business Day any Base Rate Loan into a
                  LIBOR Rate Loan provided the amount converted is not less than
                  the Minimum Borrowing Amount; or

            ii)   elect to convert any or a part of LIBOR Rate Loan as of the
                  last day of the applicable Interest Period into a Base Rate
                  Loan provided no partial conversion of a LIBOR Rate Loan shall
                  reduce the outstanding principal amount of such LIBOR Rate
                  Loan to less than the Minimum Borrowing Amount; or

            iii)  elect to continue all or a part (subject to the Minimum
                  Borrowing Amount limitation) of any LIBOR Rate Loan as of the
                  last day of the Interest Period applicable to such LIBOR Rate
                  Loan with the same or a different Interest Period provided no
                  partial continuation of a LIBOR Rate Loan with a different
                  Interest Period shall reduce the outstanding principal amount
                  of the LIBOR Rate Loan with the same Interest Period to less
                  than the Minimum Borrowing Amount.

      b)    Notice of Conversion/Continuation.

            i)    For an election under Section 4(a)(i) or 4(a)(iii), an
                  Authorized Person must deliver to the Bank by 2:00 p.m.
                  (Eastern Time) on a Business Day a Notice of Conversion
                  ("Notice of Conversion") for an election under Section 4(a)(i)
                  or a Notice of Continuation ("Notice of Continuation") for an
                  election under Section 4(a)(iii) specifying:

                  (a)   the aggregate amount of the Loans to be converted or
                        continued;

                  (b)   the duration of the requested Interest Period (i.e., 1,
                        2, 3 or 6 month Interest Period); and

                  (c)   whether the Automatic Continuation Option will be
                        activated for such LIBOR Rate Loan.

            ii)   The Continuation Date or Conversion Date (as the case may be)
                  shall be the later of (A) two (2) Business Days from the
                  Business Day the Bank receives the Notice of Conversion or
                  Notice of Continuation (either, a "Notice") in accordance with
                  the foregoing Section or (B) the last day of the relevant
                  Interest Period if a Notice is received by the Bank more than
                  two (2) Business Days before the last day of an Interest
                  Period. If a Notice is received after 2:00 p.m. (Eastern
                  Time), the Notice will be deemed to have been received on the
                  next Business Day. Notice of Continuation received more than
                  two (2) Business Days before the end of an Interest Period
                  shall be deemed to have been received two (2) Business Days
                  before the end of such Interest Period for purposes of
                  determining the LIBOR Rate for the next Interest Period per
                  Section 2(b)(i). Accordingly, if, for example, Borrower has a
                  LIBOR Rate Loan with a one month Interest Period ending on
                  June 15 and wants to continue the LIBOR Rate Loan with a two
                  month Interest Period, Borrower must deliver its Notice of
                  Continuation identifying the new two month Interest Period to
                  the Bank by 2:00 p.m. (Eastern Time) on June 13 (provided that
                  June 13 and June 14 are Business Days).

            iii)  For LIBOR Rate Loans where Borrower has elected to activate
                  the Automatic Continuation Option, the Bank shall
                  automatically continue such LIBOR Rate Loan with an same
                  Interest Period initially selected by the Borrower. Once the
                  Automatic Continuation Option has been activated for a LIBOR
                  Rate Loan, the submission of a Notice of Conversion or a
                  Notice of Continuation with a different Interest Period shall
                  result in the cancellation of the Automatic Continuation
                  Option for such LIBOR Rate Loan.

            iv)   For an election under Section 4(a)(ii), an Authorized Person
                  may deliver to the Bank a Notice of Conversion at any time
                  during an Interest Period up to the last day of such Interest
                  Period or may have the LIBOR Rate Loan automatically convert
                  to a Base Rate Loan pursuant to Section 4(c). Any such Notice
                  of Conversion delivered during an Interest Period shall be
                  effective on the last day of the Interest Period.

            v)    The Bank may take action in reliance upon any oral,
                  telephonic, written or teletransmitted Notice that the Bank in
                  good faith believes to be valid and to have been made by
                  Borrower or on behalf of Borrower by an Authorized Person. No
                  Notice may be delivered by e-mail. The Bank may act on the
                  Notice from any Authorized Person until the Bank shall have
                  received from Borrower, and had a reasonable time to act on,
                  written notice revoking the authority of such Authorized
                  Person. The Bank shall incur no liability to Borrower or to
                  any other person as a direct or indirect result of acting on
                  any Notice under this Note. The Bank, in its sole discretion,
                  may reject any Notice that is incomplete.

      c) Expiration of Interest Period. Unless Borrower has elected the
Automatic Continuation Option with respect to a LIBOR Rate Loan, if Borrower
does not submit a Notice of Continuation in accordance with Section 4(b)(i) and
4(b)(ii) so that the Bank receives the Notice of Continuation at least two (2)
Business Days before the end of an Interest Period with respect to such LIBOR
Rate Loan, such LIBOR Rate Loan shall automatically be converted into a Base
Rate Loan and such Loan shall



accrue interest at the Base Rate until two (2) Business Days after the Bank
receives a Notice of Conversion pursuant to Section 4(b)(i) and 4(b)(ii)
electing to convert the Loan from a Base Rate Loan to a LIBOR Rate Loan pursuant
to Section 4(a)(i). A Notice of Continuation received one (1) Business Day
before the end of an Interest Period will not effect a continuation of such Loan
as a LIBOR Rate Loan. Rather, such LIBOR Rate Loan shall automatically convert
to a Base Rate Loan on the last day of the Interest Period. The late Notice of
Continuation, however, will be deemed to be a Notice of Conversion that will be
effective two (2) Business Days from the date received by the Bank.

      d) Conversion upon Default. Unless the Bank shall otherwise consent in
writing, if (i) Borrower has failed to pay when due, in whole or in part, the
indebtedness under the Note, or (ii) there exists a condition or event which
with the passage of time, the giving of notice or both shall constitute an event
of default under any of Borrower's agreement with the Bank, if any, Borrower may
not elect to have a Loan converted or continued as a LIBOR Rate Loan or have any
Loan made as a LIBOR Rate Loan. Further, the Bank, in its sole discretion, may
(i) permit any outstanding LIBOR Rate Loans to continue until the last day of
the applicable Interest Period at which time such Loan shall automatically be
converted into a Base Rate Loan or (ii) convert any outstanding LIBOR Rate Loans
into a Base Rate Loan before the end of the applicable Interest Period
applicable to such LIBOR Rate Loan. Notwithstanding the foregoing, if Borrower
commences, or has commenced against it, any proceeding or request for relief
under any bankruptcy, insolvency or similar laws now or hereafter in effect in
the United States of America or any state or territory thereof or any foreign
jurisdiction or any formal or informal proceeding for the dissolution or
liquidation of, settlement of claims against or winding up of affairs of
Borrower (a "Bankruptcy Event"), any outstanding LIBOR Rate Loans shall be
automatically converted to Base Rate Loans without further action by the Bank
and Borrower's rights to have Base Rate Loans converted under Section 4 shall be
automatically terminated. Nothing herein shall be construed to be a waiver by
the Bank to have any Loan accrue interest at the Default Rate of interest (which
shall be calculated from the higher of the LIBOR Rate or the Base Rate) or the
right of the Bank to the amounts set forth in Section 2(e) of this Note.

41) SETOFF. After the occurrence of any "Default," as defined in the Credit
Agreement, the Bank shall have the right to set off against the amounts owing
under this Note any property held in a deposit or other account with the Bank or
any of its affiliates or otherwise owing by the Bank or any of its affiliates in
any capacity to Borrower or any guarantor or endorser of this Note. Such set-off
shall be deemed to have been exercised immediately at the time the Bank or such
affiliate elect to do so.

42) DEFAULT. Upon the occurrence of an "Event of Default" under the Credit
Agreement, the Bank shall be entitled to the remedies set forth in Section 7.2
of the Credit Agreement.

43) BANK RECORDS CONCLUSIVE. The Bank shall set forth on a schedule attached to
this Note or maintained on computer, the date and original principal amount of
each Loan and the date and amount of each payment to be applied to the
Outstanding Principal Amount of this Note. The Outstanding Principal Amount set
forth on any such schedule shall be presumptive evidence of the Outstanding
Principal Amount of this Note and of all Loans. No failure by the Bank to make,
and no error by the Bank in making, any annotation on any such schedule shall
affect the Borrower's obligation to pay the principal and interest of each Loan
or any other obligation of Borrower to the Bank pursuant to this Note.

44) PURPOSE. Borrower certifies (a) that no Loan will be used to purchase margin
stock except with the Bank's express prior written consent for each such
purchase and (b) that all Loans shall be used for a business purpose, and not
for any personal, family or household purpose.

45) AUTHORIZATION. Borrower, if a corporation, partnership, limited liability
company, trust or other entity, represents that it is duly organized and in good
standing or duly constituted in the state of its organization and is duly
authorized to do business in all jurisdictions material to the conduct of its
business; that the execution, delivery and performance of this Note have been
duly authorized by all necessary regulatory and corporate or partnership action
or by its governing instrument; that this Note has been duly executed by an
authorized officer, partner or trustee and constitutes a binding obligation
enforceable against Borrower and not in violation of any law, court order or
agreement by which Borrower is bound; and that Borrower's performance is not
threatened by any pending or threatened litigation.

46) INABILITY TO DETERMINE LIBOR RATES, INCREASED COSTS, ILLEGALITY.

      a) Increased Costs. If the Bank shall determine that, due to either (a)
the introduction of any change (other than any change by way of imposition of or
increase in reserve requirements included in the calculation of the LIBOR) in or
in the interpretation of any requirement of law or (b) the compliance with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law), there shall be any increase in the
cost to the Bank of agreeing to make or making, funding or maintaining any LIBOR
Rate Loans, then Borrower shall be liable for, and shall from time to time, upon
demand therefor by the Bank and pay to the Bank such additional amounts as are
sufficient to compensate the Bank for such increased costs.

      b) Inability to Determine Rates. If the Bank shall determine that for any
reason adequate and reasonable means do not exist for ascertaining LIBOR for any
requested Interest Period with respect to a proposed LIBOR Rate Loan, the Bank
will give notice of such determination to Borrower. Thereafter, the Bank may not
make or maintain LIBOR Rate Loans, as the case may be, hereunder until the Bank
revokes such notice in writing. Upon receipt of such notice, Borrower may revoke
any request for a LIBOR Rate Loan or Notice then submitted by it. If Borrower
does not revoke such notice the Bank may make, or continue the Loans, as
proposed by Borrower, in the amount specified in the applicable request
submitted by Borrower, but such Loans shall be made or continued as Base Rate
Loans instead of LIBOR Rate Loans, as the case may be.

      c) Illegality. If the Bank shall determine that the introduction of any
law (statutory or common), treaty, rule, regulation, guideline or determination
of an arbitrator or of a governmental authority or in the interpretation or
administration thereof, has made it unlawful, or that any central bank or other
governmental authority has asserted that it is unlawful for the Bank to make
LIBOR Rate Loans, then, on notice thereof by the Bank to Borrower, the Bank may
suspend the making of LIBOR Rate Loans until the Bank shall have notified
Borrower that the circumstances giving rise to such determination shall no
longer exist. If the Bank shall determine that it is unlawful to maintain any
LIBOR Rate Loans, Borrower shall prepay in full all LIBOR Rate Loans then
outstanding, together with accrued interest, either on the last date of the
Interest Period thereof if the Bank may lawfully continue to maintain such LIBOR
Rate Loans to such day, or immediately, if the Bank may not lawfully continue to
maintain such LIBOR Rate Loans. If Borrower is required to prepay any LIBOR Rate
Loan immediately as set forth in this subsection,



then concurrently with such prepayment, Borrower may borrow from the Bank, in
the amount of such repayment, a Base Rate Loan.

47) MISCELLANEOUS. This Note, together with any related loan and security
agreements and guaranties, contains the entire agreement between the Bank and
Borrower with respect to the Note, and supersedes every course of dealing, other
conduct, oral agreement and representation previously made by the Bank. All
rights and remedies of the Bank under applicable law and this Note or amendment
of any provision of this Note are cumulative and not exclusive. No single,
partial or delayed exercise by the Bank of any right or remedy shall preclude
the subsequent exercise by the Bank at any time of any right or remedy of the
Bank without notice. No waiver or amendment of any provision of this Note shall
be effective unless made specifically in writing by the Bank. No course of
dealing or other conduct, no oral agreement or representation made by the Bank,
and no usage of trade, shall operate as a waiver of any right or remedy of the
Bank. No waiver of any right or remedy of the Bank shall be effective unless
made specifically in writing by the Bank. Borrower agrees that in any legal
proceeding, a copy of this Note kept in the Bank's course of business may be
admitted into evidence as an original. This Note is a binding obligation
enforceable against Borrower and its successors and assigns and shall inure to
the benefit of the Bank and its successors and assigns. If a court deems any
provision of this Note invalid, the remainder of the Note shall remain in
effect. Section headings are for convenience only. Singular number includes
plural and neuter gender includes masculine and feminine as appropriate.

48) NOTICES. Any demand or notice hereunder or under any applicable law
pertaining hereto shall be in writing and duly given if delivered to Borrower
(at its address on the Bank's records) or to the Bank (at the address on page
one and separately to the Bank officer responsible for Borrower's relationship
with the Bank). Such notice or demand shall be deemed sufficiently given for all
purposes when delivered (i) by personal delivery and shall be deemed effective
when delivered, or (ii) by mail or courier and shall be deemed effective three
(3) business days after deposit in an official depository maintained by the
United States Post Office for the collection of mail or one (1) business day
after delivery to a nationally recognized overnight courier service (e.g.,
Federal Express). Notice by e-mail is not valid notice under this or any other
agreement between Borrower and the Bank.

49) JOINT AND SEVERAL. If there is more than one Borrower, each of them shall be
jointly and severally liable for all amounts which become due under this Note
and the term "Borrower" shall include each as well as all of them.

50) GOVERNING LAW; JURISDICTION. This Note has been delivered to and accepted by
the Bank and will be deemed to be made in the State of New York. This Note will
be interpreted in accordance with the laws of the State of New York excluding
its conflict of laws rules. BORROWER HEREBY IRREVOCABLY CONSENTS TO THE
EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT IN ERIE COUNTY, NEW YORK;
PROVIDED THAT NOTHING CONTAINED IN THIS NOTE WILL PREVENT THE BANK FROM BRINGING
ANY ACTION, ENFORCING ANY AWARD OR JUDGMENT OR EXERCISING ANY RIGHTS AGAINST
BORROWER INDIVIDUALLY, AGAINST ANY SECURITY OR AGAINST ANY PROPERTY OF BORROWER
WITHIN ANY OTHER COUNTY, STATE OR OTHER FOREIGN OR DOMESTIC JURISDICTION.
Borrower acknowledges and agrees that the venue provided above is the most
convenient forum for both the Bank and Borrower. Borrower waives any objection
to venue and any objection based on a more convenient forum in any action
instituted under this Note.

51) WAIVER OF JURY TRIAL. BORROWER AND THE BANK HEREBY KNOWINGLY, VOLUNTARILY,
AND INTENTIONALLY WAIVE ANY RIGHT TO TRIAL BY JURY BORROWER AND THE BANK MAY
HAVE IN ANY ACTION OR PROCEEDING, IN LAW OR IN EQUITY, IN CONNECTION WITH THIS
NOTE OR THE TRANSACTIONS RELATED HERETO. BORROWER REPRESENTS AND WARRANTS THAT
NO REPRESENTATIVE OR AGENT OF THE BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT THE BANK WILL NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THIS JURY
TRIAL WAIVER. BORROWER ACKNOWLEDGES THAT THE BANK HAS BEEN INDUCED TO ENTER INTO
THIS NOTE BY, AMONG OTHER THINGS, THE PROVISIONS OF THIS SECTION.

Preauthorized Transfers from Deposit Account. If a deposit account number is
provided in the following blank Borrower hereby authorizes the Bank to debit
available funds in Borrower's deposit account #8890769956 with the Bank
automatically for any amount which becomes due under this Note or as directed by
an Authorized Person, by telephone.

Acknowledgment. Borrower acknowledges that it has read and understands all the
provisions of this Note, including the Governing Law, Jurisdiction and Waiver of
Jury Trial, and has been advised by counsel as necessary or appropriate.

Replacement Note. This Note is given in replacement of and in substitution for,
but not in payment of, a note dated on or about July 3, 2002 in the original
principal amount of $10,000,000.00 issued by Borrower to the Bank.

TAX ID/SS #        16-0816610                 FINANCIAL INSTITUTIONS, INC.
            ------------------------------    ----------------------------------
                                              BORROWER


                                              By:/s/ Ronald A. Miller
                                                 -------------------------------

                                              Name: Ronald A. Miller
                                              ----------------------------------

                                              Its: Senior Vice President & CFO
                                              ----------------------------------


                                 ACKNOWLEDGMENT

STATE OF NEW YORK)
                            : SS.
COUNTY OF WYOMING)

      On the____day of December, in the year 2003, before me, the undersigned, a
Notary Public in and for said State, personally appeared Ronald A. Miller,
personally known to me or proved to me on the basis of satisfactory evidence to
be the individual(s) whose name(s) is (are) subscribed to the within instrument
and acknowledged to me that he/she/they executed the same in his/her/their
capacity(ies), and that by his/her/their signature(s) on the instrument, the
individual(s), or the person upon behalf of which the individual(s) acted,
executed the instrument.

                                        ------------------------------
                                                 Notary Public


- --------------------------------------------------------------------------------

                                FOR BANK USE ONLY

Authorization Confirmed:________________________________________________________

Product Code:  11900

Disbursement of Funds:

Credit A/C #                Off Ck #              Payoff Obligation #
             ------------            ------------                     ----------

           $                       $                                $
             ------------            ------------                     ----------



                      SCHEDULE TO STANDARD LIBOR GRID NOTE

                  TYPE OF LOAN
         AMOUNT   LIBOR     RATE  INTEREST   INTEREST   AMOUNT  NOTATION
DATE    OF LOAN   OR BASE   RATE  RATE*      PERIOD**   PAID    MADE  BY

- ---------------------------------
*     For Base Rate Loans, insert "Base Rate"

**    For LIBOR Rate Loans only



                                    EXHIBIT B

                          FINANCIAL INSTITUTIONS, INC.

                                  ENCUMBRANCES

                                      NONE



                                    EXHIBIT C

                          FINANCIAL INSTITUTIONS, INC.

                                   LITIGATION

                                      NONE



                                    EXHIBIT D

                          FINANCIAL INSTITUTIONS, INC.

                              MATERIAL SUBSIDIARIES

              Name                              Percentage of Ownership
              ----                              -----------------------

              Wyoming County Bank                         99.60%
              National Bank of Geneva                     99.10%
              Pavilion State Bank                        100.00%
              First Tier Bank & Trust                    100.00%



                                    EXHIBIT E

          FINANCIAL INSTITUTIONS, INCREPORT OF CHIEF FINANCIAL OFFICER

      Financial Institutions, Inc. (the "Borrower") hereby certifies that:

      This Report is furnished pursuant to Section 5.1(c) of the Revolving
Credit Agreement dated as of April __, 2001 the ("Credit Agreement") between the
Borrower and MANUFACTURERS AND TRADERS TRUST COMPANY. Unless otherwise defined
herein, the terms used in this Report have the meanings given to them in the
Credit Agreement.

      As required by Section 5.1(a) and (b) of the Credit Agreement, the
consolidated financial statements of the Borrower and its Subsidiaries for the
[year/quarter] ended _________________, 200__ (the "Financial Statements"),
prepared in accordance with generally accepted accounting principles
consistently applied, accompany this Report. The Financial Statements present
fairly the consolidated financial position of the Borrower and its Subsidiaries
as at the date thereof and the consolidated results of operations of the
Borrower and its Subsidiaries for the period covered thereby (subject only to
normal recurring year-end adjustments which will not in the aggregate be
material in amount).

      The figures set forth in Schedule A for determining compliance by the
Borrower with the financial covenants contained in Sections 6.7, 6.8 and 6.10 of
the Credit Agreement are true and complete as of the date hereof.

      As of the date hereof, Borrower and its Material Subsidiaries, excluding
any other federally-insured depository institution that was acquired after April
25, 2001 and prior to the Termination Date, have total "Risk-Based Capital
Ratios", "Tier I Risk-Based Capital Ratios", and "Leverage Ratios", as defined
in applicable FDIC regulations, sufficient to cause each of such entity or
consolidated entity to be considered "well capitalized" by the appropriate
Federal Banking Agency; and any other federally-insured depository institution
that was acquired after April 25, 2001 has total "Risk-Based Capital Ratios",
"Tier I Risk-Based Capital Ratios", and "Leverage Ratios", as defined in
applicable FDIC regulations, sufficient to cause each such entity so acquired to
be considered no less than "adequately capitalized", and any entity with which
it is consolidated to be considered "well capitalized", by the appropriate
Federal Banking Agency; to comply with Section 6.9 of the Credit Agreement.

      The activities of the Borrower and its Subsidiaries during the period
covered by the Financial Statements have been reviewed by me as Borrower's Chief
Financial Officer or by employees or agents of Borrower under my immediate
supervision. Based on such review, to my best knowledge and belief, and as of
the date of this Report, no Default has occurred. *

                         WITNESS my hand this ___ day of_________ 2000_.

                                        FINANCIAL INSTITUTIONS, INC.


                                        By:
                                            -------------------------------
                                                 Chief Financial Officer



*If a Default has occurred, this paragraph is to be modified with an appropriate
statement as to the nature thereof, the period of existence thereof and what
action the Borrower has taken, is taking, or proposes to take with respect
thereto.

                                   SCHEDULE A
                                       to
                                    EXHIBIT E

                        AFFIRMATIVE (FINANCIAL) COVENANTS

Double Leverage Ratio (Section 6.7)

MAXIMUM PERMITTED                                                  1.35: 1.00
                                                                   ----  -------

ACTUAL:

         (i)      Consolidated equity Investments in               $
                  Subsidiaries                                     -------------

         (ii)     Consolidated stockholders' equity                $
                                                                   -------------
         (iii)    Double Leverage Ratio:  line (i)                     : 1.00
                  divided by line (ii)                             ----  -------

Nonperforming Asset Coverage Ratio (Section 6.8)

MINIMUM REQUIRED:                                                   8.5: 1.00
                                                                   ----  -------

ACTUAL:

         (i)      Consolidated stockholders' equity                $
                                                                   -------------
         (ii)     loan loss reserves                               $
                                                                   -------------

         (iii)    Non accrual and other past due loans and
                  leases                           $
                                                   -----------

         (iv)     Other real estate owned          $
                                                   -----------
         (v)      Nonperforming assets: line (iii)
                  plus line(iv)                                    $
                                                                   -------------

         (vi)     Nonperforming Assets Coverage Ratio:
                  [line (i) plus line (ii)] divided by line (v)    $   : 1.00
                                                                   ----  -------



Minimum Tangible Net Worth (Section 6.10)

REQUIRED:                                                           $75,000,000

ACTUAL:

         (i)      Consolidated stockholders' equity                 $

         (ii)     Less:  Intangible assets                          ($         )
                                                                     ----------

         (iii)    Plus:

         (iv)     Total Tangible Net Worth (line (i) minus
                  line (ii) plus line (iii)                         $
                                                                    -----------

         WITNESS my hand this ______ day of ____________, 20__.

                                      FINANCIAL INSTITUTIONS, INC.


                                      By:
                                         --------------------------------------
                                               Chief Financial Officer



                                    EXHIBIT F

                       OPINION OF COUNSEL TO THE BORROWER

EX-3.3

EX-3.3
(Exhibit 3.3)     Amended and Restated Bylaws dated February 18, 2004

                                     BY-LAWS
                                       OF
                          FINANCIAL INSTITUTIONS, INC.
                                    ARTICLE I

                                  SHAREHOLDERS

      Section 1. Annual Meetings. The annual meeting of the shareholders for the
election of directors and the transaction of other business shall be held each
year on such day and at such hour as shall be fixed by the Board of Directors.

      Section 2. Special Meetings. A special meeting of the shareholders may be
called at any time by (a) the holders of a majority of the outstanding shares
who would be entitled to vote at the meeting, (b) the Board of Directors or (c)
the President, and such meeting shall be held on such day and at such hour as is
fixed in the call of the meeting.

      Section 3. Place of Meetings. Meetings of shareholders shall be held at
the principal office of the Corporation or at such other place, within or
without the State of New York, as may be fixed by the Board of Directors.

      Section 4. Notice of Meetings. Notice of each meeting of shareholders
shall be in writing or electronic form and shall state the place, date, and hour
of the meeting. Notice of a special meeting also shall state the purpose or
purposes for which the meeting is called and shall indicate who called the
meeting. A copy of the notice of any meeting shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting, to each
shareholder entitled to vote at the meeting. If mailed, such notice is given
when deposited in the United States mail, with postage thereon prepaid, directed
to the shareholder at such address as appears on the record of shareholders, or,
if the shareholder shall have filed with the Secretary a written request that
notices be mailed to some other address, then directed to the shareholder at
such other address. If transmitted electronically, such notice is given when
directed to the shareholder's electronic mail address as supplied by the
shareholder to the Secretary of the Corporation or as otherwise directed
pursuant to the shareholder's authorization or instructions. Notice of meetings
of shareholders need not be given to any shareholder who submits a waiver of
notice, in person, by proxy or electronically, whether before or after the
meeting. The attendance of any shareholder at a meeting, whether in person or by
proxy, without protesting prior to the conclusion of the meeting the lack of
notice of such meeting, shall constitute a waiver of notice by him or her.

      Section 5. Organization. At each meeting of shareholders, the Chairman, or
in the Chairman's absence, the President or the Chairman's designee shall
preside as chairman of the meeting and the Secretary, or in the Secretary's
absence an Assistant Secretary, shall act as secretary of the meeting. If none
of those designated to preside or to act as secretary of the meeting shall be
present, the shareholders present in person or by proxy and entitled to vote at
the meeting shall select someone to preside or to act as secretary, as may be
needed.


                                      -2-


      Section 6. Quorum. At each meeting of shareholders, except as otherwise
provided by law, the holders of a majority of the shares entitled to vote
thereat, present in person or by proxy, shall constitute a quorum for the
transaction of business.

      Section 7. Voting. Except as otherwise provided by law or by the
Certificate of Incorporation, at each meeting of shareholders, every shareholder
of record shall be entitled to cast one vote for every share of stock standing
in his or her name on the record of shareholders. Except as otherwise provided
by law or by the Certificate of Incorporation, all matters shall be determined
by a majority of the votes cast, except that directors shall be elected by a
plurality of the votes cast.

      Section 8. Proxies.

      (a) Every shareholder entitled to vote at a meeting of shareholders or to
express consent or dissent without a meeting may authorize another person or
persons to act for him or her by proxy.

      (b) No proxy shall be valid after the expiration of eleven months from the
date thereof unless otherwise provided in the proxy. Every proxy shall be
revocable at the pleasure of the shareholder executing it, except as otherwise
provided by law.

      (c) The authority of the holder of a proxy to act shall not be revoked by
the incompetence or death of the shareholder who executed the proxy unless,
before the authority is exercised, written notice of an adjudication of such
incompetence or of such death is received by the Secretary or an Assistant
Secretary.

      (d) Without limiting the manner in which a shareholder may authorize
another person or persons to act for him or her as proxy pursuant to paragraph
(a) of this Section, the following shall constitute a valid means by which a
shareholder may grant such authority:

            (1) A shareholder may execute a writing authorizing another person
or persons to act for him as proxy. Execution may be accomplished by the
shareholder or the shareholder's authorized officer, director, employee or agent
signing such writing or causing his or her signature to be affixed to such
writing by any reasonable means including, but not limited to, by facsimile
signature.

            (2) A shareholder may authorize another person or persons to act for
the shareholder as proxy by transmitting or authorizing the transmission of a
telegram, cablegram or other means of electronic transmission to the person who
will be the holder of the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the person who will be the
holder of the proxy to receive such transmission, provided that such telegram,
cablegram or other means of electronic transmission must either set forth or be
submitted with information from which it can be reasonably determined that the
telegram, cablegram or other electronic transmission was authorized by the
shareholder. If it is determined that such telegrams, cablegrams or other
electronic transmissions are valid, the inspectors shall specify the nature of
the information upon which they relied.


                                      -3-


      (e) Any copy, facsimile telecommunications or other reliable reproduction
of the writing or transmission created pursuant to paragraph (d) of this Section
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that such copy, facsimile, telecommunication or other
reproduction shall be a complete reproduction of the entire original writing or
transmission.

      Section 9. List of Shareholders at Meetings. A list of shareholders as of
the record date, certified by the corporate officer responsible for its
preparation or by a transfer agent, shall be produced at any meeting of
shareholders upon the request thereat or prior thereto of any shareholder.

      Section 10. Action Without a Meeting. Action may be taken by written
consent of the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.

      Section 11. Introduction of Business at a Meeting of Shareholders. At an
annual meeting of shareholders, only such business shall be conducted, and only
such proposals shall be acted upon, as shall have been properly brought before
the annual meeting of shareholders (a) by, or at the direction of, the Board of
Directors, or (b) by a shareholder of the Corporation who complies with the
procedures set forth in this Section 11. For business or a proposal to be
properly brought before an annual meeting of shareholders by a shareholder, the
shareholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a shareholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 60 days nor more than 90 days prior to the scheduled date of the
annual meeting, regardless of any postponement, deferrals or adjournments of
that meeting to a later date; provided, however, that if less than 70 days'
notice or prior public disclosure of the date of the annual meeting is given or
made to shareholders, notice by the shareholder to be timely must be so
delivered or received not later than the close of business on the 10th day
following the earlier of (i) the day on which such notice of the date of the
meeting was mailed or (ii) the day on which such public disclosure was made.

      A shareholder's notice to the Secretary shall set forth as to each matter
the shareholder proposes to bring before an annual meeting of shareholders (i) a
description, in 500 words or less, of the business desired to be brought before
the annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the shareholder proposing such business and any other shareholder proposing
such business and any other shareholders known by such shareholder to be
supporting such proposal, (iii) the class and number of shares of the
Corporation which are beneficially owned by such shareholder on the date of such
shareholder's notice and by any other shareholders known by such shareholder to
be supporting such proposal on the date of such shareholder's notice, (iv) a
description, in 500 words or less, of any interest of the shareholder in such
proposal, and (v) a representation that the shareholder is a holder of record of
stock of the Corporation and intends to appear in person or by proxy at the
meeting to present the proposal specified in the notice. Notwithstanding
anything in the By-Laws to the contrary, no business shall be conducted at a
meeting of shareholders except in accordance with the procedures set forth in
this Section 11.


                                      -4-


      The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that the business was not properly brought before the
meeting in accordance with the procedures prescribed by the By-Laws, and if he
should so determine, he shall so declare to the meeting and any such business
not properly brought before the meeting shall not be transacted. Notwithstanding
the foregoing, nothing in this Section 11 shall be interpreted or construed to
require the inclusion of information about any such proposal in any proxy
statement distributed by, at the direction of, or on behalf of, the Board of
Directors.

                                   ARTICLE II

                               BOARD OF DIRECTORS

      Section 1. General Power. Except as otherwise provided in the Certificate
of Incorporation of the Corporation, the business, property, and affairs of the
Corporation shall be managed under the direction of its Board of Directors.

      Section 2. Number. The number of directors constituting the entire Board
of Directors shall be such number as shall be fixed from time to time by the
Board of Directors, provided that no decrease in the number of directors shall
shorten the term of any incumbent director, and further provided that, if all
the shares of the Corporation are owned beneficially and of record by less than
three shareholders, the number of directors may be less than three but not less
than the number of shareholders. The Board of Directors shall be divided into
three classes of approximately equal number. The term of one class of directors
shall expire at each annual meeting.

      Section 3. Election and Term of Directors. Directors shall, except as
otherwise required by law, be elected by a plurality of the votes cast at a
meeting of shareholders by the holders of shares entitled to vote in the
election. At each annual meeting one class of directors shall be elected, each
to hold office until the third succeeding annual meeting and until his successor
has been elected and qualified. A director elected to a newly created
directorship shall be elected to hold office until the expiration of the terms
of the other directors in the class to which he is assigned, and a director
elected to fill a vacancy shall be elected to fill such vacancy for the
remainder of such term.

      Section 4. Meetings of the Board. An annual meeting of the Board of
Directors shall be held in each year directly after adjournment of the annual
meeting of shareholders. Other regular meetings of the Board of Directors shall
be held at such times as may from time to time be fixed by resolution of the
Board of Directors. Special meetings of the Board of Directors may be held at
any time upon the call of the President or a majority of the members of the
Board of Directors. Meetings of the Board of Directors shall be held at such
place, within or without the State of New York, as from time to time may be
fixed by resolution of the Board of Directors or by order of the President. If
no place is so fixed, meetings of the Board of Directors shall be held at the
principal office of the Corporation.


                                      -5-


      Section 5. Notice of Meetings. Notice of regular meetings of the Board of
Directors need not be given. Notice of each special meeting shall be mailed to
each director, addressed to the address last given by each director to the
Secretary or, if none has been given, to the director's residence or usual place
of business, at least three days before the day on which the meeting is to be
held, or shall be sent to the director by facsimile, electronic transmission, or
similar means so addressed or shall be delivered personally or by telephone, at
least twenty-four (24) hours before the time the meeting is to be held. Each
notice shall state the time and place of the meeting but need not state the
purposes thereof except as otherwise expressly required by law. Notices of any
such meeting need not be given to any director who submits a signed waiver of
notice, whether before or after the meeting, or who attends the meeting without
protesting, prior thereto or at its commencement, the lack of notice.

      Section 6. Quorum and Manner of Acting. At each meeting of the Board of
Directors the presence of a majority of the entire Board of Directors shall
constitute a quorum for the transaction of business, and the vote of a majority
of the directors present at the time of the vote, if a quorum is present at that
time, shall be the act of the Board of Directors.

      Section 7. Action Without a Meeting. Any action required or permitted to
be taken by the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board of Directors or the committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents thereto by the members of the Board of Directors or
committee shall be filed with the minutes of the proceedings of the Board of
Directors or committee.

      Section 8. Participation in Board Meetings by Conference Telephone. Any
one or more members of the Board of Directors or any committee thereof may
participate in a meeting of such Board of Directors or committee by means of a
conference telephone or similar communications equipment allowing all persons
participating in the meeting to hear each other at the same time. Participation
by such means shall constitute presence in person at a meeting.

      Section 9. Executive and Other Committees of Directors. The Board of
Directors, by resolution adopted by a majority of the entire Board of Directors,
may designate from among its members an executive committee and other
committees, each consisting of one or more directors, and each of which, to the
extent provided in the resolution, shall have all the authority of the Board of
Directors, except that no such committee shall have authority as to the
following matters:

      (1) The submission to shareholders of any action that needs shareholders'
      approval under the New York Business Corporation Law;

      (2) The filling of vacancies in the Board of Directors or in any
      committee;

      (3) The fixing of compensation of the directors for serving on the Board
      of Directors or on any committee;

      (4) The amendment or repeal of the By-laws, or the adoption of new
      By-laws; and


                                      -6-


      (5) The amendment or repeal of any resolution of the Board of Directors
      which by its terms shall not be so amendable or repealable.

Except to the extent otherwise determined by the Board of Directors, each
committee shall fix its own rules of procedure. Regular meetings of each
committee shall be held at such times as may be fixed from time to time by
resolution of the Board of Directors or the committee. Special meetings shall be
held whenever called by the President or the chairman of the committee. The
notice provisions of Article II, Section 5, of the By-Laws shall apply to
regular and special meetings of committees. Unless a greater proportion is
required by the resolution designating a committee of the Board of Directors, a
majority of the entire committee shall constitute a quorum for the transaction
of business or of any specified item of business, and the vote of a majority of
the members present at the time of such vote, if a quorum is present at such
time, shall be the act of the committee. The Board of Directors may designate
one or more directors as alternate members of any such committee, who may
replace any absent member or members at any meeting of such committee.

      Section 10. Resignation and Removal. Any director may resign at any time
by giving written notice to the President or to the Secretary. Such resignation
shall take effect at the time specified therein or, if no time be specified,
then on delivery and, unless otherwise specified therein, the acceptance of such
resignation by the Board of Directors shall not be needed to make it effective.
Any or all of the directors may be removed, at any time, with or without cause,
by vote of the shareholders at a special meeting of shareholders, and any
vacancy thereby created may be filled at said meeting by vote of the
shareholders and, if not so filled, then by the directors as provided in Section
11 of this Article.

      Section 11. Vacancies. Newly created directorships resulting from an
increase in the number of directors and vacancies occurring in the Board of
Directors for any reason may be filled by vote of a majority of the directors
then in office, even if less than a quorum exists. A director elected to fill a
newly created directorship or a vacancy shall hold office for the period
described in Article II, Section 3.

      Section 12. Nominations and Qualifications of Directors. Only persons
nominated in accordance with the procedures set forth in this Section shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors may be made at an annual meeting of shareholders or special
meeting of shareholders called by the Board of Directors for the purpose of
electing directors (i) by or at the direction of the Board of Directors, or (ii)
by any shareholder of the Corporation entitled to vote for the election of
directors at such meeting who complies with the notice procedures set forth in
this Section 12. Such nominations, other than those made by or at the direction
of the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 60 days nor more than 90 days prior to the scheduled
date of the meeting, regardless of postponements, deferrals, or adjournments of
that meeting to a later date; provided, however, that if less than 70 days'
notice or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder to be timely must be so delivered or
received not later than the close of business on the 10th day following the
earlier of (i) the day on which such


                                      -7-


notice of the date of such meeting was mailed or (ii) the day on which such
public disclosure was made.

      A shareholder's notice to the Secretary shall set forth (i) as to each
person whom the shareholder proposes to nominate for election or reelection as a
director (a) the name, age, business address and residence address of such
person, (b) the principal occupation or employment of such person, (c) the class
and number of shares of the Corporation which are beneficially owned by such
person on the date of such shareholder's notice and (d) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, or any successor regulation (including without limitation such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (ii) as to the shareholder giving the notice
(a) the name and address, as they appear on the Corporation's books, of such
shareholder and any other shareholders known by such shareholder to be
supporting such nominee(s), (b) the class and number of shares of the
Corporation which are beneficially owned by such shareholder on the date of such
shareholder's notice and by any other shareholders known by such shareholder to
be supporting such nominee(s) on the date of such shareholder's notice, (c) a
representation that the shareholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; and (iii) a description of all arrangements or understandings between
the shareholder and each nominee and other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder.

      No persons shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this Section 12.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the procedures
prescribed by the By-Laws, and if he should so determine, he shall so declare to
the meeting and the defective nomination shall be disregarded.

                                   ARTICLE III

                                    OFFICERS

      Section 1. Officers Enumerated. The Board of Directors may elect or
appoint a Chairman of the Board, a President, a Chief Executive Officer, one or
more Vice Presidents, a Secretary, and a Treasurer, and such other officers as
the Board of Directors may determine. Any two or more offices may be held by the
same person.

      Section 2. Election and Term of Office. All officers shall be elected by
the Board of Directors at its first meeting held after the annual election of
directors. The officers need not be directors. Subject always to the right of
the Board of Directors to remove an officer with or without cause, each officer
shall hold office at the pleasure of the Board of Directors.


                                      -8-


      Section 3. Chairman of the Board. The Chairman of the Board of Directors,
if there is one, shall perform such duties and exercise such other powers which
may from time to time be assigned to him by the Board of Directors.

      Section 4. The President. The President shall, in the absence of the
Chairman of the Board, preside at all meetings of the Board of Directors at
which he is present, and shall, if he is not the Chief Executive Officer,
perform such other duties and exercise such other powers which may from time to
time be assigned to him by the Chief Executive Officer or the Board of
Directors.

      Section 5. Chief Executive Officer. The Chief Executive Officer shall be
either the Chairman of the Board or the President, as the Board of Directors
shall from time to time determine, and shall have general powers and duties of
management of the Corporation's business and affairs, subject to the control of
the Board of Directors, shall preside at meetings of shareholders and shall
perform such duties which may from time to time be assigned to him by the Board
of Directors. The duties of the Chief Executive Officer shall in the event of
his absence or disability be performed by such other officer as he or the Board
of Directors shall designate.

      Section 6. The Vice Presidents. Each Vice President, if any, shall, in the
absence or incapacity of the President and in order as fixed by the Board of
Directors, have the authority and perform the duties of the President, and each
shall have such other authority and perform such other duties as the Board of
Directors may prescribe.

      Section 7. The Secretary. The Secretary (a) shall attend all meetings of
the Board of Directors and all meetings of the shareholders and record all votes
and the minutes of all proceedings in a book to be kept for that purpose, (b)
shall perform like duties for committees of the Board of Directors when
required, (c) shall give, or cause to be given, notice of all meetings of the
shareholders and special meetings of the Board of Directors, and (d) shall have
such other authority and perform such other duties as usually pertain to the
office or as may be prescribed by the Board of Directors. The Secretary shall
keep in safe custody the seal of the Corporation and, when authorized by the
Board of Directors or the President, affix the same to any instrument requiring
it, and when so affixed, it shall be attested by the signature of the Secretary
or Treasurer.

      Section 8. The Treasurer. The Treasurer (a) shall have the care and
custody of all the moneys and securities of the Corporation, (b) shall keep or
cause to be kept complete and accurate books of account of all moneys received
and paid on account of the Corporation, (c) shall sign such instruments as
require the Treasurer's signature, and (d) shall have such other authority and
perform such other duties as usually pertain to the office or as the Board of
Directors may prescribe.

      Section 9. Other Officers. Any Assistant Vice President, Assistant
Secretary, or Assistant Treasurer elected by the Board of Directors, (a) shall
assist the Vice President, Secretary, or Treasurer, respectively, as the case
may be, (b) shall possess that officer's authority and perform that officer's
duties in that officer's absence or incapacity, and, (c) shall have such other
authority and perform such other duties as the Board of Directors may prescribe.
The


                                      -9-


Board of Directors may appoint such other officers as from time to time may
appear to the Board of Directors to be required or desirable to transact the
business of the Corporation. Such officers shall exercise such powers and
perform such duties as may be conferred upon, or assigned to them, by the Board
of Directors, the Chairman, or the President.

      Section 10. Appointed Officers. The Board of Directors may delegate to any
officer or committee the power to appoint and to remove any subordinate officer,
agent, or employee.

      Section 11. Securities of Other Corporations. The President or the
Treasurer may, with respect to any shares of stock or other securities issued by
any other corporation or other business organization and held by the
Corporation, exercise voting and similar rights on behalf of the Corporation and
execute proxies for that purpose. In addition, either such officer may endorse
for sale or transfer and may sell or transfer for and on behalf of the
Corporation any such stock or other securities and may appoint proxies or
attorneys for that purpose.

                                   ARTICLE IV

                            SHARES AND THEIR TRANSFER

      Section 1. Certificates of Stock. Every shareholder shall be entitled to
have one or more certificates, in such form as the Board of Directors may from
time to time prescribe, representing in the aggregate the number of shares of
stock of the Corporation owned by said shareholder, which certificates shall be
signed by, or in the name of, the Corporation by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary. The Board of Directors may decide in its discretion to
prescribe book-entry or uncertificated securities in lieu of or in addition to
certificates.

      Section 2. Transfers. Shares of stock of the Corporation shall be
transferable on the books of the Corporation by the registered holder thereof in
person or by such holder's duly authorized attorney, but, except as hereinafter
provided in the case of loss, destruction, or mutilation of certificates, no
transfer of shares shall be entered until the previously issued certificate
representing those shares shall have been surrendered and canceled. Except as
otherwise required by law, the Corporation shall be entitled to treat the person
registered as the holder of shares on its books as the owner thereof for all
purposes regardless of any notice or knowledge to the contrary.

      Section 3. Lost, Destroyed or Mutilated Certificates. The Corporation may
issue a new certificate representing shares of stock of the same tenor and the
same number of shares in place of a certificate theretofore issued by it that is
alleged to have been lost, stolen, or destroyed; provided, however, that the
Board of Directors may require the owner of the lost, stolen, or destroyed
certificate, or such owner's legal representative, to give the Corporation a
bond or indemnity, in form and with one or more sureties satisfactory to the
Board of Directors, sufficient to indemnify the Corporation against any claim
that may be made against it on account of the alleged loss, theft, or
destruction of any such certificate or the issuance of such new certificate.


                                      -10-


                                    ARTICLE V

                                INDEMNIFICATION

      Section 1. Indemnification of Directors and Officers. To the fullest
extent authorized or permitted by law, the Corporation shall indemnify any
person ("Indemnified Person") made, or threatened to be made, a party to any
action or proceeding, whether civil, at law, in equity, criminal,
administrative, investigative or otherwise, including any action by or in the
right of the Corporation, by reason of the fact that he, his testator or
intestate ("Responsible Person"), whether before or after adoption of this
Article (a) is or was a director, or officer of the Corporation, or (b) if a
director or officer of the Corporation, is serving or served, in any capacity,
at the request of the Corporation, any other corporation, or any partnership,
joint venture, trust, employee benefit plan or other enterprise, or (c) if not a
director or officer of the Corporation, is serving or served, at the request of
the Corporation, as a director or officer of any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
against all judgments, fines, penalties, amounts paid in settlement (provided
the Corporation shall have consented to such settlement, which consent shall not
be unreasonably withheld by it) and reasonable expenses, including attorneys'
fees and costs of investigation, incurred by such Indemnified Person with
respect to any such threatened or actual action or proceeding, and any appeal
therein, provided only that (x) acts of the Responsible Person which were
material to the cause of action so adjudicated or otherwise disposed of were not
(i) committed in bad faith or (ii) were not the result of active and deliberate
dishonesty, and (y) the Responsible Person did not personally gain in fact a
financial profit or other advantage to which he was not legally entitled.

      Section 2. Advancement of Expenses. All expenses reasonably incurred by an
Indemnified Person in connection with a threatened or actual action or
proceeding with respect to which such person is or may be entitled to
indemnification under this Article shall be advanced or promptly reimbursed by
the Corporation to him in advance of the final disposition of such action or
proceeding, upon receipt of an undertaking by him or on his behalf to repay the
amount of such advances, if any, as to which he is ultimately found not to be
entitled to indemnification or, where indemnification is granted, to the extent
such advances exceed the indemnification to which he is entitled.

      Section 3. Procedure for Indemnification.

      (a) Not later than thirty (30) days following final disposition of an
action or proceeding with respect to which the Corporation has received written
request by an Indemnified Person for indemnification pursuant to this Article,
if such indemnification has not been ordered by a court, the Board of Directors
shall meet and find whether the Responsible Person met the standard of conduct
set forth in Section 1 of this Article, and, if it finds that he did, or to the
extent it so finds, shall authorize such indemnification.

      (b) Such standard shall be found to have been met unless (i) a judgment or
other final adjudication adverse to the Indemnified Person establishes that (A)
acts of the Responsible Person were committed in bad faith or were the result of
active and deliberate dishonesty and


                                      -11-


were material to the cause of action so adjudicated, or (B) the Responsible
Person personally gained in fact a financial profit or other advantage to which
he was not legally entitled; or (ii) if the action or proceeding was disposed of
other than by judgment or other final adjudication, the Board of Directors finds
in good faith that, if it had been disposed of by judgment or other final
adjudication, such judgment or other final adjudication would have been adverse
to the Indemnified Person and would have established (A) or (B) above.

      (c) If indemnification is denied, in whole or part, because of such a
finding by the Board of Directors in the absence of a judgment or other final
adjudication, or because the Board of Directors believes the expenses for which
indemnification is requested to be unreasonable, such action by the Board of
Directors shall in no way affect the right of the Indemnified Person to make
application therefor in any court having jurisdiction thereof, and in such
action or proceeding the issue shall be whether the Responsible Person met the
standard of conduct set forth in Section 1, or whether the expenses were
reasonable, as the case may be; not whether the finding of the Board of
Directors with respect thereto was correct; and the determination of such issue
shall not be affected by the Board's finding. If the judgment or other final
adjudication in such action or proceeding establishes that the Responsible
Person met the standard set forth in Section 1, or that the disallowed expenses
were reasonable, or to the extent that it does, the Board of Directors shall
then find such standard to have been met if it has not done so, and shall grant
such indemnification, and shall also grant to the Indemnified Person
indemnification of the expenses incurred by him in connection with the action or
proceeding resulting in the judgment or other final adjudication that such
standard of conduct was met, or if pursuant to such court determination such
person is entitled to less than the full amount of indemnification denied by the
Corporation, the portion of such expenses proportionate to the amount of such
indemnification so awarded.

      (d) A finding by the Board of Directors pursuant to this Section that the
standard of conduct set forth in Section 1 has been met shall mean a finding (i)
by a quorum consisting of directors who are not parties to such action or
proceeding or, (ii) if such a quorum is not obtainable or, if obtainable, such a
quorum is unable to make such a finding and so directs, (A) by the Board of
Directors upon the written opinion of independent legal counsel that
indemnification is proper in the circumstances because the applicable standard
of conduct has been met, or (B) by the shareholders upon a finding that such
standard has been met, such action by the Board of Directors or shareholders to
be taken as promptly as is practicable.

      Section 4. Contractual Article. This Article shall be deemed to constitute
a contract between the Corporation and each director and each officer of the
Corporation who serves as such at any time while this Article is in effect. No
repeal or amendment of this Article, insofar as it reduces the extent of the
indemnification of any person who could be a Responsible Person shall without
his written consent be effective as to such person with respect to any event,
act or omission occurring or allegedly occurring (a) prior to the date of such
repeal or amendment if on that date he is not serving in any capacity for which
he could be a Responsible Person, or (b) prior to the thirtieth (30th) day
following delivery to him of written notice of such amendment as to any capacity
in which he is serving on the date of such repeal or amendment, other than as a
director or officer of the Corporation, for which he could be a Responsible
Person, or (c) the later of the thirtieth (30th) day following delivery to him
of such notice or the end of the term of office (for whatever reason) he is
serving as director or officer of the Corporation when such


                                      -12-


repeal or amendment is adopted, with respect to being a Responsible Person in
that capacity. No amendment of the Business Corporation Law shall, insofar as it
reduces the permissible extent of the right of indemnification of a Responsible
Person under this Article, be effective as to such person with respect to any
event, act or omission occurring or allegedly occurring prior to the effective
date of such amendment. This Article shall be binding on any successor to the
Corporation, including any corporation or other entity which acquires all or
substantially all of the Corporation's assets.

      Section 5. Insurance. The Corporation may, but need not, maintain
insurance insuring the Corporation or persons entitled to indemnification under
Section 1 of this Article for liabilities against which they are entitled to
indemnification under this Article or insuring such persons for liabilities
against which they are not entitled to indemnification under this Article.

      Section 6. Indemnification of Employees and Agents. The Corporation may,
to the extent authorized by the Board of Directors, grant rights of
indemnification and advancement of expenses to any employee or agent of the
Corporation to the full extent of the provisions of this Article with respect to
indemnification and advancement of expenses of directors and officers of the
Corporation.

      Section 7. Non-exclusivity. The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which any person covered
hereby may be entitled other than pursuant to this Article. The Corporation is
authorized to enter into agreements with any such person or persons providing
them rights to indemnification or advancement of expenses in addition to the
provisions therefor in this Article to the full extent permitted by law.

                                   ARTICLE VI

                                     GENERAL

      Section 1. Seal. The seal of the Corporation shall be in the form of a
circle and shall bear matters deemed appropriate by the Board of Directors.

      Section 2. Fiscal Year. The fiscal year of the Corporation shall end at
the close of business on December 31 of each calendar year.


                                   ARTICLE VII

                                   AMENDMENTS

      Section 1. Power to Amend. Both the shareholders and the Board of
Directors shall have the power to adopt, amend, or repeal by-laws. Any by-law
adopted by the Board of Directors may be amended or repealed by the shareholders
at any annual or special meeting of the shareholders.

      Section 2. Amendment Affecting Election of Directors. If any by-law
regulating an impending election of directors is adopted, amended, or repealed
by the Board of Directors, there


                                      -13-


shall be set forth in the notice of the next meeting of shareholders for the
election of directors the by-law so adopted, amended, or repealed, together with
a concise statement of the changes made.

EX-21

EX-21
(Exhibit 21)      Subsidiaries of Financial Institutions, Inc.

                  Wyoming County Bank (99.65% owned)
                  National Bank of Geneva (100% owned)
                  First Tier Bank & Trust (100% owned)
                  Bath National Bank (100% owned)
                  Burke Group, Inc. (100% owned)
                  The FI Group, Inc. (100% owned)
                  FISI Statutory Trust I (100% owned)

EX-23

EX-23
(Exhibit 23)      Independent Accountants' Consent

                        INDEPENDENT ACCOUNTANTS' CONSENT

The Board of Directors
Financial Institutions, Inc.:

We consent to incorporation by reference in the Registration Statement on Form
S-8 (No. 333-76865) of Financial Institutions, Inc. of our report dated February
6, 2004, relating to the consolidated statements of financial condition of
Financial Institutions, Inc. and subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of income, changes in shareholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2003, which report has been included in the
December 31, 2003 Annual Report on Form 10-K of Financial Institutions, Inc. Our
report included an explanatory paragraph describing the adoption of the
provisions of the Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets, in 2002.


                                            /s/ KPMG LLP

Buffalo, New York
March 12, 2004

EX-24

EX-24
(Exhibit 24)      Power of Attorney

                                POWER OF ATTORNEY

The undersigned Directors of Financial Institutions, Inc. do hereby constitute
and appoint each of Peter G. Humphrey and Ronald A. Miller their true and lawful
attorneys and agents, to execute the Financial Institutions, Inc. Annual Report
on Form 10-K for the fiscal year ended December 31, 2003 and any amendments
thereto.

Dated: March 10, 2004               /s/ W. J. Humphrey, Jr.
                                    -----------------------------------
                                             W. J. Humphrey, Jr.

Dated: March 10, 2004               /s/ Jon J. Cooper
                                    -----------------------------------
                                                Jon J. Cooper

Dated: March 10, 2004               /s/ Barton P. Dambra
                                    -----------------------------------
                                              Barton P. Dambra

Dated: March 10, 2004               /s/ Samuel M. Gullo
                                    -----------------------------------
                                               Samuel M. Gullo

Dated: March 10, 2004               /s/ John R. Tyler, Jr.
                                    -----------------------------------
                                             John R. Tyler, Jr.

Dated: March 10, 2004
                                    -----------------------------------
                                              Joseph F. Hurley

Dated: March 10, 2004               /s/ James H. Wyckoff
                                    -----------------------------------
                                              James H. Wyckoff

Dated: March 10, 2004               /s/ James E. Stitt
                                    -----------------------------------
                                               James E. Stitt

Dated: March 10, 2004               /s/ John E. Benjamin
                                    -----------------------------------
                                              John E. Benjamin

Dated: March 10, 2004               /s/ Pamela Davis Heilman
                                    -----------------------------------
                                            Pamela Davis Heilman

Dated: March 10, 2004               /s/ Susan R. Holliday
                                    -----------------------------------
                                              Susan R. Holliday

EX-31.1

EX-31.1
(Exhibit 31.1)

CERTIFICATION

I, Peter G. Humphrey, certify that:

1. I have reviewed this annual report on Form 10-K of Financial Institutions,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure procedures to be designed under our supervision, to
            ensure that material information relating to the registrant,
            including its consolidated subsidiaries, is made known to us by
            others within those entities, particularly during the period in
            which this annual report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: March 12, 2004

                                             /s/ Peter G. Humphrey
                                             ---------------------------------

                                             Peter G. Humphrey
                                             Chief Executive Officer

EX-31.2

EX-31.2
(Exhibit 31.2)

CERTIFICATION

I, Ronald A. Miller, certify that:

1. I have reviewed this annual report on Form 10-K of Financial Institutions,
Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

      a)    Designed such disclosure controls and procedures, or caused such
            disclosure procedures to be designed under our supervision, to
            ensure that material information relating to the registrant,
            including its consolidated subsidiaries, is made known to us by
            others within those entities, particularly during the period in
            which this annual report is being prepared;

      b)    Evaluated the effectiveness of the registrant's disclosure controls
            and procedures and presented in this report our conclusions about
            the effectiveness of the disclosure controls and procedures, as of
            the end of the period covered by this report based on such
            evaluation; and

      c)    Disclosed in this report any change in the registrant's internal
            control over financial reporting that occurred during the
            registrant's most recent fiscal quarter (the registrant's fourth
            fiscal quarter in the case of an annual report) that has materially
            affected, or is reasonably likely to materially affect, the
            registrant's internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

      a)    All significant deficiencies and material weaknesses in the design
            or operation of internal control over financial reporting which are
            reasonably likely to adversely affect the registrant's ability to
            record, process, summarize and report financial information; and

      b)    Any fraud, whether or not material, that involves management or
            other employees who have a significant role in the registrant's
            internal control over financial reporting.

Date: March 12, 2004

                                            /s/ Ronald A. Miller
                                            ---------------------------------

                                            Ronald A. Miller
                                            Chief Financial Officer

EX-32.1

EX-32.1
(Exhibit 32.1)

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Financial Institutions, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Peter G. Humphrey, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:

      (1) The Report fully complies with the requirements of Section 13(a) or
      15(d) of the Securities Exchange Act of 1934; and

      (2) The information contained in the Report fairly presents, in all
      material respects, the financial condition and results of operations of
      the Company.

March 12, 2004


/s/ Peter G. Humphrey
- ---------------------
Peter G. Humphrey
Chief Executive Officer

A signed original of this written statement required by Section 906 has been
provided to Financial Institutions, Inc. and will be retained by Financial
Institutions, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.

EX-32.2

EX-32.2
(Exhibit 32.2)

                           CERTIFICATION PURSUANT TO
                            18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                 SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Financial Institutions, Inc. (the
"Company") on Form 10-K for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Ronald A. Miller, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:

            (1) The Report fully complies with the requirements of Section 13(a)
            or 15(d) of the Securities Exchange Act of 1934; and

            (2) The information contained in the Report fairly presents, in all
            material respects, the financial condition and results of operations
            of the Company.

March 12, 2004


/s/ Ronald A. Miller
- --------------------
Ronald A. Miller
Chief Financial Officer

A signed original of this written statement required by Section 906 has been
provided to Financial Institutions, Inc. and will be retained by Financial
Institutions, Inc. and furnished to the Securities and Exchange Commission or
its staff upon request.