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FINANCIAL INSTITUTIONS INC - Quarter Report: 2023 March (Form 10-Q)

10-Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

or

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

For the transition period from ________ to ________

Commission File Number: 000-26481

Financial Institutions, Inc.

(Exact name of registrant as specified in its charter)

New York

16-0816610

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

220 LIBERTY STREET, WARSAW, New York

14569

(Address of principal executive offices)

(Zip Code)

 

(585) 786-1100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

FISI

Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☑

The registrant had 1,575,670 shares of Common Stock, $0.01 par value, outstanding as of May 1, 2023.

 


Table of Contents

 

FINANCIAL INSTITUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2023

TABLE OF CONTENTS

 

 

PAGE

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition (Unaudited) – at March 31, 2023 and December 31, 2022

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income (Unaudited) – Three months ended March 31, 2023 and 2022

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (Unaudited) – Three months ended March 31, 2023 and 2022

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Three months ended March 31, 2023 and 2022

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) – Three months ended March 31, 2023 and 2022

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

40

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

59

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

61

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

62

 

 

 

 

 

ITEM 1A.

 

Risk Factors

 

63

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

64

 

 

 

 

 

ITEM 6.

 

Exhibits

 

65

 

 

 

 

 

 

 

Signatures

 

66

 

 

 

 

 

 

 

2


Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)

 

(Dollars in thousands, except share and per share data)

 

March 31,
2023

 

 

December 31,
2022

 

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

139,974

 

 

$

130,466

 

Securities available for sale, at fair value (amortized cost of $1,103,851 and $1,127,057, respectively)

 

 

945,442

 

 

 

954,371

 

Securities held to maturity, at amortized cost (net of allowance for credit losses of $5 as of each period) (fair value of $167,812 and $174,188, respectively)

 

 

180,052

 

 

 

188,975

 

Loans held for sale

 

 

682

 

 

 

550

 

Loans (net of allowance for credit losses of $47,528 and $45,413, respectively)

 

 

4,195,804

 

 

 

4,005,036

 

Company owned life insurance

 

 

140,488

 

 

 

139,482

 

Premises and equipment, net

 

 

41,609

 

 

 

41,986

 

Goodwill and other intangible assets, net

 

 

73,180

 

 

 

73,414

 

Other assets

 

 

249,761

 

 

 

262,992

 

Total assets

 

$

5,966,992

 

 

$

5,797,272

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing demand

 

$

1,067,011

 

 

$

1,139,214

 

Interest-bearing demand

 

 

901,251

 

 

 

863,822

 

Savings and money market

 

 

1,701,663

 

 

 

1,643,516

 

Time deposits

 

 

1,471,382

 

 

 

1,282,872

 

Total deposits

 

 

5,141,307

 

 

 

4,929,424

 

Short-term borrowings

 

 

116,000

 

 

 

205,000

 

Long-term borrowings, net of issuance costs of $701 and $778, respectively

 

 

124,299

 

 

 

74,222

 

Other liabilities

 

 

162,563

 

 

 

183,021

 

Total liabilities

 

 

5,544,169

 

 

 

5,391,667

 

Shareholders’ equity:

 

 

 

 

 

 

Series A 3% preferred stock, $100 par value; 1,533 shares authorized;
   
1,435 shares issued

 

 

143

 

 

 

143

 

Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized;
 
171,486 shares issued

 

 

17,149

 

 

 

17,149

 

Total preferred equity

 

 

17,292

 

 

 

17,292

 

Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares issued

 

 

161

 

 

 

161

 

Additional paid-in capital

 

 

125,476

 

 

 

126,636

 

Retained earnings

 

 

428,453

 

 

 

421,340

 

Accumulated other comprehensive loss

 

 

(127,372

)

 

 

(137,487

)

Treasury stock, at cost – 724,077 and 759,555 shares, respectively

 

 

(21,187

)

 

 

(22,337

)

Total shareholders’ equity

 

 

422,823

 

 

 

405,605

 

Total liabilities and shareholders’ equity

 

$

5,966,992

 

 

$

5,797,272

 

 

See accompanying notes to the consolidated financial statements.

 

 

 

 

 

3


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

 

(In thousands, except per share amounts)

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Interest income:

 

 

 

 

 

 

Interest and fees on loans

 

$

57,098

 

 

$

36,298

 

Interest and dividends on investment securities

 

 

6,057

 

 

 

6,036

 

Other interest income

 

 

616

 

 

 

17

 

Total interest income

 

 

63,771

 

 

 

42,351

 

Interest expense:

 

 

 

 

 

 

Deposits

 

 

19,294

 

 

 

1,705

 

Short-term borrowings

 

 

1,202

 

 

 

28

 

Long-term borrowings

 

 

1,460

 

 

 

1,060

 

Total interest expense

 

 

21,956

 

 

 

2,793

 

Net interest income

 

 

41,815

 

 

 

39,558

 

Provision for credit losses

 

 

4,214

 

 

 

2,319

 

Net interest income after provision for credit losses

 

 

37,601

 

 

 

37,239

 

Noninterest income:

 

 

 

 

 

 

Service charges on deposits

 

 

1,027

 

 

 

1,369

 

Insurance income

 

 

2,087

 

 

 

2,097

 

Card interchange income

 

 

1,939

 

 

 

1,952

 

Investment advisory

 

 

2,923

 

 

 

3,041

 

Company owned life insurance

 

 

994

 

 

 

833

 

Investments in limited partnerships

 

 

251

 

 

 

795

 

Loan servicing

 

 

146

 

 

 

109

 

Income from derivative instruments, net

 

 

496

 

 

 

519

 

Net gain (loss) on sale of loans held for sale

 

 

112

 

 

 

(91

)

Net gain on other assets

 

 

39

 

 

 

 

Net loss on tax credit investments

 

 

(201

)

 

 

(227

)

Other

 

 

1,111

 

 

 

925

 

Total noninterest income

 

 

10,924

 

 

 

11,322

 

Noninterest expense:

 

 

 

 

 

 

Salaries and employee benefits

 

 

18,133

 

 

 

16,616

 

Occupancy and equipment

 

 

3,730

 

 

 

3,756

 

Professional services

 

 

1,495

 

 

 

1,656

 

Computer and data processing

 

 

4,691

 

 

 

3,979

 

Supplies and postage

 

 

490

 

 

 

541

 

FDIC assessments

 

 

1,115

 

 

 

513

 

Advertising and promotions

 

 

314

 

 

 

380

 

Amortization of intangibles

 

 

234

 

 

 

254

 

Other

 

 

3,459

 

 

 

2,440

 

Total noninterest expense

 

 

33,661

 

 

 

30,135

 

Income before income taxes

 

 

14,864

 

 

 

18,426

 

Income tax expense

 

 

2,775

 

 

 

3,443

 

Net income

 

$

12,089

 

 

$

14,983

 

Preferred stock dividends

 

 

365

 

 

 

365

 

Net income available to common shareholders

 

$

11,724

 

 

$

14,618

 

Earnings per common share (Note 3):

 

 

 

 

 

 

Basic

 

$

0.76

 

 

$

0.94

 

Diluted

 

$

0.76

 

 

$

0.93

 

Cash dividends declared per common share

 

$

0.30

 

 

$

0.29

 

See accompanying notes to the consolidated financial statements.

 

4


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 

(Dollars in thousands)

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Net income

 

$

12,089

 

 

$

14,983

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

Securities available for sale and transferred securities

 

 

10,634

 

 

 

(55,773

)

Hedging derivative instruments

 

 

(663

)

 

 

1,838

 

Pension and post-retirement obligations

 

 

144

 

 

 

48

 

Total other comprehensive income (loss), net of tax

 

 

10,115

 

 

 

(53,887

)

Comprehensive income (loss)

 

$

22,204

 

 

$

(38,904

)

 

See accompanying notes to the consolidated financial statements.

 

5


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Three months ended March 31, 2023 and 2022

 

(Dollars in thousands, except per share data)

 

Preferred
Equity

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Treasury
Stock

 

 

Total
Shareholders’
Equity

 

Balance at December 31, 2022

 

$

17,292

 

 

$

161

 

 

$

126,636

 

 

$

421,340

 

 

$

(137,487

)

 

$

(22,337

)

 

$

405,605

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

12,089

 

 

 

 

 

 

 

 

 

12,089

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,115

 

 

 

 

 

 

10,115

 

Purchases of common stock for treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(561

)

 

 

(561

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

551

 

 

 

 

 

 

 

 

 

 

 

 

551

 

Restricted stock units released

 

 

 

 

 

 

 

 

(1,711

)

 

 

 

 

 

 

 

 

1,711

 

 

 

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred–$0.75 per share

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Series B-1 8.48% Preferred–$2.12 per
   share

 

 

 

 

 

 

 

 

 

 

 

(364

)

 

 

 

 

 

 

 

 

(364

)

Common–$0.30 per share

 

 

 

 

 

 

 

 

 

 

 

(4,611

)

 

 

 

 

 

 

 

 

(4,611

)

Balance at March 31, 2023

 

$

17,292

 

 

$

161

 

 

$

125,476

 

 

$

428,453

 

 

$

(127,372

)

 

$

(21,187

)

 

$

422,823

 

 

(Dollars in thousands, except per share data)

 

Preferred
Equity

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Treasury
Stock

 

 

Total
Shareholders’
Equity

 

Balance at December 31, 2021

 

$

17,292

 

 

$

161

 

 

$

126,105

 

 

$

384,007

 

 

$

(13,207

)

 

$

(9,216

)

 

$

505,142

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

14,983

 

 

 

 

 

 

 

 

 

14,983

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(53,887

)

 

 

 

 

 

(53,887

)

Purchases of common stock for treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,026

)

 

 

(15,026

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

443

 

 

 

 

 

 

 

 

 

 

 

 

443

 

Restricted stock units released

 

 

 

 

 

 

 

 

(667

)

 

 

 

 

 

 

 

 

667

 

 

 

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred–$0.75 per share

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Series B-1 8.48% Preferred–$2.12 per
   share

 

 

 

 

 

 

 

 

 

 

 

(364

)

 

 

 

 

 

 

 

 

(364

)

Common–$0.29 per share

 

 

 

 

 

 

 

 

 

 

 

(4,444

)

 

 

 

 

 

 

 

 

(4,444

)

Balance at March 31, 2022

 

$

17,292

 

 

$

161

 

 

$

125,881

 

 

$

394,181

 

 

$

(67,094

)

 

$

(23,575

)

 

$

446,846

 

 

See accompanying notes to the consolidated financial statements.

 

6


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in thousands)

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

12,089

 

 

$

14,983

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

2,068

 

 

 

1,918

 

Net amortization of premiums on securities

 

 

882

 

 

 

1,443

 

Provision for credit losses

 

 

4,214

 

 

 

2,319

 

Share-based compensation

 

 

551

 

 

 

443

 

Deferred income tax benefit

 

 

417

 

 

 

554

 

Proceeds from sale of loans held for sale

 

 

3,416

 

 

 

11,383

 

Originations of loans held for sale

 

 

(3,436

)

 

 

(10,816

)

Income on company owned life insurance

 

 

(994

)

 

 

(833

)

Net (gain) loss on sale of loans held for sale

 

 

(112

)

 

 

91

 

Net gain on other assets

 

 

(39

)

 

 

 

Increase in other assets

 

 

8,319

 

 

 

1,083

 

(Decrease) increase in other liabilities

 

 

(20,813

)

 

 

21,626

 

Net cash provided by operating activities

 

 

6,562

 

 

 

44,194

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of investment securities:

 

 

 

 

 

 

Available for sale

 

 

 

 

 

(50,669

)

Held to maturity

 

 

(898

)

 

 

(17,882

)

Proceeds from principal payments, maturities and calls on investment securities:

 

 

 

 

 

 

Available for sale securities

 

 

22,461

 

 

 

33,620

 

Held to maturity

 

 

9,704

 

 

 

12,062

 

Net loan originations

 

 

(194,972

)

 

 

(54,999

)

Purchases of company owned life insurance

 

 

(12

)

 

 

(10

)

Purchases of premises and equipment

 

 

(848

)

 

 

(1,216

)

Net cash used in investing activities

 

 

(164,565

)

 

 

(79,094

)

Cash flows from financing activities:

 

 

 

 

 

 

Net increase in deposits

 

 

211,883

 

 

 

175,842

 

Net decrease in short-term borrowings

 

 

(89,000

)

 

 

(30,000

)

Proceeds from long-term borrowings

 

 

50,000

 

 

 

 

Purchases of common stock for treasury

 

 

(561

)

 

 

(15,026

)

Cash dividends paid to common and preferred shareholders

 

 

(4,811

)

 

 

(4,624

)

Net cash provided by financing activities

 

 

167,511

 

 

 

126,192

 

Net increase in cash and cash equivalents

 

 

9,508

 

 

 

91,292

 

Cash and cash equivalents, beginning of period

 

 

130,466

 

 

 

79,112

 

Cash and cash equivalents, end of period

 

$

139,974

 

 

$

170,404

 

 

See accompanying notes to the consolidated financial statements.

7


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(1.) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Financial Institutions, Inc. (the “Company”) is a financial holding company organized in 1931 under the laws of New York State (“New York”). The Company provides diversified financial services through its subsidiaries, Five Star Bank, SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York chartered banking subsidiary, Five Star Bank (the “Bank”). The Bank also has commercial loan production offices in Ellicott City (Baltimore), Maryland and Syracuse, New York, and indirect lending network relationships with franchised automobile dealers in the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. On May 1, 2023, the Company announced the completion of the merger of HNP Capital with and into Courier Capital. Refer to Note 17. Subsequent Event, for further details on the merger. Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. Corn Hill Innovations Lab, LLC (“CHIL”), which oversaw the Company’s Banking-as-a-Service (“BaaS”) and financial technology (“FinTech”) relationships, was dissolved on March 28, 2023, and all assets and liabilities were transferred to the Bank.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation of the consolidated statements of financial condition, income, comprehensive income, changes in shareholders’ equity and cash flows for the periods indicated and contain adequate disclosure to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year or any other period.

Reclassifications

Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Such reclassifications did not impact net income or shareholders’ equity as previously reported.

Use of Estimates

The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates relate to the determination of the allowance for credit losses.

Cash Flow Reporting

Supplemental cash flow information is summarized as follows for the three months ended March 31, 2023 and 2022 (in thousands):

 

 

 

2023

 

 

2022

 

Supplemental information:

 

 

 

 

 

 

Cash paid for interest

 

$

28,666

 

 

$

4,623

 

Cash paid (refunded) for income taxes

 

 

1,134

 

 

 

(441

)

Noncash investing and financing activities:

 

 

 

 

 

 

Real estate and other assets acquired in settlement of loans

 

101

 

 

 

 

Accrued and declared unpaid dividends

 

 

4,976

 

 

 

4,809

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(1.) BASIS OF PRESENTATION OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current-period gross write-offs for financing receivables by year of origination in the vintage disclosures. ASU 2022-02 became effective for the Company on January 1, 2023 and was applied on a prospective basis. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements. See Note 5. Loans, for additional information regarding loan refinancings and restructurings made when a borrower is experiencing financial difficulties and updates to vintage disclosures.

In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method. The ASU expands the scope in which an entity can apply the portfolio layer method of hedge accounting, allowing for more consistent accounting for similar hedges. The amendments in this update became effective for the Company on January 1, 2023. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Standards Not Yet Effective

In March 2023, the FASB issued ASU No. 2023-02, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The ASU allows for entities to consistently account for tax credit equity investments utilizing the proportional amortization method across all types of tax credits when certain requirement are met. The election of proportional amortization method must be made on a programmatic basis rather than an individual investment basis. For previously held tax credit investments, the amendments will be applied either on a modified retrospective basis or a retrospective basis. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

(2.) RESTRUCTURING CHARGES

On July 17, 2020, the Bank announced management’s decision to adapt to a full-service branch model to streamline retail branches to better align with shifting customer needs and preferences. The transformation resulted in six branch closures and a reduction in staffing. The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conducted in partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping service areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and facilitate the long-term sustainability of current and future branches. The announced consolidations represented about ten percent of the branch network and impacted approximately six percent of the total Company workforce. Where possible, those impacted were offered alternative roles or the opportunity to apply for open positions in other areas of the Company. Separated associates received a comprehensive severance package based on tenure.

In October 2020, the Company announced the planned closure of one additional branch that closed in January 2021. This location was not included in the branch consolidations announced in July 2020, as alternative options were being considered and consolidation was not possible given its significant distance from other Bank branches.

The Company incurred total pre-tax expense related to the branch closures in 2020 of approximately $1.7 million, including approximately $0.2 million in employee severance, $0.5 million in lease termination costs and $1.0 million in valuation adjustments on branch facilities. Additional related restructuring charges of $1.6 million and $111 thousand were incurred in 2022 and 2021, respectively, as a result of property valuation adjustments to write-down certain real estate assets to fair market value based on existing purchase offers and current market conditions. There were no restructuring charges incurred for the three months ended March 31, 2023.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(2.) RESTRUCTURING CHARGES (Continued)

The following table represents the changes in the restructuring reserve (in thousands):

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Balance at beginning of period

 

$

302

 

 

$

445

 

Cash payments

 

 

(14

)

 

 

(22

)

Balance at end of period

 

$

288

 

 

$

423

 

In contemplation of the transactions noted above, certain long-lived assets have met the held for sale criteria as of March 31, 2023. Long lived assets held for sale totaled $1.5 million as of March 31, 2023 and December 31, 2022, and are included in other assets on the Company’s consolidated statements of financial condition.

 

(3.) EARNINGS PER COMMON SHARE (“EPS”)

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS (in thousands, except per share amounts).

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Net income available to common shareholders

 

$

11,724

 

 

$

14,618

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Total shares issued

 

 

16,100

 

 

 

16,100

 

Unvested restricted stock awards

 

 

(6

)

 

 

(5

)

Treasury shares

 

 

(746

)

 

 

(518

)

Total basic weighted average common shares outstanding

 

 

15,348

 

 

 

15,577

 

Incremental shares from assumed:

 

 

 

 

 

 

Vesting of restricted stock awards

 

 

87

 

 

 

122

 

Total diluted weighted average common shares outstanding

 

 

15,435

 

 

 

15,699

 

Basic earnings per common share

 

$

0.76

 

 

$

0.94

 

Diluted earnings per common share

 

$

0.76

 

 

$

0.93

 

For each of the periods presented, average shares subject to the following instruments were excluded from the computation of diluted EPS because the effect would be antidilutive (in thousands):

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Restricted stock awards

 

 

3

 

 

 

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) INVESTMENT SECURITIES

The amortized cost and fair value of investment securities are summarized below (in thousands):

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

24,535

 

 

$

 

 

$

2,877

 

 

$

21,658

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

536,221

 

 

 

 

 

 

68,817

 

 

 

467,404

 

Federal Home Loan Mortgage Corporation

 

 

398,487

 

 

 

 

 

 

62,373

 

 

 

336,114

 

Government National Mortgage Association

 

 

111,527

 

 

 

1

 

 

 

18,295

 

 

 

93,233

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

11,938

 

 

 

 

 

 

2,326

 

 

 

9,612

 

Federal Home Loan Mortgage Corporation

 

 

21,143

 

 

 

 

 

 

4,064

 

 

 

17,079

 

Privately issued

 

 

 

 

 

342

 

 

 

 

 

 

342

 

Total mortgage-backed securities

 

 

1,079,316

 

 

 

343

 

 

 

155,875

 

 

 

923,784

 

Total available for sale securities

 

$

1,103,851

 

 

$

343

 

 

$

158,752

 

 

$

945,442

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

16,400

 

 

$

 

 

$

544

 

 

$

15,856

 

State and political subdivisions

 

 

93,678

 

 

 

32

 

 

 

6,012

 

 

 

87,698

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

6,038

 

 

 

 

 

 

457

 

 

 

5,581

 

Federal Home Loan Mortgage Corporation

 

 

7,786

 

 

 

 

 

 

1,256

 

 

 

6,530

 

Government National Mortgage Association

 

 

21,783

 

 

 

 

 

 

1,723

 

 

 

20,060

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

13,536

 

 

 

 

 

 

963

 

 

 

12,573

 

Federal Home Loan Mortgage Corporation

 

 

16,781

 

 

 

 

 

 

1,022

 

 

 

15,759

 

Government National Mortgage Association

 

 

4,055

 

 

 

 

 

 

300

 

 

 

3,755

 

Total mortgage-backed securities

 

 

69,979

 

 

 

 

 

 

5,721

 

 

 

64,258

 

Total held to maturity securities

 

 

180,057

 

 

$

32

 

 

$

12,277

 

 

$

167,812

 

Allowance for credit losses – securities

 

 

(5

)

 

 

 

 

 

 

 

 

 

Total held to maturity securities, net

 

$

180,052

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government sponsored enterprises

 

$

24,535

 

 

$

 

 

$

3,420

 

 

$

21,115

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

545,797

 

 

 

 

 

 

76,193

 

 

 

469,604

 

Federal Home Loan Mortgage Corporation

 

 

410,829

 

 

 

 

 

 

68,608

 

 

 

342,221

 

Government National Mortgage Association

 

 

112,202

 

 

 

1

 

 

 

18,037

 

 

 

94,166

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

12,175

 

 

 

 

 

 

2,603

 

 

 

9,572

 

Federal Home Loan Mortgage Corporation

 

 

21,519

 

 

 

 

 

 

4,163

 

 

 

17,356

 

Privately issued

 

 

 

 

 

337

 

 

 

 

 

 

337

 

Total mortgage-backed securities

 

 

1,102,522

 

 

 

338

 

 

 

169,604

 

 

 

933,256

 

Total available for sale securities

 

$

1,127,057

 

 

$

338

 

 

$

173,024

 

 

$

954,371

 

 

 

11


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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) INVESTMENT SECURITIES (Continued)

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

December 31, 2022 (continued)

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government sponsored enterprises

 

$

16,363

 

 

$

 

 

$

848

 

 

$

15,515

 

State and political subdivisions

 

 

97,583

 

 

 

24

 

 

 

7,172

 

 

 

90,435

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

8,332

 

 

 

 

 

 

582

 

 

 

7,750

 

Federal Home Loan Mortgage Corporation

 

 

7,959

 

 

 

 

 

 

1,396

 

 

 

6,563

 

Government National Mortgage Association

 

 

22,541

 

 

 

 

 

 

2,116

 

 

 

20,425

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

-

 

Federal National Mortgage Association

 

 

14,268

 

 

 

 

 

 

1,119

 

 

 

13,149

 

Federal Home Loan Mortgage Corporation

 

 

17,712

 

 

 

 

 

 

1,253

 

 

 

16,459

 

Government National Mortgage Association

 

 

4,222

 

 

 

 

 

 

330

 

 

 

3,892

 

Total mortgage-backed securities

 

 

75,034

 

 

 

 

 

 

6,796

 

 

 

68,238

 

Total held to maturity securities

 

 

188,980

 

 

$

24

 

 

$

14,816

 

 

$

174,188

 

Allowance for credit losses – securities

 

 

(5

)

 

 

 

 

 

 

 

 

 

Total held to maturity securities, net

 

$

188,975

 

 

 

 

 

 

 

 

 

 

 

The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. For available for sale (“AFS”) debt securities, AIR totaled $2.0 million and $2.1 million as of March 31, 2023 and December 31, 2022, respectively. For held to maturity (“HTM”) debt securities, AIR totaled $1.0 million and $695 thousand as of March 31, 2023 and December 31, 2022, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.

For the three months ended March 31, 2023 and 2022, credit loss (credit) expense for HTM investment securities was a credit of less than $1 thousand in each period.

Investment securities with a total fair value of $891.5 million and $850.4 million at March 31, 2023 and December 31, 2022, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

There were no sales of securities available for sale for the three months ended March 31, 2023 and 2022.

 

The scheduled maturities of securities available for sale and securities held to maturity at March 31, 2023 are shown below (in thousands). Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

 

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

Debt securities available for sale:

 

 

 

 

 

 

Due in one year or less

 

$

6

 

 

$

6

 

Due from one to five years

 

 

94,972

 

 

 

88,334

 

Due after five years through ten years

 

 

136,369

 

 

 

121,867

 

Due after ten years

 

 

872,504

 

 

 

735,235

 

Total available for sale securities

 

$

1,103,851

 

 

$

945,442

 

Debt securities held to maturity:

 

 

 

 

 

 

Due in one year or less

 

$

29,636

 

 

$

29,584

 

Due from one to five years

 

 

41,802

 

 

 

41,036

 

Due after five years through ten years

 

 

39,142

 

 

 

36,799

 

Due after ten years

 

 

69,477

 

 

 

60,393

 

Total held to maturity securities

 

$

180,057

 

 

$

167,812

 

 

12


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) INVESTMENT SECURITIES (Continued)

Unrealized losses on investment securities for which an allowance for credit losses has not been recorded and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands):

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government
   sponsored enterprises

 

$

 

 

$

 

 

$

21,658

 

 

$

2,877

 

 

$

21,658

 

 

$

2,877

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

276

 

 

 

3

 

 

 

467,128

 

 

 

68,814

 

 

 

467,404

 

 

 

68,817

 

Federal Home Loan Mortgage Corporation

 

 

8,698

 

 

 

514

 

 

 

327,416

 

 

 

61,859

 

 

 

336,114

 

 

 

62,373

 

Government National Mortgage Association

 

 

138

 

 

 

3

 

 

 

93,071

 

 

 

18,292

 

 

 

93,209

 

 

 

18,295

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

 

 

 

 

 

 

9,612

 

 

 

2,326

 

 

 

9,612

 

 

 

2,326

 

Federal Home Loan Mortgage Corporation

 

 

 

 

 

 

 

 

17,079

 

 

 

4,064

 

 

 

17,079

 

 

 

4,064

 

Total mortgage-backed securities

 

 

9,112

 

 

 

520

 

 

 

914,306

 

 

 

155,355

 

 

 

923,418

 

 

 

155,875

 

Total available for sale securities

 

 

9,112

 

 

 

520

 

 

 

935,964

 

 

 

158,232

 

 

 

945,076

 

 

 

158,752

 

Total AFS debt securities with unrealized losses

 

$

9,112

 

 

$

520

 

 

$

935,964

 

 

$

158,232

 

 

$

945,076

 

 

$

158,752

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government
   sponsored enterprises

 

$

 

 

$

 

 

$

21,115

 

 

$

3,420

 

 

$

21,115

 

 

$

3,420

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

154,006

 

 

 

14,708

 

 

 

315,598

 

 

 

61,485

 

 

 

469,604

 

 

 

76,193

 

Federal Home Loan Mortgage Corporation

 

 

28,493

 

 

 

2,199

 

 

 

313,728

 

 

 

66,409

 

 

 

342,221

 

 

 

68,608

 

Government National Mortgage Association

 

 

10,301

 

 

 

921

 

 

 

83,841

 

 

 

17,116

 

 

 

94,142

 

 

 

18,037

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

1,000

 

 

 

94

 

 

 

8,572

 

 

 

2,509

 

 

 

9,572

 

 

 

2,603

 

Federal Home Loan Mortgage Corporation

 

 

 

 

 

 

 

 

17,356

 

 

 

4,163

 

 

 

17,356

 

 

 

4,163

 

Total mortgage-backed securities

 

 

193,800

 

 

 

17,922

 

 

 

739,095

 

 

 

151,682

 

 

 

932,895

 

 

 

169,604

 

Total available for sale securities

 

 

193,800

 

 

 

17,922

 

 

 

760,210

 

 

 

155,102

 

 

 

954,010

 

 

 

173,024

 

Total AFS debt securities with unrealized losses

 

$

193,800

 

 

$

17,922

 

 

$

760,210

 

 

$

155,102

 

 

$

954,010

 

 

$

173,024

 

 

 

13


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) INVESTMENT SECURITIES (Continued)

The total number of available for sale securities positions in the investment portfolio, for which an allowance for credit losses has not been recorded, in the investment portfolio in an unrealized loss position at March 31, 2023 was 222 compared to 226 at December 31, 2022. At March 31, 2023, the Company had positions in 189 investment securities with a fair value of $936.0 million and a total unrealized loss of $158.2 million that had been in a continuous unrealized loss position for more than 12 months. At March 31, 2023, there were a total of 33 securities positions in the Company’s investment portfolio with a fair value of $9.1 million and a total unrealized loss of $520 thousand that had been in a continuous unrealized loss position for less than 12 months. At December 31, 2022, the Company had a position in 127 investment securities with a fair value of $760.2 million and a total unrealized loss of $155.1 million that had been in a continuous unrealized loss position for more than 12 months. At December 31, 2022, there were a total of 99 securities positions in the Company’s investment portfolio with a fair value of $193.8 million and a total unrealized loss of $17.9 million that had been in a continuous unrealized loss position for less than 12 months. The unrealized loss on investment securities was predominantly caused by changes in market interest rates subsequent to purchase. The fair value of most of the investment securities in the Company’s portfolio fluctuates as market interest rates change.

Securities Available for Sale

As of March 31, 2023 and December 31, 2022, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities were impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

Securities Held to Maturity

The Company’s HTM investment securities include debt securities that are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. In addition, the Company’s HTM investment securities include debt securities that are issued by state and local government agencies, or municipal bonds.

The Company monitors the credit quality of our municipal bonds through the use of a credit rating agency or by ratings that are derived by an internal scoring model. The scoring methodology for the internally derived ratings is based on a series of financial ratios for the municipality being reviewed as compared to typical industry figures. This information is used to determine the financial strengths and weaknesses of the municipality, which is indicated with a numeric rating. This number is then converted into a letter rating to better match the system used by the credit rating agencies. As of March 31, 2023, $87.3 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $6.0 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating, and $0.4 million in non-rated bonds all of which mature in 2023. Additionally, no municipal bonds were rated below investment grade. As of December 31, 2022, $90.6 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $6.9 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating, no municipal bonds were rated below investment grade.

As of March 31, 2023 and December 31, 2022, the Company had no past due or nonaccrual held to maturity investment securities.

 

14


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS

The Company’s loan portfolio consisted of the following as of the dates indicated (in thousands):

 

 

 

Principal
Amount
Outstanding

 

 

Net Deferred
Loan (Fees)
Costs

 

 

Loans,
Net

 

March 31, 2023

 

 

 

 

 

 

 

 

 

Commercial business

 

$

694,427

 

 

$

683

 

 

$

695,110

 

Commercial mortgage

 

 

1,845,762

 

 

 

(4,281

)

 

 

1,841,481

 

Residential real estate loans

 

 

578,363

 

 

 

13,483

 

 

 

591,846

 

Residential real estate lines

 

 

72,793

 

 

 

3,293

 

 

 

76,086

 

Consumer indirect

 

 

984,302

 

 

 

37,900

 

 

 

1,022,202

 

Other consumer

 

 

16,495

 

 

 

112

 

 

 

16,607

 

Total

 

$

4,192,142

 

 

$

51,190

 

 

 

4,243,332

 

Allowance for credit losses – loans

 

 

 

 

 

 

 

 

(47,528

)

Total loans, net

 

 

 

 

 

 

 

$

4,195,804

 

December 31, 2022

 

 

 

 

 

 

 

 

 

Commercial business

 

$

663,611

 

 

$

638

 

 

$

664,249

 

Commercial mortgage

 

 

1,683,814

 

 

 

(3,974

)

 

 

1,679,840

 

Residential real estate loans

 

 

576,279

 

 

 

13,681

 

 

 

589,960

 

Residential real estate lines

 

 

74,432

 

 

 

3,238

 

 

 

77,670

 

Consumer indirect

 

 

985,580

 

 

 

38,040

 

 

 

1,023,620

 

Other consumer

 

 

15,002

 

 

 

108

 

 

 

15,110

 

Total

 

$

3,998,718

 

 

$

51,731

 

 

 

4,050,449

 

Allowance for credit losses – loans

 

 

 

 

 

 

 

 

(45,413

)

Total loans, net

 

 

 

 

 

 

 

$

4,005,036

 

 

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $682 thousand and $550 thousand as of March 31, 2023 and December 31, 2022, respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of March 31, 2023 and December 31, 2022, AIR for loans totaled $17.0 million and $16.6 million, respectively, and is included in other assets on the Company’s consolidated statements of financial condition.

15


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

Past Due Loans Aging

The Company’s recorded investment, by loan class, in current and nonaccrual loans, as well as an analysis of accruing delinquent loans is set forth as of the dates indicated (in thousands):

 

 

 

30-59 Days
Past Due

 

 

60-89 Days
Past Due

 

 

Greater
Than
90 Days

 

 

Total Past
Due

 

 

Nonaccrual

 

 

Current

 

 

Total
Loans

 

 

Nonaccrual
with no
allowance

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

925

 

 

$

 

 

$

 

 

$

925

 

 

$

334

 

 

$

693,168

 

 

$

694,427

 

 

$

233

 

Commercial mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,550

 

 

 

1,843,212

 

 

 

1,845,762

 

 

 

520

 

Residential real estate loans

 

 

778

 

 

 

49

 

 

 

 

 

 

827

 

 

 

3,267

 

 

 

574,269

 

 

 

578,363

 

 

 

3,267

 

Residential real estate lines

 

 

219

 

 

 

30

 

 

 

 

 

 

249

 

 

 

159

 

 

 

72,385

 

 

 

72,793

 

 

 

159

 

Consumer indirect

 

 

5,812

 

 

 

1,245

 

 

 

 

 

 

7,057

 

 

 

2,487

 

 

 

974,758

 

 

 

984,302

 

 

 

2,487

 

Other consumer

 

 

104

 

 

 

1

 

 

 

4

 

 

 

109

 

 

 

 

 

 

16,386

 

 

 

16,495

 

 

 

 

Total loans, gross

 

$

7,838

 

 

$

1,325

 

 

$

4

 

 

$

9,167

 

 

$

8,797

 

 

$

4,174,178

 

 

$

4,192,142

 

 

$

6,666

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

176

 

 

$

10

 

 

$

 

 

$

186

 

 

$

340

 

 

$

663,085

 

 

$

663,611

 

 

$

233

 

Commercial mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,564

 

 

 

1,681,250

 

 

 

1,683,814

 

 

 

659

 

Residential real estate loans

 

 

1,306

 

 

 

28

 

 

 

 

 

 

1,334

 

 

 

4,071

 

 

 

570,874

 

 

 

576,279

 

 

 

4,071

 

Residential real estate lines

 

 

264

 

 

 

102

 

 

 

 

 

 

366

 

 

 

142

 

 

 

73,924

 

 

 

74,432

 

 

 

142

 

Consumer indirect

 

 

12,637

 

 

 

2,073

 

 

 

 

 

 

14,710

 

 

 

3,079

 

 

 

967,791

 

 

 

985,580

 

 

 

3,079

 

Other consumer

 

 

111

 

 

 

1

 

 

 

1

 

 

 

113

 

 

 

1

 

 

 

14,888

 

 

 

15,002

 

 

 

1

 

Total loans, gross

 

$

14,494

 

 

$

2,214

 

 

$

1

 

 

$

16,709

 

 

$

10,197

 

 

$

3,971,812

 

 

$

3,998,718

 

 

$

8,185

 

There were $4 thousand and $1 thousand of consumer overdrafts which were past due greater than 90 days as of March 31, 2023 and December 31, 2022, respectively. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was no interest income recognized on nonaccrual loans during the three months ended March 31, 2023 and 2022. Estimated interest income of $122 thousand and $161 thousand for the three months ended March 31, 2023 and 2022, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

Loan Modifications for Borrower Experiencing Financial Difficulty

Loans may be modified when it is determined that a borrower is experiencing financial difficulty. Loan modifications may include principal forgiveness, interest rate reduction, an other-than-insignificant payment delay, and term extensions, or a combination of these concessions.

The following table presents the amortized cost basis of loans modified to borrowers experiencing financial difficulty, disaggregated by loan class and type of concession granted as of March 31, 2023 (in thousands):

 

 

 

Term Extension

 

 

 

Amortized Cost Basis

 

 

% of Total Loans

 

Loan Type

 

 

 

 

 

 

Commercial business

 

$

-

 

 

 

0.00

%

Commercial mortgage

 

 

-

 

 

 

0.00

%

Residential real estate loans

 

 

158

 

 

 

0.03

%

Residential real estate lines

 

 

-

 

 

 

0.00

%

Consumer indirect

 

 

-

 

 

 

0.00

%

Other consumer

 

 

-

 

 

 

0.00

%

Total

 

$

158

 

 

 

0.00

%

 

16


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty:

 

Term Extension

Loan Type

 

Financial Effect

Residential real estate loans

 

Added a weighted average 10.0 years to the life of the loan, which reduced monthly payment amount for the borrower.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the three months ended March 31, 2023 (in thousands):

 

 

 

Payment Status (Amortized Cost Basis)

 

 

 

Current

 

 

30-89 Days
Past Due

 

 

90+ Days
Past Due

 

Loan Type

 

 

 

 

 

 

 

 

 

Commercial business

 

$

-

 

 

$

-

 

 

$

-

 

Commercial mortgage

 

 

-

 

 

 

-

 

 

 

-

 

Residential real estate loans

 

 

158

 

 

 

-

 

 

 

-

 

Residential real estate lines

 

 

-

 

 

 

-

 

 

 

-

 

Consumer indirect

 

 

-

 

 

 

-

 

 

 

-

 

Other consumer

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

158

 

 

$

-

 

 

$

-

 

Collateral Dependent Loans

Management has determined that specific commercial loans on nonaccrual status, all loans that have had their terms restructured when a borrower is experiencing financial difficulty, and other loans deemed appropriate by management where repayment is expected to be provided substantially through the operation or sale of the collateral to be collateral dependent loans. The following table presents the amortized cost basis of collateral dependent loans by collateral type as of March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

Collateral type

 

 

 

 

 

 

 

 

 

Business assets

 

 

Real property

 

 

Total

 

 

Specific Reserve

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

3,307

 

 

$

78

 

 

$

3,385

 

 

$

732

 

Commercial mortgage

 

 

 

 

 

18,546

 

 

 

18,546

 

 

 

1,140

 

Total

 

$

3,307

 

 

$

18,624

 

 

$

21,931

 

 

$

1,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

147

 

 

$

993

 

 

$

1,140

 

 

$

126

 

Commercial mortgage

 

 

 

 

 

21,592

 

 

 

21,592

 

 

 

1,152

 

Total

 

$

147

 

 

$

22,585

 

 

$

22,732

 

 

$

1,278

 

 

17


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors such as the fair value of collateral. The Company analyzes commercial business and commercial mortgage loans individually by classifying the loans as to credit risk. Risk ratings are updated any time the situation warrants. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as 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.

Loans that do not meet the criteria above that are analyzed individually as part of the process described above are considered “uncriticized” or pass-rated loans and are included in groups of homogeneous loans with similar risk and loss characteristics.

The following tables set forth the Company’s commercial loan portfolio, categorized by internally assigned asset classification, as of the dates indicated (in thousands):

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

28,923

 

 

$

152,049

 

 

$

94,802

 

 

$

46,348

 

 

$

26,149

 

 

$

64,882

 

 

$

252,189

 

 

$

 

 

$

665,342

 

Special mention

 

 

 

 

 

237

 

 

 

2,388

 

 

 

18,995

 

 

 

12

 

 

 

187

 

 

 

3,272

 

 

 

 

 

 

25,091

 

Substandard

 

 

 

 

 

41

 

 

 

1,002

 

 

 

1,295

 

 

 

77

 

 

 

1,392

 

 

 

870

 

 

 

 

 

 

4,677

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Commercial Business loans

 

$

28,923

 

 

$

152,327

 

 

$

98,192

 

 

$

66,638

 

 

$

26,238

 

 

$

66,461

 

 

$

256,331

 

 

$

 

 

$

695,110

 

Current period gross write-offs

 

$

 

 

$

5

 

 

$

 

 

$

7

 

 

$

5

 

 

$

10

 

 

$

 

 

$

 

 

$

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

167,701

 

 

$

506,777

 

 

$

382,081

 

 

$

244,874

 

 

$

155,960

 

 

$

342,082

 

 

$

 

 

$

 

 

$

1,799,475

 

Special mention

 

 

 

 

 

 

 

 

 

 

 

10,118

 

 

 

 

 

 

12,033

 

 

 

 

 

 

 

 

 

22,151

 

Substandard

 

 

 

 

 

343

 

 

 

202

 

 

 

105

 

 

 

75

 

 

 

19,130

 

 

 

 

 

 

 

 

 

19,855

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Commercial Mortgage loans

 

$

167,701

 

 

$

507,120

 

 

$

382,283

 

 

$

255,097

 

 

$

156,035

 

 

$

373,245

 

 

$

 

 

$

 

 

$

1,841,481

 

Current period gross write-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

18


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

146,581

 

 

$

105,001

 

 

$

61,115

 

 

$

29,644

 

 

$

39,625

 

 

$

21,467

 

 

$

244,848

 

 

$

 

 

$

648,281

 

Special mention

 

 

238

 

 

 

2,351

 

 

 

8,736

 

 

 

7

 

 

 

5

 

 

 

 

 

 

1,809

 

 

 

 

 

 

13,146

 

Substandard

 

 

 

 

 

72

 

 

 

 

 

 

42

 

 

 

516

 

 

 

1,034

 

 

 

1,158

 

 

 

 

 

 

2,822

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

146,819

 

 

$

107,424

 

 

$

69,851

 

 

$

29,693

 

 

$

40,146

 

 

$

22,501

 

 

$

247,815

 

 

$

 

 

$

664,249

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

464,863

 

 

$

380,138

 

 

$

260,463

 

 

$

171,918

 

 

$

116,770

 

 

$

248,771

 

 

$

 

 

$

 

 

$

1,642,923

 

Special mention

 

 

 

 

 

 

 

 

2,319

 

 

 

136

 

 

 

 

 

 

11,784

 

 

 

 

 

 

 

 

 

14,239

 

Substandard

 

 

2,987

 

 

 

202

 

 

 

105

 

 

 

78

 

 

 

10,104

 

 

 

9,202

 

 

 

 

 

 

 

 

 

22,678

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

467,850

 

 

$

380,340

 

 

$

262,887

 

 

$

172,132

 

 

$

126,874

 

 

$

269,757

 

 

$

 

 

$

 

 

$

1,679,840

 

 

19


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

The Company utilizes payment status as a means of identifying and reporting problem and potential problem retail loans. The Company considers nonaccrual loans and loans past due greater than 90 days and still accruing interest to be non-performing. The following tables set forth the Company’s retail loan portfolio, categorized by performance status, as of the dates indicated (in thousands):

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

14,093

 

 

$

80,513

 

 

$

84,985

 

 

$

116,787

 

 

$

75,111

 

 

$

217,090

 

 

$

 

 

$

 

 

$

588,579

 

Nonperforming

 

 

 

 

 

104

 

 

 

424

 

 

 

575

 

 

 

430

 

 

 

1,734

 

 

 

 

 

 

 

 

 

3,267

 

Total Residential Real Estate Loans

 

$

14,093

 

 

$

80,617

 

 

$

85,409

 

 

$

117,362

 

 

$

75,541

 

 

$

218,824

 

 

$

 

 

$

 

 

$

591,846

 

Current period gross write-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

32

 

 

$

31

 

 

$

 

 

$

 

 

$

63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

69,849

 

 

$

6,078

 

 

$

75,927

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41

 

 

 

118

 

 

 

159

 

Total Residential Real Estate Lines

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

69,890

 

 

$

6,196

 

 

$

76,086

 

Current period gross write-offs

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

3

 

 

$

13

 

 

$

16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Indirect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

84,318

 

 

$

418,196

 

 

$

305,429

 

 

$

112,809

 

 

$

51,838

 

 

$

47,125

 

 

$

 

 

$

 

 

$

1,019,715

 

Nonperforming

 

 

 

 

 

864

 

 

 

903

 

 

 

337

 

 

 

228

 

 

 

155

 

 

 

 

 

 

 

 

 

2,487

 

Total Consumer Indirect Loans

 

$

84,318

 

 

$

419,060

 

 

$

306,332

 

 

$

113,146

 

 

$

52,066

 

 

$

47,280

 

 

$

 

 

$

 

 

$

1,022,202

 

Current period gross write-offs

 

$

3

 

 

$

1,322

 

 

$

1,692

 

 

$

497

 

 

$

586

 

 

$

520

 

 

$

 

 

$

 

 

$

4,620

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

3,748

 

 

$

5,367

 

 

$

2,285

 

 

$

1,735

 

 

$

565

 

 

$

420

 

 

$

2,483

 

 

$

 

 

$

16,603

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

 

 

 

 

 

4

 

Total Other Consumer Loans

 

$

3,748

 

 

$

5,367

 

 

$

2,285

 

 

$

1,735

 

 

$

565

 

 

$

420

 

 

$

2,487

 

 

$

 

 

$

16,607

 

Current period gross write-offs

 

$

265

 

 

$

34

 

 

$

48

 

 

$

9

 

 

$

5

 

 

$

8

 

 

$

13

 

 

$

 

 

$

382

 

 

20


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

79,882

 

 

$

85,821

 

 

$

118,819

 

 

$

76,437

 

 

$

55,520

 

 

$

169,410

 

 

$

 

 

$

 

 

$

585,889

 

Nonperforming

 

 

 

 

 

305

 

 

 

510

 

 

 

795

 

 

 

677

 

 

 

1,784

 

 

 

 

 

 

 

 

 

4,071

 

Total

 

$

79,882

 

 

$

86,126

 

 

$

119,329

 

 

$

77,232

 

 

$

56,197

 

 

$

171,194

 

 

$

 

 

$

 

 

$

589,960

 

Residential Real Estate Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

70,942

 

 

$

6,586

 

 

$

77,528

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

 

 

108

 

 

 

142

 

Total

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

70,976

 

 

$

6,694

 

 

$

77,670

 

Consumer Indirect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

440,332

 

 

$

331,902

 

 

$

126,664

 

 

$

59,981

 

 

$

39,352

 

 

$

22,310

 

 

$

 

 

$

 

 

$

1,020,541

 

Nonperforming

 

 

748

 

 

 

1,209

 

 

 

432

 

 

 

381

 

 

 

205

 

 

 

104

 

 

 

 

 

 

 

 

 

3,079

 

Total

 

$

441,080

 

 

$

333,111

 

 

$

127,096

 

 

$

60,362

 

 

$

39,557

 

 

$

22,414

 

 

$

 

 

$

 

 

$

1,023,620

 

Other Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

6,463

 

 

$

2,664

 

 

$

2,043

 

 

$

761

 

 

$

213

 

 

$

308

 

 

$

2,656

 

 

$

 

 

$

15,108

 

Nonperforming

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

2

 

Total

 

$

6,463

 

 

$

2,664

 

 

$

2,043

 

 

$

761

 

 

$

213

 

 

$

308

 

 

$

2,658

 

 

$

 

 

$

15,110

 

Allowance for Credit Losses – Loans

The following table sets forth the changes in the allowance for credit losses – loans for the three months ended March 31, 2023 and 2022 (in thousands):

 

 

 

Commercial
Business

 

 

Commercial
Mortgage

 

 

Residential
Real Estate
Loans

 

 

Residential
Real Estate
Lines

 

 

Consumer
Indirect

 

 

Other
Consumer

 

 

Total

 

Three months ended March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses – loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

12,585

 

 

$

14,412

 

 

$

3,301

 

 

$

608

 

 

$

14,238

 

 

$

269

 

 

$

45,413

 

Charge-offs

 

 

(27

)

 

 

 

 

 

(63

)

 

 

(16

)

 

 

(4,620

)

 

 

(382

)

 

 

(5,108

)

Recoveries

 

 

151

 

 

 

2

 

 

 

5

 

 

 

 

 

 

2,782

 

 

 

79

 

 

 

3,019

 

Provision

 

 

202

 

 

 

781

 

 

 

970

 

 

 

59

 

 

 

1,717

 

 

 

475

 

 

 

4,204

 

Ending balance

 

$

12,911

 

 

$

15,195

 

 

$

4,213

 

 

$

651

 

 

$

14,117

 

 

$

441

 

 

$

47,528

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial
Business

 

 

Commercial
Mortgage

 

 

Residential
Real Estate
Loans

 

 

Residential
Real Estate
Lines

 

 

Consumer
Indirect

 

 

Other
Consumer

 

 

Total

 

Three months ended March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses – loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

11,099

 

 

$

14,777

 

 

$

1,604

 

 

$

379

 

 

$

11,611

 

 

$

206

 

 

$

39,676

 

Charge-offs

 

 

(51

)

 

 

 

 

 

 

 

 

 

 

 

(2,486

)

 

 

(376

)

 

 

(2,913

)

Recoveries

 

 

88

 

 

 

1

 

 

 

5

 

 

 

5

 

 

 

1,936

 

 

 

91

 

 

 

2,126

 

Provision (benefit)

 

 

(1,015

)

 

 

(1,032

)

 

 

243

 

 

 

41

 

 

 

3,507

 

 

 

333

 

 

 

2,077

 

Ending balance

 

$

10,121

 

 

$

13,746

 

 

$

1,852

 

 

$

425

 

 

$

14,568

 

 

$

254

 

 

$

40,966

 

 

21


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5.) LOANS (Continued)

Risk Characteristics

Commercial business loans primarily consist of loans to small to mid-sized businesses in our market area in a diverse range of industries. These loans are typically associated with higher credit risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic conditions, and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, potentially resulting in higher losses on an individual customer basis. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral securing the loan. Economic events, including inflation influencing the ability of the tenants to pay rent at these properties, or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Company’s commercial real estate loans and on the value of such properties.

Residential real estate loans (comprised of conventional mortgages and home equity loans) and residential real estate lines of credit (comprised of home equity lines of credit) are generally made based on the borrower’s ability to make repayment from his or her employment and other income but are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, the characteristics of individual borrowers, and the nature of the loan collateral.

Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by inflation and adverse personal circumstances such as job loss, illness or personal bankruptcy, including the heightened risk that such circumstances may arise as a result of inflation. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

(6.) LEASES

The Company is obligated under a number of non-cancellable operating lease agreements for land, buildings and equipment with terms, including renewal options reasonably certain to be exercised, extending through 2061. Two building leases were subleased with terms that extended through December 31, 2023.

The following table represents the consolidated statements of financial condition classification of the Company’s right of use assets and lease liabilities:

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

Balance Sheet Location

 

2023

 

 

2022

 

Operating Lease Right of Use Assets:

 

 

 

 

 

 

 

 

Gross carrying amount

 

Other assets

 

$

36,960

 

 

$

36,723

 

Accumulated amortization

 

Other assets

 

 

(6,010

)

 

 

(5,603

)

Net book value

 

 

 

$

30,950

 

 

$

31,120

 

 

 

 

 

 

 

 

 

 

Operating Lease Liabilities:

 

 

 

 

 

 

 

 

Right of use lease obligations

 

Other liabilities

 

$

33,148

 

 

$

33,229

 

 

The weighted average remaining lease term for operating leases was 21.9 years at March 31, 2023 and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.89%. The Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term for the discount rate.

22


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(6.) LEASES (Continued)

The following table represents lease costs and other lease information:

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Lease costs:

 

 

 

 

 

 

Operating lease costs

 

$

776

 

 

$

668

 

Variable lease costs (1)

 

 

117

 

 

 

113

 

Sublease income

 

 

(24

)

 

 

(12

)

Net lease costs

 

$

869

 

 

$

769

 

 

 

 

 

 

 

 

Other information:

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

690

 

 

$

643

 

Right of use assets obtained in exchange for new operating lease liabilities

 

$

323

 

 

$

90

 

 

(1)
Variable lease costs primarily represent variable payments such as common area maintenance, insurance, taxes and utilities.

 

Future minimum payments under non-cancellable operating leases with initial or remaining terms of one year or more, are as follows at March 31, 2023 (in thousands):

 

Twelve months ended March 31,

 

 

2024

$

2,248

 

2025

 

2,899

 

2026

 

2,795

 

2027

 

2,641

 

2028

 

2,612

 

Thereafter

 

39,337

 

Total future minimum operating lease payments

 

52,532

 

Amounts representing interest

 

(19,384

)

Present value of net future minimum operating lease payments

$

33,148

 

 

 

23


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(7.) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill totaled $67.1 million as of both March 31, 2023 and December 31, 2022. The Company performs a goodwill impairment test on an annual basis as of October 1st or more frequently if events and circumstances warrant.

 

 

 

Banking

 

 

All Other (1)

 

 

Total

 

Balance, December 31, 2022

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

Acquisitions

 

 

 

 

 

 

 

 

 

Balance, March 31, 2023

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

 

(1) All Other includes the SDN, Courier Capital and HNP Capital reporting units

Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based on the continued capital markets downturn due to macroeconomic pressures, including inflation, along with the sharp decline in the overall bank industry as a result of the collapses of Silicon Valley Bank and Signature Bank in March 2023, a goodwill impairment test was performed in the first quarter of 2023. Based on its qualitative assessment, the Company concluded that it was not more likely than not that goodwill was impaired as of March 31, 2023. Therefore, no quantitative assessment was deemed necessary as of March 31, 2023.

Other Intangible Assets

The Company has other intangible assets that are amortized, consisting of core deposit intangibles and other intangibles (primarily related to customer relationships). Gross carrying amount, accumulated amortization and net book value, were as follows (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Core deposit intangibles:

 

 

 

 

 

 

Gross carrying amount

 

$

2,042

 

 

$

2,042

 

Accumulated amortization

 

 

(2,042

)

 

 

(2,042

)

Net book value

 

$

 

 

$

 

 

 

 

 

 

 

 

Other intangibles:

 

 

 

 

 

 

Gross carrying amount

 

$

14,545

 

 

$

14,545

 

Accumulated amortization

 

 

(8,436

)

 

 

(8,202

)

Net book value

 

$

6,109

 

 

$

6,343

 

Amortization expense for total other intangible assets was $234 thousand for the three months ended March 31, 2023, and $254 thousand for the three months ended March 31, 2022. As of March 31, 2023, the estimated amortization expense of other intangible assets for the remainder of 2023 and each of the next five years is as follows (in thousands):

 

2023 (remainder of year)

$

676

 

2024

 

838

 

2025

 

766

 

2026

 

694

 

2027

 

623

 

2028

 

551

 

Thereafter

 

1,961

 

Total

 

6,109

 

 

24


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(8.) OTHER ASSETS AND OTHER LIABILITIES

A summary of other assets and other liabilities as of the dates indicated are as follows (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Other Assets:

 

 

 

 

 

 

Operating lease right of use assets

 

$

30,950

 

 

$

31,120

 

Tax credit investments

 

 

57,137

 

 

 

55,568

 

Derivative instruments

 

 

42,849

 

 

 

54,557

 

Net deferred tax asset

 

 

49,528

 

 

 

53,427

 

Other

 

 

69,297

 

 

 

68,320

 

Total other assets

 

$

249,761

 

 

$

262,992

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Other Liabilities:

 

 

 

 

 

 

Operating lease right of use obligations

 

$

33,148

 

 

$

33,229

 

Derivative instruments

 

 

36,809

 

 

 

47,751

 

Collateral on derivative instruments

 

 

43,580

 

 

 

54,300

 

Accrued interest expense

 

 

12,693

 

 

 

5,983

 

Other

 

 

36,333

 

 

 

41,758

 

Total other liabilities

 

$

162,563

 

 

$

183,021

 

25


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(9.) DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities, and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate caps and interest rate swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During the three months ended March 31, 2023 and in 2022, such derivatives were used to hedge the variable cash flows associated with short-term borrowings or brokered CDs. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The following table summarizes the terms of the Company’s outstanding interest rate swap agreements entered into to manage its exposure to the variability in future cash flows as of March 31, 2023 (dollars in thousands):

 

Effective Date

 

Expiration Date

 

Notional Amount

 

 

Pay Fixed Rate

4/11/2022

 

4/11/2027

 

$

50,000

 

 

0.787%

1/24/2023

 

1/24/2026

 

$

30,000

 

 

3.669%

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. During the next twelve months, the Company estimates that $2.3 million in accumulated other comprehensive loss related to derivatives will be reclassified as a decrease to interest expense.

Interest Rate Swaps

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain one or more of the following provisions: (a) if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations, and (b) if the Company fails to maintain its status as a well-capitalized institution, the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(9.) DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES (Continued)

Mortgage Banking Derivatives

The Company extends rate lock agreements to borrowers related to the origination of residential mortgage loans. To mitigate the interest rate risk inherent in these rate lock agreements when the Company intends to sell the related loan, once originated, as well as closed residential mortgage loans held for sale, the Company enters into forward commitments to sell individual residential mortgages. Rate lock agreements and forward commitments are considered derivatives and are recorded at fair value.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the notional amounts, respective fair values of the Company’s derivative financial instruments, as well as their classification on the balance sheet as of March 31, 2023 and December 31, 2022 (in thousands):

 

 

 

 

 

 

 

 

Asset derivatives

 

 

Liability derivatives

 

 

 

Gross notional
amount

 

 

 

 

Fair value

 

 

 

 

Fair value

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

Balance
sheet
line item

 

March 31, 2023

 

 

December 31, 2022

 

 

Balance
sheet
line item

 

March 31, 2023

 

 

December 31, 2022

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

80,000

 

 

$

50,000

 

 

Other assets

 

$

5,972

 

 

$

6,725

 

 

Other liabilities

 

$

 

 

$

 

Total derivatives

 

$

80,000

 

 

$

50,000

 

 

 

 

$

5,972

 

 

$

6,725

 

 

 

 

$

 

 

$

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (1)

 

 

1,040,437

 

 

 

1,006,386

 

 

Other assets

 

 

36,784

 

 

 

47,736

 

 

Other liabilities

 

 

36,788

 

 

 

47,738

 

Credit contracts

 

 

84,529

 

 

 

104,497

 

 

Other assets

 

 

 

 

 

 

 

Other liabilities

 

 

 

 

 

 

Mortgage banking

 

 

11,027

 

 

 

7,884

 

 

Other assets

 

 

93

 

 

 

96

 

 

Other liabilities

 

 

21

 

 

 

13

 

Total derivatives

 

$

1,135,993

 

 

$

1,118,767

 

 

 

 

$

36,877

 

 

$

47,832

 

 

 

 

$

36,809

 

 

$

47,751

 

 

(1)
The Company has posted collateral of $43.6 million and $54.3 million against its net obligations under these contracts at March 31, 2023 and December 31, 2022, respectively.

Effect of Derivative Instruments on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three months ended March 31, 2023 and 2022 (in thousands):

 

 

 

 

Gain (loss) recognized in income

 

 

 

Line item of gain (loss)

 

Three months ended
March 31,

 

Undesignated derivatives

 

recognized in income

 

2023

 

 

2022

 

Interest rate swaps

 

Income from derivative instruments, net

 

 

501

 

 

 

762

 

Credit contracts

 

Income from derivative instruments, net

 

 

7

 

 

 

 

Mortgage banking

 

Income from derivative instruments, net

 

 

(12

)

 

 

(243

)

Total undesignated

 

 

 

$

496

 

 

$

519

 

 

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(10.) SHAREHOLDERS’ EQUITY

Common Stock

The changes in shares of common stock were as follows for the three months ended March 31, 2023 and 2022:

 

 

 

Outstanding

 

 

Treasury

 

 

Issued

 

 

 

 

 

 

 

 

 

 

Shares at December 31, 2022

 

 

15,340,001

 

 

 

759,555

 

 

 

16,099,556

 

Restricted stock units released

 

 

58,188

 

 

 

(58,188

)

 

 

 

Treasury stock purchases

 

 

(22,710

)

 

 

22,710

 

 

 

 

Shares at March 31, 2023

 

 

15,375,479

 

 

 

724,077

 

 

 

16,099,556

 

 

 

 

 

 

 

 

 

 

 

2022

 

 

 

 

 

 

 

 

 

Shares at December 31, 2021

 

 

15,745,453

 

 

 

354,103

 

 

 

16,099,556

 

Restricted stock units released

 

 

23,271

 

 

 

(23,271

)

 

 

 

Treasury stock purchases

 

 

(469,647

)

 

 

469,647

 

 

 

 

Shares at March 31, 2022

 

 

15,299,077

 

 

 

800,479

 

 

 

16,099,556

 

Share Repurchase Programs

In June 2022, the Company's Board of Directors (the “Board”) authorized a share repurchase program for up to 766,447 shares of common stock (the “2022 Share Repurchase Program”). Repurchased shares are recorded in treasury stock, at cost, which includes any applicable transaction costs. As of March 31, 2023, there were 766,447 shares remaining for repurchase under the 2022 Share Repurchase Program.

In November 2020, the Board authorized a share repurchase program for up to 801,879 shares of common stock (the “2020 Share Repurchase Program”). The 2020 Share Repurchase Program was completed in March 2022. Under the 2020 Share Repurchase Program, 461,191 shares were repurchased at an average price of $31.99 during the three months ended March 31, 2022, and 340,688 shares were repurchased during the year ended December 31, 2021.

 

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(11.) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the components of other comprehensive income (loss) for the three months ended March 31, 2023 and 2022 (in thousands):

 

 

 

Pre-tax
Amount

 

 

Tax
Effect

 

 

Net-of-tax
Amount

 

March 31, 2023

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

Change in unrealized gain during the period

 

$

14,278

 

 

$

3,658

 

 

$

10,620

 

Reclassification adjustment for net gains included in net income (1)

 

 

19

 

 

 

5

 

 

 

14

 

Total securities available for sale and transferred securities

 

 

14,297

 

 

 

3,663

 

 

 

10,634

 

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

Change in unrealized loss during the period

 

 

(891

)

 

 

(228

)

 

 

(663

)

Pension obligations:

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

 

(122

)

 

 

(31

)

 

 

(91

)

Amortization of net actuarial loss included in income

 

 

316

 

 

 

81

 

 

 

235

 

Total pension obligations

 

 

194

 

 

 

50

 

 

 

144

 

Other comprehensive income

 

$

13,600

 

 

$

3,485

 

 

$

10,115

 

 

 

 

Pre-tax
Amount

 

 

Tax
Effect

 

 

Net-of-tax
Amount

 

March 31, 2022

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

Change in unrealized loss during the period

 

$

(75,017

)

 

$

(19,221

)

 

$

(55,796

)

Reclassification adjustment for net gains included in net income (1)

 

 

31

 

 

 

8

 

 

 

23

 

Total securities available for sale and transferred securities

 

 

(74,986

)

 

 

(19,213

)

 

 

(55,773

)

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

Change in unrealized gain during the period

 

 

2,471

 

 

 

633

 

 

 

1,838

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

 

 

 

 

 

 

 

 

Amortization of net actuarial loss included in income

 

 

64

 

 

 

16

 

 

 

48

 

Total pension and post-retirement obligations

 

 

64

 

 

 

16

 

 

 

48

 

Other comprehensive loss

 

$

(72,451

)

 

$

(18,564

)

 

$

(53,887

)

 

(1) Includes amounts related to the amortization/accretion of unrealized net gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category. The unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield.

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(11.) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

Activity in accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2023 and 2022 was as follows (in thousands):

 

 

 

Hedging
Derivative
Instruments

 

 

Securities
Available
for Sale and
Transferred
Securities

 

 

Pension and
Post-
retirement
Obligations

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

4,735

 

 

$

(128,634

)

 

$

(13,588

)

 

$

(137,487

)

Other comprehensive (loss) income before reclassifications

 

 

(663

)

 

 

10,620

 

 

 

 

 

 

9,957

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

 

14

 

 

 

144

 

 

 

158

 

Net current period other comprehensive (loss) income

 

 

(663

)

 

 

10,634

 

 

 

144

 

 

 

10,115

 

Balance at end of period

 

$

4,072

 

 

$

(118,000

)

 

$

(13,444

)

 

$

(127,372

)

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,160

 

 

$

(4,971

)

 

$

(9,396

)

 

$

(13,207

)

Other comprehensive income (loss) before reclassifications

 

 

1,838

 

 

 

(55,796

)

 

 

 

 

 

(53,958

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

 

23

 

 

 

48

 

 

 

71

 

Net current period other comprehensive income (loss)

 

 

1,838

 

 

 

(55,773

)

 

 

48

 

 

 

(53,887

)

Balance at end of period

 

$

2,998

 

 

$

(60,744

)

 

$

(9,348

)

 

$

(67,094

)

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss) income for the three months ended March 31, 2023 and 2022 (in thousands):

 

Details About Accumulated Other Comprehensive Income (Loss) Components

 

Amount Reclassified from
Accumulated Other
Comprehensive
Income (Loss)

 

 

Affected Line Item in the
Consolidated Statement of Income

 

 

Three months ended
March 31,

 

 

 

 

 

2023

 

 

2022

 

 

 

Realized loss on sale of investment securities

 

$

 

 

$

 

 

Net (loss) gain on investment securities

Amortization of unrealized holding gain on investment securities transferred from available for sale to held to maturity

 

 

(19

)

 

 

(31

)

 

Interest income

 

 

(19

)

 

 

(31

)

 

Total before tax

 

 

5

 

 

 

8

 

 

Income tax expense

 

 

(14

)

 

 

(23

)

 

Net of tax

Amortization of pension and post-retirement items:

 

 

 

 

 

 

 

 

Prior service credit (1)

 

 

122

 

 

 

 

 

Salaries and employee benefits

Net actuarial losses (1)

 

 

(316

)

 

 

(64

)

 

Salaries and employee benefits

 

 

(194

)

 

 

(64

)

 

Total before tax

 

 

50

 

 

 

16

 

 

Income tax benefit

 

 

(144

)

 

 

(48

)

 

Net of tax

Total reclassified for the period

 

$

(158

)

 

$

(71

)

 

 

 

(1) These items are included in the computation of net periodic pension expense. See Note 13. Employee Benefit Plans, for additional information.

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(12.) SHARE-BASED COMPENSATION PLANS

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

The MD&C Committee approved the grant of restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) shown in the table below during the three months ended March 31, 2023.

 

 

 

Number of
   Underlying
Shares

 

 

Weighted Average Grant Date Fair Value

 

RSUs

 

 

132,310

 

 

$

16.65

 

PSUs

 

 

53,060

 

 

 

16.66

 

 

The grant-date fair value for the RSUs and PSUs granted during the three months ended March 31, 2023 was equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.

The RSUs granted during the three months ended March 31, 2023 will vest on the third anniversary of the grant date assuming the recipient’s continuous service to the Company.

The Company awarded grants of PSUs to certain members of management during the three months ended March 31, 2023. Fifty percent of shares subject to each grant that ultimately vest are contingent on achieving specified return on average equity (“ROAE”) targets relative to the market index the MD&C Committee has selected as a peer group for this purpose. These shares will be earned based on the Company’s achievement of a relative ROAE performance requirement, on a percentile basis, compared to the market index over a three-year performance period ending December 31, 2025. The shares earned based on the achievement of the ROAE performance requirement, if any, will vest on the third anniversary of the grant date assuming the recipients continuous service to the Company. The remaining fifty percent of the PSUs that ultimately vest are contingent upon achievement of an average return on average assets (“ROAA”) performance requirement over a three-year performance period ending December 31, 2025. The shares earned based on the achievement of the ROAA performance requirement, if any, will vest of the third anniversary of the grant date assuming the recipient's continuous service to the Company.

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

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Salaries and employee benefits

 

$

510

 

 

$

406

 

Other noninterest expense

 

 

41

 

 

 

37

 

Total share-based compensation expense

 

$

551

 

 

$

443

 

 

 

 

 

 

 

 

Income tax benefit realized for compensation costs

 

$

368

 

 

$

191

 

As of March 31, 2023, there was $6.0 million of unrecognized compensation expense related to unvested restricted stock awards and restricted stock units that is expected to be recognized over a weighted average period of 2.35 years.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(13.) EMPLOYEE BENEFIT PLANS

The components of the Company’s net periodic benefit expense for its pension and post-retirement obligations were as follows (in thousands):

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Service cost

 

$

448

 

 

$

872

 

Interest cost on projected benefit obligation

 

 

855

 

 

 

647

 

Expected return on plan assets

 

 

(878

)

 

 

(1,141

)

Amortization of unrecognized prior service credit

 

 

(122

)

 

 

 

Amortization of unrecognized net actuarial loss

 

 

316

 

 

 

65

 

Net periodic benefit expense

 

$

619

 

 

$

443

 

 

The net periodic benefit expense is recorded as a component of salaries and employee benefits in the consolidated statements of income. The Company’s funding policy is to contribute, at a minimum, an actuarially determined amount that will satisfy the minimum funding requirements determined under the appropriate sections of the Internal Revenue Code. The Company has no minimum required contribution for the 2023 fiscal year.

(14.) COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk

The Company has financial instruments with off-balance sheet risk established in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk extending beyond amounts recognized in the financial statements.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is essentially the same as that involved with extending loans to customers. The Company uses the same credit underwriting policies in making commitments and conditional obligations as for on-balance sheet instruments.

Off-balance sheet commitments consist of the following (in thousands):

 

 

 

March 31,
2023

 

 

December 31,
2022

 

Commitments to extend credit

 

$

1,326,003

 

 

$

1,435,323

 

Standby letters of credit

 

 

15,576

 

 

 

17,181

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee. Commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers.

Unfunded Commitments

At March 31, 2023 and December 31, 2022, the allowance for credit losses for unfunded commitments totaled $4.1 million at each date, and was included in other liabilities on the Company’s consolidated statements of financial condition. The credit loss expense for unfunded commitments was as follows (in thousands):

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Credit loss expense for unfunded commitments

 

$

11

 

 

$

241

 

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(14.) COMMITMENTS AND CONTINGENCIES (Continued)

Contingent Liabilities and Litigation

In the ordinary course of business, there are various threatened and pending legal proceedings against the Company. Management believes that the aggregate liability, if any, arising from such litigation, except for the matter described below, would not have a material adverse effect on the Company’s consolidated financial statements.

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 as filed with the SEC on March 9, 2023 and as disclosed in Part II, Item 1 of this Quarterly Report on Form 10-Q, the Company is party to an action filed against it on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs sought and were granted class certification to represent classes of consumers in New York and Pennsylvania seeking to recover statutory damages, interest and declaratory relief. The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. The Company disputes and believes it has meritorious defenses against these claims and plans to vigorously defend itself.

On September 30, 2021, the Court granted plaintiffs’ motion for class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). There are approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes.

On September 26, 2022, the lower Court denied the plaintiffs’ motion for partial summary judgment for most of the relief they seek and found that there were questions of fact as to whether the members of the class had purchased the subject vehicles for “consumer use” within the meaning of the relevant statutes. The Court also denied the Company’s motion for partial summary judgment and seeking an offset in the form of recoupment reducing any liability that may be imposed against the Company by the amounts that the borrowers owe for failing to repay their motor vehicle loans, determining that the Court could not enter a judgment on recoupment – which is a set off from liability – without first determining whether there was liability. Also pending with the lower Court is the Company’s motion to compel discovery.

On October 7, 2022, the Superior Court of Pennsylvania granted the Company’s December 20, 2021 Request for an Interlocutory Appeal of the denial of the Company’s motion to dismiss the claims brought by New York borrowers for lack of subject matter jurisdiction and lack of standing. The case is stayed until the appeal is decided by the Superior Court.

The Company has not accrued a contingent liability for this matter at this time because, given its defenses, it is unable to conclude whether a liability is probable to occur nor is it able to currently reasonably estimate the amount of potential loss.

If the Company settles these claims or the action is not resolved in its favor, the Company may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by its insurer. The Company can provide no assurances that its insurer will cover the full legal costs, settlements or judgments it incurs. If the Company is unsuccessful in defending itself from these claims or if its insurer does not cover the full amount of legal costs it incurs, the result may materially adversely affect the Company’s business, results of operations and financial condition.

33


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(15.) FAIR VALUE MEASUREMENTS

Determination of Fair Value – Assets Measured at Fair Value on a Recurring and Nonrecurring Basis

Valuation Hierarchy

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. There have been no changes in the valuation techniques used during the current period. The fair value hierarchy is as follows:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Transfers between levels of the fair value hierarchy are recorded as of the end of the reporting period.

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

Securities available for sale: Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Derivative instruments: The fair value of derivative instruments is determined using quoted secondary market prices for similar financial instruments and are classified as Level 2 in the fair value hierarchy.

Loans held for sale: The fair value of loans held for sale is determined using quoted secondary market prices and investor commitments. Loans held for sale are classified as Level 2 in the fair value hierarchy.

Collateral dependent loans: Fair value of collateral dependent loans with specific allocations of the allowance for credit losses – loans is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and collateral value is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

34


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(15.) FAIR VALUE MEASUREMENTS (Continued)

Long-lived assets held for sale: The fair value of the long-lived assets held for sale was based on estimated market prices from independently prepared current appraisals and are classified as Level 3 in the fair value hierarchy.

Loan servicing rights: Loan servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The assumptions used in the discounted cash flow model are those that management believes market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. The significant unobservable inputs used in the fair value measurement of the Company’s loan servicing rights are the constant prepayment rates and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions. Loan servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

Other real estate owned (foreclosed assets): Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Commitments to extend credit and letters of credit: Commitments to extend credit and fund letters of credit are principally at current interest rates, and, therefore, the carrying amount approximates fair value. The fair value of commitments is not material.

35


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(15.) FAIR VALUE MEASUREMENTS (Continued)

Assets Measured at Fair Value

The following tables present for each of the fair-value hierarchy levels the Company’s assets that are measured at fair value on a recurring and nonrecurring basis as of the dates indicated (in thousands).

 

 

 

Quoted
Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

 

Total

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

 

 

$

21,658

 

 

$

 

 

$

21,658

 

Mortgage-backed securities

 

 

 

 

 

923,784

 

 

 

 

 

 

923,784

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Hedging derivative instruments

 

 

 

 

 

5,972

 

 

 

 

 

 

5,972

 

Fair value adjusted through comprehensive income

 

$

 

 

$

951,414

 

 

$

 

 

$

951,414

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate swaps

 

 

 

 

 

36,784

 

 

 

 

 

 

36,784

 

Derivative instruments – credit contracts

 

 

 

 

 

 

 

 

 

 

 

-

 

Derivative instruments – mortgage banking

 

 

 

 

 

93

 

 

 

 

 

 

93

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate swaps

 

 

 

 

 

(36,788

)

 

 

 

 

 

(36,788

)

Derivative instruments – credit contracts

 

 

 

 

 

 

 

 

 

 

 

-

 

Derivative instruments – mortgage banking

 

 

 

 

 

(21

)

 

 

 

 

 

(21

)

Fair value adjusted through net income

 

$

 

 

$

68

 

 

$

 

 

$

68

 

Measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

 

 

$

682

 

 

$

 

 

$

682

 

Collateral dependent loans

 

 

 

 

 

 

 

 

20,059

 

 

 

20,059

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

 

 

 

 

 

 

 

1,509

 

 

 

1,509

 

Loan servicing rights

 

 

 

 

 

 

 

 

1,453

 

 

 

1,453

 

Other real estate owned

 

 

 

 

 

 

 

 

101

 

 

 

101

 

Total

 

$

 

 

$

682

 

 

$

23,122

 

 

$

23,804

 

 

There were no transfers between Levels 1 and 2 during the three months ended March 31, 2023. There were no liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2023.

 

36


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(15.) FAIR VALUE MEASUREMENTS (Continued)

 

 

 

Quoted
Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

 

Total

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government sponsored enterprises

 

$

 

 

$

21,115

 

 

$

 

 

$

21,115

 

Mortgage-backed securities

 

 

 

 

 

933,256

 

 

 

 

 

 

933,256

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Hedging derivative instruments

 

 

 

 

 

6,725

 

 

 

 

 

 

6,725

 

Fair value adjusted through comprehensive income

 

$

 

 

$

961,096

 

 

$

 

 

$

961,096

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate products

 

$

 

 

$

47,736

 

 

$

 

 

$

47,736

 

Derivative instruments – mortgage banking

 

 

 

 

 

96

 

 

 

 

 

 

96

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate products

 

 

 

 

 

(47,738

)

 

 

 

 

 

(47,738

)

Derivative instruments – mortgage banking

 

 

 

 

 

(13

)

 

 

 

 

 

(13

)

Fair value adjusted through net income

 

$

 

 

$

81

 

 

$

 

 

$

81

 

Measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

 

 

$

550

 

 

$

 

 

$

550

 

Collateral dependent loans

 

 

 

 

 

 

 

 

21,454

 

 

 

21,454

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

 

 

 

 

 

 

 

1,509

 

 

 

1,509

 

Loan servicing rights

 

 

 

 

 

 

 

 

1,470

 

 

 

1,470

 

Other real estate owned

 

 

 

 

 

 

 

 

19

 

 

 

19

 

Total

 

$

 

 

$

550

 

 

$

24,452

 

 

$

25,002

 

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value as of March 31, 2023 (dollars in thousands).

 

Asset

 

Fair
Value

 

 

Valuation Technique

 

Unobservable Input

 

Unobservable Input
Value or Range

Collateral dependent loans

 

$

20,059

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

15.7%(3) / 0 - 40%

Loan servicing rights

 

$

1,453

 

 

Discounted cash flow

 

Discount rate

 

10.4% (3)

 

 

 

 

 

 

 

Constant prepayment rate

 

11.6% (3)

Long-lived assets held for sale

 

$

1,509

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

10 - 108%

Other real estate owned

 

$

101

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

39.0%

 

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3) Weighted averages.

37


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(15.) FAIR VALUE MEASUREMENTS (Continued)

Changes in Level 3 Fair Value Measurements

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the three months ended March 31, 2023 and 2022.

Disclosures about Fair Value of Financial Instruments

The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

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

The estimated fair value approximates carrying value for cash and cash equivalents, Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, accrued interest receivable, non-maturity deposits, short-term borrowings and accrued interest payable.

The following table presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value measurement hierarchy of the Company’s financial instruments as of the dates indicated.

 

 

 

Level in

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Fair Value

 

 

 

 

Estimated

 

 

 

 

 

Estimated

 

 

 

Measurement

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

Hierarchy

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

 

$

139,974

 

 

$

139,974

 

 

$

130,466

 

 

$

130,466

 

Securities available for sale

 

Level 2

 

 

945,442

 

 

 

945,442

 

 

 

954,371

 

 

 

954,371

 

Securities held to maturity, net

 

Level 2

 

 

180,052

 

 

 

167,812

 

 

 

188,975

 

 

 

174,188

 

Loans held for sale

 

Level 2

 

 

682

 

 

 

682

 

 

 

550

 

 

 

550

 

Loans

 

Level 2

 

 

4,175,745

 

 

 

4,069,579

 

 

 

3,983,582

 

 

 

3,867,285

 

Loans (1)

 

Level 3

 

 

20,059

 

 

 

20,059

 

 

 

21,454

 

 

 

21,454

 

Long-lived assets held for sale

 

Level 3

 

 

1,509

 

 

 

1,509

 

 

 

1,509

 

 

 

1,509

 

Accrued interest receivable

 

Level 1

 

 

20,167

 

 

 

20,167

 

 

 

19,371

 

 

 

19,371

 

Derivative instruments – cash flow hedges

 

Level 2

 

 

5,972

 

 

 

5,972

 

 

 

6,725

 

 

 

6,725

 

Derivative instruments – interest rate products

 

Level 2

 

 

36,784

 

 

 

36,784

 

 

 

47,736

 

 

 

47,736

 

Derivative instruments – mortgage banking

 

Level 2

 

 

93

 

 

 

93

 

 

 

96

 

 

 

96

 

FHLB and FRB stock

 

Level 2

 

 

17,630

 

 

 

17,630

 

 

 

19,385

 

 

 

19,385

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

Level 1

 

 

3,669,925

 

 

 

3,669,925

 

 

 

3,646,552

 

 

 

3,646,552

 

Time deposits

 

Level 2

 

 

1,471,382

 

 

 

1,460,737

 

 

 

1,282,872

 

 

 

1,268,957

 

Short-term borrowings

 

Level 1

 

 

116,000

 

 

 

116,000

 

 

 

205,000

 

 

 

205,000

 

Long-term borrowings

 

Level 2

 

 

124,299

 

 

 

121,042

 

 

 

74,222

 

 

 

70,814

 

Accrued interest payable

 

Level 1

 

 

12,693

 

 

 

12,693

 

 

 

5,983

 

 

 

5,983

 

Derivative instruments – interest rate products

 

Level 2

 

 

36,788

 

 

 

36,788

 

 

 

47,738

 

 

 

47,738

 

Derivative instruments – credit contracts

 

Level 2

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – mortgage banking

 

Level 2

 

 

21

 

 

 

21

 

 

 

13

 

 

 

13

 

 

(1) Comprised of collateral dependent loans.

 

38


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(16.) SEGMENT REPORTING

The Company has one reportable segment, Banking, which includes all of the Company’s retail and commercial banking operations. This reportable segment has been identified and organized based on the nature of the underlying products and services applicable to the segment, the type of customers to whom those products and services are offered and the distribution channel through which those products and services are made available.

All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This “All Other” grouping includes the activities of SDN, a full-service insurance agency that provides a broad range of insurance services to both personal and business clients, and Courier Capital and HNP Capital, our investment advisor and wealth management firms that provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans, and Holding Company amounts, which are the primary differences between segment amounts and consolidated totals, along with amounts to eliminate balances and transactions between segments.

The following tables present information regarding our business segments as of and for the periods indicated (in thousands):

 

 

 

Banking

 

 

All Other

 

 

Consolidated
Totals

 

March 31, 2023

 

 

 

 

 

 

 

 

 

Goodwill

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

Other intangible assets, net

 

 

 

 

 

6,109

 

 

 

6,109

 

Total assets

 

 

5,927,077

 

 

 

39,915

 

 

 

5,966,992

 

December 31, 2022

 

 

 

 

 

 

 

 

 

Goodwill

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

Other intangible assets, net

 

 

 

 

 

6,343

 

 

 

6,343

 

Total assets

 

 

5,756,441

 

 

 

40,831

 

 

 

5,797,272

 

 

 

 

 

Banking

 

 

All Other

 

 

Consolidated
Totals

 

Three months ended March 31, 2023

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

42,875

 

 

$

(1,060

)

 

$

41,815

 

Provision for credit losses

 

 

(4,214

)

 

 

 

 

 

(4,214

)

Noninterest income

 

 

6,375

 

 

 

4,549

 

 

 

10,924

 

Noninterest expense

 

 

(29,773

)

 

 

(3,888

)

 

 

(33,661

)

Income (loss) before income taxes

 

 

15,263

 

 

 

(399

)

 

 

14,864

 

Income tax expense

 

 

(2,630

)

 

 

(145

)

 

 

(2,775

)

Net income (loss)

 

$

12,633

 

 

$

(544

)

 

$

12,089

 

 

 

 

Banking

 

 

All Other

 

 

Consolidated
Totals

 

Three months ended March 31, 2022

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

40,618

 

 

$

(1,060

)

 

$

39,558

 

Benefit for credit losses

 

 

(2,319

)

 

 

 

 

 

(2,319

)

Noninterest income

 

 

6,627

 

 

 

4,695

 

 

 

11,322

 

Noninterest expense

 

 

(25,872

)

 

 

(4,263

)

 

 

(30,135

)

Income (loss) before income taxes

 

$

19,054

 

 

$

(628

)

 

$

18,426

 

Income tax (expense) benefit

 

 

(3,636

)

 

 

193

 

 

 

(3,443

)

Net income (loss)

 

$

15,418

 

 

$

(435

)

 

$

14,983

 

 

(17.) SUBSEQUENT EVENT

On May 1, 2023, the Company announced the completion of the merger of its wholly-owned SEC-registered investments advisory firms, under which HNP Capital LLC merged with and into Courier Capital LLC. The merger was accounted for under ASC-805-50-15 - “Transactions Between Entities Under Common Control,” as an exchange of assets in which Courier Capital LLC recognizes the assets and liabilities transferred at historical cost basis at the date of transfer.

39


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

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

This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

FORWARD LOOKING INFORMATION

Statements and financial analysis contained in this Quarterly Report on Form 10-Q that are based on other than historical data are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:

statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Financial Institutions, Inc. (the “Parent” or “FII”) and its subsidiaries (collectively, the “Company,” “we,” “our” or “us”); and
statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “continue,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects” or similar expressions.

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Form 10-K”), including, but not limited to, those presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Factors that might cause such material differences include, but are not limited to:

We are subject to interest rate risk, and fluctuations in market interest rates may affect our interest margins and income,
demand for our products, defaults on loans, loan prepayments and the fair value of our financial instruments;
The soundness of other financial institutions could adversely affect us;
Our business may be adversely affected by conditions in the financial markets and economic conditions generally;
Recent events involving the failure of three financial institutions may adversely affect our business and the market price of our common stock;
Lawmakers’ failure to address the federal debt ceiling in a timely manner, downgrades of the U.S. credit rating and uncertain credit and financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may affect the valuation or liquidity of our investment securities portfolio and increase future borrowing costs;
If we experience greater credit losses than anticipated, earnings may be adversely impacted;
Geographic concentration may unfavorably impact our operations;
Our commercial business and mortgage loans increase our exposure to credit risks;
If our regulators impose limitations on our commercial real estate lending activities, earnings could be adversely affected;
Our indirect and consumer lending involves risk elements in addition to normal credit risk;
Lack of seasoning in portions of our loan portfolio could increase risk of credit defaults in the future;
We accept deposits that do not have a fixed term, and which may be withdrawn by the customer at any time for any reason;
We are subject to environmental liability risk associated with our lending activities;
We operate in a highly competitive industry and market area;
Changes to and replacement of the LIBOR Benchmark Interest Rate may adversely affect our business, financial condition, and results of operations;
Legal and regulatory proceedings and related matters, such as the action brought by a class of consumers against us as described in Part II, Item 1, “Legal Proceedings,” could adversely affect us and the banking industry in general;
Any future FDIC insurance premium increases, or special assessment may adversely affect our earnings;
We are highly regulated, and any adverse regulatory action may result in additional costs, loss of business opportunities, and reputational damage;
The policies of the Federal Reserve have a significant impact on our earnings;
Our insurance brokerage subsidiary is subject to risk related to the insurance industry;
Our investment advisory and wealth management operations are subject to risk related to the regulation of the financial services industry and market volatility;
We make certain assumptions and estimates in preparing our financial statements that may prove to be incorrect, which could significantly impact our results of operations, cash flows and financial condition, and we are subject to new or changing accounting

40


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

rules and interpretations, and the failure by us to correctly interpret or apply these evolving rules and interpretations could have a material adverse effect;
The value of our goodwill and other intangible assets may decline in the future;
We may be unable to successfully implement our growth strategies, including the integration and successful management of newly-acquired businesses;
Acquisitions may disrupt our business and dilute shareholder value;
Our tax strategies and the value of our deferred tax assets and liabilities could adversely affect our operating results and regulatory capital ratios;
Liquidity is essential to our businesses;
We rely on dividends from our subsidiaries for most of our revenue;
If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses;
Public health emergencies, like the COVID-19 outbreak, may have an adverse impact on our business and results of operations;
We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all;
We face competition in staying current with technological changes and banking alternatives to compete and meet customer demands;
We rely on other companies to provide key components of our business infrastructure;
A breach in security of our or third-party information systems, including the occurrence of a cyber incident or a deficiency in cybersecurity, or a failure by us to comply with New York State cybersecurity regulations, may subject us to liability, result in a loss of customer business or damage our brand image;
We may not pay or may reduce the dividends on our common stock;
We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, and which could dilute our current shareholders or negatively affect the value of our common stock;
Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect;
The market price of our common stock may fluctuate significantly in response to a number of factors;
We may not be able to attract and retain skilled people;
We use financial models for business planning purposes that may not adequately predict future results;
We depend on the accuracy and completeness of information about or from customers and counterparties;
Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other external events could significantly impact our business;
Negative public opinion could damage our reputation and impact business operations and revenues; and
Environmental, social and governance matters, and any related reporting obligations may impact our business.

We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advise readers that various factors, including those described above, could affect our financial performance and could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected. See also Item 1A, Risk Factors, in the Form 10-K for further information. Except as required by law, we do not undertake, and specifically disclaim 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.

GENERAL

The Parent is a financial holding company headquartered in New York State, providing diversified financial services through its operating subsidiaries, Five Star Bank (the “Bank”), SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York-chartered banking subsidiary, the Bank. The Bank also has commercial loan production offices in Ellicott City (Baltimore), Maryland, and Syracuse, New York, serving the Mid-Atlantic and Central New York regions. Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. In May 2023, the Company announced the completion of the merger of HNP Capital with and into Courier Capital. Refer to Note 17. Subsequent Event, of the notes to the consolidated financial statements for further details on the merger.

Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and other funding sources) and noninterest income, particularly fees and other revenue from insurance, investment advisory and financial services provided to customers or ancillary services tied to loans and deposits. Business volumes and pricing drive revenue potential, and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth, and competitive conditions

41


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

within the marketplace. We are not able to predict market interest rate fluctuations with certainty and our asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on our results of operations and financial condition.

Our business strategy has been to maintain a community bank philosophy, which consists of focusing on and understanding the individualized banking and other financial needs of individuals, municipalities and businesses of the local communities surrounding our primary service area. We believe this focus allows us to be more responsive to our customers’ needs and provide a high level of personal service that differentiates us from larger competitors, resulting in long-standing and broad-based banking relationships. Our core customers are primarily small- to medium-sized businesses, individuals and community organizations who prefer to build banking, insurance and wealth management relationships with a community bank that combines high quality, competitively-priced products and services with personalized service. Because of our identity and origin as a locally operated bank, we believe that our level of personal service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local communities.

A key aspect of our current business strategy is to foster a community-oriented culture where our customers and employees establish long-standing and mutually beneficial relationships. We believe that we are well-positioned to be a strong competitor within our market area because of our focus on community banking needs and customer service, our comprehensive suite of deposit, loan, insurance and wealth management products typically found at larger banks, our highly experienced management team and our strategically located banking centers. We have also broadened our service offerings to include financial advice and insurance solutions along with traditional banking needs.

We have evolved to meet changing customer needs by opening what we refer to as financial solution center branches. These financial solution center branches have a smaller footprint than our traditional branches, focus on technology to provide solutions that fit our customer preferences for transacting business with us, and these branches are staffed by certified personal bankers who are trained to meet a broad array of customer needs. We expanded our footprint into the Mid-Atlantic region with the opening of a loan production office in Baltimore, Maryland in February 2022, and further expanded our footprint in Central New York with the opening of a commercial loan production office in Syracuse, New York in January 2023. Additionally, we are focused on the continued expansion of product delivery channels and are investing in our digital banking platform to allow for greater flexibility in the customer experience. We believe that the foregoing factors all help to grow our core deposits, which support a central element of our business strategy – the growth of a diversified and high-quality loan portfolio.

Our Banking-as-a-Service (“BaaS”) and financial technology (“FinTech”) relationships offer BaaS to technology firms and other non-bank financial service providers, allowing them to provide banking services to their clients. With the help of the Bank’s partners, we can offer banking services and products beyond our traditional footprint.

EXECUTIVE OVERVIEW

Summary of 2023 First Quarter Results

Net income decreased $2.9 million to $12.1 million for the first quarter of 2023 compared to $15.0 million for the first quarter of 2022. Net income available to common shareholders for the first quarter of 2023 was $11.7 million, or $0.76 per diluted share, compared with $14.6 million, or $0.93 per diluted share, for the first quarter of 2022. Return on average common equity was 11.87% and return on average assets was 0.84% for the first quarter of 2023 compared to 12.49% and 1.09%, respectively, for the first quarter of 2022.

The decrease in net income for the first quarter of 2023 largely reflected a $4.2 million provision for credit losses as compared to $2.3 million in the first quarter of 2022. Loan loss provision reflected the impact of an increase in the national unemployment forecast and qualitative factors reflecting economic uncertainty associated with higher interest rates. The increase in provision for credit losses in the first quarter of 2023 was primarily driven by higher loan growth and net charge-offs in comparison to the first quarter of 2022. Also contributing to the decrease in net income was a $3.5 million increase in noninterest expense, including a $1.5 million increase in salaries and employee benefits expense and a $1.0 million increase in other expenses.

Net interest income totaled $41.8 million in the first quarter of 2023, an increase of $2.3 million compared to $39.6 million in the first quarter of 2022. Average interest-earning assets for the first quarter of 2023 were $319.1 million higher than the first quarter of 2022 due to a $418.8 million increase in average loans, and an $18.8 million increase in the average balance of federal funds sold and interest-earning deposits, partially offset by a $118.4 million decrease in the average balance of investment securities.

Net interest margin was 3.09% for the first quarter of 2023 compared to 3.11% in the first quarter of 2022, as a result of a shift in mix from lower cost transactional accounts to higher cost time deposits, as well as seasonality and repricing within the public deposit portfolio.

The provision for credit losses – loans was $4.2 million in the first quarter of 2023, compared to a provision of $2.1 million in the first quarter of 2022. Net charge-offs during the recent quarter were $2.1 million compared to $787 thousand in the first quarter of 2022. Net charge-offs expressed as an annualized percentage of average loans outstanding was 0.21% during the first quarter of 2023 compared to 0.09% during the first quarter of 2022. See the “Allowance for Credit Losses – Loans” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion regarding the provision for credit losses – loans and net charge-offs.

Noninterest income totaled $10.9 million in the first quarter of 2023, compared to $11.3 million in the first quarter of 2022. The decrease in noninterest income for the first quarter of 2023 was primarily due to decreases in income from investments in limited partnerships and service charges on deposits.

42


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Noninterest expense totaled $33.7 million in the first quarter of 2023, compared to $30.1 million in the first quarter of 2022. The increase in noninterest expense was primarily the result of increases in salaries and employee benefits expense, other expenses, computer and data processing expense, and FDIC assessments. The increase in salaries and employee benefits expense was primarily the result of investments in personnel and hourly wage pressures driven by the current competitive labor market. The increase in other expenses was the result of a combination of factors, including interest charges related to collateral held for derivative transactions, the timing of deposit account-related fraud charge-offs, higher insurance costs and the impact of inflationary pressures. Computer and data processing expense increased due to the timing of our strategic investment in technology, including digital banking initiatives, a customer relationship management solution across all business lines, and Banking-as-a-Service, or BaaS, initiatives. The increase in FDIC assessments was due in part to the impact of an increase in the initial base deposit insurance assessment rate schedules by two basis points.

The regulatory Common Equity Tier 1 Ratio and Total Risk-Based Capital Ratio were 9.55%, and 11.93%, respectively, at March 31, 2023. See the “Liquidity and Capital Management” section of this Management’s Discussion and Analysis for further discussion regarding regulatory capital and the Basel III capital rules.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Net interest income is our primary source of revenue, comprising 79% of revenue during the three months ended March 31, 2023. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of interest-earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities and repricing frequencies.

 

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

The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis (dollars in thousands):

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Interest income per consolidated statements of income

 

$

63,771

 

 

$

42,351

 

Adjustment to fully taxable equivalent basis

 

 

121

 

 

 

146

 

Interest income adjusted to a fully taxable equivalent basis

 

 

63,892

 

 

 

42,497

 

Interest expense per consolidated statements of income

 

 

21,956

 

 

 

2,793

 

Net interest income on a taxable equivalent basis

 

$

41,936

 

 

$

39,704

 

 

Analysis of Net Interest Income for the Three Months Ended March 31, 2023 and 2022

Net interest income on a taxable equivalent basis for the three months ended March 31, 2023, was $41.9 million, an increase of $2.2 million versus the comparable quarter last year of $39.7 million. The increase in net interest income was primarily due to a $21.4 million increase in interest income, resulting from the impact of the interest rate increases having a positive impact on yields, as well an increase in average loans of $418.8 million, or 11%, partially offset by a decrease in average investment securities of $118.4 million, or 8%. The increase in interest income was partially offset by an increase in interest expense of $19.2 million. The increase in interest expense was primarily the result of continued repricing of time deposits at higher rates.

Our net interest margin for the first quarter of 2023 was 3.09%, 2-basis points lower than 3.11% for the same period in 2022 as a result of a shift in our deposit mix from lower cost transactional accounts to higher cost time deposits, as well as seasonality and repricing within the public deposit portfolio.

For the first quarter of 2023, the average yield on average interest earning assets of 4.71% was 139-basis points higher than the first quarter of 2022 of 3.32% due to the increase in market interest rates. Average loan yield increased 164-basis points during the first quarter of 2023 to 5.61% from 3.97% for the same period in 2022. The average yield on investment securities increased 16-basis points during the first quarter of 2023 to 1.90% from 1.74% for the same period in 2022. Overall, a favorable volume variance increased interest income by $4.0 million during the first

43


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

quarter of 2023, and the interest earning asset rate changes increased interest income by $17.4 million which collectively drove the $21.4 million increase in interest income.

Average interest-earning assets were $5.49 billion for the first quarter of 2023 compared to $5.17 billion for the first quarter of 2022, an increase of $319.1 million, or 6%, from the comparable quarter last year, with average loans up $418.8 million from $3.70 billion for the first quarter of 2022 to $4.12 billion for the first quarter of 2023, and average securities down $118.4 million from $1.42 billion for the first quarter of 2022 to $1.30 billion for the first quarter of 2023. Securities represented 23.7% of average interest-earning assets during the first quarter of 2023 compared to 27.5% during the first quarter of 2022. The decrease in average investment securities was due to a decrease in the market value of the portfolio due to rising interest rates combined with the use of portfolio cash flow to primarily fund loan originations rather than reinvest in securities. Loans comprised 75.1% of average interest-earning assets during the first quarter of 2023 compared to 71.7% during the first quarter of 2022. The growth in average loans was primarily due to organic growth bolstered by our February 2022 expansion into the Mid-Atlantic Region. Loans generally have significantly higher yields compared to other interest-earning assets and, as such, have a more positive effect on the net interest margin. The average yield on average loans was 5.61% for the first quarter of 2023, an increase of 164-basis points compared to 3.97% for the comparable quarter in 2022 due to the impact of the current rising interest rate environment. An increase in the volume of average loans resulted in a $4.6 million increase in interest income and rate changes increased interest income by $16.2 million.

For the first quarter of 2023, the average cost of average interest-bearing liabilities of 2.12% was 183-basis points higher than the first quarter of 2022 and the average cost of interest-bearing deposits of 1.99% was 181-basis points higher than the first quarter of 2022 due to the rising interest rate environment that occurred in 2022 and continued into 2023.

Average interest-bearing liabilities were $4.19 billion for the first quarter of 2023, compared to $3.90 billion for the first quarter of 2022, an increase of $289.1 million, or 7%. On average, interest-bearing deposits grew $127.9 million from $3.80 billion for the first quarter of 2022 to $3.93 billion for the current quarter and total borrowings increased $161.2 million, from $98.6 million for the first quarter of 2022, to $259.8 million for the current quarter. The increase in average deposits was primarily due to growth in brokered deposits. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities – Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in $17.6 million higher interest expense during the first quarter of 2023, primarily due to the higher rate market conditions.

44


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The following table sets forth certain information relating to the consolidated balance sheets and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the periods indicated (dollars in thousands). Average balances were derived from daily balances.

 

 

 

Three months ended March 31,

 

 

 

2023

 

 

2022

 

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate
(3)

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate
(3)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-earning deposits

 

$

63,311

 

 

$

616

 

 

 

3.95

%

 

$

44,559

 

 

$

18

 

 

 

0.16

%

Investment securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,215,608

 

 

 

5,601

 

 

 

1.84

 

 

 

1,309,122

 

 

 

5,487

 

 

 

1.68

 

Tax-exempt (2)

 

 

85,898

 

 

 

577

 

 

 

2.69

 

 

 

110,825

 

 

 

695

 

 

 

2.51

 

Total investment securities

 

 

1,301,506

 

 

 

6,178

 

 

 

1.90

 

 

 

1,419,947

 

 

 

6,182

 

 

 

1.74

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

670,354

 

 

 

11,232

 

 

 

6.80

 

 

 

627,915

 

 

 

6,004

 

 

 

3.88

 

Commercial mortgage

 

 

1,744,963

 

 

 

26,400

 

 

 

6.14

 

 

 

1,431,933

 

 

 

13,538

 

 

 

3.83

 

Residential real estate loans

 

 

589,747

 

 

 

5,245

 

 

 

3.56

 

 

 

581,021

 

 

 

4,821

 

 

 

3.32

 

Residential real estate lines

 

 

76,627

 

 

 

1,303

 

 

 

6.89

 

 

 

77,610

 

 

 

679

 

 

 

3.55

 

Consumer indirect

 

 

1,024,362

 

 

 

12,525

 

 

 

4.96

 

 

 

969,441

 

 

 

10,875

 

 

 

4.55

 

Other consumer

 

 

15,156

 

 

 

393

 

 

 

10.51

 

 

 

14,531

 

 

 

381

 

 

 

10.65

 

Total loans (4)

 

 

4,121,209

 

 

 

57,098

 

 

 

5.61

 

 

 

3,702,451

 

 

 

36,298

 

 

 

3.97

 

Total interest-earning assets

 

 

5,486,026

 

 

 

63,892

 

 

 

4.71

 

 

 

5,166,957

 

 

 

42,498

 

 

 

3.32

 

Less: Allowance for credit losses

 

 

(46,668

)

 

 

 

 

 

 

 

 

(40,795

)

 

 

 

 

 

 

Other noninterest-earning assets

 

 

404,428

 

 

 

 

 

 

 

 

 

434,154

 

 

 

 

 

 

 

Total assets

 

$

5,843,786

 

 

 

 

 

 

 

 

$

5,560,316

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

880,093

 

 

 

1,399

 

 

 

0.64

%

 

$

923,425

 

 

$

283

 

 

 

0.12

%

Savings and money market

 

 

1,665,075

 

 

 

6,556

 

 

 

1.60

 

 

 

1,948,050

 

 

 

787

 

 

 

0.16

 

Time deposits

 

 

1,382,131

 

 

 

11,339

 

 

 

3.33

 

 

 

927,886

 

 

 

636

 

 

 

0.28

 

Total interest-bearing deposits

 

 

3,927,299

 

 

 

19,294

 

 

 

1.99

 

 

 

3,799,361

 

 

 

1,706

 

 

 

0.18

 

Short-term borrowings

 

 

145,533

 

 

 

1,202

 

 

 

3.35

 

 

 

24,672

 

 

 

28

 

 

 

0.45

 

Long-term borrowings

 

 

114,251

 

 

 

1,460

 

 

 

5.11

 

 

 

73,942

 

 

 

1,060

 

 

 

5.74

 

Total borrowings

 

 

259,784

 

 

 

2,662

 

 

 

4.16

 

 

 

98,614

 

 

 

1,088

 

 

 

4.47

 

Total interest-bearing liabilities

 

 

4,187,083

 

 

 

21,956

 

 

 

2.12

 

 

 

3,897,975

 

 

 

2,794

 

 

 

0.29

 

Noninterest-bearing demand deposits

 

 

1,064,754

 

 

 

 

 

 

 

 

 

1,083,506

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

174,014

 

 

 

 

 

 

 

 

 

86,983

 

 

 

 

 

 

 

Shareholders’ equity

 

 

417,935

 

 

 

 

 

 

 

 

 

491,852

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,843,786

 

 

 

 

 

 

 

 

$

5,560,316

 

 

 

 

 

 

 

Net interest income (tax-equivalent)

 

 

 

 

$

41,936

 

 

 

 

 

 

 

 

$

39,704

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

2.59

%

 

 

 

 

 

 

 

 

3.03

%

Net earning assets

 

$

1,298,943

 

 

 

 

 

 

 

 

$

1,268,982

 

 

 

 

 

 

 

Net interest margin (tax-equivalent)

 

 

 

 

 

 

 

 

3.09

%

 

 

 

 

 

 

 

 

3.11

%

Ratio of average interest-earning assets to average
   interest-bearing liabilities

 

 

 

 

 

 

 

 

131.02

%

 

 

 

 

 

 

 

 

132.55

%

 

(1) Investment securities are shown at amortized cost.

(2) The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.

(3) Annualized.

45


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

(4) Loans include net unearned income, net deferred loan fees and costs and non-accruing loans. Net deferred loan fees (costs) included in interest income were as follows (in thousands):

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Commercial business

 

$

(1

)

 

$

969

 

Commercial mortgage

 

 

548

 

 

 

376

 

Residential real estate loans

 

 

(404

)

 

 

(504

)

Residential real estate lines

 

 

(74

)

 

 

(73

)

Consumer indirect

 

 

(537

)

 

 

(425

)

Other consumer

 

 

 

 

 

5

 

Total

 

$

(468

)

 

$

348

 

The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands). No out-of-period adjustments were included in the rate/volume analysis.

 

 

 

Three months ended
March 31, 2023 vs. 2022

 

Increase (decrease) in:

 

Volume

 

 

Rate

 

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-earning deposits

 

$

11

 

 

$

587

 

 

$

598

 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

 

(408

)

 

 

522

 

 

 

114

 

Tax-exempt

 

 

(164

)

 

 

46

 

 

 

(118

)

Total investment securities

 

 

(572

)

 

 

568

 

 

 

(4

)

Loans:

 

 

 

 

 

 

 

 

 

Commercial business

 

 

431

 

 

 

4,797

 

 

 

5,228

 

Commercial mortgage

 

 

3,433

 

 

 

9,429

 

 

 

12,862

 

Residential real estate loans

 

 

73

 

 

 

351

 

 

 

424

 

Residential real estate lines

 

 

(9

)

 

 

633

 

 

 

624

 

Consumer indirect

 

 

638

 

 

 

1,012

 

 

 

1,650

 

Other consumer

 

 

16

 

 

 

(4

)

 

 

12

 

Total loans

 

 

4,582

 

 

 

16,218

 

 

 

20,800

 

Total interest income

 

 

4,021

 

 

 

17,373

 

 

 

21,394

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

(14

)

 

 

1,130

 

 

 

1,116

 

Savings and money market

 

 

(130

)

 

 

5,899

 

 

 

5,769

 

Time deposits

 

 

457

 

 

 

10,246

 

 

 

10,703

 

Total interest-bearing deposits

 

 

313

 

 

 

17,275

 

 

 

17,588

 

Short-term borrowings

 

 

930

 

 

 

244

 

 

 

1,174

 

Long-term borrowings

 

 

525

 

 

 

(125

)

 

 

400

 

Total borrowings

 

 

1,455

 

 

 

119

 

 

 

1,574

 

Total interest expense

 

 

1,768

 

 

 

17,394

 

 

 

19,162

 

Net interest income

 

$

2,253

 

 

$

(21

)

 

$

2,232

 

Provision for Credit Losses

The provision for credit losses for the first quarter of 2023 was $4.2 million, compared to $2.3 million for the first quarter of 2022. Loan loss provision reflected the impact of an increase in the national unemployment forecast and qualitative factors reflecting economic uncertainty associated with higher interest rates. The increase in provision for credit losses in the first quarter of 2023 was primarily driven by higher loan growth and net charge-offs in comparison to the first quarter of 2022.

See the “Allowance for Credit Losses – Loans” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion.

46


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Noninterest Income

The following table details the major categories of noninterest income for the periods presented (in thousands):

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Service charges on deposits

 

$

1,027

 

 

$

1,369

 

Insurance income

 

 

2,087

 

 

 

2,097

 

Card interchange income

 

 

1,939

 

 

 

1,952

 

Investment advisory

 

 

2,923

 

 

 

3,041

 

Company owned life insurance

 

 

994

 

 

 

833

 

Investments in limited partnerships

 

 

251

 

 

 

795

 

Loan servicing

 

 

146

 

 

 

109

 

Income from derivative instruments, net

 

 

496

 

 

 

519

 

Net gain (loss) on sale of loans held for sale

 

 

112

 

 

 

(91

)

Net gain on other assets

 

 

39

 

 

 

 

Net loss on tax credit investments

 

 

(201

)

 

 

(227

)

Other

 

 

1,111

 

 

 

925

 

Total noninterest income

 

$

10,924

 

 

$

11,322

 

Service charges on deposits decreased $342 thousand to $1.0 million for the first quarter of 2023 compared to $1.4 million for first quarter of 2022 due to a reduction in nonsufficient funds fees as a result of January 2023 changes in the Bank’s consumer overdraft program that align with trends in community banking.

Investments in limited partnerships income decreased $544 thousand to $251 thousand for the first quarter of 2023 compared to $795 thousand for first quarter of 2022. The Company has made several investments in limited partnerships, primarily small business investment companies, and accounts for these investments under the equity method. Income from these investments fluctuates based on the maturity and performance of the underlying investments.

Net gain (loss) on sale of loans held for sale was a net gain of $112 thousand for the first quarter of 2023 compared to a net loss of $91 thousand for the first quarter of 2022. The net loss in the first quarter of 2022 was a result of the fair market value of pipeline commitments at that time, negatively impacted by interest rates.

Noninterest Expense

The following table details the major categories of noninterest expense for the periods presented (in thousands):

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Salaries and employee benefits

 

$

18,133

 

 

$

16,616

 

Occupancy and equipment

 

 

3,730

 

 

 

3,756

 

Professional services

 

 

1,495

 

 

 

1,656

 

Computer and data processing

 

 

4,691

 

 

 

3,979

 

Supplies and postage

 

 

490

 

 

 

541

 

FDIC assessments

 

 

1,115

 

 

 

513

 

Advertising and promotions

 

 

314

 

 

 

380

 

Amortization of intangibles

 

 

234

 

 

 

254

 

Other

 

 

3,459

 

 

 

2,440

 

Total noninterest expense

 

$

33,661

 

 

$

30,135

 

 

Salaries and employee benefits expense increased $1.5 million, or 9%, to $18.1 million for the first quarter of 2023 compared to $16.6 million for the first quarter of 2022. The increase in salaries and employee benefits expense was primarily the result of investments in personnel and hourly wage pressures driven by the competitive labor market.

Computer and data processing expense increased $712 thousand, or 18%, to $4.7 million for the first quarter of 2023 compared to $4.0 million for the first quarter of 2022. The increase was primarily due to the timing of our strategic investments in technology, including digital banking initiatives, a customer relationship management solution across all lines of business, and Banking as a Service, or BaaS, initiatives.

FDIC assessments expense increased $602 thousand to $1.1 million for the first quarter of 2023 compared to $513 thousand for the first quarter of 2022, due in part to the impact of an increase in the base deposit insurance assessment rate schedules by 2-basis points.

47


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Other expense increased $1.0 million, or 42%, to $3.5 million for the first quarter of 2023 compared to $2.4 million for the first quarter of 2022. The increase was due to a combination of factors, including interest charges related to collateral held for derivative transactions, the timing of deposit account-related fraud charge-offs, higher insurance costs and the impact of inflationary pressures.

Our efficiency ratio for the first quarter of 2023 was 63.68% compared with 59.06% for the first quarter of 2022. The higher efficiency ratio was primarily the result of an increase in noninterest expense in 2023 as described above, coupled with the $1.1 million decline in interest and fee income in connection with PPP loans in 2023 versus 2022. The efficiency ratio is calculated by dividing total noninterest expense by net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains on investment securities. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease indicates a more efficient allocation of resources. The efficiency ratio, a banking industry financial measure, is not required by GAAP. However, the efficiency ratio is used by management in its assessment of financial performance specifically as it relates to noninterest expense control. Management also believes such information is useful to investors in evaluating Company performance.

Income Taxes

For the first quarter of 2023, we recorded income tax expense of $2.8 million, versus $3.4 million for the first quarter of 2022. In the first quarter of 2023, we recognized federal and state tax benefits related to tax credit investments placed in service resulting in a reduction in income tax expense of $584 thousand, versus $589 thousand for the same period in the prior year.

Our effective tax rate was 18.7% for both the first quarter of 2023 and 2022. Effective tax rates are typically impacted by items of income and expense that are not subject to federal or state taxation. Our effective tax rates reflect the impact of these items, which include, but are not limited to, interest income from tax-exempt securities, earnings on company owned life insurance and the impact of tax credit investments. In addition, our effective tax rate for 2023 and 2022 reflects the New York State tax benefit generated by our real estate investment trust.

ANALYSIS OF FINANCIAL CONDITION

INVESTING ACTIVITIES

Investment Securities

The following table summarizes the composition of our investment securities portfolio as of the dates indicated (in thousands):

 

 

 

Investment Securities Portfolio Composition

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government-sponsored enterprise securities

 

$

24,535

 

 

$

21,658

 

 

$

24,535

 

 

$

21,115

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

 

1,079,316

 

 

 

923,442

 

 

 

1,102,522

 

 

 

932,919

 

Non-Agency mortgage-backed securities

 

 

 

 

 

342

 

 

 

 

 

 

337

 

Total available for sale securities

 

 

1,103,851

 

 

 

945,442

 

 

 

1,127,057

 

 

 

954,371

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government-sponsored enterprise securities

 

 

16,400

 

 

 

15,856

 

 

 

16,363

 

 

 

15,515

 

State and political subdivisions

 

 

93,678

 

 

 

87,698

 

 

 

97,583

 

 

 

90,435

 

Mortgage-backed securities

 

 

69,979

 

 

 

64,258

 

 

 

75,034

 

 

 

68,238

 

Total held to maturity securities

 

 

180,057

 

 

 

167,812

 

 

 

188,980

 

 

 

174,188

 

Allowance for credit losses – securities

 

 

(5

)

 

 

 

 

 

(5

)

 

 

 

Total held to maturity securities, net

 

 

180,052

 

 

 

 

 

 

188,975

 

 

 

 

Total investment securities

 

$

1,283,903

 

 

$

1,113,254

 

 

$

1,316,032

 

 

$

1,128,559

 

 

Our available for sale (“AFS”) investment securities portfolio decreased $23.2 million from December 31, 2022 to March 31, 2023. The AFS portfolio had a net unrealized loss of $158.4 million at March 31, 2023 and $172.7 million at December 31, 2022, respectively. The decline in the portfolio balance was primarily the result of the use of portfolio cash flow to fund loan originations.

48


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Security Yields and Maturities Schedule

The following table sets forth certain information regarding the amortized cost (“Cost”), weighted average yields (“Yield”) and contractual maturities of our debt securities portfolio as of March 31, 2023. In this table, Yield is defined as the book yield weighted against the ending book value. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Actual maturities may differ from the contractual maturities presented because borrowers may have the right to call or prepay certain investments. No tax-equivalent adjustments were made to the weighted average yields (dollars in thousands).

 

 

 

Due in one year or less

 

 

Due from one to five years

 

 

Due after five years through ten years

 

 

Due after
ten years

 

 

Total

 

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

Available for sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government-sponsored enterprises

 

$

 

 

 

0.00

%

 

$

15,000

 

 

 

1.70

%

 

$

9,535

 

 

 

1.90

%

 

$

 

 

 

 

 

$

24,535

 

 

 

1.78

%

Mortgage-backed securities

 

 

6

 

 

 

3.33

 

 

 

79,972

 

 

 

2.24

 

 

 

126,834

 

 

 

2.04

 

 

 

872,504

 

 

 

1.72

 

 

 

1,079,316

 

 

 

1.80

 

 

 

 

6

 

 

 

3.33

 

 

 

94,972

 

 

 

2.16

 

 

 

136,369

 

 

 

2.03

 

 

 

872,504

 

 

 

1.72

 

 

 

1,103,851

 

 

 

1.80

 

Held to maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government-sponsored enterprises

 

$

 

 

 

0.00

%

 

$

 

 

 

0.00

%

 

$

16,400

 

 

 

3.20

%

 

$

 

 

 

0.00

%

 

$

16,400

 

 

 

3.20

%

State and political subdivisions

 

 

29,635

 

 

 

2.29

 

 

 

37,431

 

 

 

1.85

 

 

 

5,005

 

 

 

1.62

 

 

 

21,607

 

 

 

2.45

 

 

 

93,678

 

 

 

2.11

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

4,370

 

 

 

2.23

 

 

 

17,739

 

 

 

2.48

 

 

 

47,870

 

 

 

2.65

 

 

 

69,979

 

 

 

2.58

 

 

 

29,635

 

 

 

2.29

 

 

 

41,801

 

 

 

1.89

 

 

 

39,144

 

 

 

2.67

 

 

 

69,477

 

 

 

2.58

 

 

 

180,057

 

 

 

2.39

 

Total investment securities

 

$

29,641

 

 

 

2.29

%

 

$

136,773

 

 

 

2.07

%

 

$

175,513

 

 

 

2.17

%

 

$

941,981

 

 

 

1.79

%

 

$

1,283,908

 

 

 

1.88

%

 

Impairment Assessment

For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. For the three months ended March 31, 2023 and 2022 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.

49


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

LENDING ACTIVITIES

The following table summarizes the composition of our loan portfolio, excluding loans held for sale and including net unearned income and net deferred fees and costs, as of the dates indicated (dollars in thousands).

 

 

 

Loan Portfolio Composition

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Amount

 

 

% of
Total

 

 

Amount

 

 

% of
Total

 

Commercial business

 

$

695,110

 

 

 

16.4

%

 

$

664,249

 

 

 

16.4

%

Commercial mortgage

 

 

1,841,481

 

 

 

43.4

 

 

 

1,679,840

 

 

 

41.5

 

Total commercial

 

 

2,536,591

 

 

 

59.8

 

 

 

2,344,089

 

 

 

57.9

 

Residential real estate loans

 

 

591,846

 

 

 

13.9

 

 

 

589,960

 

 

 

14.5

 

Residential real estate lines

 

 

76,086

 

 

 

1.8

 

 

 

77,670

 

 

 

1.9

 

Consumer indirect

 

 

1,022,202

 

 

 

24.1

 

 

 

1,023,620

 

 

 

25.3

 

Other consumer

 

 

16,607

 

 

 

0.4

 

 

 

15,110

 

 

 

0.4

 

Total consumer

 

 

1,706,741

 

 

 

40.2

 

 

 

1,706,360

 

 

 

42.1

 

Total loans

 

 

4,243,332

 

 

 

100.0

%

 

 

4,050,449

 

 

 

100.0

%

Less: Allowance for credit losses – loans

 

 

47,528

 

 

 

 

 

 

45,413

 

 

 

 

Total loans, net

 

$

4,195,804

 

 

 

 

 

$

4,005,036

 

 

 

 

 

Total loans increased $192.9 million to $4.24 billion at March 31, 2023 from $4.05 billion at December 31, 2022. The increase in loans was primarily attributable to our organic growth initiatives.

Total commercial loans increased $192.5 million during the first three months of 2023 to $2.54 billion and represented 59.8% of total loans as of March 31, 2023. The increase was primarily a result of our continued commercial business development efforts.

Total consumer loans increased $381 thousand to $1.71 billion and represented 40.2% of total loans as of March 31, 2023. During the first three months of 2023, we originated $97.7 million in indirect automobile loans with a mix of approximately 25% new automobile loans and 75% used automobile loans. During the first three months of 2022, we originated $129.9 million in indirect automobile loans with a mix of approximately 25% new automobile and 75% used automobile loans. Origination volumes and mix of new and used vehicles financed fluctuate depending on general market conditions. Growth in the consumer indirect portfolio in the current period was primarily a result of increased customer demand for automobiles with the Company well-positioned to take advantage of the market opportunity given our deep history and experience in this line of business.

Our loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within our operating footprint. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At March 31, 2023, no significant concentrations, as defined above, existed in our portfolio in excess of 10% of total loans.

Loans Held for Sale and Loan Servicing Rights

Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled $682 thousand and $550 thousand as of March 31, 2023 and December 31, 2022, respectively.

We sell certain qualifying newly originated or refinanced residential real estate loans on the secondary market. Residential real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $273.4 million and $275.3 million as of March 31, 2023 and December 31, 2022, respectively.

Loan servicing rights totaled $1.5 million as of March 31, 2023 and December 31, 2022, and are included in other assets on our consolidated statements of financial condition.

50


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Allowance for Credit Losses – Loans

The following table summarizes the activity in the allowance for credit losses – loans for the periods indicated (dollars in thousands).

 

 

 

Credit Loss – Loans Analysis

 

 

 

Three months ended
March 31,

 

 

 

2023

 

 

2022

 

Allowance for credit losses – loans, beginning of period

 

$

45,413

 

 

$

39,676

 

Net charge-offs (recoveries):

 

 

 

 

 

 

Commercial business

 

 

(124

)

 

 

(37

)

Commercial mortgage

 

 

(2

)

 

 

(1

)

Residential real estate loans

 

 

58

 

 

 

(5

)

Residential real estate lines

 

 

16

 

 

 

(5

)

Consumer indirect

 

 

1,838

 

 

 

550

 

Other consumer

 

 

303

 

 

 

285

 

Total net charge-offs

 

 

2,089

 

 

 

787

 

Provision for credit losses – loans

 

 

4,204

 

 

 

2,077

 

Allowance for credit losses – loans, end of period

 

$

47,528

 

 

$

40,966

 

 

 

 

 

 

 

 

Net loan charge-offs (recoveries) to average loans:

 

 

 

 

 

 

Commercial business

 

 

-0.08

%

 

 

-0.02

%

Commercial mortgage

 

 

0.00

%

 

 

0.00

%

Residential real estate loans

 

 

0.04

%

 

 

0.00

%

Residential real estate lines

 

 

0.09

%

 

 

-0.03

%

Consumer indirect

 

 

0.73

%

 

 

0.23

%

Other consumer

 

 

8.10

%

 

 

7.95

%

Total loans

 

 

0.21

%

 

 

0.09

%

 

 

 

 

 

 

 

Allowance for credit losses – loans to total loans

 

 

1.12

%

 

 

1.10

%

Allowance for credit losses – loans to nonaccrual loans

 

 

540

%

 

 

514

%

Allowance for credit losses – loans to non-performing loans

 

 

540

%

 

 

426

%

Loans not analyzed for a specific reserve are segmented into “pools” of loans based upon similar risk characteristics. This is referred to as the “pooled loan” component of the allowance for credit losses estimate. The allowance for credit losses for pooled loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information. Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics such as changes in: underwriting standards, delinquency level, regulatory environment, economic condition, Company management and the status of portfolio administration including the Company’s Loan Review function. The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans, and other loans deemed appropriate by management, collectively referred to as collateral dependent loans. See Note 5. Loans, of the notes to the consolidated financial statements for further details on collateral dependent loans.

Assessing the adequacy of the allowance for credit losses – loans involves substantial uncertainties and is based upon management’s evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing a variety of factors, including the risk profile of our loan products and customers.

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

51


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Net charge-offs of $2.1 million in the first quarter of 2023 represented 0.21% of average loans on an annualized basis compared to net charge-offs of $787 thousand, or 0.09% of average loans for the first quarter of 2022. The allowance for credit losses – loans was $47.5 million at March 31, 2023, compared with $41.0 million at March 31, 2022. The ratio of the allowance for credit losses – loans to total loans was 1.12% and 1.10% at March 31, 2023 and March 31, 2022, respectively. The ratio of allowance for credit losses – loans to non-performing loans was 540% at March 31, 2023, compared with 426% at March 31, 2022.

The following table sets forth the allocation of the allowance for credit losses – loans by loan category as of the dates indicated (dollars in thousands). 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.

 

 

Allowance for Credit Losses – Loans by Loan Category

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

 

 

 

Percentage

 

 

 

 

 

Percentage

 

 

 

Credit

 

 

of loans by

 

 

Credit

 

 

of loans by

 

 

 

Loss

 

 

category to

 

 

Loss

 

 

category to

 

 

 

Allowance

 

 

total loans

 

 

Allowance

 

 

total loans

 

Commercial business

 

$

12,911

 

 

 

16.4

%

 

$

12,585

 

 

 

16.4

%

Commercial mortgage

 

 

15,195

 

 

 

43.4

 

 

 

14,412

 

 

 

41.5

 

Residential real estate loans

 

 

4,213

 

 

 

13.9

 

 

 

3,301

 

 

 

14.5

 

Residential real estate lines

 

 

651

 

 

 

1.8

 

 

 

608

 

 

 

1.9

 

Consumer indirect

 

 

14,117

 

 

 

24.1

 

 

 

14,238

 

 

 

25.3

 

Other consumer

 

 

441

 

 

 

0.4

 

 

 

269

 

 

 

0.4

 

Total

 

$

47,528

 

 

 

100.0

%

 

$

45,413

 

 

 

100.0

%

Non-Performing Assets and Potential Problem Loans

The table below summarizes our non-performing assets at the dates indicated (dollars in thousands).

 

 

 

Non-Performing Assets

 

 

 

March 31,
2023

 

 

December 31,
2022

 

Nonaccrual loans:

 

 

 

 

 

 

Commercial business

 

$

334

 

 

$

340

 

Commercial mortgage

 

 

2,550

 

 

 

2,564

 

Residential real estate loans

 

 

3,267

 

 

 

4,071

 

Residential real estate lines

 

 

159

 

 

 

142

 

Consumer indirect

 

 

2,487

 

 

 

3,079

 

Other consumer

 

 

 

 

 

1

 

Total nonaccrual loans

 

 

8,797

 

 

 

10,197

 

Accruing loans 90 days or more delinquent

 

 

4

 

 

 

1

 

Total non-performing loans

 

 

8,801

 

 

 

10,198

 

Foreclosed assets

 

 

101

 

 

 

19

 

Total non-performing assets

 

$

8,902

 

 

$

10,217

 

 

 

 

 

 

 

 

Nonaccrual loans to total loans

 

 

0.21

%

 

 

0.25

%

Non-performing loans to total loans

 

 

0.21

%

 

 

0.25

%

Non-performing assets to total assets

 

 

0.15

%

 

 

0.18

%

 

 

Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at March 31, 2023 were $8.9 million, a decrease of $1.3 million from the $10.2 million balance at December 31, 2022. The primary component of non-performing assets is non-performing loans, which were $8.8 million or 0.21% of total loans at March 31, 2023, down from $10.2 million or 0.25% of total loans at December 31, 2022 primarily due to pay-downs or payments received and applied to principal for the non-performing loans.

Approximately $1.2 million, or 14%, of the $8.8 million in non-performing loans as of March 31, 2023 were current with respect to payment of principal and interest but were classified as non-accruing because repayment in full of principal and/or interest was uncertain.

Foreclosed assets consist of real property formerly pledged as collateral for loans, which we have acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. We had $101 thousand and $19 thousand of properties representing foreclosed asset holdings at March 31, 2023 and December 31, 2022, respectively.

52


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Potential problem loans are loans that are currently performing, but information known about possible credit problems of the borrowers causes us to have concern as to the ability of such borrowers to comply with the present loan payment terms and may result in disclosure of such loans as nonperforming at some time in the future. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and/or personal or government guarantees. We consider loans classified as substandard, which continue to accrue interest, to be potential problem loans. We identified $25.8 million and $22.7 million in loans that continued to accrue interest which were classified as substandard as of March 31, 2023 and December 31, 2022, respectively.

Contractual Loan Maturity Schedule

The following table summarizes the contractual maturities of our loan portfolio at March 31, 2023. Loans, net of deferred loan origination costs, include principal amortization and non-accruing loans. Demand loans having no stated schedule of repayment or maturity and overdrafts as reported as due in one year or less (in thousands).

 

 

Due in less
than one
year

 

 

Due from
one to
five years

 

 

Due from
five to
fifteen years

 

 

Due after
fifteen years

 

 

Total

 

Commercial business

 

$

179,114

 

 

$

261,526

 

 

$

9,085

 

 

$

245,385

 

 

$

695,110

 

Commercial mortgage

 

 

541,754

 

 

 

969,660

 

 

 

328,493

 

 

 

1,574

 

 

 

1,841,481

 

Residential real estate loans

 

 

73,819

 

 

 

224,174

 

 

 

278,481

 

 

 

15,372

 

 

 

591,846

 

Residential real estate lines

 

 

1,481

 

 

 

6,857

 

 

 

27,432

 

 

 

40,316

 

 

 

76,086

 

Consumer indirect (1)

 

 

429,586

 

 

 

592,616

 

 

 

 

 

 

 

 

 

1,022,202

 

Other consumer

 

 

7,102

 

 

 

8,564

 

 

 

884

 

 

 

57

 

 

 

16,607

 

Total loans

 

$

1,232,856

 

 

$

2,063,397

 

 

$

644,375

 

 

$

302,704

 

 

$

4,243,332

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans maturing after one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With a predetermined interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

 

 

$

88,473

 

 

$

3,234

 

 

$

14,098

 

 

$

105,805

 

Commercial mortgage

 

 

 

 

 

501,062

 

 

 

161,659

 

 

 

414

 

 

 

663,135

 

Residential real estate loans

 

 

 

 

 

194,308

 

 

 

252,954

 

 

 

13,180

 

 

 

460,442

 

Residential real estate lines

 

 

 

 

 

12

 

 

 

36

 

 

 

 

 

 

48

 

Consumer indirect (1)

 

 

 

 

 

592,616

 

 

 

 

 

 

 

 

 

592,616

 

Other consumer

 

 

 

 

 

8,564

 

 

 

884

 

 

 

57

 

 

 

9,505

 

With a floating or adjustable rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

 

 

 

173,053

 

 

 

5,851

 

 

 

231,287

 

 

 

410,191

 

Commercial mortgage

 

 

 

 

 

468,598

 

 

 

166,834

 

 

 

1,160

 

 

 

636,592

 

Residential real estate loans

 

 

 

 

 

29,866

 

 

 

25,527

 

 

 

2,192

 

 

 

57,585

 

Residential real estate lines

 

 

 

 

 

6,845

 

 

 

27,396

 

 

 

40,316

 

 

 

74,557

 

Consumer indirect (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans maturing after one year

 

 

 

 

$

2,063,397

 

 

$

644,375

 

 

$

302,704

 

 

$

3,010,476

 

_________

(1) Amounts include prepayment assumptions based on actual historical experience.

FUNDING ACTIVITIES

Deposits

The following table summarizes the composition of our deposits at the dates indicated (dollars in thousands):

 

 

 

Deposit Composition

 

 

 

March 31, 2023

 

 

December 31, 2022

 

 

 

Amount

 

 

% of
Total

 

 

Amount

 

 

% of
Total

 

Noninterest-bearing demand

 

$

1,067,011

 

 

 

20.8

%

 

$

1,139,214

 

 

 

23.1

%

Interest-bearing demand

 

 

901,251

 

 

 

17.5

%

 

 

863,822

 

 

 

17.5

%

Savings and money market

 

 

1,701,663

 

 

 

33.1

%

 

 

1,643,516

 

 

 

33.4

%

Time deposits

 

 

1,471,382

 

 

 

28.6

%

 

 

1,282,872

 

 

 

26.0

%

Total deposits

 

$

5,141,307

 

 

 

100.0

%

 

$

4,929,424

 

 

 

100.0

%

 

53


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

As of March 31, 2023 and December 31, 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $2.17 billion and $2.05 billion, respectively. The portion of our time deposits by account that were in excess of the FDIC insurance limit was $294.6 million and $258.7 million at March 31, 2023 and December 31, 2022, respectively. The maturities of our uninsured time deposits at March 31, 2023 were as follows: $138.3 million in three months or less; $82.9 million between three months and six months; $61.6 million between six months and one year; and $11.8 million over one year.

We offer a variety of deposit products designed to attract and retain customers, with the primary focus on building and expanding long-term relationships. At March 31, 2023, total deposits were $5.14 billion, representing an increase of $211.9 million from December 31, 2022. The increase was primarily the result of seasonally higher public deposits and an increase in reciprocal deposits. Time deposits were approximately 29% and 26% of total deposits at March 31, 2023 and December 31, 2022, respectively.

Non-public deposits, the largest component of our funding sources, totaled $2.79 billion and $2.77 billion at March 31, 2023 and December 31, 2022, respectively, and represented 54% and 56% of total deposits as of each date, respectively. We have managed this segment of funding through a strategy of competitive pricing that minimizes the number of customer relationships that have only a single service high-cost deposit account.

As an additional source of funding, we offer a variety of public (municipal) deposit products to the towns, villages, counties and school districts within our market area. Public deposits generally range from 20% to 30% of our total deposits. There is a high degree of seasonality in this component of funding, because the level of deposits varies with the seasonal cash flows for these public customers. We maintain the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits. Total public deposits were $1.18 billion and $1.12 billion at March 31, 2023 and December 31, 2022, respectively, and represented 23% of total deposits as of each date. The increase in public deposits as of March 31, 2023 in comparison to December 31, 2022 was due largely to seasonality.

We also participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Prior to the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) enacted on May 14, 2018, all reciprocal deposits were considered brokered deposits for regulatory reporting purposes. With the enactment of EGRRCPA, reciprocal deposits, subject to certain restrictions, are no longer required to be reported as brokered deposits. Reciprocal deposits totaled $779.0 million at March 31, 2023, compared to $696.1 million at December 31, 2022, representing 15% and 14% of total deposits as of each date, respectively.

Brokered deposits totaled $395.0 million and $347.2 million at March 31, 2023 and December 31, 2022, respectively, and represented 8% and 7% of total deposits as of each date, respectively.

Borrowings

The Company classifies borrowings as short-term or long-term in accordance with the original terms of the applicable agreement. Outstanding borrowings consisted of the following as of the dates indicated (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Short-term borrowings – FHLB

 

$

116,000

 

 

$

205,000

 

 

 

 

 

 

 

 

Long-term borrowings – FHLB

 

 

50,000

 

 

 

-

 

Long-term borrowings – Subordinated notes, net

 

 

74,299

 

 

 

74,222

 

Total long-term borrowings

 

 

124,299

 

 

 

74,222

 

Total borrowings

 

$

240,299

 

 

$

279,222

 

 

Short-term Borrowings

Short-term Federal Home Loan Bank (“FHLB”) borrowings have original maturities of less than one year and include overnight borrowings which we typically utilize to address short term funding needs as they arise. Short-term FHLB borrowings at March 31, 2023 and December 31, 2022 consisted of $116.0 million and $205.0 million in short-term borrowings, respectively. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits. $50 million of the short-term borrowings balance at March 31, 2023 is designated as a cash-flow hedge, which became effective in April 2022, at a fixed rate of 0.787% and $30 million of the short-term borrowings balance at March 31, 2023 is designated as a cash-flow hedge, which became effective in January 2023, at a fixed rate of 3.669%.

54


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements. We had approximately $253.1 million of immediate credit capacity with the FHLB as of March 31, 2023. We had approximately $592.4 million in secured borrowing capacity at the Federal Reserve Bank (“FRB”) discount window, none of which was outstanding at March 31, 2023. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans. We had $145.0 million of credit available under unsecured federal funds purchased lines with various banks as of both March 31, 2023 and December 31, 2022. Additionally, we had approximately $215.6 million of unencumbered liquid securities available for pledging at March 31, 2023.

The Parent has a revolving line of credit with a commercial bank allowing borrowings up to $20.0 million in total as an additional source of working capital. At March 31, 2023, no amounts have been drawn on the line of credit.

Long-term Borrowings

As of March 31, 2023 we had a long-term advance payable to FHLB of $50.0 million. The advance matures on January 20, 2026 and bears interest at a fixed rate of 4.05%. FHLB advances are collateralized by securities from our investment portfolio and certain qualifying loans.

On October 7, 2020, we completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes to qualified institutional buyers and accredited institutional investors that were subsequently exchanged for subordinated notes with substantially the same terms (the “2020 Notes”) registered under the Securities Act of 1933, as amended. The 2020 Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 4.265%, payable quarterly until maturity. The 2020 Notes are redeemable by us, in whole or in part, on any interest payment date on or after October 15, 2025, and we may redeem the Notes in whole at any time upon certain other specified events. We used the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank. Proceeds, net of debt issuance costs of $740 thousand, were $34.3 million. The 2020 Notes qualify as Tier 2 capital for regulatory purposes.

On April 15, 2015, we issued $40.0 million of subordinated notes (the “2015 Notes”) in a registered public offering. The 2015 Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to the April 15, 2030 maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month London Interbank Offered Rate (“LIBOR”) plus 3.944%, payable quarterly. After the discontinuance of LIBOR, the interest rate will be determined by an alternate method as reasonably selected by the Company. The 2015 Notes are redeemable by us at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. Proceeds, net of debt issuance costs of $1.1 million, were $38.9 million. The 2015 Notes qualify as Tier 2 capital for regulatory purposes.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity

We continue to actively monitor our liquidity profile and funding concentrations in accordance with our Board approved Liquidity Policy. While funding pressures have not occurred, management is actively monitoring customer activity by way of commercial and consumer line of credit utilization, as well as deposit flows. As of March 31, 2023, all structural liquidity ratios and early warning indicators remain in compliance, with what we believe are ample funding sources available in the event of a stress scenario.

The objective of maintaining adequate liquidity is to assure that we meet our financial obligations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of matured borrowings, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. We achieve liquidity by maintaining a strong base of both core customer funds and maturing short-term assets; we also rely on our ability to sell or pledge securities and lines-of-credit and our overall ability to access to the financial and capital markets.

Liquidity for the Bank is managed through the monitoring of anticipated changes in loans, the investment portfolio, deposits and wholesale funds. The strength of the Bank’s liquidity position is a result of its base of core customer deposits. These core deposits are supplemented by wholesale funding sources that include credit lines with other banking institutions, the FHLB, the FRB Discount Window and newly-established Bank Term Funding Program, and brokered deposit relationships. The primary source of our non-deposit short-term borrowings is FHLB advances, of which we had $116.0 million outstanding at March 31, 2023. In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately $990.5 million as of March 31, 2023 from various funding sources which include the FHLB, the FRB and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position.

The Parent’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of non-bank subsidiaries, repurchases of our stock, and acquisitions. The Parent obtains funding to meet obligations from dividends received from the Bank, net taxes collected from subsidiaries included in the federal consolidated tax return, and the issuance of debt and equity securities. In addition, the Parent maintains a revolving line of credit with a commercial bank for an aggregate amount of up to $20.0 million, all of which was available at March 31, 2023. The line of credit has a one-year term and matures in May 2023. Funds drawn would be used for general corporate purposes and backup liquidity.

55


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Cash and cash equivalents were $140.0 million as of March 31, 2023, up $9.5 million from $130.5 million as of December 31, 2022. Net cash provided by operating activities totaled $6.6 million and the principal source of operating activity cash flow was net income adjusted for noncash income and expense items. Net cash used in investing activities totaled $164.6 million, which included outflows of $195.0 million for net loan originations, partially offset by $31.3 million net cash provided from investment securities. Net cash provided by financing activities of $167.5 million was primarily attributed to a $211.9 million net increase in deposits, and a $50.0 million net increase in long-term borrowings, partially offset by an $89.0 million net decrease in short-term borrowings, and $4.8 million in dividend payments.

 

Capital Management

We actively manage capital, commensurate with our risk profile, to enhance shareholder value. We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory “well-capitalized” thresholds. Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.

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

Shareholders’ equity was $422.8 million at March 31, 2023, an increase of $17.2 million from $405.6 million at December 31, 2022. Accumulated other comprehensive loss included in shareholders’ equity decreased $10.1 million during the three months ended March 31, 2023 due primarily to a decrease in net unrealized losses on securities available for sale. Net income for the three months ended March 31, 2023 increased shareholders’ equity by $12.1 million, offset by common and preferred stock dividends declared of $5.0 million.

The FRB and FDIC have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies. As of March 31, 2023, the Company’s capital levels remained characterized as “well-capitalized” under the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks.

56


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The following table reflects the ratios and their components (dollars in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2023

 

 

2022

 

Common shareholders’ equity

 

$

409,800

 

 

$

394,716

 

Less: Goodwill and other intangible assets

 

 

70,377

 

 

 

70,643

 

Net unrealized loss on investment securities (1)

 

 

(117,820

)

 

 

(128,440

)

Hedging derivative instruments

 

 

4,072

 

 

 

4,735

 

Net periodic pension and postretirement benefits plan adjustments

 

 

(13,444

)

 

 

(13,588

)

Other

 

 

(180

)

 

 

(194

)

Common Equity Tier 1 (“CET1”) Capital

 

 

466,795

 

 

 

461,560

 

Plus: Preferred stock

 

 

17,292

 

 

 

17,292

 

Less: Other

 

 

 

 

 

 

Tier 1 Capital

 

 

484,087

 

 

 

478,852

 

Plus: Qualifying allowance for credit losses

 

 

45,905

 

 

 

40,895

 

Subordinated Notes

 

 

74,299

 

 

 

74,222

 

Total regulatory capital

 

$

604,291

 

 

$

593,969

 

Adjusted average total assets (for leverage capital purposes)

 

$

5,913,677

 

 

$

5,748,203

 

Total risk-weighted assets

 

$

5,066,864

 

 

$

4,896,451

 

 

 

 

 

 

 

 

Regulatory Capital Ratios

 

 

 

 

 

 

Tier 1 Leverage (Tier 1 capital to adjusted average assets)

 

 

8.19

%

 

 

8.33

%

CET1 Capital (CET1 capital to total risk-weighted assets)

 

 

9.21

%

 

 

9.42

%

Tier 1 Capital (Tier 1 capital to total risk-weighted assets)

 

 

9.55

%

 

 

9.78

%

Total Risk-Based Capital (Total regulatory capital to total risk-weighted assets)

 

 

11.93

%

 

 

12.13

%

 

(1) Includes unrealized gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category.

 

We have elected to apply the 2020 Current Expected Credit Losses (“CECL”) transition provision related to the impact of the CECL accounting standard on regulatory capital, as provided by the US banking agencies’ March 2020 interim final rule. Under the 2020 CECL transition provision, the regulatory capital impact of the Day 1 adjustment to the allowance for credit losses (after-tax) upon the January 1, 2020 CECL adoption date has been deferred, and has begun to phase into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, we were allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020, and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020, and December 31, 2021, also began to phase into regulatory capital at 25% per year commencing January 1, 2022.

Basel III Capital Rules

Under the Basel III Capital Rules, the current minimum capital ratios, including an additional capital conservation buffer applicable to the Company and the Bank, are:

7.0% CET1 to risk-weighted assets;
8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and
10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.

Banking institutions with a capital conservation buffer below the minimum level will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank. Strict eligibility criteria for regulatory capital instruments were also implemented under the Basel III Capital Rules.

57


MANAGEMENT’S DISCUSSION AND ANALYSIS

 

The following table presents actual and required capital ratios as of March 31, 2023 and December 31, 2022 for the Company and the Bank under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, under the Basel III Capital Rules (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Required to be

 

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Considered Well

 

 

 

Actual

 

 

Required – Basel III

 

 

Capitalized

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

484,087

 

 

 

8.19

%

 

$

236,547

 

 

 

4.00

%

 

$

295,684

 

 

 

5.00

%

Bank

 

 

529,541

 

 

 

8.97

 

 

 

236,085

 

 

 

4.00

 

 

 

295,106

 

 

 

5.00

 

CET1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

466,795

 

 

 

9.21

 

 

 

354,680

 

 

 

7.00

 

 

 

329,346

 

 

 

6.50

 

Bank

 

 

529,541

 

 

 

10.48

 

 

 

353,831

 

 

 

7.00

 

 

 

328,557

 

 

 

6.50

 

Tier 1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

484,087

 

 

 

9.55

 

 

 

430,683

 

 

 

8.50

 

 

 

405,349

 

 

 

8.00

 

Bank

 

 

529,541

 

 

 

10.48

 

 

 

429,651

 

 

 

8.50

 

 

 

404,378

 

 

 

8.00

 

Total capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

604,291

 

 

 

11.93

 

 

 

532,021

 

 

 

10.50

 

 

 

506,686

 

 

 

10.00

 

Bank

 

 

575,446

 

 

 

11.38

 

 

 

530,746

 

 

 

10.50

 

 

 

505,472

 

 

 

10.00

 

December 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

478,853

 

 

 

8.33

%

 

$

229,928

 

 

 

4.00

%

 

$

287,410

 

 

 

5.00

%

Bank

 

 

525,997

 

 

 

9.17

 

 

 

229,434

 

 

 

4.00

 

 

 

286,793

 

 

 

5.00

 

CET1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

461,560

 

 

 

9.42

 

 

 

342,852

 

 

 

7.00

 

 

 

318,363

 

 

 

6.50

 

Bank

 

 

525,997

 

 

 

10.77

 

 

 

341,944

 

 

 

7.00

 

 

 

317,520

 

 

 

6.50

 

Tier 1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

478,853

 

 

 

9.78

 

 

 

416,321

 

 

 

8.50

 

 

 

391,831

 

 

 

8.00

 

Bank

 

 

525,997

 

 

 

10.77

 

 

 

415,218

 

 

 

8.50

 

 

 

390,794

 

 

 

8.00

 

Total capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

593,969

 

 

 

12.13

 

 

 

514,278

 

 

 

10.50

 

 

 

489,789

 

 

 

10.00

 

Bank

 

 

566,891

 

 

 

11.60

 

 

 

512,917

 

 

 

10.50

 

 

 

488,492

 

 

 

10.00

 

 

Dividend Restrictions

In the ordinary course of business, the Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.

58


 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to the potential impact on earnings or capital arising from movements in interest rates. The Bank’s market risk management framework has been developed to control both short-term and long-term exposure within Board approved policy limits and is monitored by the Asset-Liability Management Committee and Board of Directors. Quantitative and qualitative disclosures about market risk were presented at December 31, 2022 in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission on March 9, 2023. The following is an update of the discussion provided therein.

Portfolio Composition

There was no material change in the composition of assets, deposit liabilities or borrowings from December 31, 2022 to March 31, 2023. See the section titled “Analysis of Financial Condition” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of asset, deposit and borrowing activity during the period.

Net Interest Income at Risk

A primary tool used to manage interest rate risk is “rate shock” simulation to measure the rate sensitivity. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on net interest income as well as economic value of equity.

Net interest income at risk is measured 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. The following table sets forth the estimated changes to net interest income over the 12-month period ending March 31, 2024 assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):

 

 

 

Changes in Interest Rate

 

 

 

-100 bp

 

 

+100 bp

 

 

+200 bp

 

 

+300 bp

 

Estimated change in net interest income

 

$

(822

)

 

$

(812

)

 

$

(1,622

)

 

$

(2,435

)

% Change

 

 

-0.50

%

 

 

-0.50

%

 

 

-1.00

%

 

 

-1.49

%

 

In the rising rate scenarios, the static model results indicate that net interest income is modeled to increase compared to the flat rate scenario over a one-year time frame. This is a result of the increasing of the funding curve in shorter maturities driving up the funding costs for wholesale, municipal, and reciprocal deposits, which were used to fund loan growth on a quarter-over-quarter basis. This simulation does not consider balance sheet growth or a change in the balance sheet mix. As intermediate and longer-term assets continue to mature and are replaced at higher yields, net interest income should improve over longer-term time frames. Model results in the declining rate scenario also indicate decreases in net interest income due to assets having the ability to reprice downward near full market rate shocks, while deposit and borrowing liabilities have the ability to reprice downward but reach modeled floors.

In addition to the changes in interest rate scenarios listed above, other scenarios are typically modeled to measure interest rate risk. These scenarios vary depending on the economic and interest rate environment. Furthermore, given the static balance sheet approach, retained earnings are considered to be reinvested in a non-interest earning asset.

The simulation referenced above is based on our 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 future results, does not measure the effect of changing interest rates on noninterest income and is based on many assumptions that, if changed, could cause a different outcome.

59


 

Economic Value of Equity At Risk

The economic (or “fair”) value of financial instruments on our balance sheet will also vary under the interest rate scenarios previously discussed. This variance is measured by simulating changes in our economic value of equity (“EVE”), which is calculated by subtracting the estimated fair value of liabilities from the estimated fair value of assets. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at current replacement rates for each account type, while fair values of non-financial assets and liabilities are assumed to equal book value and do not vary with interest rate fluctuations. An economic value simulation is a static measure for balance sheet accounts at a given point in time, but this measurement can change substantially over time as the characteristics of our balance sheet evolve and as interest rate and yield curve assumptions are updated.

The amount of change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including the stated interest rate or spread relative to current market rates or spreads, the likelihood of prepayment, whether the rate is fixed or floating, and the maturity date of the instrument. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical data (back-testing).

The analysis that follows presents the estimated EVE resulting from market interest rates prevailing at a given quarter-end (“Pre-Shock Scenario”), and under other interest rate scenarios (each a “Rate Shock Scenario”) represented by immediate, permanent, parallel shifts in interest rates from those observed at March 31, 2023 and December 31, 2022 (dollars in thousands). The analysis additionally presents a measurement of the interest rate sensitivity at March 31, 2023 and December 31, 2022. EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock Scenario. An increase in the EVE amount is considered favorable, while a decline is considered unfavorable. The following table sets forth the estimated changes to EVE assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):

 

 

 

March 31, 2023

 

 

December 31, 2022

 

Rate Shock Scenario:

 

EVE

 

 

Change

 

 

Percentage
Change

 

 

EVE

 

 

Change

 

 

Percentage
Change

 

Pre-Shock Scenario

 

$

812,173

 

 

 

 

 

 

 

 

$

848,308

 

 

 

 

 

 

 

- 100 Basis Points

 

 

809,189

 

 

$

(2,984

)

 

 

-0.37

%

 

 

851,921

 

 

$

3,613

 

 

 

0.43

%

+100 Basis Points

 

 

803,678

 

 

 

(8,495

)

 

 

-1.05

 

 

 

838,462

 

 

 

(9,846

)

 

 

-1.16

 

+ 200 Basis Points

 

 

800,198

 

 

 

(11,975

)

 

 

-1.47

 

 

 

832,558

 

 

 

(15,750

)

 

 

-1.86

 

+ 300 Basis Points

 

 

796,354

 

 

 

(15,819

)

 

 

-1.95

 

 

 

825,826

 

 

 

(22,482

)

 

 

-2.65

 

 

The decrease in the Pre-Shock Scenario EVE at March 31, 2023 compared to December 31, 2022 is the result of a deposit mix shift from non-maturity, non-public to time reciprocal, and municipal deposits. The deposits don’t receive as much deposit valuation increase in comparison to non-maturity, non-public deposits. The sensitivity in the +100 basis point Rate Shock Scenario to EVE stayed relatively flat at March 31, 2023 compared to December 31, 2022. This is a result of non-maturity deposit valuation being similar to last quarter, while asset mix also remained similar to last quarter, resulting in a minimal variance on a quarter-over-quarter basis.

60


 

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2023, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

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

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

61


 

PART II. OTHER INFORMATION

From time to time we are a party to or otherwise involved in legal proceedings arising out of the normal course of business. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense and settlement costs, unfavorable awards, diversion of management resources and other factors.

We are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs sought class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs sought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed. The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. We dispute and believe we have meritorious defenses against these claims and plan to vigorously defend ourselves.

On September 30, 2021, the Court granted plaintiffs’ motion for class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). There are approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes.

On September 26, 2022, the lower Court denied the plaintiffs’ motion for partial summary judgment for most of the relief they seek and found that there were questions of fact as to whether the members of the class had purchased the subject vehicles for “consumer use” within the meaning of the relevant statutes. The Court also denied our motion for partial summary judgment seeking an offset in the form of recoupment reducing any liability that may be imposed against us by the amounts that the borrowers owe for failing to repay their motor vehicle loans, determining that the Court could not enter a judgment on recoupment – which is a set off from liability – without first determining whether there was liability. Also pending with the lower Court is our motion to compel discovery.

On October 7, 2022, the Superior Court of Pennsylvania granted our December 20, 2021 Request for an Interlocutory Appeal of the denial of our motion to dismiss the claims brought by New York borrowers for lack of subject matter jurisdiction and lack of standing. The case is stayed until the appeal is briefed and decided by the Superior Court.

We have not accrued a contingent liability for this matter at this time because, given our defenses, we are unable to conclude whether a liability is probable to occur nor are we able to currently reasonably estimate the amount of potential loss.

If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our insurer. We can provide no assurances that our insurer will cover the full legal costs, settlements or judgments we incur. If we are unsuccessful in defending ourselves from these claims or if our insurer does not cover the full amount of legal costs we incur, the result may materially adversely affect our business, results of operations and financial condition.

62


 

ITEM 1A. Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. The risk factors set forth below also identify important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

Recent events involving the failure of three financial institutions may adversely affect our business, and the market price of our common stock.

Recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank, Signature Bank, and First Republic Bank that resulted in the failure of those institutions have resulted in decreased confidence in banks among depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These events and developments could materially and adversely impact our business or financial condition, including through potential liquidity pressures, reduced net interest margins, and potential increased credit losses. These recent events and developments have, and could continue to, adversely impact the market price and volatility of our common stock. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our businesses. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

Lawmakers’ failure to address the federal debt ceiling in a timely manner, downgrades of the U.S. credit rating and uncertain credit and financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may affect the valuation or liquidity of our investment securities portfolio and increase future borrowing costs.

As a result of uncertain political, credit and financial market conditions, including the potential consequences of the federal government defaulting on its obligations for a period of time due to federal debt ceiling limitations or other unresolved political issues, investments in financial instruments issued or guaranteed by the federal government pose credit default and liquidity risks. Given that future deterioration in the U.S. credit and financial markets is a possibility, no assurance can be made that losses or significant deterioration in the fair value of our U.S. government issued or guaranteed investments will not occur. At March 31, 2023, we had approximately $40.9 million and $1.15 billion invested in U.S. government agency securities and residential mortgage-backed securities issued or guaranteed by government-sponsored enterprises, respectively, and no investments in U.S. treasury securities. Downgrades to the U.S. credit rating could affect the stability of securities issued or guaranteed by the federal government and the valuation or liquidity of our portfolio of such investment securities, and could result in our counterparties requiring additional collateral for our borrowings. Further, unless and until U.S. political, credit and financial market conditions have been sufficiently resolved or stabilized, it may increase our future borrowing costs.

63


 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

In June 2022, the Company’s Board of Directors authorized a share repurchase program for up to 766,447 shares of common stock. The program will expire at the earlier of the completion of all share repurchases or a Board vote to retire the program.

The Company’s repurchases of its common stock during the first quarter of 2023 were as follows:

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number of Shares Purchased(1)

 

 

Average Price Paid Per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

 

January 1, 2023 - January 31, 2023

 

 

 

 

$

 

 

 

 

 

 

766,447

 

February 1, 2023 - February 28, 2023

 

 

 

 

 

 

 

 

 

 

 

766,447

 

March 1, 2023 - March 31, 2023

 

 

22,710

 

 

 

24.71

 

 

 

 

 

 

766,447

 

Total

 

 

22,710

 

 

$

24.71

 

 

 

 

 

 

766,447

 

(1)
This column reflects the deemed surrender to us of 22,710 shares of common stock to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units.

 

64


 

ITEM 6. Exhibits

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

 

Exhibit

Number

Description

Location

3.1

 

Amended and Restated Certificate of Incorporation of the Company

 

Incorporated by reference to Exhibits 3.1, 3.2 and 3.3 of the Form 10-K for the year ended December 31, 2008, dated March 12, 2009

3.2

 

Amended and Restated Bylaws of Financial Institutions, Inc.

 

Incorporated by reference to Exhibit 3.1 of the Form 8-K, dated June 25, 2019

31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Principal Executive Officer

Filed Herewith

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Principal Financial Officer

Filed Herewith

32

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

Filed Herewith

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

 

 

65


 

SIGNATURES

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

FINANCIAL INSTITUTIONS, INC.

 

 

/s/ Martin K. Birmingham

 

, May 8, 2023

Martin K. Birmingham

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

/s/ W. Jack Plants II

 

, May 8, 2023

W. Jack Plants II

 

 

Executive Vice President and Chief Financial Officer and Treasurer

 

 

(Principal Financial Officer)

 

 

 

 

/s/ Sonia M. Dumbleton

 

, May 8, 2023

Sonia M. Dumbleton

 

 

Senior Vice President and Controller

 

 

(Principal Accounting Officer)

 

 

 

66