株探米国株
英語
エドガーで原本を確認する
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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, 2024

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 15,446,949 shares of Common Stock, $0.01 par value, outstanding as of April 30, 2024.

 

Table of Contents

 

FINANCIAL INSTITUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2024

TABLE OF CONTENTS

 

 

PAGE

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition (Unaudited) – at March 31, 2024 and December 31, 2023

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income (Unaudited) – Three months ended March 31, 2024 and 2023

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) – Three months ended March 31, 2024 and 2023

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) – Three months ended March 31, 2024 and 2023

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) – Three months ended March 31, 2024 and 2023

 

7

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

8

 

 

 

 

 

ITEM 2.

 

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

 

39

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

59

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

60

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

61

ITEM 1A.

 

Risk Factors

 

61

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

 

62

 

 

 

 

 

ITEM 5.

 

Other Information

 

62

 

 

 

 

 

ITEM 6.

 

Exhibits

 

63

 

 

 

 

 

 

 

Signatures

 

64

 

 

 

 

 

 

 

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,
2024

 

 

December 31,
2023

 

ASSETS

 

 

 

 

 

 

Cash and due from banks

 

$

237,038

 

 

$

124,442

 

Securities available for sale, at fair value (amortized cost of $1,083,669 and $1,037,990, respectively)

 

 

923,761

 

 

 

887,730

 

Securities held to maturity, at amortized cost (net of allowance for credit losses of $3 and $4, respectively) (fair value of $131,269 and $137,030, respectively)

 

 

143,714

 

 

 

148,156

 

Loans held for sale

 

 

504

 

 

 

1,370

 

Loans (net of allowance for credit losses of $43,075 and $51,082, respectively)

 

 

4,398,971

 

 

 

4,411,057

 

Company owned life insurance

 

 

162,685

 

 

 

161,363

 

Premises and equipment, net

 

 

39,798

 

 

 

39,902

 

Goodwill and other intangible assets, net

 

 

72,287

 

 

 

72,504

 

Other assets

 

 

319,840

 

 

 

314,357

 

Total assets

 

$

6,298,598

 

 

$

6,160,881

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing demand

 

$

972,801

 

 

$

1,010,614

 

Interest-bearing demand

 

 

798,831

 

 

 

713,158

 

Savings and money market

 

 

2,064,539

 

 

 

2,084,444

 

Time deposits

 

 

1,560,586

 

 

 

1,404,696

 

Total deposits

 

 

5,396,757

 

 

 

5,212,912

 

Short-term borrowings

 

 

133,000

 

 

 

185,000

 

Long-term borrowings, net of issuance costs of $390 and $468, respectively

 

 

124,610

 

 

 

124,532

 

Other liabilities

 

 

198,497

 

 

 

183,641

 

Total liabilities

 

 

5,852,864

 

 

 

5,706,085

 

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

 

 

124,627

 

 

 

125,841

 

Retained earnings

 

 

448,772

 

 

 

451,687

 

Accumulated other comprehensive loss

 

 

(126,264

)

 

 

(119,941

)

Treasury stock, at cost – 652,607 and 692,150 shares, respectively

 

 

(18,854

)

 

 

(20,244

)

Total shareholders’ equity

 

 

445,734

 

 

 

454,796

 

Total liabilities and shareholders’ equity

 

$

6,298,598

 

 

$

6,160,881

 

 

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,

 

 

 

2024

 

 

2023

 

Interest income:

 

 

 

 

 

 

Interest and fees on loans

 

$

70,333

 

 

$

57,098

 

Interest and dividends on investment securities

 

 

6,095

 

 

 

6,057

 

Other interest income

 

 

1,985

 

 

 

616

 

Total interest income

 

 

78,413

 

 

 

63,771

 

Interest expense:

 

 

 

 

 

 

Deposits

 

 

35,238

 

 

 

19,294

 

Short-term borrowings

 

 

1,529

 

 

 

1,202

 

Long-term borrowings

 

 

1,564

 

 

 

1,460

 

Total interest expense

 

 

38,331

 

 

 

21,956

 

Net interest income

 

 

40,082

 

 

 

41,815

 

(Benefit) provision for credit losses

 

 

(5,456

)

 

 

4,214

 

Net interest income after (benefit) provision for credit losses

 

 

45,538

 

 

 

37,601

 

Noninterest income:

 

 

 

 

 

 

Service charges on deposits

 

 

1,077

 

 

 

1,027

 

Insurance income

 

 

2,134

 

 

 

2,087

 

Card interchange income

 

 

1,902

 

 

 

1,939

 

Investment advisory

 

 

2,582

 

 

 

2,923

 

Company owned life insurance

 

 

1,298

 

 

 

994

 

Investments in limited partnerships

 

 

342

 

 

 

251

 

Loan servicing

 

 

175

 

 

 

146

 

Income from derivative instruments, net

 

 

174

 

 

 

496

 

Net gain on sale of loans held for sale

 

 

88

 

 

 

112

 

Net (loss) gain on other assets

 

 

(13

)

 

 

39

 

Net loss on tax credit investments

 

 

(375

)

 

 

(201

)

Other

 

 

1,517

 

 

 

1,111

 

Total noninterest income

 

 

10,901

 

 

 

10,924

 

Noninterest expense:

 

 

 

 

 

 

Salaries and employee benefits

 

 

17,340

 

 

 

18,133

 

Occupancy and equipment

 

 

3,752

 

 

 

3,730

 

Professional services

 

 

2,372

 

 

 

1,495

 

Computer and data processing

 

 

5,386

 

 

 

4,691

 

Supplies and postage

 

 

475

 

 

 

490

 

FDIC assessments

 

 

1,295

 

 

 

1,115

 

Advertising and promotions

 

 

297

 

 

 

314

 

Amortization of intangibles

 

 

217

 

 

 

234

 

Deposit-related charged-off items

 

 

19,179

 

 

 

323

 

Other

 

 

3,700

 

 

 

3,136

 

Total noninterest expense

 

 

54,013

 

 

 

33,661

 

Income before income taxes

 

 

2,426

 

 

 

14,864

 

Income tax expense

 

 

356

 

 

 

2,775

 

Net income

 

$

2,070

 

 

$

12,089

 

Preferred stock dividends

 

 

365

 

 

 

365

 

Net income available to common shareholders

 

$

1,705

 

 

$

11,724

 

Earnings per common share (Note 2):

 

 

 

 

 

 

Basic

 

$

0.11

 

 

$

0.76

 

Diluted

 

$

0.11

 

 

$

0.76

 

Cash dividends declared per common share

 

$

0.30

 

 

$

0.30

 

 

See accompanying notes to the consolidated financial statements.

4

Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

 

(Dollars in thousands)

 

Three months ended
March 31,

 

 

 

2024

 

 

2023

 

Net income

 

$

2,070

 

 

$

12,089

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

Securities available for sale and transferred securities

 

 

(7,164

)

 

 

10,634

 

Hedging derivative instruments

 

 

675

 

 

 

(663

)

Pension and post-retirement obligations

 

 

166

 

 

 

144

 

Total other comprehensive (loss) income, net of tax

 

 

(6,323

)

 

 

10,115

 

Comprehensive (loss) income

 

$

(4,253

)

 

$

22,204

 

 

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, 2024 and 2023

 

(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, 2023

 

$

17,292

 

 

$

161

 

 

$

125,841

 

 

$

451,687

 

 

$

(119,941

)

 

$

(20,244

)

 

$

454,796

 

Comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,070

 

 

 

—

 

 

 

—

 

 

 

2,070

 

Other comprehensive income, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(6,323

)

 

 

—

 

 

 

(6,323

)

Purchases of common stock for treasury

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(393

)

 

 

(393

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

569

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

569

 

Restricted stock units released

 

 

—

 

 

 

—

 

 

 

(1,783

)

 

 

—

 

 

 

—

 

 

 

1,783

 

 

 

—

 

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

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,620

)

 

 

—

 

 

 

—

 

 

 

(4,620

)

Balance at March 31, 2024

 

$

17,292

 

 

$

161

 

 

$

124,627

 

 

$

448,772

 

 

$

(126,264

)

 

$

(18,854

)

 

$

445,734

 

 

 

(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 (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

12,089

 

 

 

—

 

 

 

—

 

 

 

12,089

 

Other comprehensive income (loss), 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

 

 

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,

 

 

 

2024

 

 

2023

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

2,070

 

 

$

12,089

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

2,027

 

 

 

2,068

 

Net amortization of premiums on securities

 

 

718

 

 

 

882

 

(Benefit) provision for credit losses

 

 

(5,456

)

 

 

4,214

 

Share-based compensation

 

 

569

 

 

 

551

 

Deferred income tax benefit

 

 

3,761

 

 

 

417

 

Proceeds from sale of loans held for sale

 

 

5,853

 

 

 

3,416

 

Originations of loans held for sale

 

 

(4,899

)

 

 

(3,436

)

Income on company owned life insurance

 

 

(1,298

)

 

 

(994

)

Net gain on sale of loans held for sale

 

 

(88

)

 

 

(112

)

Net loss (gain) on other assets

 

 

13

 

 

 

(39

)

(Increase) decrease in other assets

 

 

(6,240

)

 

 

8,319

 

Increase (decrease) in other liabilities

 

 

15,260

 

 

 

(20,813

)

Net cash provided by operating activities

 

 

12,290

 

 

 

6,562

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of investment securities:

 

 

 

 

 

 

Available for sale

 

 

(64,613

)

 

 

—

 

Held to maturity

 

 

(406

)

 

 

(898

)

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

 

 

 

 

 

 

Available for sale securities

 

 

18,298

 

 

 

22,461

 

Held to maturity

 

 

4,783

 

 

 

9,704

 

Net loan proceeds (originations)

 

 

16,972

 

 

 

(194,972

)

Net payments for company owned life insurance

 

 

(24

)

 

 

(12

)

Purchases of premises and equipment

 

 

(1,174

)

 

 

(848

)

Net cash used in investing activities

 

 

(26,164

)

 

 

(164,565

)

Cash flows from financing activities:

 

 

 

 

 

 

Net increase in deposits

 

 

183,845

 

 

 

211,883

 

Net decrease in short-term borrowings

 

 

(52,000

)

 

 

(89,000

)

Proceeds from long-term borrowings

 

 

—

 

 

 

50,000

 

Purchases of common stock for treasury

 

 

(393

)

 

 

(561

)

Cash dividends paid to common and preferred shareholders

 

 

(4,982

)

 

 

(4,811

)

Net cash provided by financing activities

 

 

126,470

 

 

 

167,511

 

Net increase in cash and cash equivalents

 

 

112,596

 

 

 

9,508

 

Cash and cash equivalents, beginning of period

 

 

124,442

 

 

 

130,466

 

Cash and cash equivalents, end of period

 

$

237,038

 

 

$

139,974

 

 

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 (the “Bank”) and Courier Capital, LLC (“Courier 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, and indirect lending network relationships with franchised automobile dealers in the Capital District of New York. Effective January 1, 2024, the Company exited the Pennsylvania automobile market to align our focus more fully around its core Upstate New York market. The Company’s Banking-as-a-Service (“BaaS”) business offers banking capabilities to non-bank financial service providers and other financial technology firms (“FinTechs”), allowing them to provide banking services to their end users. These BaaS partnerships allow the Bank to offer banking services and products beyond our traditional footprint.

As of March 31, 2024, the Company’s fee-based subsidiaries included SDN Insurance Agency, LLC (“SDN”), which provided a broad range of insurance services to personal and business clients, and Courier Capital, which provides customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. On April 1, 2024, the Company announced and closed the sale of the assets of SDN to NFP Property & Casualty Services, Inc., a subsidiary of NFP Corp.

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 disclosures 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, 2023. 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’s 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, the carrying value of goodwill and deferred tax assets, and assumptions used in the defined benefit pension plan accounting.

Cash Flow Reporting

Supplemental cash flow information is summarized as follows for the three months ended March 31, 2024 and 2023 (in thousands):

 

 

 

2024

 

 

2023

 

Supplemental information:

 

 

 

 

 

 

Cash paid for interest

 

$

46,143

 

 

$

28,666

 

Cash paid for income taxes

 

 

—

 

 

 

1,134

 

Noncash investing and financing activities:

 

 

 

 

 

 

Real estate and other assets acquired in settlement of loans

 

 

142

 

 

 

101

 

Accrued and declared unpaid dividends

 

 

4,985

 

 

 

4,976

 

 

8

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

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

Fraudulent Activity

In early March 2024, the Company discovered fraudulent activity associated with deposit transactions conducted over the course of several business days by an in-market business customer of the Bank, which resulted in an $18.4 million pre-tax loss. The Bank is working with the appropriate law enforcement authorities in connection with this matter and is pursuing all legal recourse available to recover additional funds and minimize the loss. However, there can be no assurance that the Company will be able to recover any further offset to the deposit loss. The ultimate financial impact could be lower and will depend, in part, on the Bank’s success in its efforts to recover the funds.

The fraud exposure arose from non-contractual, external fraud, and was treated as an operational loss, recorded in deposit-related charged-off items, in noninterest expense for the first quarter of 2024.

Recent Accounting Pronouncements

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 requirements 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 adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Standards Not Yet Effective

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments expand the disclosure requirements of segment expenses, as well as adding disclosure of the title and position of the chief operation decision maker “CODM” and an explanation of how the CODM uses the reported measures of segment profit or loss in assessing segment performance and deciding how to allocate resources is also required. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The adoption of this guidance may require additional disclosure in the Company’s financial statement related to segments.

In December 2023, the FASB issued ASU 2023-09, Income Tax (Topic 740): Improvements to Income Tax Disclosures. The amendments expand the disclosure requirements of income taxes, primarily related to the income tax rate reconciliation and income taxes paid. The guidance also eliminates certain existing disclosure requirements related to uncertain tax positions and unrecognized deferred income tax liabilities. The amendments are effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

9

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(2.) 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,

 

 

 

2024

 

 

2023

 

Net income available to common shareholders

 

$

1,705

 

 

$

11,724

 

Weighted average common shares outstanding:

 

 

 

 

 

 

Total shares issued

 

 

16,100

 

 

 

16,100

 

Unvested restricted stock awards

 

 

(10

)

 

 

(6

)

Treasury shares

 

 

(687

)

 

 

(746

)

Total basic weighted average common shares outstanding

 

 

15,403

 

 

 

15,348

 

Incremental shares from assumed:

 

 

 

 

 

 

Vesting of restricted stock awards

 

 

140

 

 

 

87

 

Total diluted weighted average common shares outstanding

 

 

15,543

 

 

 

15,435

 

Basic earnings per common share

 

$

0.11

 

 

$

0.76

 

Diluted earnings per common share

 

$

0.11

 

 

$

0.76

 

 

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,

 

 

 

2024

 

 

2023

 

Restricted stock awards

 

 

—

 

 

 

3

 

 

10

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(3.) 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, 2024

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

24,535

 

 

$

—

 

 

$

2,783

 

 

$

21,752

 

U.S. Treasury Bills

 

 

64,698

 

 

 

—

 

 

 

1

 

 

 

64,697

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

440,860

 

 

 

—

 

 

 

65,445

 

 

 

375,415

 

Federal Home Loan Mortgage Corporation

 

 

393,249

 

 

 

292

 

 

 

64,018

 

 

 

329,523

 

Government National Mortgage Association

 

 

125,796

 

 

 

107

 

 

 

22,057

 

 

 

103,846

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

10,649

 

 

 

—

 

 

 

2,313

 

 

 

8,336

 

Federal Home Loan Mortgage Corporation

 

 

19,413

 

 

 

—

 

 

 

4,229

 

 

 

15,184

 

Government National Mortgage Association

 

 

4,469

 

 

 

142

 

 

 

—

 

 

 

4,611

 

Privately issued

 

 

—

 

 

 

397

 

 

 

—

 

 

 

397

 

Total mortgage-backed securities

 

 

994,436

 

 

 

938

 

 

 

158,062

 

 

 

837,312

 

Total available for sale securities

 

$

1,083,669

 

 

$

938

 

 

$

160,846

 

 

$

923,761

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

16,551

 

 

$

—

 

 

$

674

 

 

$

15,877

 

State and political subdivisions

 

 

66,405

 

 

 

33

 

 

 

5,638

 

 

 

60,800

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

5,683

 

 

 

—

 

 

 

572

 

 

 

5,111

 

Federal Home Loan Mortgage Corporation

 

 

7,603

 

 

 

—

 

 

 

1,387

 

 

 

6,216

 

Government National Mortgage Association

 

 

19,736

 

 

 

—

 

 

 

2,071

 

 

 

17,665

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

10,851

 

 

 

—

 

 

 

876

 

 

 

9,975

 

Federal Home Loan Mortgage Corporation

 

 

13,450

 

 

 

—

 

 

 

980

 

 

 

12,470

 

Government National Mortgage Association

 

 

3,438

 

 

 

—

 

 

 

283

 

 

 

3,155

 

Total mortgage-backed securities

 

 

60,761

 

 

 

—

 

 

 

6,169

 

 

 

54,592

 

Total held to maturity securities

 

 

143,717

 

 

$

33

 

 

$

12,481

 

 

$

131,269

 

Allowance for credit losses – securities

 

 

(3

)

 

 

 

 

 

 

 

 

 

Total held to maturity securities, net

 

$

143,714

 

 

 

 

 

 

 

 

 

 

December 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government sponsored enterprises

 

$

24,535

 

 

$

—

 

 

$

2,724

 

 

$

21,811

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

449,418

 

 

 

—

 

 

 

61,219

 

 

 

388,199

 

Federal Home Loan Mortgage Corporation

 

 

402,399

 

 

 

488

 

 

 

59,665

 

 

 

343,222

 

Government National Mortgage Association

 

 

126,417

 

 

 

252

 

 

 

21,409

 

 

 

105,260

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

10,954

 

 

 

—

 

 

 

2,343

 

 

 

8,611

 

Federal Home Loan Mortgage Corporation

 

 

19,766

 

 

 

—

 

 

 

4,186

 

 

 

15,580

 

Government National Mortgage Association

 

 

4,501

 

 

 

221

 

 

 

—

 

 

 

4,722

 

Privately issued

 

 

—

 

 

 

325

 

 

 

—

 

 

 

325

 

Total mortgage-backed securities

 

 

1,013,455

 

 

 

1,286

 

 

 

148,822

 

 

 

865,919

 

Total available for sale securities

 

$

1,037,990

 

 

$

1,286

 

 

$

151,546

 

 

$

887,730

 

 

 

11

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(3.) INVESTMENT SECURITIES (Continued)

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

December 31, 2023 (continued)

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government sponsored enterprises

 

$

16,513

 

 

$

—

 

 

$

530

 

 

$

15,983

 

State and political subdivisions

 

 

68,854

 

 

 

34

 

 

 

5,106

 

 

 

63,782

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

5,729

 

 

 

—

 

 

 

467

 

 

 

5,262

 

Federal Home Loan Mortgage Corporation

 

 

7,648

 

 

 

—

 

 

 

1,269

 

 

 

6,379

 

Government National Mortgage Association

 

 

20,223

 

 

 

—

 

 

 

1,703

 

 

 

18,520

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

11,432

 

 

 

—

 

 

 

851

 

 

 

10,581

 

Federal Home Loan Mortgage Corporation

 

 

14,196

 

 

 

—

 

 

 

968

 

 

 

13,228

 

Government National Mortgage Association

 

 

3,565

 

 

 

—

 

 

 

270

 

 

 

3,295

 

Total mortgage-backed securities

 

 

62,793

 

 

 

—

 

 

 

5,528

 

 

 

57,265

 

Total held to maturity securities

 

 

148,160

 

 

$

34

 

 

$

11,164

 

 

$

137,030

 

Allowance for credit losses – securities

 

 

(4

)

 

 

 

 

 

 

 

 

 

Total held to maturity securities, net

 

$

148,156

 

 

 

 

 

 

 

 

 

 

 

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, 2024 and December 31, 2023, respectively. For held to maturity (“HTM”) debt securities, AIR totaled $783 thousand and $571 thousand as of March 31, 2024 and December 31, 2023, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.

For the three months ended March 31, 2024 and 2023, provision for credit loss for HTM investment securities was less than $1 thousand in each period.

Investment securities with a total fair value of $1.02 billion and $845.2 million at March 31, 2024 and December 31, 2023, 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, 2024 and 2023.

The scheduled maturities of securities available for sale and securities held to maturity at March 31, 2024 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

 

$

64,727

 

 

$

64,726

 

Due from one to five years

 

 

40,836

 

 

 

37,238

 

Due after five years through ten years

 

 

131,967

 

 

 

116,668

 

Due after ten years

 

 

846,139

 

 

 

705,129

 

Total available for sale securities

 

$

1,083,669

 

 

$

923,761

 

Debt securities held to maturity:

 

 

 

 

 

 

Due in one year or less

 

$

25,506

 

 

$

25,331

 

Due from one to five years

 

 

28,882

 

 

 

28,036

 

Due after five years through ten years

 

 

29,400

 

 

 

26,387

 

Due after ten years

 

 

59,929

 

 

 

51,515

 

Total held to maturity securities

 

$

143,717

 

 

$

131,269

 

 

12

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(3.) 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, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government
   sponsored enterprises

 

$

—

 

 

$

—

 

 

$

21,752

 

 

$

2,783

 

 

$

21,752

 

 

$

2,783

 

U.S. Treasury bills

 

 

64,697

 

 

 

1

 

 

 

—

 

 

 

—

 

 

 

64,697

 

 

 

1

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

—

 

 

 

—

 

 

 

375,415

 

 

 

65,445

 

 

 

375,415

 

 

 

65,445

 

Federal Home Loan Mortgage Corporation

 

 

—

 

 

 

—

 

 

 

303,577

 

 

 

64,018

 

 

 

303,577

 

 

 

64,018

 

Government National Mortgage Association

 

 

—

 

 

 

—

 

 

 

85,257

 

 

 

22,057

 

 

 

85,257

 

 

 

22,057

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

—

 

 

 

—

 

 

 

8,336

 

 

 

2,313

 

 

 

8,336

 

 

 

2,313

 

Federal Home Loan Mortgage Corporation

 

 

—

 

 

 

—

 

 

 

15,184

 

 

 

4,229

 

 

 

15,184

 

 

 

4,229

 

Government National Mortgage Association

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total mortgage-backed securities

 

 

—

 

 

 

—

 

 

 

787,769

 

 

 

158,062

 

 

 

787,769

 

 

 

158,062

 

Total available for sale securities

 

 

64,697

 

 

 

1

 

 

 

809,521

 

 

 

160,845

 

 

 

874,218

 

 

 

160,846

 

Total AFS debt securities with unrealized losses

 

$

64,697

 

 

$

1

 

 

$

809,521

 

 

$

160,845

 

 

$

874,218

 

 

$

160,846

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government
   sponsored enterprises

 

$

—

 

 

$

—

 

 

$

21,811

 

 

$

2,724

 

 

$

21,811

 

 

$

2,724

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

8

 

 

 

—

 

 

 

388,191

 

 

 

61,219

 

 

 

388,199

 

 

 

61,219

 

Federal Home Loan Mortgage Corporation

 

 

—

 

 

 

—

 

 

 

314,854

 

 

 

59,665

 

 

 

314,854

 

 

 

59,665

 

Government National Mortgage Association

 

 

—

 

 

 

—

 

 

 

86,475

 

 

 

21,409

 

 

 

86,475

 

 

 

21,409

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

—

 

 

 

—

 

 

 

8,611

 

 

 

2,343

 

 

 

8,611

 

 

 

2,343

 

Federal Home Loan Mortgage Corporation

 

 

—

 

 

 

—

 

 

 

15,580

 

 

 

4,186

 

 

 

15,580

 

 

 

4,186

 

Total mortgage-backed securities

 

 

8

 

 

 

—

 

 

 

813,711

 

 

 

148,822

 

 

 

813,719

 

 

 

148,822

 

Total available for sale securities

 

 

8

 

 

 

—

 

 

 

835,522

 

 

 

151,546

 

 

 

835,530

 

 

 

151,546

 

Total AFS debt securities with unrealized losses

 

$

8

 

 

$

—

 

 

$

835,522

 

 

$

151,546

 

 

$

835,530

 

 

$

151,546

 

 

 

13

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(3.) INVESTMENT SECURITIES (Continued)

The total number of AFS securities positions in the investment portfolio in an unrealized loss position was 201 at both March 31, 2024 and December 31, 2023. At March 31, 2024, the Company had positions in 197 investment securities with a fair value of $809.5 million and a total unrealized loss of $160.8 million that had been in a continuous unrealized loss position for more than 12 months. At March 31, 2024, there were a total of four securities positions in the Company’s investment portfolio with a fair value of $64.7 million and a total unrealized loss of $1 thousand that had been in a continuous unrealized loss position for less than 12 months. At December 31, 2023, the Company had a position in 198 investment securities with a fair value of $835.5 million and a total unrealized loss of $151.5 million that had been in a continuous unrealized loss position for more than 12 months. At December 31, 2023, there were a total of three securities positions in the Company’s investment portfolio with a fair value of $8 thousand and a total unrealized loss of less than $1 thousand 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 the Company’s portfolio fluctuates as market interest rates change.

Securities Available for Sale

As of March 31, 2024 and December 31, 2023, no allowance for credit losses had been recognized on AFS 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, the Company expects to recover the amortized cost basis of its investments and more than likely will not need to sell before the recovery period for operating purposes, with no impairment identified. As the portfolio is managed from a liquidity, earnings, and risk standpoint, sales from the AFS portfolio may be warranted based upon prevailing market factors. 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, 2024, $62.3 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $4.1 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating. Additionally, no municipal bonds were rated below investment grade. As of December 31, 2023, $64.6 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $4.2 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating, and no municipal bonds were rated below investment grade.

As of March 31, 2024 and December 31, 2023, 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)

 

(4.) 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, 2024

 

 

 

 

 

 

 

 

 

Commercial business

 

$

706,756

 

 

$

808

 

 

$

707,564

 

Commercial mortgage

 

 

2,048,580

 

 

 

(3,524

)

 

 

2,045,056

 

Residential real estate loans

 

 

635,849

 

 

 

12,311

 

 

 

648,160

 

Residential real estate lines

 

 

72,307

 

 

 

3,361

 

 

 

75,668

 

Consumer indirect

 

 

889,129

 

 

 

31,299

 

 

 

920,428

 

Other consumer

 

 

45,243

 

 

 

(73

)

 

 

45,170

 

Total

 

$

4,397,864

 

 

$

44,182

 

 

 

4,442,046

 

Allowance for credit losses – loans

 

 

 

 

 

 

 

 

(43,075

)

Total loans, net

 

 

 

 

 

 

 

$

4,398,971

 

December 31, 2023

 

 

 

 

 

 

 

 

 

Commercial business

 

$

734,947

 

 

$

753

 

 

$

735,700

 

Commercial mortgage

 

 

2,009,269

 

 

 

(3,950

)

 

 

2,005,319

 

Residential real estate loans

 

 

637,173

 

 

 

12,649

 

 

 

649,822

 

Residential real estate lines

 

 

73,972

 

 

 

3,395

 

 

 

77,367

 

Consumer indirect

 

 

915,723

 

 

 

33,108

 

 

 

948,831

 

Other consumer

 

 

45,167

 

 

 

(67

)

 

 

45,100

 

Total

 

$

4,416,251

 

 

$

45,888

 

 

 

4,462,139

 

Allowance for credit losses – loans

 

 

 

 

 

 

 

 

(51,082

)

Total loans, net

 

 

 

 

 

 

 

$

4,411,057

 

 

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $504 thousand and $1.4 million as of March 31, 2024 and December 31, 2023, respectively.

The Company sells 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 $268.7 million and $269.4 million as of March 31, 2024 and December 31, 2023, respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of March 31, 2024, and December 31, 2023, AIR for loans totaled $22.0 million and $21.8 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)

 

(4.) 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, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

2,950

 

 

$

—

 

 

$

—

 

 

$

2,950

 

 

$

5,956

 

 

$

697,850

 

 

$

706,756

 

 

$

315

 

Commercial mortgage

 

 

—

 

 

 

36

 

 

 

—

 

 

 

36

 

 

 

10,826

 

 

 

2,037,718

 

 

 

2,048,580

 

 

 

10,826

 

Residential real estate loans

 

 

1,481

 

 

 

—

 

 

 

—

 

 

 

1,481

 

 

 

6,797

 

 

 

627,571

 

 

 

635,849

 

 

 

6,797

 

Residential real estate lines

 

 

68

 

 

 

119

 

 

 

—

 

 

 

187

 

 

 

235

 

 

 

71,885

 

 

 

72,307

 

 

 

235

 

Consumer indirect

 

 

6,578

 

 

 

1,546

 

 

 

—

 

 

 

8,124

 

 

 

2,880

 

 

 

878,125

 

 

 

889,129

 

 

 

2,880

 

Other consumer

 

 

86

 

 

 

6

 

 

 

36

 

 

 

128

 

 

 

—

 

 

 

45,115

 

 

 

45,243

 

 

 

—

 

Total loans, gross

 

$

11,163

 

 

$

1,707

 

 

$

36

 

 

$

12,906

 

 

$

26,694

 

 

$

4,358,264

 

 

$

4,397,864

 

 

$

21,053

 

December 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

341

 

 

$

—

 

 

$

—

 

 

$

341

 

 

$

5,664

 

 

$

728,942

 

 

$

734,947

 

 

$

341

 

Commercial mortgage

 

 

5,900

 

 

 

727

 

 

 

—

 

 

 

6,627

 

 

 

10,563

 

 

 

1,992,079

 

 

 

2,009,269

 

 

 

10,563

 

Residential real estate loans

 

 

2,614

 

 

 

80

 

 

 

—

 

 

 

2,694

 

 

 

6,364

 

 

 

628,115

 

 

 

637,173

 

 

 

6,364

 

Residential real estate lines

 

 

163

 

 

 

20

 

 

 

—

 

 

 

183

 

 

 

221

 

 

 

73,568

 

 

 

73,972

 

 

 

221

 

Consumer indirect

 

 

16,128

 

 

 

3,204

 

 

 

—

 

 

 

19,332

 

 

 

3,814

 

 

 

892,577

 

 

 

915,723

 

 

 

3,814

 

Other consumer

 

 

122

 

 

 

27

 

 

 

21

 

 

 

170

 

 

 

13

 

 

 

44,984

 

 

 

45,167

 

 

 

13

 

Total loans, gross

 

$

25,268

 

 

$

4,058

 

 

$

21

 

 

$

29,347

 

 

$

26,639

 

 

$

4,360,265

 

 

$

4,416,251

 

 

$

21,316

 

 

There were $36 thousand and $21 thousand in consumer overdrafts which were past due greater than 90 days as of March 31, 2024 and December 31, 2023. 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, 2024 and 2023. Estimated interest income of $132 thousand and $122 thousand for the three months ended March 31, 2024 and 2023, 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, 2024 (in thousands):

 

 

Term Extension

 

 

 

Amortized Cost Basis

 

 

% of Total Loans

 

Loan Type

 

 

 

 

 

 

Commercial business

 

$

—

 

 

 

0.0

%

Commercial mortgage

 

 

—

 

 

 

0.0

%

Residential real estate loans

 

 

1,506

 

 

 

0.2

%

Residential real estate lines

 

 

—

 

 

 

0.0

%

Consumer indirect

 

 

—

 

 

 

0.0

%

Other consumer

 

 

—

 

 

 

0.0

%

Total

 

$

1,506

 

 

 

0.0

%

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 loans, which reduced monthly payment amount for the borrower.

 

16

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) LOANS (Continued)

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, 2024 (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

 

 

865

 

 

 

144

 

 

 

97

 

Residential real estate lines

 

 

-

 

 

 

-

 

 

 

-

 

Consumer indirect

 

 

-

 

 

 

-

 

 

 

-

 

Other consumer

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

865

 

 

$

144

 

 

$

97

 

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, 2024 and December 31, 2023 (in thousands):

 

 

Collateral type

 

 

 

 

 

 

 

 

 

Business assets

 

 

Real property

 

 

Total

 

 

Specific Reserve

 

March 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

7,260

 

 

$

5,000

 

 

$

12,260

 

 

$

2,314

 

Commercial mortgage

 

 

—

 

 

 

20,808

 

 

 

20,808

 

 

 

—

 

Total

 

$

7,260

 

 

$

25,808

 

 

$

33,068

 

 

$

2,314

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

8,698

 

 

$

5,000

 

 

$

13,698

 

 

$

2,198

 

Commercial mortgage

 

 

—

 

 

 

26,575

 

 

 

26,575

 

 

 

559

 

Total

 

$

8,698

 

 

$

31,575

 

 

$

40,273

 

 

$

2,757

 

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.

17

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) LOANS (Continued)

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

 

 

 

 

 

 

 

 

 

 

 

 

2024

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

March 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

7,337

 

 

$

107,289

 

 

$

96,821

 

 

$

75,632

 

 

$

39,515

 

 

$

74,444

 

 

$

277,930

 

 

$

—

 

 

$

678,968

 

Special mention

 

 

—

 

 

 

7,023

 

 

 

—

 

 

 

2,310

 

 

 

—

 

 

 

950

 

 

 

2,379

 

 

 

—

 

 

 

12,662

 

Substandard

 

 

57

 

 

 

1,243

 

 

 

10

 

 

 

105

 

 

 

27

 

 

 

6

 

 

 

8,570

 

 

 

—

 

 

 

10,018

 

Doubtful

 

 

—

 

 

 

—

 

 

 

5,041

 

 

 

—

 

 

 

—

 

 

 

633

 

 

 

242

 

 

 

—

 

 

 

5,916

 

Total Commercial Business loans

 

$

7,394

 

 

$

115,555

 

 

$

101,872

 

 

$

78,047

 

 

$

39,542

 

 

$

76,033

 

 

$

289,121

 

 

$

—

 

 

$

707,564

 

Current period gross write-offs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

17

 

 

$

—

 

 

$

—

 

 

$

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

25,656

 

 

$

364,635

 

 

$

629,850

 

 

$

317,407

 

 

$

209,655

 

 

$

429,008

 

 

$

—

 

 

$

—

 

 

$

1,976,211

 

Special mention

 

 

—

 

 

 

—

 

 

 

4,716

 

 

 

17,414

 

 

 

6,825

 

 

 

17,417

 

 

 

—

 

 

 

—

 

 

 

46,372

 

Substandard

 

 

—

 

 

 

—

 

 

 

—

 

 

 

212

 

 

 

895

 

 

 

10,541

 

 

 

—

 

 

 

—

 

 

 

11,648

 

Doubtful

 

 

—

 

 

 

1,394

 

 

 

333

 

 

 

4,098

 

 

 

13

 

 

 

4,987

 

 

 

—

 

 

 

—

 

 

 

10,825

 

Total Commercial Mortgage loans

 

$

25,656

 

 

$

366,029

 

 

$

634,899

 

 

$

339,131

 

 

$

217,388

 

 

$

461,953

 

 

$

—

 

 

$

—

 

 

$

2,045,056

 

Current period gross write-offs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

 

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

 

December 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

111,035

 

 

$

124,572

 

 

$

77,079

 

 

$

49,531

 

 

$

21,971

 

 

$

64,648

 

 

$

257,585

 

 

$

—

 

 

$

706,421

 

Special mention

 

 

7,532

 

 

 

—

 

 

 

2,400

 

 

 

—

 

 

 

114

 

 

 

—

 

 

 

2,442

 

 

 

—

 

 

 

12,488

 

Substandard

 

 

1,609

 

 

 

11

 

 

 

81

 

 

 

—

 

 

 

—

 

 

 

888

 

 

 

8,532

 

 

 

—

 

 

 

11,121

 

Doubtful

 

 

—

 

 

 

5,097

 

 

 

—

 

 

 

—

 

 

 

14

 

 

 

397

 

 

 

162

 

 

 

—

 

 

 

5,670

 

Total

 

$

120,176

 

 

$

129,680

 

 

$

79,560

 

 

$

49,531

 

 

$

22,099

 

 

$

65,933

 

 

$

268,721

 

 

$

—

 

 

$

735,700

 

Current period gross write-offs

 

$

—

 

 

$

5

 

 

$

3

 

 

$

31

 

 

$

8

 

 

$

235

 

 

$

—

 

 

$

—

 

 

$

282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

350,370

 

 

$

603,686

 

 

$

328,916

 

 

$

209,213

 

 

$

151,022

 

 

$

294,703

 

 

$

—

 

 

$

—

 

 

$

1,937,910

 

Special mention

 

 

—

 

 

 

494

 

 

 

17,136

 

 

 

8,982

 

 

 

119

 

 

 

11,355

 

 

 

—

 

 

 

—

 

 

 

38,086

 

Substandard

 

 

—

 

 

 

338

 

 

 

212

 

 

 

918

 

 

 

—

 

 

 

17,291

 

 

 

—

 

 

 

—

 

 

 

18,759

 

Doubtful

 

 

1,397

 

 

 

—

 

 

 

4,098

 

 

 

14

 

 

 

67

 

 

 

4,988

 

 

 

—

 

 

 

—

 

 

 

10,564

 

Total

 

$

351,767

 

 

$

604,518

 

 

$

350,362

 

 

$

219,127

 

 

$

151,208

 

 

$

328,337

 

 

$

—

 

 

$

—

 

 

$

2,005,319

 

 

18

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) 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

 

 

 

 

 

 

 

 

 

 

 

 

2024

 

 

2023

 

 

2022

 

 

2021

 

 

2020

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

March 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

8,514

 

 

$

114,423

 

 

$

79,271

 

 

$

78,727

 

 

$

107,364

 

 

$

253,064

 

 

$

—

 

 

$

—

 

 

$

641,363

 

Non-performing

 

 

—

 

 

 

298

 

 

 

522

 

 

 

1,084

 

 

 

1,427

 

 

 

3,466

 

 

 

—

 

 

 

—

 

 

 

6,797

 

Total Residential Real Estate Loans

 

$

8,514

 

 

$

114,721

 

 

$

79,793

 

 

$

79,811

 

 

$

108,791

 

 

$

256,530

 

 

$

—

 

 

$

—

 

 

$

648,160

 

Current period gross write-offs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

70,458

 

 

$

4,975

 

 

$

75,433

 

Non-performing

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

73

 

 

 

162

 

 

 

235

 

Total Residential Real Estate Lines

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

70,531

 

 

$

5,137

 

 

$

75,668

 

Current period gross write-offs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Indirect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

54,006

 

 

$

234,715

 

 

$

310,666

 

 

$

210,874

 

 

$

68,800

 

 

$

38,487

 

 

$

—

 

 

$

—

 

 

$

917,548

 

Non-performing

 

 

—

 

 

 

566

 

 

 

969

 

 

 

882

 

 

 

294

 

 

 

169

 

 

 

—

 

 

 

—

 

 

 

2,880

 

Total Consumer Indirect Loans

 

$

54,006

 

 

$

235,281

 

 

$

311,635

 

 

$

211,756

 

 

$

69,094

 

 

$

38,656

 

 

$

—

 

 

$

—

 

 

$

920,428

 

Current period gross write-offs

 

$

—

 

 

$

1,357

 

 

$

2,245

 

 

$

1,422

 

 

$

504

 

 

$

689

 

 

$

—

 

 

$

—

 

 

$

6,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

1,924

 

 

$

35,157

 

 

$

3,489

 

 

$

1,228

 

 

$

751

 

 

$

385

 

 

$

2,200

 

 

$

—

 

 

$

45,134

 

Non-performing

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

36

 

 

 

—

 

 

 

36

 

Total Other Consumer Loans

 

$

1,924

 

 

$

35,157

 

 

$

3,489

 

 

$

1,228

 

 

$

751

 

 

$

385

 

 

$

2,236

 

 

$

—

 

 

$

45,170

 

Current period gross write-offs

 

$

93

 

 

$

42

 

 

$

75

 

 

$

7

 

 

$

16

 

 

$

4

 

 

$

32

 

 

$

—

 

 

$

269

 

 

 

19

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) LOANS (Continued)

 

 

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

 

December 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

112,704

 

 

$

80,117

 

 

$

80,323

 

 

$

109,601

 

 

$

70,325

 

 

$

190,388

 

 

$

—

 

 

$

—

 

 

$

643,458

 

Non-performing

 

 

—

 

 

 

384

 

 

 

1,190

 

 

 

1,354

 

 

 

1,137

 

 

 

2,299

 

 

 

—

 

 

 

—

 

 

 

6,364

 

Total

 

$

112,704

 

 

$

80,501

 

 

$

81,513

 

 

$

110,955

 

 

$

71,462

 

 

$

192,687

 

 

$

—

 

 

$

—

 

 

$

649,822

 

Current period gross write-offs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

32

 

 

$

95

 

 

$

—

 

 

$

—

 

 

$

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

72,128

 

 

$

5,018

 

 

$

77,146

 

Non-performing

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

55

 

 

 

166

 

 

 

221

 

Total

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

72,183

 

 

$

5,184

 

 

$

77,367

 

Current period gross write-offs

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

28

 

 

$

13

 

 

$

41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer Indirect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

247,194

 

 

$

336,369

 

 

$

232,891

 

 

$

78,652

 

 

$

31,091

 

 

$

18,820

 

 

$

—

 

 

$

—

 

 

$

945,017

 

Non-performing

 

 

724

 

 

 

1,083

 

 

 

1,273

 

 

 

380

 

 

 

224

 

 

 

130

 

 

 

—

 

 

 

—

 

 

 

3,814

 

Total

 

$

247,918

 

 

$

337,452

 

 

$

234,164

 

 

$

79,032

 

 

$

31,315

 

 

$

18,950

 

 

$

—

 

 

$

—

 

 

$

948,831

 

Current period gross write-offs

 

$

1,371

 

 

$

6,279

 

 

$

5,845

 

 

$

1,787

 

 

$

1,282

 

 

$

1,459

 

 

$

—

 

 

$

—

 

 

$

18,023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

35,483

 

 

$

3,990

 

 

$

1,424

 

 

$

949

 

 

$

217

 

 

$

256

 

 

$

2,747

 

 

$

—

 

 

$

45,066

 

Non-performing

 

 

13

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

21

 

 

 

—

 

 

 

34

 

Total

 

$

35,496

 

 

$

3,990

 

 

$

1,424

 

 

$

949

 

 

$

217

 

 

$

256

 

 

$

2,768

 

 

$

—

 

 

$

45,100

 

 

20

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) LOANS (Continued)

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, 2024 and 2023 (in thousands):

 

 

 

Commercial
Business

 

 

Commercial
Mortgage

 

 

Residential
Real Estate
Loans

 

 

Residential
Real Estate
Lines

 

 

Consumer
Indirect

 

 

Other
Consumer

 

 

Total

 

Three months ended March 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses – loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

13,102

 

 

$

15,858

 

 

$

5,286

 

 

$

764

 

 

$

14,099

 

 

$

1,973

 

 

$

51,082

 

Charge-offs

 

 

(17

)

 

 

—

 

 

 

(8

)

 

 

—

 

 

 

(6,217

)

 

 

(269

)

 

 

(6,511

)

Recoveries

 

 

54

 

 

 

1

 

 

 

4

 

 

 

—

 

 

 

3,244

 

 

 

87

 

 

 

3,390

 

(Benefit) provision

 

 

(148

)

 

 

(1,746

)

 

 

(652

)

 

 

30

 

 

 

(1,272

)

 

 

(1,098

)

 

 

(4,886

)

Ending balance

 

$

12,991

 

 

$

14,113

 

 

$

4,630

 

 

$

794

 

 

$

9,854

 

 

$

693

 

 

$

43,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

21

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.) 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, including inflation, 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 primarily unsecured or, in the case of some BaaS loans, secured by depreciable assets such as solar panels, and 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.

(5.) 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, 2024.

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

 

2024

 

 

2023

 

Operating Lease Right of Use Assets:

 

 

 

 

 

 

 

 

Gross carrying amount

 

Other assets

 

$

38,978

 

 

$

38,684

 

Accumulated amortization

 

Other assets

 

 

(7,594

)

 

 

(7,160

)

Net book value

 

 

 

$

31,384

 

 

$

31,524

 

 

 

 

 

 

 

 

 

 

Operating Lease Liabilities:

 

 

 

 

 

 

 

 

Right of use lease obligations

 

Other liabilities

 

$

33,680

 

 

$

33,788

 

 

The weighted average remaining lease term for operating leases was 20.4 years at March 31, 2024 and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.91%. 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)

 

(5.) LEASES (Continued)

The following table represents lease costs and other lease information:

 

 

 

Three months ended
March 31,

 

 

 

2024

 

 

2023

 

Lease costs:

 

 

 

 

 

 

Operating lease costs

 

$

774

 

 

$

776

 

Variable lease costs (1)

 

 

106

 

 

 

117

 

Sublease income

 

 

(30

)

 

 

(24

)

Net lease costs

 

$

850

 

 

$

869

 

 

 

 

 

 

 

 

Other information:

 

 

 

 

 

 

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

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

754

 

 

$

690

 

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

 

$

328

 

 

$

323

 

 

(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, 2024 (in thousands):

 

Twelve months ended March 31,

 

 

2024

$

2,231

 

2025

 

2,887

 

2026

 

2,733

 

2027

 

2,705

 

2028

 

2,421

 

Thereafter

 

37,013

 

Total future minimum operating lease payments

 

49,990

 

Amounts representing interest

 

(16,310

)

Present value of net future minimum operating lease payments

$

33,680

 

 

(6.) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill totaled $67.1 million as of both March 31, 2024 and December 31, 2023. 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. The Company performs its annual goodwill impairment test as of October 1. The Company did not identify an indication of goodwill impairment for any of its reporting units during the quarter ended March 31, 2024.

23

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(6.) GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

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,

 

 

 

2024

 

 

2023

 

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

 

 

(9,329

)

 

 

(9,112

)

Net book value

 

$

5,216

 

 

$

5,433

 

 

Amortization expense for total other intangible assets was $217 thousand and $234 thousand for the three months ended March 31, 2024 and 2023. As of March 31, 2024, the estimated amortization expense of other intangible assets for the remainder of 2024 and each of the next five years is as follows (in thousands):

 

2024 (remainder of year)

$

622

 

2025

 

766

 

2026

 

694

 

2027

 

623

 

2028

 

551

 

2029

 

479

 

Thereafter

 

1,481

 

Total

$

5,216

 

 

(7.) 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,

 

 

 

2024

 

 

2023

 

Other Assets:

 

 

 

 

 

 

Tax credit investments

 

$

66,593

 

 

$

68,253

 

Net deferred tax asset

 

 

47,150

 

 

 

48,733

 

Derivative instruments

 

 

51,229

 

 

 

43,506

 

Operating lease right of use assets

 

 

31,384

 

 

 

31,524

 

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock

 

 

15,042

 

 

 

17,406

 

Accrued interest receivable

 

 

24,914

 

 

 

24,481

 

Other

 

 

83,528

 

 

 

80,454

 

Total other assets

 

$

319,840

 

 

$

314,357

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Other Liabilities:

 

 

 

 

 

 

Collateral on derivative instruments

 

$

50,170

 

 

$

40,350

 

Derivative instruments

 

 

44,180

 

 

 

37,521

 

Operating lease right of use obligations

 

 

33,680

 

 

 

33,788

 

Accrued interest expense

 

 

27,224

 

 

 

19,412

 

Other

 

 

43,243

 

 

 

52,570

 

Total other liabilities

 

$

198,497

 

 

$

183,641

 

 

24

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(8.) 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. 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 at March 31, 2024 (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%

5/5/2023

 

5/5/2026

 

$

25,000

 

 

3.4615%

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 $2.9 million in accumulated other comprehensive loss related to derivatives will be reclassified as an increase 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)

 

(8.) 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, 2024 and December 31, 2023 (in thousands):

 

 

 

 

 

 

 

 

Asset derivatives

 

 

Liability derivatives

 

 

 

Gross notional
amount

 

 

 

 

Fair value

 

 

 

 

Fair value

 

 

 

March 31, 2024

 

 

December 31, 2023

 

 

Balance
sheet
line item

 

March 31, 2024

 

 

December 31, 2023

 

 

Balance
sheet
line item

 

March 31, 2024

 

 

December 31, 2023

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

105,000

 

 

$

105,000

 

 

Other assets

 

$

6,835

 

 

$

5,939

 

 

Other liabilities

 

$

—

 

 

$

—

 

Total derivatives

 

$

105,000

 

 

$

105,000

 

 

 

 

$

6,835

 

 

$

5,939

 

 

 

 

$

—

 

 

$

—

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (1)

 

$

1,089,166

 

 

$

1,104,804

 

 

Other assets

 

$

44,173

 

 

$

37,517

 

 

Other liabilities

 

$

44,175

 

 

$

37,519

 

Credit contracts

 

 

75,168

 

 

 

81,211

 

 

Other assets

 

 

—

 

 

 

—

 

 

Other liabilities

 

 

—

 

 

 

—

 

Mortgage banking

 

 

18,149

 

 

 

5,292

 

 

Other assets

 

 

221

 

 

 

50

 

 

Other liabilities

 

 

5

 

 

 

2

 

Total derivatives

 

$

1,182,483

 

 

$

1,191,307

 

 

 

 

$

44,394

 

 

$

37,567

 

 

 

 

$

44,180

 

 

$

37,521

 

 

(1)
The Company was holding collateral of $50.2 million and $40.4 million against its net obligations under these contracts at March 31, 2024 and December 31, 2023, 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, 2024 and 2023 (in thousands):

 

 

 

 

Gain (loss) recognized in income

 

 

 

Line item of gain (loss)

 

Three months ended
March 31,

 

Undesignated derivatives

 

recognized in income

 

2024

 

 

2023

 

Interest rate swaps

 

Income from derivative instruments, net

 

$

1

 

 

$

501

 

Credit contracts

 

Income from derivative instruments, net

 

 

5

 

 

 

7

 

Mortgage banking

 

Income from derivative instruments, net

 

 

168

 

 

 

(12

)

Total undesignated

 

 

 

$

174

 

 

$

496

 

 

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(9.) SHAREHOLDERS’ EQUITY

Common Stock

The changes in shares of common stock were as follows for the three months ended March 31, 2024 and 2023:

 

 

 

Outstanding

 

 

Treasury

 

 

Issued

 

2024

 

 

 

 

 

 

 

 

 

Shares at December 31, 2023

 

 

15,407,406

 

 

 

692,150

 

 

 

16,099,556

 

Restricted stock units released

 

 

60,989

 

 

 

(60,989

)

 

 

—

 

Treasury stock purchases

 

 

(21,446

)

 

 

21,446

 

 

 

—

 

Shares at March 31, 2024

 

 

15,446,949

 

 

 

652,607

 

 

 

16,099,556

 

2023

 

 

 

 

 

 

 

 

 

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

 

 

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, 2024, no shares have been repurchased under the 2022 Share Repurchase Program.

 

(10.) ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The following tables present the components of other comprehensive (loss) income for the three months ended March 31, 2024 and 2023 (in thousands):

 

 

 

Pre-tax
Amount

 

 

Tax
Effect

 

 

Net-of-tax
Amount

 

March 31, 2024

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

Change in unrealized loss during the period

 

$

(9,646

)

 

$

(2,472

)

 

$

(7,174

)

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

 

 

14

 

 

 

4

 

 

 

10

 

Total securities available for sale and transferred securities

 

 

(9,632

)

 

 

(2,468

)

 

 

(7,164

)

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

Change in unrealized gain during the period

 

 

907

 

 

 

232

 

 

 

675

 

Pension obligations:

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

 

(134

)

 

 

(34

)

 

 

(100

)

Amortization of net actuarial loss included in income

 

 

358

 

 

 

92

 

 

 

266

 

Total pension obligations

 

 

224

 

 

 

58

 

 

 

166

 

Other comprehensive loss

 

$

(8,501

)

 

$

(2,178

)

 

$

(6,323

)

 

(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)

 

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

 

 

 

Pre-tax
Amount

 

 

Tax
Effect

 

 

Net-of-tax
Amount

 

March 31, 2023

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

Change in unrealized loss 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 gain during the period

 

 

(891

)

 

 

(228

)

 

 

(663

)

Pension and post-retirement 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 and post-retirement obligations

 

 

194

 

 

 

50

 

 

 

144

 

Other comprehensive loss

 

$

13,600

 

 

$

3,485

 

 

$

10,115

 

 

(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.

Activity in accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2024 and 2023 was as follows (in thousands):

 

 

 

Hedging
Derivative
Instruments

 

 

Securities
Available
for Sale and
Transferred
Securities

 

 

Pension and
Post-
retirement
Obligations

 

 

Accumulated
Other
Comprehensive
(Loss) Income

 

March 31, 2024

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

3,911

 

 

$

(111,906

)

 

$

(11,946

)

 

$

(119,941

)

Other comprehensive income (loss) before reclassifications

 

 

675

 

 

 

(7,174

)

 

 

—

 

 

 

(6,499

)

Amounts reclassified from accumulated other comprehensive income

 

 

—

 

 

 

10

 

 

 

166

 

 

 

176

 

Net current period other comprehensive income (loss)

 

 

675

 

 

 

(7,164

)

 

 

166

 

 

 

(6,323

)

Balance at end of period

 

$

4,586

 

 

$

(119,070

)

 

$

(11,780

)

 

$

(126,264

)

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

4,735

 

 

$

(128,634

)

 

$

(13,588

)

 

$

(137,487

)

Other comprehensive income (loss) before reclassifications

 

 

(663

)

 

 

10,620

 

 

 

—

 

 

 

9,957

 

Amounts reclassified from accumulated other comprehensive income

 

 

—

 

 

 

14

 

 

 

144

 

 

 

158

 

Net current period other comprehensive income (loss)

 

 

(663

)

 

 

10,634

 

 

 

144

 

 

 

10,115

 

Balance at end of period

 

$

4,072

 

 

$

(118,000

)

 

$

(13,444

)

 

$

(127,372

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

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

The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss) income for the three months ended March 31, 2024 and 2023 (in thousands):

 

Details About Accumulated Other Comprehensive (Loss) Income Components

 

Amount Reclassified from
Accumulated Other
Comprehensive
(Loss) Income

 

 

Affected Line Item in the
Consolidated Statement of Income

 

 

Three months ended
March 31,

 

 

 

 

 

2024

 

 

2023

 

 

 

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

 

 

(14

)

 

 

(19

)

 

Interest income

 

 

(14

)

 

 

(19

)

 

Total before tax

 

 

4

 

 

 

5

 

 

Income tax expense

 

 

(10

)

 

 

(14

)

 

Net of tax

Amortization of pension and post-retirement items:

 

 

 

 

 

 

 

 

Prior service credit (1)

 

 

134

 

 

 

122

 

 

Salaries and employee benefits

Net actuarial losses (1)

 

 

(358

)

 

 

(316

)

 

Salaries and employee benefits

 

 

(224

)

 

 

(194

)

 

Total before tax

 

 

58

 

 

 

50

 

 

Income tax benefit

 

 

(166

)

 

 

(144

)

 

Net of tax

Total reclassified for the period

 

$

(176

)

 

$

(158

)

 

 

 

(1) These items are included in the computation of net periodic pension expense. See Note 12 – Employee Benefit Plans for additional information.

(11.) SHARE-BASED COMPENSATION PLANS

The Company maintains certain share-based compensation plans, approved by the Company’s shareholders, which 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 the 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 Company awards grants of performance-based restricted stock units (“PSUs”) to certain members of management. Fifty percent of the 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 Compensation 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. 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. The shares earned based on the achievement of the ROAE and ROAA performance requirement, if any, will vest on March 1 of the third year from the grant date assuming the recipient’s continuous service to the Company.

The Company granted restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”) during the three months ended March 31, 2024 as follows:

 

 

Number of
   Underlying
Shares

 

 

Weighted Average Grant Date Fair Value

 

RSUs

 

 

129,665

 

 

$

15.58

 

PSUs

 

 

54,754

 

 

$

15.59

 

The grant-date fair value for the RSUs and PSUs granted during the three months ended March 31, 2024 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.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(11.) SHARE-BASED COMPENSATION PLANS (Continued)

Assuming the recipient’s continuous service to the Company, the RSUs granted during the three months ended March 31, 2024 will vest on the third anniversary of the grant date.

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,

 

 

 

2024

 

 

2023

 

Salaries and employee benefits

 

$

528

 

 

$

510

 

Other noninterest expense

 

 

41

 

 

 

41

 

Total share-based compensation expense

 

$

569

 

 

$

551

 

 

 

 

 

 

 

 

Income tax benefit realized for compensation costs

 

$

286

 

 

$

368

 

 

At March 31, 2024, there was $5.2 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 2.36 years.

(12.) EMPLOYEE BENEFIT PLANS

The Company participates in a non-contributory defined benefit pension plan for certain employees who meet participation requirements. The components of the Company’s net periodic benefit expense for its pension obligations were as follows (in thousands):

 

 

 

Three months ended
March 31,

 

 

 

2024

 

 

2023

 

Service cost

 

$

491

 

 

$

448

 

Interest cost on projected benefit obligation

 

 

861

 

 

 

855

 

Expected return on plan assets

 

 

(1,005

)

 

 

(878

)

Amortization of unrecognized prior service credit

 

 

(134

)

 

 

(122

)

Amortization of unrecognized net actuarial loss

 

 

358

 

 

 

316

 

Net periodic benefit expense

 

$

571

 

 

$

619

 

 

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 2024 fiscal year.

(13.) 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,
2024

 

 

December 31,
2023

 

Commitments to extend credit

 

$

1,109,364

 

 

$

1,200,617

 

Standby letters of credit

 

 

13,292

 

 

 

13,498

 

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(13.) COMMITMENTS AND CONTINGENCIES (Continued)

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, 2024 and December 31, 2023, the allowance for credit losses for unfunded commitments totaled $3.0 million and $3.6 million, respectively, 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,

 

 

 

2024

 

 

2023

 

Credit (benefit) loss for unfunded commitments

 

$

(570

)

 

$

11

 

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, 2023 as filed with the SEC on March 13, 2024 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.

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.

In a Memorandum filed on February 13, 2024, the Superior Court affirmed the decision of the lower court, holding that trial court has subject matter jurisdiction over the New York part of this action and that the New York plaintiffs have standing to pursue relief against the Company. The Superior Court also remanded the case to the lower court for further proceedings, which will include the completion of any remaining discovery and an adjudication of the open claims and defenses that have been asserted in the case. Once the lower court has issued a final adjudication, the parties will have an opportunity to appeal adverse rulings in the case.

 

 

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(13.) COMMITMENTS AND CONTINGENCIES (Continued)

On April 5, 2024, the lower court conducted a Case Management Conference to discuss remaining matters and next steps, and thereafter issued a Scheduling Order setting a deadline of April 19, 2024 for the Company to re-file its motion to compel discovery and motion for re-consideration of the prior striking of its jurisdictional defense and scheduled a pre-trial conference for July 11, 2024. The time for the Company to re-file the aforementioned motions was extended to April 23, 2024, and the Company timely filed and served them. The case was also re-assigned to another member of the Court of Common Pleas to handle future proceedings.

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.

(14.) 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. 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.

 

32

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(14.) FAIR VALUE MEASUREMENTS (Continued)

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.

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.

33

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(14.) 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, 2024

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

—

 

 

$

21,752

 

 

$

—

 

 

$

21,752

 

U.S. Treasury bills

 

 

—

 

 

 

64,697

 

 

 

—

 

 

 

64,697

 

Mortgage-backed securities

 

 

—

 

 

 

837,312

 

 

 

—

 

 

 

837,312

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Hedging derivative instruments

 

 

—

 

 

 

6,835

 

 

 

—

 

 

 

6,835

 

Fair value adjusted through comprehensive income

 

$

—

 

 

$

930,596

 

 

$

—

 

 

$

930,596

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate swaps

 

 

—

 

 

 

44,173

 

 

 

—

 

 

 

44,173

 

Derivative instruments – mortgage banking

 

 

—

 

 

 

221

 

 

 

—

 

 

 

221

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate swaps

 

 

—

 

 

 

(44,175

)

 

 

—

 

 

 

(44,175

)

Derivative instruments – mortgage banking

 

 

—

 

 

 

(5

)

 

 

—

 

 

 

(5

)

Fair value adjusted through net income

 

$

—

 

 

$

214

 

 

$

—

 

 

$

214

 

Measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

—

 

 

$

504

 

 

$

—

 

 

$

504

 

Collateral dependent loans

 

 

—

 

 

 

—

 

 

 

30,754

 

 

 

30,754

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

 

—

 

 

 

—

 

 

 

629

 

 

 

629

 

Loan servicing rights

 

 

—

 

 

 

—

 

 

 

1,382

 

 

 

1,382

 

Other real estate owned

 

 

—

 

 

 

—

 

 

 

140

 

 

 

140

 

Total

 

$

—

 

 

$

504

 

 

$

32,905

 

 

$

33,409

 

 

There were no transfers between Levels 1 and 2 during the three months ended March 31, 2024. There were no liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2024.

 

34

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(14.) 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, 2023

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government sponsored enterprises

 

$

—

 

 

$

21,811

 

 

$

—

 

 

$

21,811

 

Mortgage-backed securities

 

 

—

 

 

 

865,919

 

 

 

—

 

 

 

865,919

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Hedging derivative instruments

 

 

—

 

 

 

5,939

 

 

 

—

 

 

 

5,939

 

Fair value adjusted through comprehensive income

 

$

—

 

 

$

893,669

 

 

$

—

 

 

$

893,669

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate products

 

$

—

 

 

$

37,517

 

 

$

—

 

 

$

37,517

 

Derivative instruments – mortgage banking

 

 

—

 

 

 

50

 

 

 

—

 

 

 

50

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate products

 

 

—

 

 

 

(37,519

)

 

 

—

 

 

 

(37,519

)

Derivative instruments – mortgage banking

 

 

—

 

 

 

(2

)

 

 

—

 

 

 

(2

)

Fair value adjusted through net income

 

$

—

 

 

$

46

 

 

$

—

 

 

$

46

 

Measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

—

 

 

$

1,370

 

 

$

—

 

 

$

1,370

 

Collateral dependent loans

 

 

—

 

 

 

—

 

 

 

37,516

 

 

 

37,516

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

 

—

 

 

 

—

 

 

 

629

 

 

 

629

 

Loan servicing rights

 

 

—

 

 

 

—

 

 

 

1,382

 

 

 

1,382

 

Other real estate owned

 

 

—

 

 

 

—

 

 

 

142

 

 

 

142

 

Total

 

$

—

 

 

$

1,370

 

 

$

39,669

 

 

$

41,039

 

 

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, 2024 (dollars in thousands).

 

Asset

 

Fair
Value

 

 

Valuation Technique

 

Unobservable Input

 

Unobservable Input
Value or Range

Collateral dependent loans

 

$

30,754

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

44.6%(3) / 0 - 91.7%

Loan servicing rights

 

$

1,382

 

 

Discounted cash flow

 

Discount rate

 

10.2% (3)

 

 

 

 

 

 

 

Constant prepayment rate

 

12.8% (3)

Long-lived assets held for sale

 

$

629

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

12.4 - 46.3%

Other real estate owned

 

$

140

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

35.7 - 47.7%

 

(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.

 

35

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(14.) 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, 2024 and 2023.

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. Fair value estimates for other financial instruments not included elsewhere in this disclosure are discussed below.

Securities held to maturity: The fair value of the Company’s investment securities held to maturity is primarily measured using information from a third-party 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.

Loans: The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities. Loans were first segregated by type, such as commercial, residential mortgage, and consumer, and were then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Time deposits: The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Long-term borrowings: Long-term borrowings consist of $75 million of subordinated notes and $50 million of long-term borrowings from the FHLB. The subordinated notes are publicly traded and are valued based on market prices, which are characterized as Level 2 liabilities in the fair value hierarchy. The FHLB borrowings are valued using discounted cash flows based on current market rates for borrowings with similar remaining maturities and are characterized as Level 2 liabilities in the fair value hierarchy.

36

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(14.) FAIR VALUE MEASUREMENTS (Continued)

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, 2024

 

 

December 31, 2023

 

 

 

Fair Value

 

 

 

 

Estimated

 

 

 

 

 

Estimated

 

 

 

Measurement

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

Hierarchy

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

 

$

237,038

 

 

$

237,038

 

 

$

124,442

 

 

$

124,442

 

Securities available for sale

 

Level 2

 

 

923,761

 

 

 

923,761

 

 

 

887,730

 

 

 

887,730

 

Securities held to maturity, net

 

Level 2

 

 

143,714

 

 

 

131,269

 

 

 

148,156

 

 

 

137,030

 

Loans held for sale

 

Level 2

 

 

504

 

 

 

504

 

 

 

1,370

 

 

 

1,370

 

Loans

 

Level 2

 

 

4,368,217

 

 

 

4,160,389

 

 

 

4,373,541

 

 

 

4,143,918

 

Loans (1)

 

Level 3

 

 

30,754

 

 

 

30,754

 

 

 

37,516

 

 

 

37,516

 

Long-lived assets held for sale

 

Level 3

 

 

629

 

 

 

629

 

 

 

629

 

 

 

629

 

Accrued interest receivable

 

Level 1

 

 

24,914

 

 

 

24,914

 

 

 

24,481

 

 

 

24,481

 

Derivative instruments – cash flow hedges

 

Level 2

 

 

6,835

 

 

 

6,835

 

 

 

5,939

 

 

 

5,939

 

Derivative instruments – interest rate products

 

Level 2

 

 

44,173

 

 

 

44,173

 

 

 

37,517

 

 

 

37,517

 

Derivative instruments – mortgage banking

 

Level 2

 

 

221

 

 

 

221

 

 

 

50

 

 

 

50

 

FHLB and FRB stock

 

Level 2

 

 

15,042

 

 

 

15,042

 

 

 

17,406

 

 

 

17,406

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

Level 1

 

 

3,836,171

 

 

 

3,836,171

 

 

 

3,808,216

 

 

 

3,808,216

 

Time deposits

 

Level 2

 

 

1,560,586

 

 

 

1,553,489

 

 

 

1,404,696

 

 

 

1,398,352

 

Short-term borrowings

 

Level 1

 

 

133,000

 

 

 

133,000

 

 

 

185,000

 

 

 

185,000

 

Long-term borrowings

 

Level 2

 

 

124,610

 

 

 

127,022

 

 

 

124,532

 

 

 

128,363

 

Accrued interest payable

 

Level 1

 

 

27,224

 

 

 

27,224

 

 

 

19,412

 

 

 

19,412

 

Derivative instruments – interest rate products

 

Level 2

 

 

44,175

 

 

 

44,175

 

 

 

37,519

 

 

 

37,519

 

Derivative instruments – mortgage banking

 

Level 2

 

 

5

 

 

 

5

 

 

 

2

 

 

 

2

 

 

(1) Comprised of collateral dependent loans.

37

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(15.) SEGMENT REPORTING

The Company has one reportable segment, Banking, which includes all 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,” which include the activities of SDN and Courier Capital. SDN is a full-service insurance agency that provided a broad range of insurance services to both personal and business clients, and Courier Capital is our investment advisor and wealth management firm that offers customized investment management, financial planning and consulting services to individuals and families, businesses, institutions, non-profits and retirement plans. Also included in “All Other” are 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, 2024

 

 

 

 

 

 

 

 

 

Goodwill

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

Other intangible assets, net

 

 

—

 

 

 

5,216

 

 

 

5,216

 

Total assets

 

 

6,255,833

 

 

 

42,765

 

 

 

6,298,598

 

 

 

 

 

 

 

 

 

 

 

December 31, 2023

 

 

 

 

 

 

 

 

 

Goodwill

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

Other intangible assets, net

 

 

—

 

 

 

5,433

 

 

 

5,433

 

Total assets

 

 

6,117,748

 

 

 

43,133

 

 

 

6,160,881

 

 

 

 

 

Banking

 

 

All Other

 

 

Consolidated
Totals

 

Three months ended March 31, 2024

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

41,141

 

 

$

(1,059

)

 

$

40,082

 

Provision for credit losses

 

 

5,456

 

 

 

—

 

 

 

5,456

 

Noninterest income

 

 

6,496

 

 

 

4,405

 

 

 

10,901

 

Noninterest expense

 

 

(49,717

)

 

 

(4,296

)

 

 

(54,013

)

Income (loss) before income taxes

 

 

3,376

 

 

 

(950

)

 

 

2,426

 

Income tax (expense) benefit

 

 

(455

)

 

 

99

 

 

 

(356

)

Net income (loss)

 

$

2,921

 

 

$

(851

)

 

$

2,070

 

 

 

 

 

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) benefit

 

 

(2,630

)

 

 

(145

)

 

 

(2,775

)

Net income (loss)

 

$

12,633

 

 

$

(544

)

 

$

12,089

 

 

(16.) SUBSEQUENT EVENT

On April 1, 2024, the Company announced and closed on the sale of the assets of its wholly owned subsidiary, SDN, to NFP Property & Casualty Services, Inc. (“NFP”), a privately held property and casualty broker and benefits consultant. The sale generated approximately $27 million in proceeds, or an after-tax gain of $11.2 million, and supports the Company’s earnings potential, capital position, and focus on its core banking business.

38

Table of Contents

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, 2023. 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, 2023 (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:

•
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;
•
Environmental, social and governance matters, and any related reporting obligations may impact our business;
•
If we experience greater credit losses than anticipated, earnings may be adversely impacted;
•
We are subject to risks and losses resulting from fraudulent activities that could adversely impact our financial performance and results of operations;
•
Geographic concentration in our loan portfolio may unfavorably impact our operations;
•
Our commercial business and mortgage loans increase our exposure to credit risks;
•
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;
•
Legal and regulatory proceedings and related matters, such as the action brought by a class of consumers against us as described in Part I, Item 3, “Legal Proceedings,” could adversely affect us and the banking industry in general;
•
Any future FDIC insurance premium increases 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;
•
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties;
•
The policies of the Federal Reserve have a significant impact on our earnings;
•
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 the results of our operations, cash flows and financial condition, and we are subject to new or changing accounting 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;
•
The introduction of new products and services may subject us to increased regulation and regulatory scrutiny and may affect our reputation;
•
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;

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

•
•
If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses;
•
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;
•
The soundness of other financial institutions could adversely affect us;
•
We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all;
•
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, 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;
•
Our business may be adversely affected by conditions in the financial markets and economic conditions generally, including macroeconomic pressures such as inflation, supply chain issues, and geopolitical risks associated with international conflict; and
•
Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other external events could significantly 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 Annual Report on Form 10-K for the year ended December 31, 2023. 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”) and Courier Capital, LLC (“Courier 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, and the Capital District of New York. Effective January 1, 2024, we exited the Pennsylvania automobile market to align our focus more fully around our core Upstate New York market. Courier Capital provides customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

As of March 31, 2024, the Company’s fee-based subsidiaries included SDN Insurance Agency, LLC (“SDN”), which provided a broad range of insurance services to personal and business clients, and Courier Capital, which provides customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. On April 1, 2024, the Company announced and closed the sale of the assets of its wholly owned subsidiary SDN Insurance Agency, LLC (“SDN”) to NFP Property & Casualty Services, Inc. (“NFP”), a subsidiary of NFP Corp. Please refer to the “Recent Developments” section below for additional details regarding the sale of SDN.

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, prior to the sale of the assets of SDN, 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 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 the results of our operations and financial condition.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

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 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 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, and wealth management products typically found at larger banks, our highly experienced management team and our strategically located banking centers.

We prioritize customer acquisition through cost-effective, high-demand digital, virtual and physical channels, while maintaining a community bank distinctiveness relative to larger banks and digital-only neobanks. We leverage the retail branch network and customer contact center to build trust and credibility, provide personal financial education and advice, offer convenience, and bridge digital and physical channels. Our enhanced digital capabilities complement a continued focus on a consistent customer experience and engagement across physical and virtual channels, including using branches to create deeper engagement and relationships with customers, balancing customer engagement with efficiency opportunities (e.g., framing outreach to the customer contact center to teach customers how to use digital channels, in addition to addressing the reason for the call), and maintaining and expanding our customer reach digitally, physically or virtually. By employing digital channels across our current products and services, we deepen existing relationships and enter new geographies or market segments that would otherwise be prohibitively expensive targets using traditional approaches. Deepening our existing digital capabilities allows us to capitalize on a shift in customer preferences away from physical branches, while launching opportunities with non-bank entities through BaaS.

We have evolved to meet changing customer needs by offering complementary physical, digital and virtual channels. We focus on technology to provide solutions that fit our customers' preferences for transacting business with us. Branches are staffed by certified personal bankers who are trained to meet a broad array of customer needs. Our digital banking capabilities, interactive teller machine (“ITM”) functionality and Customer Contact Center provide additional self-serve and phone options through which customer needs are met effectively.

Our BaaS business offers banking capabilities to non-bank financial service providers and other FinTechs, allowing them to provide banking services to their end users. With the help of the Bank’s partners, we can offer banking services and products beyond our traditional footprint, creating new fee-based revenue opportunities through service, interchange and other fees, coupled with cost effective deposit gathering opportunities. We are primarily focused on five key BaaS client types where we see strong opportunity: business-to-business, where we help FinTechs innovate solutions while creating new market opportunities and efficiencies; affinity groups, where we help empower traditionally under-banked communities with expanded financial services access; sustainable finance, where we meet customer-led environmental demands by partnering with early movers in the green banking space; cannabis-related businesses, where we can tap into the multi-billion dollar cannabis market by leveraging regulatory and risk experience for sustained operations; and wealth management, which enables wealth managers to meet accelerating client demand for banking services.

We will continue to explore market expansion opportunities that complement current market areas as opportunities arise. Our primary focus will be on increasing the Bank’s market share within existing markets, while taking advantage of potential growth opportunities within our noninterest income lines of business by acquiring businesses that can be incorporated into existing operations. We believe our capital position remains strong enough to support an active merger and acquisition strategy and the expansion of our core financial service businesses. Consequently, we continue to explore acquisition opportunities in these activities. When evaluating acquisition opportunities, we will balance the potential for earnings accretion with maintaining adequate capital levels, which could result in our common stock being the predominant form of consideration and/or the need for us to raise capital.

Conversations with potential strategic partners occur on a regular basis. The evaluation of any potential opportunity will favor a transaction that complements our core competencies and strategic intent, with a lesser emphasis being placed on geographic location or size. Additionally, we remain committed to maintaining a diversified revenue stream. Our senior management team has experience in acquisitions and post-acquisition integration of operations and is prepared to act promptly should a potential opportunity arise but will remain disciplined with its approach. We believe this experience positions us to successfully acquire and integrate additional financial services and banking businesses.

Cannabis Banking

The Marijuana Regulation and Taxation Act was signed into law on March 31, 2021, legalizing the possession and sale of recreational marijuana in New York State for adults aged 21 or older and the state has issued adult-use cannabis cultivation, processing and retail dispensary licenses. We have implemented a program to provide financial products and services to legal cannabis-related businesses and partner with other financial institutions who provide such services.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

Offering financial products and services to the cannabis industry presents a unique set of regulatory risks due to the conflict between state and federal laws, as marijuana remains illegal at the federal level. In January 2018, the U.S. Department of Justice (the “DOJ”) rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion. The impact of the DOJ’s rescission of the Cole Memo and related memoranda is unclear, but in the future may result in increased enforcement actions against the regulated cannabis industry generally. More recently, the United States Attorney General has indicated that the DOJ, under his leadership, does not intend to pursue cases against parties who comply with the laws in states which have legalized and are effectively regulating marijuana. However, enforcement policies and practices may be highly variable between political administrations. In addition, federal prosecutors have significant discretion and there can be no assurance that the federal prosecutor for any district in which we operate will not choose to strictly enforce the federal laws governing cannabis. In the future, enforcement actions may be taken against cannabis-related businesses or financial services providers that are viewed as aiding and abetting such activities.

The Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state-legal cannabis businesses. These guidelines were issued for the explicit purpose so “that financial institutions can provide services to marijuana-related businesses in a manner consistent with their obligations to know their customers and to report possible criminal activity.” The Bank has and will continue to follow this and other FinCEN guidance in the areas of cannabis banking.

RECENT DEVELOPMENTS

Sale of SDN

On April 1, 2024, the Company announced and closed the sale of the assets of SDN to NFP. The sale generated approximately $27 million in proceeds, or an after-tax gain of $11.2 million before selling costs. The all-cash transaction value represented approximately four times our 2023 insurance revenue.

Fraudulent Activity

In early March 2024, the Company discovered fraudulent activity associated with deposit transactions conducted over the course of several business days by an in-market business customer of the Bank, that resulted in an $18.4 million pre-tax loss for deposit-related charged-off items and approximately $600 thousand of legal and consulting expenses, recorded in the first quarter related to this event. The Bank is working with the appropriate law enforcement authorities in connection with this matter and is pursuing all legal recourse available to recover additional funds and minimize the loss. However, there can be no assurance that the Company will be able to recover any further offset to the deposit loss.

EXECUTIVE OVERVIEW

Summary of 2024 First Quarter Results

Net income decreased $10.0 million to $2.1 million for the first quarter of 2024 compared to $12.1 million for the first quarter of 2023. Net income available to common shareholders for the first quarter of 2024 was $1.7 million, or $0.11 per diluted share, compared with $11.7 million, or $0.76 per diluted share, for the first quarter of 2023. Return on average common equity was 1.83% and return on average assets was 0.13% for the first quarter of 2024 compared to 11.87% and 0.84%, respectively, for the first quarter of 2023. First quarter 2024 results reflected an $18.4 million pre-tax loss that was recorded in deposit-related charged-off items and approximately $660 thousand of legal and consulting expenses, recorded in professional services expenses related to the previously mentioned fraud event.

Net interest income totaled $40.1 million in the first quarter of 2024, a decrease of $1.7 million compared to $41.8 million in the first quarter of 2023. Average interest-earning assets for the first quarter of 2024 were $318.8 million higher than the first quarter of 2023 due to a $342.6 million increase in average loans and a $94.8 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $118.5 million decrease in average investment securities. Average interest-bearing liabilities for the first quarter of 2024 were $427.7 million higher than the first quarter of 2023 due to a $416.7 million increase in average savings and money market account deposits, a $97.0 million increase in average time deposits, and a $44.5 million increase in average borrowings, partially offset by a $130.6 million decrease in average interest-bearing demand deposits.

Net interest margin was 2.78% for the first quarter of 2024 compared to 3.09% in the first quarter of 2023, primarily due to higher funding costs as a result of the continued high interest rate environment, as well as seasonality and repricing within the public deposit portfolio, partially offset by an increase in the average yield on interest-earning assets.

The benefit for credit losses was $5.5 million in the first quarter of 2024 compared to a provision for credit losses of $4.2 million in the first quarter of 2023. The benefit for credit losses for the first quarter of 2024 was primarily driven by positive trends in qualitative factors, including an improvement in consumer indirect loan delinquencies during the period, and improvement in forecasted losses, which are based in part on the national unemployment forecast, and a reduction in period-end loan balances. Net charge-offs during the recent quarter were $3.1 million, representing 0.28% of average loans on an annualized basis, compared to $2.1 million, or an annualized 0.21% of average loans, in the first quarter of 2023. 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 and net charge-offs.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

Noninterest income totaled $10.9 million in the first quarters of 2024 and 2023. Noninterest income for the first quarter of 2024 included decreases of $341 thousand in investment advisory income, primarily due to lower transaction-based fees on retail accounts, and $322 thousand in income from derivative instruments, net, partially offset by increases of $304 thousand in company owned life insurance income, due to the higher crediting rate and associated impact to cash surrender value related to the surrender and redeploy strategy executed in the fourth quarter of 2023, and $406 thousand in other income.

Noninterest expense totaled $54.0 million in the first quarter of 2024, compared to $33.7 million in the first quarter of 2023. The increase in noninterest expense was primarily the result of the deposit fraud-related charge-off and associated legal and consulting expenses totaling $19.0 million. Also contributing to the increase in noninterest expense for the first quarter of 2024 were increases in computer and data processing expense, due in part to investments in data efficiency and marketing technology, FDIC assessments expense, and other expenses.

The regulatory Common Equity Tier 1 Ratio and Total Risk-Based Capital Ratio were 9.76%, and 12.04%, respectively, at March 31, 2024. 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 approximately 79% of revenue during the three months ended March 31, 2024. 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 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,

 

 

 

2024

 

 

2023

 

Interest income per consolidated statements of income

 

$

78,413

 

 

$

63,771

 

Adjustment to fully taxable equivalent basis

 

 

86

 

 

 

121

 

Interest income adjusted to a fully taxable equivalent basis

 

 

78,499

 

 

 

63,892

 

Interest expense per consolidated statements of income

 

 

38,331

 

 

 

21,956

 

Net interest income on a taxable equivalent basis

 

$

40,168

 

 

$

41,936

 

 

Analysis of Net Interest Income for the Three Months Ended March 31, 2024 and 2023

Net interest income on a taxable equivalent basis for the three months ended March 31, 2024, was $40.2 million, a decrease of $1.8 million versus the comparable quarter last year of $41.9 million. The decrease in net interest income was primarily due to higher funding costs amid the current high interest rate environment.

Our net interest margin for the first quarter of 2024 was 2.78%, 31-basis points lower than 3.09% for the same period in 2023 due to higher funding costs as a result of the continued high interest rate environment, as well as seasonality and repricing within the public deposit portfolio, partially offset by an increase in the average yield on interest-earning assets.

For the first quarter of 2024, the average yield on average interest earning assets of 5.43% was 72-basis points higher than the first quarter of 2023 of 4.71% primarily due to an increase in market interest rates. Average loan yields increased 72-basis points during the first quarter of 2024 to 6.33% from 5.61% for the first quarter of 2023. The average yield on investment securities increased 19-basis points during the first quarter of 2024 to 2.09% from 1.90% for the first quarter of 2023. Overall, a favorable volume variance increased interest income by $6.0 million during the first quarter of 2024, and the average interest rate changes increased interest income by $8.6 million which collectively drove a $14.6 million increase in interest income.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

Average interest-earning assets were $5.80 billion for the first quarter of 2024 compared to $5.49 billion for the first quarter of 2023, an increase of $318.8 million, or 6%, from the comparable quarter last year, with average loans up $342.6 million from $4.12 billion for the first quarter of 2023 to $4.46 billion for the first quarter of 2024, and a $94.8 million increase in average Federal Reserve interest-earning cash, partially offset by a decrease in average securities of $118.5 million from $1.30 billion for the first quarter of 2023 to $1.18 billion for the first quarter of 2024. Average loans comprised 77% of average interest-earning assets during the first quarter of 2024 compared to 75% during the first quarter of 2023. The increase in average loans was primarily due to organic growth in commercial mortgages. 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 6.33% for the first quarter of 2024, an increase of 72-basis points compared to 5.61% for the comparable quarter in 2023 due to the impact of the higher market interest rates. An increase in the volume of average loans resulted in a $5.5 million increase in interest income and rate changes on average loans increased interest income by $7.7 million. Average investment securities represented 20% of average interest-earning assets during the first quarter of 2024 compared to 24% during the first quarter of 2023. The decrease in average investment securities was primarily due to repayment and maturities of investment securities, and the use of cash to fund loan originations, including the sale of approximately $54 million in lower yielding available-for-sale agency mortgage-backed securities in the fourth quarter of 2023.

For the first quarter of 2024, the average cost of average interest-bearing liabilities of 3.34% was 122-basis points higher than the first quarter of 2023 and the average cost of interest-bearing deposits of 3.29% was 130-basis points higher than the first quarter of 2023 due to the continued repricing of deposits at higher interest rates. The average cost of total borrowings decreased 8-basis points to 4.08% in the first quarter of 2024, compared to 4.16% in the first quarter of 2023.

Average interest-bearing liabilities were $4.61 billion for the first quarter of 2024, compared to $4.19 billion for the first quarter of 2023, an increase of $427.7 million, or 10% driven by increases in both average balances of interest-bearing deposits and average total borrowings. On average, interest-bearing deposits grew $383.2 million from $3.93 billion for the first quarter of 2023 to $4.31 billion for the current quarter while noninterest-bearing demand deposits (a principal component of net free funds) decreased $102.2 million to $962.5 million for the first quarter of 2024. The increase in average interest-bearing deposits was due to growth in non-public deposits, public deposits, and reciprocal deposits, partially offset by a decrease in brokered deposits. For further discussion of our reciprocal and brokered deposits, refer to the “Funding Activities – Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate changes resulted in a $13.4 million increase in interest expense, and volume changes resulted in a $2.6 million increase in interest expense during the first quarter of 2024. Total average borrowings increased to $304.3 million, up $44.5 million from the first quarter of 2023. The increase in average borrowings volume contributed $439 thousand to interest expense.

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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,

 

 

 

2024

 

 

2023

 

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate (3)

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate (3)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-earning deposits

 

$

158,075

 

 

$

1,985

 

 

 

5.05

%

 

$

63,311

 

 

$

616

 

 

 

3.95

%

Investment securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,125,365

 

 

 

5,768

 

 

 

2.05

 

 

 

1,215,608

 

 

 

5,601

 

 

 

1.84

 

Tax-exempt (2)

 

 

57,628

 

 

 

413

 

 

 

2.87

 

 

 

85,898

 

 

 

577

 

 

 

2.69

 

Total investment securities

 

 

1,182,993

 

 

 

6,181

 

 

 

2.09

 

 

 

1,301,506

 

 

 

6,178

 

 

 

1.90

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

722,720

 

 

 

13,599

 

 

 

7.57

 

 

 

670,354

 

 

 

11,232

 

 

 

6.80

 

Commercial mortgage

 

 

2,029,841

 

 

 

34,300

 

 

 

6.80

 

 

 

1,744,963

 

 

 

26,400

 

 

 

6.14

 

Residential real estate loans

 

 

648,921

 

 

 

6,476

 

 

 

3.99

 

 

 

589,747

 

 

 

5,245

 

 

 

3.56

 

Residential real estate lines

 

 

76,396

 

 

 

1,491

 

 

 

7.85

 

 

 

76,627

 

 

 

1,303

 

 

 

6.89

 

Consumer indirect

 

 

934,380

 

 

 

13,711

 

 

 

5.90

 

 

 

1,024,362

 

 

 

12,525

 

 

 

4.96

 

Other consumer

 

 

51,535

 

 

 

756

 

 

 

5.90

 

 

 

15,156

 

 

 

393

 

 

 

10.51

 

Total loans (4)

 

 

4,463,793

 

 

 

70,333

 

 

 

6.33

 

 

 

4,121,209

 

 

 

57,098

 

 

 

5.61

 

Total interest-earning assets

 

 

5,804,861

 

 

 

78,499

 

 

 

5.43

 

 

 

5,486,026

 

 

 

63,892

 

 

 

4.71

 

Less: Allowance for credit losses

 

 

(51,534

)

 

 

 

 

 

 

 

 

(46,668

)

 

 

 

 

 

 

Other noninterest-earning assets

 

 

472,433

 

 

 

 

 

 

 

 

 

404,428

 

 

 

 

 

 

 

Total assets

 

$

6,225,760

 

 

 

 

 

 

 

 

$

5,843,786

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

749,512

 

 

$

2,076

 

 

 

1.11

%

 

$

880,093

 

 

$

1,399

 

 

 

0.64

%

Savings and money market

 

 

2,081,815

 

 

 

15,948

 

 

 

3.08

 

 

 

1,665,075

 

 

 

6,556

 

 

 

1.60

 

Time deposits

 

 

1,479,133

 

 

 

17,214

 

 

 

4.68

 

 

 

1,382,131

 

 

 

11,339

 

 

 

3.33

 

Total interest-bearing deposits

 

 

4,310,460

 

 

 

35,238

 

 

 

3.29

 

 

 

3,927,299

 

 

 

19,294

 

 

 

1.99

 

Short-term borrowings

 

 

179,747

 

 

 

1,529

 

 

 

3.42

 

 

 

145,533

 

 

 

1,202

 

 

 

3.35

 

Long-term borrowings

 

 

124,562

 

 

 

1,564

 

 

 

5.02

 

 

 

114,251

 

 

 

1,460

 

 

 

5.11

 

Total borrowings

 

 

304,309

 

 

 

3,093

 

 

 

4.08

 

 

 

259,784

 

 

 

2,662

 

 

 

4.16

 

Total interest-bearing liabilities

 

 

4,614,769

 

 

 

38,331

 

 

 

3.34

 

 

 

4,187,083

 

 

 

21,956

 

 

 

2.12

 

Noninterest-bearing demand deposits

 

 

962,522

 

 

 

 

 

 

 

 

 

1,064,754

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

193,434

 

 

 

 

 

 

 

 

 

174,014

 

 

 

 

 

 

 

Shareholders’ equity

 

 

455,035

 

 

 

 

 

 

 

 

 

417,935

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

6,225,760

 

 

 

 

 

 

 

 

$

5,843,786

 

 

 

 

 

 

 

Net interest income (tax-equivalent)

 

 

 

 

$

40,168

 

 

 

 

 

 

 

 

$

41,936

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

2.09

%

 

 

 

 

 

 

 

 

2.59

%

Net earning assets

 

$

1,190,092

 

 

 

 

 

 

 

 

$

1,298,943

 

 

 

 

 

 

 

Net interest margin (tax-equivalent)

 

 

 

 

 

 

 

 

2.78

%

 

 

 

 

 

 

 

 

3.09

%

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

 

 

 

 

 

 

 

 

125.79

%

 

 

 

 

 

 

 

 

131.02

%

 

(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.

(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):

45

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

 

 

Three months ended
March 31,

 

 

 

2024

 

 

2023

 

Commercial business

 

$

4

 

 

$

(1

)

Commercial mortgage

 

 

613

 

 

 

548

 

Residential real estate loans

 

 

(358

)

 

 

(404

)

Residential real estate lines

 

 

(83

)

 

 

(74

)

Consumer indirect

 

 

(922

)

 

 

(537

)

Other consumer

 

 

10

 

 

 

—

 

Total

 

$

(736

)

 

$

(468

)

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, 2024 vs. 2023

 

Increase (decrease) in:

 

Volume

 

 

Rate

 

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-earning deposits

 

$

1,146

 

 

$

223

 

 

$

1,369

 

Investment securities:

 

 

 

 

 

 

 

 

 

Taxable

 

 

(435

)

 

 

602

 

 

 

167

 

Tax-exempt

 

 

(201

)

 

 

37

 

 

 

(164

)

Total investment securities

 

 

(636

)

 

 

639

 

 

 

3

 

Loans:

 

 

 

 

 

 

 

 

 

Commercial business

 

 

919

 

 

 

1,448

 

 

 

2,367

 

Commercial mortgage

 

 

4,604

 

 

 

3,296

 

 

 

7,900

 

Residential real estate loans

 

 

555

 

 

 

676

 

 

 

1,231

 

Residential real estate lines

 

 

(4

)

 

 

192

 

 

 

188

 

Consumer indirect

 

 

(1,167

)

 

 

2,353

 

 

 

1,186

 

Other consumer

 

 

597

 

 

 

(234

)

 

 

363

 

Total loans

 

 

5,504

 

 

 

7,731

 

 

 

13,235

 

Total interest income

 

 

6,014

 

 

 

8,593

 

 

 

14,607

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

(234

)

 

 

911

 

 

 

677

 

Savings and money market

 

 

1,966

 

 

 

7,426

 

 

 

9,392

 

Time deposits

 

 

844

 

 

 

5,031

 

 

 

5,875

 

Total interest-bearing deposits

 

 

2,576

 

 

 

13,368

 

 

 

15,944

 

Short-term borrowings

 

 

310

 

 

 

17

 

 

 

327

 

Long-term borrowings

 

 

129

 

 

 

(25

)

 

 

104

 

Total borrowings

 

 

439

 

 

 

(8

)

 

 

431

 

Total interest expense

 

 

3,015

 

 

 

13,360

 

 

 

16,375

 

Net interest income

 

$

2,999

 

 

$

(4,767

)

 

$

(1,768

)

 

46

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

(Benefit) Provision for Credit Losses

The benefit for credit losses for the first quarter of 2024 was $5.5 million compared to a provision for credit losses of $4.2 million for the first quarter of 2023. The benefit for credit losses – loans was $4.9 million for the first quarter of 2024, compared to a provision for credit losses – loans of $4.2 million for the first quarter of 2023. The benefit for credit losses – loans in the first quarter of 2024 was driven by a combination of factors, including improvement in forecasted losses, positive trends in qualitative factors, including a reduction in consumer indirect loan delinquencies during the period, and a reduction in total period-end loan balances. Also included in the (benefit) provision for credit losses was a credit loss benefit for unfunded commitments of $569 thousand and $11 thousand for the first quarters of 2024 and 2023, respectively.

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.

Noninterest Income

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

 

 

 

Three months ended
March 31,

 

 

 

2024

 

 

2023

 

Service charges on deposits

 

$

1,077

 

 

$

1,027

 

Insurance income

 

 

2,134

 

 

 

2,087

 

Card interchange income

 

 

1,902

 

 

 

1,939

 

Investment advisory

 

 

2,582

 

 

 

2,923

 

Company owned life insurance

 

 

1,298

 

 

 

994

 

Investments in limited partnerships

 

 

342

 

 

 

251

 

Loan servicing

 

 

175

 

 

 

146

 

Income from derivative instruments, net

 

 

174

 

 

 

496

 

Net gain on sale of loans held for sale

 

 

88

 

 

 

112

 

Net (loss) gain on other assets

 

 

(13

)

 

 

39

 

Net loss on tax credit investments

 

 

(375

)

 

 

(201

)

Other

 

 

1,517

 

 

 

1,111

 

Total noninterest income

 

$

10,901

 

 

$

10,924

 

 

Investment advisory income decreased $341 thousand, or 12%, to $2.6 million for the first quarter of 2024 compared to $2.9 million for the first quarter of 2023, primarily due to lower transaction-based fees on retail accounts in the most recent period.

Income from company owned life insurance increased $304 thousand, or 31%, to $1.3 million for the first quarter of 2024 compared to $1.0 million for the first quarter of 2023, primarily due to the higher crediting rate and associated impact to cash surrender value recorded in the linked quarter related to the previously mentioned surrender and redeploy strategy executed in the fourth quarter of 2023.

Income from derivative instruments, net decreased $322 thousand, or 65%, to $174 thousand for first quarter of 2024 compared to $496 thousand. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed during the quarter combined with the impact of changes in the fair value of borrower-facing trades.

Noninterest Expense

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

 

 

 

Three months ended
March 31,

 

 

 

2024

 

 

2023

 

Salaries and employee benefits

 

$

17,340

 

 

$

18,133

 

Occupancy and equipment

 

 

3,752

 

 

 

3,730

 

Professional services

 

 

2,372

 

 

 

1,495

 

Computer and data processing

 

 

5,386

 

 

 

4,691

 

Supplies and postage

 

 

475

 

 

 

490

 

FDIC assessments

 

 

1,295

 

 

 

1,115

 

Advertising and promotions

 

 

297

 

 

 

314

 

Amortization of intangibles

 

 

217

 

 

 

234

 

Deposit-related charged-off items

 

 

19,179

 

 

 

323

 

Other

 

 

3,700

 

 

 

3,136

 

Total noninterest expense

 

$

54,013

 

 

$

33,661

 

 

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

Salaries and employee benefits expense decreased $793 thousand, or 4%, to $17.3 million for the first quarter of 2024 compared to $18.1 million for the first quarter of 2023. The decrease was driven in part by lower salaries and wages and lower bonuses in the current quarter, as a result of our previously disclosed leadership and organizational changes completed in the fourth quarter of 2023 and higher earnout compensation associated with a past insurance subsidiary acquisition.

Professional services expense increased $877 thousand, or 59%, to $2.4 million for the first quarter of 2024 compared to $1.5 million for the first quarter of 2023. The increase was primarily due to higher legal and consulting expenses in the first quarter of 2024 primarily related to the fraud event.

Computer and data processing expense increased $695 thousand, or 15%, to $5.4 million for the first quarter of 2024 compared to $4.7 million for the first quarter of 2023. The increase during the 2024 period was a result of our strategic investments in data efficiency and marketing technology.

Deposit-related charged-off items of $19.2 million for the first quarter of 2024 included the $18.4 million loss associated with the fraud event described above.

Other expense increased $564 thousand, or 18%, to $3.7 million for the first quarter of 2024 compared to $3.1 million for the first quarter of 2023. The increase was primarily driven by an increase in New York State capital base franchise tax accrual and the timing of Community Reinvestment Act (“CRA”) grant donations.

Our efficiency ratio for the first quarter of 2024 was 105.77%, compared with 63.68% for the first quarter of 2023. The higher efficiency ratio for the first quarter of 2024 was primarily due to the $18.4 million pre-tax loss in deposit-related charged-off items and approximately $660 thousand of legal and consulting expenses, recorded in professional services expense, related to the fraud event. 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 three months ended March 31, 2024, we recorded income tax expense of $356 thousand, versus $2.8 million for the same period in the prior year. The lower level of income tax expense incurred during the first quarter of 2024 was due to a lower level of pre-tax income, reflecting the impact of the fraud event. In the first quarter of 2024, we recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the period resulting in a reduction in income tax expense of $785 thousand, versus $584 thousand for the same period in the prior year.

Our effective tax rate for the three months ended March 31, 2024 was 14.7%, versus 18.7%, for the same period in the prior year. 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 2024 and 2023 reflects the New York State tax benefit generated by our real estate investment trust.

48

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

 

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, 2024

 

 

December 31, 2023

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

24,535

 

 

$

21,752

 

 

$

24,535

 

 

$

21,811

 

U.S. Treasury bills

 

 

64,698

 

 

 

64,697

 

 

 

—

 

 

 

—

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

 

994,436

 

 

 

836,915

 

 

 

1,013,455

 

 

 

865,594

 

Non-Agency mortgage-backed securities

 

 

—

 

 

 

397

 

 

 

—

 

 

 

325

 

Total available for sale securities

 

 

1,083,669

 

 

 

923,761

 

 

 

1,037,990

 

 

 

887,730

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

16,551

 

 

 

15,877

 

 

 

16,513

 

 

 

15,983

 

State and political subdivisions

 

 

66,405

 

 

 

60,800

 

 

 

68,854

 

 

 

63,782

 

Mortgage-backed securities

 

 

60,761

 

 

 

54,592

 

 

 

62,793

 

 

 

57,265

 

Total held to maturity securities

 

 

143,717

 

 

 

131,269

 

 

 

148,160

 

 

 

137,030

 

Allowance for credit losses – securities

 

 

(3

)

 

 

 

 

 

(4

)

 

 

 

Total held to maturity securities, net

 

 

143,714

 

 

 

 

 

 

148,156

 

 

 

 

Total investment securities

 

$

1,227,383

 

 

$

1,055,030

 

 

$

1,186,146

 

 

$

1,024,760

 

 

Our available for sale (“AFS”) investment securities portfolio increased $45.7 million from December 31, 2023 to March 31, 2024. The AFS portfolio had a net unrealized loss of $159.9 million at March 31, 2024 and $150.3 million at December 31, 2023, respectively. The increase in the AFS portfolio balance was primarily the result of the purchase of securities for collateral for municipal deposits in the first quarter of 2024.

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, 2024. 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

 

$

—

 

 

 

—

 

 

$

15,000

 

 

 

1.70

%

 

$

9,535

 

 

 

1.90

%

 

$

—

 

 

 

—

 

 

$

24,535

 

 

 

1.78

%

U.S. Treasury bills

 

 

64,698

 

 

 

5.36

%

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

64,698

 

 

 

5.36

%

Mortgage-backed securities

 

 

29

 

 

 

3.11

%

 

 

25,836

 

 

 

1.53

%

 

 

122,432

 

 

 

2.05

%

 

 

846,139

 

 

 

1.99

%

 

 

994,436

 

 

 

1.99

%

 

 

 

64,727

 

 

 

5.36

%

 

 

40,836

 

 

 

1.59

%

 

 

131,967

 

 

 

2.04

%

 

 

846,139

 

 

 

1.99

%

 

 

1,083,669

 

 

 

2.18

%

Held to maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government-sponsored enterprises

 

$

—

 

 

 

—

 

 

$

10,000

 

 

 

3.00

%

 

$

6,551

 

 

 

3.50

%

 

$

—

 

 

 

—

 

 

$

16,551

 

 

 

3.20

%

State and political subdivisions

 

 

25,506

 

 

 

2.18

%

 

 

14,366

 

 

 

1.99

%

 

 

5,003

 

 

 

1.62

%

 

 

21,530

 

 

 

2.45

%

 

 

66,405

 

 

 

2.19

%

Mortgage-backed securities

 

 

—

 

 

 

—

 

 

 

4,516

 

 

 

2.53

%

 

 

17,846

 

 

 

2.27

%

 

 

38,399

 

 

 

2.88

%

 

 

60,761

 

 

 

2.68

%

 

 

25,506

 

 

 

2.18

%

 

 

28,882

 

 

 

2.42

%

 

 

29,400

 

 

 

2.43

%

 

 

59,929

 

 

 

2.73

%

 

 

143,717

 

 

 

2.51

%

Total investment securities

 

$

90,233

 

 

 

4.46

%

 

$

69,718

 

 

 

1.94

%

 

$

161,367

 

 

 

2.11

%

 

$

906,068

 

 

 

2.04

%

 

$

1,227,386

 

 

 

2.22

%

 

49

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

 

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, 2024 and 2023, no allowance for credit losses was 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.

LENDING ACTIVITIES

Total loans were $4.44 billion at March 31, 2024, a decrease of $20.1 million from $4.46 billion at December 31, 2023. Commercial loans and consumer loans represented 62% and 38% of total loans as of March 31, 2024, respectively. The composition of our loan portfolio, excluding loans held for sale and including net unearned income and net deferred fees and costs, is summarized as follows (dollars in thousands):

 

 

 

Loan Portfolio Composition

 

 

 

March 31, 2024

 

 

December 31, 2023

 

 

 

Amount

 

 

% of
Total

 

 

Amount

 

 

% of
Total

 

Commercial business

 

$

707,564

 

 

 

15.9

%

 

$

735,700

 

 

 

16.5

%

Commercial mortgage

 

 

2,045,056

 

 

 

46.1

 

 

 

2,005,319

 

 

 

44.9

 

Total commercial

 

 

2,752,620

 

 

 

62.0

 

 

 

2,741,019

 

 

 

61.4

 

Residential real estate loans

 

 

648,160

 

 

 

14.6

 

 

 

649,822

 

 

 

14.6

 

Residential real estate lines

 

 

75,668

 

 

 

1.7

 

 

 

77,367

 

 

 

1.7

 

Consumer indirect

 

 

920,428

 

 

 

20.7

 

 

 

948,831

 

 

 

21.3

 

Other consumer

 

 

45,170

 

 

 

1.0

 

 

 

45,100

 

 

 

1.0

 

Total consumer

 

 

1,689,426

 

 

 

38.0

 

 

 

1,721,120

 

 

 

38.6

 

Total loans

 

 

4,442,046

 

 

 

100.0

%

 

 

4,462,139

 

 

 

100.0

%

Less: Allowance for credit losses – loans

 

 

43,075

 

 

 

 

 

 

51,082

 

 

 

 

Total loans, net

 

$

4,398,971

 

 

 

 

 

$

4,411,057

 

 

 

 

 

Total commercial loans of $2.75 billion, or 62% of total loans at March 31, 2024, were comprised of commercial business loans of $707.6 million, or 16% of total loans, down $28.1 million, or 4%, from December 31, 2023, and commercial mortgage loans of $2.05 billion, or 46% of total loans, up $39.7 million, or 2%, from December 31, 2023. Commercial loans include both owner-occupied and non-owner occupied commercial real estate loans. As of March 31, 2024, commercial real estate (“CRE”) loans make up approximately 66% of total commercial loans, and 41% of total loans, commercial and industrial loans approximated 30% of total commercial loans, and 19% of total loans, and business banking unit loans were approximately 4% of total commercial loans and 3% of total loans. Our CRE committed credit exposure at March 31, 2024 related to approximately 42% multi-family, 17% office, 8% retail, 7% hospitality, 7% home builder, and 7% industrial property. Approximately 70% of our office exposure at March 31, 2024, or 12% of our total CRE exposure, related to Class B or medical office space. More than 90% of our CRE loans have full or limited personal or corporate recourse.

Total consumer loans of $1.69 billion, or 38% of total loans at March 31, 2024, decreased $31.7 million from December 31, 2023. Consumer loans at March 31, 2024 were comprised of residential real estate loans and lines of credit of $723.8 million, or 16.3% of total loans, consumer indirect loans of $920.4 million, or 21% of total loans, and other consumer loans of $45.2 million, or 1% of total loans. During the three months ended March 31, 2024, we originated $57.9 million in indirect automobile loans with a mix of approximately 18% new automobile and 82% used automobile loans. This compares with the $97.7 million in indirect automobile loans with a mix of approximately 25% new automobile and 75% used automobile loans for the three months ended March 31, 2023. Origination volumes and the mix of new and used vehicles financed fluctuate depending on general market conditions. Effective January 1, 2024, we exited the Pennsylvania automobile market to align our focus more fully around our core Upstate New York market, which includes a strong network of approximately 375 new automobile dealers.

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 $504 thousand and $1.4 million as of March 31, 2024 and December 31, 2023, respectively.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

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 $268.7 million and $269.4 million as of March 31, 2024 and December 31, 2023, respectively.

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,

 

 

 

2024

 

 

2023

 

Allowance for credit losses – loans, beginning of period

 

$

51,082

 

 

$

45,413

 

Net charge-offs (recoveries):

 

 

 

 

 

 

Commercial business

 

 

(37

)

 

 

(124

)

Commercial mortgage

 

 

(1

)

 

 

(2

)

Residential real estate loans

 

 

4

 

 

 

58

 

Residential real estate lines

 

 

—

 

 

 

16

 

Consumer indirect

 

 

2,973

 

 

 

1,838

 

Other consumer

 

 

182

 

 

 

303

 

Total net charge-offs

 

 

3,121

 

 

 

2,089

 

(Benefit) provision for credit losses – loans

 

 

(4,886

)

 

 

4,204

 

Allowance for credit losses – loans, end of period

 

$

43,075

 

 

$

47,528

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Commercial business

 

 

(0.02

)%

 

 

(0.08

)%

Commercial mortgage

 

 

0.00

%

 

 

0.00

%

Residential real estate loans

 

 

0.00

%

 

 

0.04

%

Residential real estate lines

 

 

0.00

%

 

 

0.09

%

Consumer indirect

 

 

1.28

%

 

 

0.73

%

Other consumer

 

 

1.41

%

 

 

8.10

%

Total loans

 

 

0.28

%

 

 

0.21

%

 

 

 

 

 

 

 

Allowance for credit losses – loans to total loans

 

 

0.97

%

 

 

1.12

%

Allowance for credit losses – loans to nonaccrual loans

 

 

161

%

 

 

540

%

Allowance for credit losses – loans to non-performing loans

 

 

161

%

 

 

540

%

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 4. 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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

Net charge-offs of $3.1 million in the first quarter of 2024 represented 0.28% of average loans on an annualized basis compared to net charge-offs of $2.1 million, or 0.21% of average loans for the first quarter of 2023. The allowance for credit losses – loans was $43.1 million at March 31, 2024, compared with $47.5 million at March 31, 2023. The ratio of the allowance for credit losses – loans to total loans was 0.97% at March 31, 2024 and 1.12% at March 31, 2023. The ratio of allowance for credit losses – loans to non-performing loans was 161% at March 31, 2024, reflecting one large commercial loan relationship totaling $13.6 million that was placed on nonaccrual status during the fourth quarter of 2023, compared with 540% at March 31, 2023.

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, 2024

 

 

December 31, 2023

 

 

 

 

 

 

Percentage

 

 

 

 

 

Percentage

 

 

 

Credit

 

 

of loans by

 

 

Credit

 

 

of loans by

 

 

 

Loss

 

 

category to

 

 

Loss

 

 

category to

 

 

 

Allowance

 

 

total loans

 

 

Allowance

 

 

total loans

 

Commercial business

 

$

12,991

 

 

 

15.9

%

 

$

13,102

 

 

 

16.5

%

Commercial mortgage

 

 

14,113

 

 

 

46.1

 

 

 

15,858

 

 

 

44.9

 

Residential real estate loans

 

 

4,630

 

 

 

14.6

 

 

 

5,286

 

 

 

14.6

 

Residential real estate lines

 

 

794

 

 

 

1.7

 

 

 

764

 

 

 

1.7

 

Consumer indirect

 

 

9,854

 

 

 

20.7

 

 

 

14,099

 

 

 

21.3

 

Other consumer

 

 

693

 

 

 

1.0

 

 

 

1,973

 

 

 

1.0

 

Total

 

$

43,075

 

 

 

100.0

%

 

$

51,082

 

 

 

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,
2024

 

 

December 31,
2023

 

Nonaccrual loans:

 

 

 

 

 

 

Commercial business

 

$

5,956

 

 

$

5,664

 

Commercial mortgage

 

 

10,826

 

 

 

10,563

 

Residential real estate loans

 

 

6,797

 

 

 

6,364

 

Residential real estate lines

 

 

235

 

 

 

221

 

Consumer indirect

 

 

2,880

 

 

 

3,814

 

Other consumer

 

 

—

 

 

 

13

 

Total nonaccrual loans

 

 

26,694

 

 

 

26,639

 

Accruing loans 90 days or more delinquent

 

 

36

 

 

 

21

 

Total non-performing loans

 

 

26,730

 

 

 

26,660

 

Foreclosed assets

 

 

140

 

 

 

142

 

Total non-performing assets

 

$

26,870

 

 

$

26,802

 

 

 

 

 

 

 

 

Nonaccrual loans to total loans

 

 

0.60

%

 

 

0.60

%

Non-performing loans to total loans

 

 

0.60

%

 

 

0.60

%

Non-performing assets to total assets

 

 

0.43

%

 

 

0.44

%

 

 

Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at March 31, 2024 were $26.9 million, an increase of $68 thousand from the $26.8 million balance at December 31, 2023. The primary component of non-performing assets is non-performing loans, which were $26.7 million or 0.60% of total loans at March 31, 2024 and December 31, 2023.

Approximately $6.4 million, or 24%, of the $26.7 million in non-performing loans as of March 31, 2024 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 $140 thousand and $142 thousand of properties representing foreclosed asset holdings at March 31, 2024 and December 31, 2023, respectively.

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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 non-performing 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 $21.7 million and $29.9 million in loans that continued to accrue interest which were classified as substandard as of March 31, 2024 and December 31, 2023, respectively.

Contractual Loan Maturity Schedule

The following table summarizes the contractual maturities of our loan portfolio at March 31, 2024. 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

 

$

150,067

 

 

$

278,386

 

 

$

20,268

 

 

$

258,843

 

 

$

707,564

 

Commercial mortgage

 

 

527,406

 

 

 

1,085,942

 

 

 

428,925

 

 

 

2,783

 

 

 

2,045,056

 

Residential real estate loans

 

 

88,954

 

 

 

243,380

 

 

 

292,246

 

 

 

23,580

 

 

 

648,160

 

Residential real estate lines

 

 

1,486

 

 

 

6,516

 

 

 

26,735

 

 

 

40,931

 

 

 

75,668

 

Consumer indirect (1)

 

 

319,363

 

 

 

601,065

 

 

 

—

 

 

 

—

 

 

 

920,428

 

Other consumer

 

 

7,760

 

 

 

16,802

 

 

 

19,313

 

 

 

1,295

 

 

 

45,170

 

Total loans

 

$

1,095,036

 

 

$

2,232,091

 

 

$

787,487

 

 

$

327,432

 

 

$

4,442,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans maturing after one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With a predetermined interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

 

 

$

110,910

 

 

$

10,713

 

 

$

84

 

 

$

121,707

 

Commercial mortgage

 

 

 

 

 

478,582

 

 

 

214,524

 

 

 

497

 

 

 

693,603

 

Residential real estate loans

 

 

 

 

 

178,106

 

 

 

244,864

 

 

 

20,710

 

 

 

443,680

 

Residential real estate lines

 

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Consumer indirect (1)

 

 

 

 

 

601,065

 

 

 

—

 

 

 

—

 

 

 

601,065

 

Other consumer

 

 

 

 

 

16,802

 

 

 

19,313

 

 

 

1,295

 

 

 

37,410

 

With a floating or adjustable rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

 

 

 

167,476

 

 

 

9,555

 

 

 

258,759

 

 

 

435,790

 

Commercial mortgage

 

 

 

 

 

607,360

 

 

 

214,401

 

 

 

2,286

 

 

 

824,047

 

Residential real estate loans

 

 

 

 

 

65,274

 

 

 

47,382

 

 

 

2,870

 

 

 

115,526

 

Residential real estate lines

 

 

 

 

 

6,516

 

 

 

26,735

 

 

 

40,931

 

 

 

74,182

 

Consumer indirect (1)

 

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other consumer

 

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total loans maturing after one year

 

 

 

 

$

2,232,091

 

 

$

787,487

 

 

$

327,432

 

 

$

3,347,010

 

_________

(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, 2024

 

 

December 31, 2023

 

 

 

Amount

 

 

% of
Total

 

 

Amount

 

 

% of
Total

 

Noninterest-bearing demand

 

$

972,801

 

 

 

18.0

%

 

$

1,010,614

 

 

 

19.4

%

Interest-bearing demand

 

 

798,831

 

 

 

14.8

 

 

 

713,158

 

 

 

13.7

 

Savings and money market

 

 

2,064,539

 

 

 

38.3

 

 

 

2,084,444

 

 

 

40.0

 

Time deposits

 

 

1,560,586

 

 

 

28.9

 

 

 

1,404,696

 

 

 

26.9

 

Total deposits

 

$

5,396,757

 

 

 

100.0

%

 

$

5,212,912

 

 

 

100.0

%

 

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

As of March 31, 2024 and December 31, 2023, the aggregate amount of uninsured deposits (deposits in amounts greater than $250 thousand, which is the maximum amount for federal deposit insurance) was $1.91 billion, or 35% of total deposits, and $1.82 billion, or 35% of total deposits, respectively. The portion of our time deposits by account that were in excess of the FDIC insurance limit was $315.9 million and $302.6 million at March 31, 2024 and December 31, 2023, respectively. The maturities of our uninsured time deposits at March 31, 2024 were as follows: $140.8 million in three months or less; $61.5 million between three months and six months; $49.1 million between six months and one year; and $64.5 million over one year. Approximately $1.14 billion and $956.3 million of reciprocal and public deposits, characterized as preferred deposits for FDIC call report purposes, were collateralized by government-backed securities as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, uninsured nonpublic deposits were approximately 14% of total deposits.

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, 2024, total deposits were $5.40 billion, representing an increase of $183.8 million from December 31, 2023. The increase was primarily due to growth in public, reciprocal, and non-public deposits. Time deposits were approximately 29% and 27% of total deposits at March 31, 2024 and December 31, 2023, respectively.

Non-public deposits, the largest component of our funding sources, totaled $3.13 billion and $3.12 billion at March 31, 2024 and December 31, 2023, respectively, and represented 58% and 60% 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 liquidity to accommodate the seasonality associated with public deposits. Total public deposits were $1.21 billion and $1.02 billion at March 31, 2024 and December 31, 2023, respectively, and represented 22% and 20% of total deposits as of each date, respectively. The increase in public deposits as of March 31, 2024 in comparison to December 31, 2023 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. Reciprocal deposits totaled $872.7 million at March 31, 2024, compared to $817.6 million at December 31, 2023, as this product has been an attractive option for customers with more than $250 thousand on deposit desiring FDIC insurance. Reciprocal deposits represented 16% of total deposits as of each date.

Brokered deposits totaled $176.7 million and $256.8 million at March 31, 2024 and December 31, 2023, respectively, and represented 3% and 5% of total deposits as of each date. As of March 31, 2024 and December 31, 2023, respectively, $26.7 million and $206.8 million of interest-bearing demand deposits and $150.0 million and $50.0 million of time deposits are brokered deposit accounts.

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,

 

 

 

2024

 

 

2023

 

Short-term borrowings:

 

 

 

 

 

 

FHLB

 

$

55,000

 

 

$

107,000

 

FRB

 

 

78,000

 

 

 

78,000

 

Total short-term borrowings

 

 

133,000

 

 

 

185,000

 

Long-term borrowings:

 

 

 

 

 

 

FHLB

 

 

50,000

 

 

 

50,000

 

Subordinated notes, net

 

 

74,610

 

 

 

74,532

 

Total long-term borrowings

 

 

124,610

 

 

 

124,532

 

Total borrowings

 

$

257,610

 

 

$

309,532

 

 

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, 2024 and December 31, 2023 totaled $55.0 million and $107.0 million, respectively. The FHLB borrowings are collateralized by securities from the Company’s investment portfolio and certain qualifying loans. In May 2023, we borrowed $15.0 million under the Federal Reserve Bank (“FRB”) Bank Term funding program at a rate of 4.80%, which matures on May 8, 2024. In December 2023, we borrowed an additional $50 million under the program at an interest rate of 4.89%, which matures on December 13, 2024, and $13.0 million at an interest rate of 4.88%, which matures on December 20, 2024. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits.

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Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

 

As of March 31, 2024, $50.0 million of the short-term borrowings balance is designated as a cash-flow hedge, which became effective in April 2022, at a fixed rate of 0.787%, $30.0 million is designated as a cash-flow hedge, which became effective in January 2023, at a fixed rate of 3.669%, and $25.0 million is designated as a cash-flow hedge, which became effective in May 2023, at a fixed rate of 3.4615%.

We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements. We had approximately $364.6 million of immediate credit capacity with the FHLB, and approximately $906.4 million in secured borrowing capacity at the FRB discount window as of March 31, 2024. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans. We had $155.0 million of credit available under unsecured federal funds purchased lines with various banks as of March 31, 2024, with no amounts outstanding. Additionally, we had approximately $29.5 million of unencumbered liquid securities available for pledging at March 31, 2024.

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, 2024, no amounts have been drawn on the line of credit.

Long-term Borrowings

As of March 31, 2024 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 CME Term SOFR plus 4.20561%. 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. 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, 2024, 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, the Bank Term Funding Program, and brokered deposit relationships.

The primary source of our non-deposit short-term borrowings is FHLB advances, of which $55.0 million were outstanding at March 31, 2024. In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately $1.43 billion as of March 31, 2024 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, 2024. The line of credit has a one-year term and matures in May 2024. Funds drawn would be used for general corporate purposes and backup liquidity.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

Cash and cash equivalents were $237.0 million as of March 31, 2024, up $112.6 million from $124.4 million as of December 31, 2023. During the three months ended March 31, 2024, net cash provided by operating activities totaled $12.3 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 $26.2 million, which primarily included outflows of $41.9 million for net purchases of investment securities, and $1.2 million of purchases of premises and equipment, partially offset by net loan proceeds of $17.0 million. Net cash provided by financing activities of $126.5 million was primarily attributed to a $183.9 million net increase in deposits, partially offset by a $52.0 million net increase in long-term borrowings, and $5.4 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 $445.7 million at March 31, 2024, a decrease of $9.1 million from $454.8 million at December 31, 2023, primarily due to lower net income in the current quarter coupled with an increase in accumulated other comprehensive loss of $6.3 million during the three months ended March 31, 2024 due primarily to an increase in net unrealized losses on securities available for sale.

The FRB and FDIC have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies on a consolidated basis. As of March 31, 2024, 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. See the “Basel III Capital Rules” section below for further discussion.

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2024

 

 

2023

 

Common shareholders’ equity

 

$

430,576

 

 

$

441,773

 

Less: Goodwill and other intangible assets

 

 

69,342

 

 

 

69,594

 

Net unrealized loss on investment securities (1)

 

 

(118,936

)

 

 

(111,761

)

Hedging derivative instruments

 

 

4,586

 

 

 

3,911

 

Net periodic pension and postretirement benefits plan adjustments

 

 

(11,780

)

 

 

(11,946

)

Other

 

 

(134

)

 

 

(145

)

Common Equity Tier 1 (“CET1”) Capital

 

 

487,498

 

 

 

492,120

 

Plus: Preferred stock

 

 

17,292

 

 

 

17,292

 

Tier 1 Capital

 

 

504,790

 

 

 

509,412

 

Plus: Qualifying allowance for credit losses

 

 

43,225

 

 

 

48,916

 

Subordinated Notes

 

 

74,610

 

 

 

74,532

 

Total regulatory capital

 

$

622,625

 

 

$

632,860

 

Adjusted average total assets (for leverage capital purposes)

 

$

6,286,844

 

 

$

6,224,339

 

Total risk-weighted assets

 

$

5,172,262

 

 

$

5,218,724

 

 

 

 

 

 

 

 

Regulatory Capital Ratios

 

 

 

 

 

 

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

 

 

8.03

%

 

 

8.18

%

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

 

 

9.43

%

 

 

9.43

%

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

 

 

9.76

%

 

 

9.76

%

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

 

 

12.04

%

 

 

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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

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. As of March 31, 2024, the Company and Bank’s capital levels remained characterized as “well capitalized” under the Basel III rules, including the additional capital conversion buffer.

The following table presents actual and required capital ratios as of March 31, 2024 and December 31, 2023 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, 2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

504,790

 

 

 

8.03

%

 

$

251,474

 

 

 

4.00

%

 

$

314,342

 

 

 

5.00

%

Bank

 

 

556,607

 

 

 

8.88

 

 

 

250,856

 

 

 

4.00

 

 

 

313,571

 

 

 

5.00

 

CET1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

487,498

 

 

 

9.43

 

 

 

362,059

 

 

 

7.00

 

 

 

336,198

 

 

 

6.50

 

Bank

 

 

556,607

 

 

 

10.79

 

 

 

360,950

 

 

 

7.00

 

 

 

335,168

 

 

 

6.50

 

Tier 1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

504,790

 

 

 

9.76

 

 

 

439,643

 

 

 

8.50

 

 

 

413,782

 

 

 

8.00

 

Bank

 

 

556,607

 

 

 

10.79

 

 

 

438,297

 

 

 

8.50

 

 

 

412,515

 

 

 

8.00

 

Total capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

622,625

 

 

 

12.04

 

 

 

543,089

 

 

 

10.50

 

 

 

517,227

 

 

 

10.00

 

Bank

 

 

599,831

 

 

 

11.63

 

 

 

541,426

 

 

 

10.50

 

 

 

515,643

 

 

 

10.00

 

December 31, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

509,412

 

 

 

8.18

%

 

$

248,974

 

 

 

4.00

%

 

$

311,217

 

 

 

5.00

%

Bank

 

 

562,775

 

 

 

9.06

 

 

 

248,385

 

 

 

4.00

 

 

 

310,481

 

 

 

5.00

 

CET1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

492,120

 

 

 

9.43

 

 

 

365,311

 

 

 

7.00

 

 

 

339,217

 

 

 

6.50

 

Bank

 

 

562,775

 

 

 

10.82

 

 

 

364,191

 

 

 

7.00

 

 

 

338,177

 

 

 

6.50

 

Tier 1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

509,412

 

 

 

9.76

 

 

 

443,592

 

 

 

8.50

 

 

 

417,498

 

 

 

8.00

 

Bank

 

 

562,775

 

 

 

10.82

 

 

 

442,232

 

 

 

8.50

 

 

 

416,218

 

 

 

8.00

 

Total capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

632,860

 

 

 

12.13

 

 

 

547,966

 

 

 

10.50

 

 

 

521,872

 

 

 

10.00

 

Bank

 

 

611,691

 

 

 

11.76

 

 

 

546,286

 

 

 

10.50

 

 

 

520,272

 

 

 

10.00

 

 

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MANAGEMENT'S DISCUSSION AND ANALYSIS

 

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.

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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, 2023 in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission on March 13, 2024. 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, 2023 to March 31, 2024. 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, 2025 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

 

$

(4,018

)

 

$

3,062

 

 

$

6,131

 

 

$

9,228

 

% Change

 

 

-2.27

%

 

 

1.73

%

 

 

3.47

%

 

 

5.22

%

 

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 timeframe. This is a combination of an increase across the entire deposit portfolio, which has decreased wholesale borrowings and the higher cost associated with the borrowings. 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 timeframes. Model results in the declining rate scenario show a decreasing in net interest income due to a combination of increases in the yield curve, as well as increases in higher yield public and nonpublic deposits, which will reprice downward slower due to market deposit competition.

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 noninterest 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.

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 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).

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Table of Contents

 

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, 2024 and December 31, 2023 (dollars in thousands). The analysis additionally presents a measurement of the interest rate sensitivity at March 31, 2024 and December 31, 2023. 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, 2024

 

 

December 31, 2023

 

Rate Shock Scenario:

 

EVE

 

 

Change

 

 

Percentage
Change

 

 

EVE

 

 

Change

 

 

Percentage
Change

 

Pre-Shock Scenario

 

$

662,257

 

 

 

 

 

 

 

 

$

627,519

 

 

 

 

 

 

 

- 100 Basis Points

 

 

645,165

 

 

$

(17,092

)

 

 

-2.58

%

 

 

616,940

 

 

$

(10,579

)

 

 

-1.69

%

+100 Basis Points

 

 

664,549

 

 

 

2,292

 

 

 

0.35

 

 

 

626,463

 

 

 

(1,056

)

 

 

-0.17

 

+ 200 Basis Points

 

 

669,985

 

 

 

7,728

 

 

 

1.17

 

 

 

628,434

 

 

 

915

 

 

 

0.15

 

+ 300 Basis Points

 

 

671,769

 

 

 

9,512

 

 

 

1.44

 

 

 

628,229

 

 

 

710

 

 

 

0.11

 

 

The increase in the Pre-Shock Scenario EVE at March 31, 2024 compared to December 31, 2023 is the result of a combination of increased cash at the federal reserve, a concentrated effort to grow the Bank’s deposits, which also improved the valuation of the deposits, as well as continued decreases to borrowings. The sensitivity in the -100-basis point Rate Shock Scenario to EVE grows more negative at March 31, 2024 compared to December 31, 2023. This is a result from the concentrated effort to grow the deposit portfolio to decrease wholesale borrowings. As a result, the shift from wholesale funding to deposits will cause liabilities to reprice lower in comparison to December 31, 2023, driving slightly more sensitive.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2024, 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, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

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.

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.

In a Memorandum filed on February 13, 2024, the Superior Court affirmed the decision of the lower court, holding that trial court has subject matter jurisdiction over the New York part of this action and that the New York plaintiffs have standing to pursue relief against us. The Superior Court also remanded the case to the lower court for further proceedings, which will include the completion of any remaining discovery and an adjudication of the open claims and defenses that have been asserted in the case. Once the lower court has issued a final adjudication, the parties will have an opportunity to appeal adverse rulings in the case.

On April 5, 2024, the lower court conducted a Case Management Conference to discuss remaining matters and next steps, and thereafter issued a Scheduling Order setting a deadline of April 19, 2024 for the Company to re-file its motion to compel discovery and motion for re-consideration of the prior striking of its jurisdictional defense and scheduled a pre-trial conference for July 11, 2024. The time for the Company to re-file the aforementioned motions was extended to April 23, 2024, and we timely filed and served them. The case was also re-assigned to another member of the Court of Common Pleas to handle future proceedings.

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.

ITEM 1A. Risk Factors

During the quarter ended March 31, 2024, there have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the SEC. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

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ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

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 2024 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, 2024 – January 31, 2024

 

 

—

 

 

$

—

 

 

 

—

 

 

 

766,447

 

February 1, 2024 – February 29, 2024

 

 

826

 

 

 

18.64

 

 

 

—

 

 

 

766,447

 

March 1, 2024 – March 31, 2024

 

 

20,620

 

 

 

18.29

 

 

 

—

 

 

 

766,447

 

Total

 

 

21,446

 

 

$

18.30

 

 

 

—

 

 

 

766,447

 

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

ITEM 5. Other Information

During the first quarter of 2024, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.

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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

10.1

 

Financial Institutions, Inc. – Executive Incentive Plan, effective January 1, 2024

 

Filed Herewith

10.2

 

Financial Institutions, Inc. – Management Incentive Plan, effective January 1, 2024

 

Filed Herewith

10.3

 

Form of Restricted Stock Unit Award Agreement Pursuant to the Financial Institutions, Inc. Amended and Restated 2015 Long-Term Incentive Plan

 

Filed Herewith

10.4

 

Form of Performance Stock Unit Award Agreement Pursuant to the Financial Institutions, Inc. Amended and Restated 2015 Long-Term Incentive Plan

 

Filed Herewith

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

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema With Embedded Linkbases Document

 

 

104

 

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

 

 

 

 

 

63

Table of Contents

 

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 6, 2024

Martin K. Birmingham

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

/s/ W. Jack Plants II

 

, May 6, 2024

W. Jack Plants II

 

 

Executive Vice President and Chief Financial Officer and Treasurer

 

 

(Principal Financial Officer)

 

 

 

 

/s/ Sandra L. Byers

 

, May 6, 2024

Sandra L. Byers

 

 

Senior Vice President and Controller

 

 

(Principal Accounting Officer)

 

 

 

64

EX-10.1 2 fisi-ex10_1.htm EX-10.1 EX-10.1

Exhibit 10.1

 

FINANCIAL INSTITUTIONS, INC.

EXECUTIVE INCENTIVE PLAN

 

Section 1.
Establishment of Plan.

Financial Institutions, Inc. (the "Company") intends to provide annual cash incentive award opportunities for eligible executives of the Company and its Subsidiaries (defined below) through the use of this Financial Institutions, Inc. Executive Incentive Plan (the "Plan"). The objective of the Plan is to align the interests of Participants (defined below) with the interests of the Company and its Subsidiaries in obtaining superior financial results. The Plan was first approved by the Management Development and Compensation Committee of the Board of Directors of the Company (the "Committee") on March 7, 2024, to be effective as of January 1, 2024.

Section 2.
Definitions.

For purposes of the Plan, the following terms shall have the following meanings:

(a)
"Award" means the cash incentive award opportunity granted to a Participant under the Plan.
(b)
"Award Certificate" means the award certificate given to each Participant evidencing the terms of the Participant's Award opportunity granted under the Plan, substantially in the form attached hereto as Exhibit B.
(c)
"Bank" means Five Star Bank, a Subsidiary of the Company.
(d)
"CEO" means the Chief Executive Officer of the Company.
(e)
"CHRO" means the Chief Human Resource Officer of the Company.
(f)
"Disability" means (i) in the case of a Participant whose employment with the Company or a Subsidiary is subject to the terms of an employment or consulting agreement that includes a definition of "Disability," the meaning set forth in such employment or consulting agreement during the period that such employment or consulting agreement remains in effect; and (ii) in all other cases, the meaning as set forth under the long-term disability plan applicable to the Participant as may be amended from time to time, and in the event there is no such plan applicable to a Participant, a physical or mental condition resulting from bodily injury, disease or mental disorder which renders the Participant incapable of continuing his or her usual and customary employment with the Company or a Subsidiary, as the case may be, for a period of not less than 120 days or such other period as may be required by applicable law.
(g)
"Funding Percentage" of a Performance Requirement means the percentage used to determine the Award Pool, which is based on the Performance Goal achieved for the Performance Requirement.
(h)
"Participant" means an executive officer or senior executive of the Company or a Subsidiary who has been selected by the Committee and granted an Award opportunity under the Plan.

 

 

 

(i)
"Performance Goal" means the threshold, target and maximum performance goals for each Performance Requirement, as set forth in the applicable Plan Year Schedule.
(j)
"Performance Period" means the Plan Year specified in the applicable Plan Year Schedule.
(k)
"Performance Requirement" means a performance requirement measured during a Performance Period, as set forth in the applicable Plan Year Schedule.
(l)
"Plan Year" means January 1 to December 31 of a specified year.
(m)
"Plan Year Schedule" means the Schedule containing the general terms of the Awards for a given Plan Year, substantially in the form attached hereto as Exhibit A.
(n)
"Retire" and "Retirement" mean the resignation or voluntary termination of employment of a Participant after attainment of age 65 and ten or more years of service with the Company or a Subsidiary.
(o)
"Subsidiary" means any subsidiary of the Company within the meaning of Rule 405 of the Securities Act of 1933, as amended.
(p)
"Weighting Percentage" means the weighting given to a Performance Requirement, as set forth in the applicable Plan Year Schedule.
Section 3.
Administration.
(a)
Committee. The Plan shall be administered by the Committee. The Committee has the exclusive power, authority and discretion to: (i) designate the Participants for a Plan Year, and if applicable, a Participant's Annual Percentage, Deferral Percentage, Deferral Performance Period and Deferral Performance Requirements; (ii) establish and review an Award's Performance Requirements and their respective Weighting Percentages, Performance Goals and Funding Percentages for a Performance Period; (iii) determine whether and to what extent the Performance Requirements and the Deferral Performance Requirements were achieved for the Performance Period and the Deferral Performance Period, respectively; (iv) calculate the Funding Percentages, the Aggregate Funding Percentage (as defined below), the Individual Performance Factor (as defined below) and the amount of the Award Pool resulting from the achievement of the Performance Requirements for a Performance Period and the application of the Individual Performance Factor; (v) determine the Earned Amount (as defined below) of an Award payable to any Participant based on such objective or subjective factors as the Committee shall deem relevant; (vi) establish, adopt or revise any rules and regulations as it may deem necessary or advisable to administer the Plan; (vii) make all other decisions and determinations that may be required under the Plan or as the Committee deems necessary or advisable to administer the Plan; and (viii) approve, modify, amend, or terminate the Plan as provided herein. The Committee's interpretation of the Plan and all decisions and determinations by the Committee with respect to the Plan are final, binding, and conclusive on all parties.
(b)
Delegation. In accordance with applicable law, the Committee may delegate any of the responsibilities listed above in Section 3(a) to the CEO or the CHRO (other than any responsibilities related to an Award to himself or herself), or may receive recommendations from such individuals regarding such responsibilities. Any reference herein to the Committee shall be deemed to include any person to whom any duty of the Committee has been delegated pursuant to this Section 3(b).

2

 

 

Section 4.
Eligibility.
(a)
Selection. For each Plan Year, the Committee will select the executive officers and senior executives who will participate in the Plan for the upcoming Plan Year, and those executives, if any, to be included in the mandatory deferral portion of the Plan for such Plan Year.
(b)
Notification. Following the selection of Participants by the Committee for a Plan Year, each selected Participant shall be notified of his or her participation in the Plan for the Plan Year, and shall receive an Award Certificate (together with the Plan Year Schedule for the Plan Year) setting forth the terms of his or her participation in the Plan for the Plan Year.
Section 5.
Award Pool.
(a)
Gateway Requirement. As soon as practicable following the end of the Plan Year, the Committee will determine the Tier 1 capital ratio of the Bank as determined under the final US Basel III capital framework (the "Tier 1 Capital Ratio") as of the end of the Plan Year. If the Tier 1 Capital Ratio as of the end of the Plan Year does not meet the requirement set by the Committee, the Award Pool will be zero and no Award shall be paid to any Participant for the Plan Year.
(b)
Performance Results. If the Tier 1 Capital Ratio as of the end of the Plan Year meets or exceeds the requirement set by the Committee, then the Committee will determine the Performance Goal achieved for each Performance Requirement for the Performance Period. The "Aggregate Funding Percentage" for the Performance Period will be equal to the sum of the following for each Performance Requirement: (i) the Weighting Percentage for such Performance Requirement, multiplied by (ii) the Funding Percentage for such Performance Requirement based on the Performance Goal achieved, each as set forth in, and determined pursuant to, the Plan Year Schedule for the Plan Year that includes the Performance Period.
(c)
Individual Performance Factor. For each Performance Period, the Committee will determine an individual performance factor of 100% to 125% (the “Individual Performance Factor”) based on the Participants’ collective individual performance against the individual performance goals established by the Committee for the Participants for the Performance Period.
(d)
Award Pool. The “Award Pool” for a Performance Period will be the Aggregate Funding Percentage for the Performance Period, multiplied by the aggregate sum of the target amount set forth in the Award Certificate for the Plan Year that includes the Performance Period (the “Target Amount”) of each Participant who was employed on the last day of the Performance Period or who is entitled to a pro rata Award pursuant to Section 6(a)(ii), Section 7(c)(i) or Section 7(c)(iv) for the Performance Period, further multiplied by the Individual Performance Factor for the Performance Period.
Section 6.
Awards.
(a)
Determination of Awards.
(i)
Earned Amount.

3

 

 

The Committee, in consultation with the CEO and the CHRO, will determine and approve the amount of each Participant's Award (respectively, a Participant's "Earned Amount"), if any, taking into account the Participant's Target Amount and the Participant's absolute and relative individual performance during the Plan Year; provided, however, the aggregate total of all Participants' Earned Amounts for the Plan Year may not exceed the actual Award Pool unless the Committee determines otherwise.
(ii)
Partial Year Participation. If a person becomes a Participant in the Plan after the beginning of a Plan Year and prior to October 31st of such Plan Year, or a Participant Retires during a Plan Year, then unless the Committee determines otherwise, the Participant's Award for such Plan Year will be prorated based on the number of days such person participated in the Plan during the Performance Period. If a person becomes a Participant in the Plan after October 31st of a Plan Year, then unless the Committee determines otherwise, the Participant is not eligible to participate in the Plan until the next Plan Year. If a Participant takes a leave of absence during the Plan Year for any reason, then unless the Committee determines otherwise, the Participant will receive a pro rata share of an Award, if any, for such Plan Year. Only the portion of the Award actually paid to a Participant pursuant to this Section 6(a)(ii) will count against the Award Pool.
(b)
Annual Amount and Deferred Amount. The Earned Amount under a Participant's Award consists of two components:
(i)
an Annual Amount determined in accordance with Section 7; and
(ii)
if specified in a Participant's Award Certificate, a Deferred Amount determined in accordance with Section 8.
Section 7.
Annual Amount.
(a)
Calculation. A Participant's "Annual Amount" is equal to the Participant's Earned Amount determined in accordance with Section 6, multiplied by the annual percentage set forth in the Participant's Award Certificate (the "Annual Percentage"). If a Participant's Award Certificate does not contain an Annual Percentage or a Deferral Percentage (as defined below), then the Annual Percentage shall be 100%; and if a Participant's Award Certificate does not contain an Annual Percentage, but does contain a Deferral Percentage, the Annual Percentage shall be 100% minus the Deferral Percentage.
(b)
Payment. Subject to Section 7(c), a Participant must be actively employed by the Company or a Subsidiary on the date that the Annual Amount is paid in order to be eligible to receive payment of the Annual Amount. The Annual Amount shall be paid to the Participant in a lump-sum cash payment as soon as administratively practicable following the end of the Performance Period, but in no event later than March 15th immediately following the end of the Performance Period.
(c)
Effects of Certain Events on the Annual Amount.
(i)
Death, Disability or Retirement During the Performance Period. In the event of a Participant's termination of employment due to death or Disability during the Performance Period, the Participant shall be entitled to a pro rata Earned Amount under the Plan for the Plan Year in which the Participant's employment terminates due to death or Disability equal to the sum of (x) and (y), where (x) equals the product of (1) the Target Amount of the Award multiplied by the Annual Percentage; times (2) a fraction, the numerator of which is the number of days that have elapsed in the Performance Period through the date of the Participant’s termination of employment due to death or Disability, and the denominator of which is the total number of days during the Performance Period, and where (y) equals the product of (1) the Target Amount of the Award multiplied by the Deferral Percentage; times (2) a fraction, the numerator of which is the number of days that have elapsed from the beginning of the Performance Period through the date of the Participant’s termination of employment due to death or Disability, and the denominator of which is the total number of days during the Performance Period and the Deferral Performance Period.

4

 

 

Such amount shall be paid to the Participant as soon as practicable following the Participant's termination of employment due to death or Disability, but in no event later than the earlier of (x) the 75th day following the Participant’s termination of employment due to death or Disability, or (y) March 15th of the calendar year immediately following the end of the Performance Period to which such Earned Amount relates. In the event of a Participant's Retirement during the Performance Period, the Participant may be entitled to a pro rata Annual Amount under the Plan pursuant to Section 6(a)(ii), in which case any Annual Amount payable to the Participant with respect to such Performance Period shall be paid at the same time and in the same form as payments for the Performance Period are paid to actively employed Participants under Section 7(b) or Section 7(c)(iv), as applicable.
(ii)
Termination of Employment (other than Death, Disability or Retirement) During the Performance Period. If a Participant's employment terminates for any reason other than Retirement, death or Disability during the Performance Period, then such Participant shall not be entitled to payment of the Annual Amount or, in the case of a termination during the Performance Period for any reason other than death or Disability, the Deferred Amount of the Award for the Plan Year in which the Participant's employment terminates.
(iii)
Death, Disability or Retirement Following the Performance Period. In the event of a Participant's termination of employment due to death, Disability or Retirement after the end of a Performance Period but prior to payment of the Annual Amount for that Performance Period, the Participant shall continue to be entitled to payment of the Annual Amount of the Award for such completed Performance Period, and such Annual Amount shall be paid at the same time and in the same form as payments for the Performance Period are made to actively employed Participants under Section 7(b) or Section 7(c)(iv), as applicable.
(iv)
Change in Control. In the event of a change in control (as defined in the Financial Institutions, Inc. 2015 Long-Term Incentive Plan, as amended from time to time, and including any successor plan thereto (the "LTIP")) after the end of a Performance Period but prior to payment of the Annual Amount for that Performance Period, then each Participant who remains employed as of the date of the change in control shall be entitled to payment of the Annual Amount of the Award for such completed Performance Period, and such Annual Amount shall be paid as soon as practicable following the occurrence of the change in control, but in no event later than March 15th immediately following the end of the completed Performance Period. In addition, if a change in control occurs during a Performance Period, then all Participants who remain employed on the date of the change in control shall be entitled to a pro rata Award under the Plan for the Plan Year in which the change in control occurs equal to the product of: (1) the greater of the Earned Amount under the Award, determined based on actual performance through the date of the change in control, and the Target Amount of the Award; and (2) a fraction, the numerator of which is the number of days that have elapsed in the Performance Period, and the denominator of which is the total number of days during the Performance Period. Such amount shall be paid to any eligible Participants as soon as practicable following the occurrence of the change in control, but in no event later than the earlier of (x) the 75th day following the occurrence of the change in control, or (y) March 15th of the calendar year immediately following the end of the calendar year in which the change in control occurs.

5

 

 

Section 8.
Deferred Amount.
(a)
Calculation. To further promote prudent and sound behaviors consistent with the long-term objectives of the Company, certain Participants may be required to defer a portion of the Earned Amount (the “Deferred Amount”) until the end of a deferral performance period specified in the Participant's Award Certificate (the "Deferral Performance Period"). A Participant's "Deferred Amount" is equal to the Participant's Earned Amount determined in accordance with Section 6, multiplied by the deferral percentage, if any, set forth in the Participant's Award Certificate (the "Deferral Percentage"). If a Participant's Award Certificate does not contain a Deferral Percentage, then the Deferral Percentage shall be 0%. At the payment date for any Annual Amount, the Deferred Amount will be credited to a hypothetical recordkeeping account for the benefit of the Participant. Whether all or a portion of the Deferred Amount becomes payable to a Participant is determined based on the satisfaction of the service and/or performance requirements specified in the Participant's Award Certificate (the "Deferral Performance Requirements") for a deferral performance period specified in the Participant's Award Certificate (the "Deferral Performance Period")
(b)
Payment. Subject to Section 8(c), a Participant must be actively employed by the Company or a Subsidiary on the date that the Deferred Amount is paid in order to be eligible to receive payment of the Deferred Amount. The Deferred Amount shall be paid to the Participant in a lump-sum cash payment as soon as administratively practicable following the end of the Deferral Performance Period, but in no event later than the earlier of (x) the 75th day following the end of the Deferral Performance Period, or (y) March 15th of the calendar year immediately following the end of the calendar year in which the Deferral Performance Period ends.
(c)
Effects of Certain Events on the Deferred Amount.
(i)
Death or Disability During the Deferral Performance Period. If a Participant’s employment terminates due to death or Disability during a Deferral Performance Period, then the Participant shall be entitled to a pro rata payment of any related Deferred Amount equal to the product of: (1) the Deferred Amount; times (2) a fraction, the numerator of which is the number of days that have elapsed from the first day of the original Performance Period for the Deferred Amount through the date of the Participant’s termination of employment due to death or Disability, and the denominator of which is the total number of days in the related Performance Period and Deferral Performance Period. Payment shall be made as soon as practicable following the Participant's termination of employment due to death or Disability, but in no event later than the earlier of (x) the 75th day following the Participant’s termination of employment, or (y) March 15th of the calendar year immediately following the calendar year in which the Participant’s employment terminates.
(ii)
Involuntary Termination of Employment After Commencement of Deferral Performance Period. If a Participant's employment is involuntarily terminated by the Company or a Subsidiary after the commencement of a Deferral Performance Period but prior to payment of any related Deferred Amount due to a reduction in force, the elimination of his or her position or the closing of his or her office, then the Committee, in its sole discretion, shall determine whether such Participant shall become entitled to a payment of all or a portion of the Deferred Amount. Any such payment shall be made as soon as practicable following the Participant's termination of employment, but in no event later than the earlier of (x) the 75th day following the Participant’s termination of employment, (y) March 15th of the calendar year immediately following the calendar year in which the Participant’s employment terminates, or (z) March 15th of the calendar year immediately following the end of the calendar year in which the Deferral Performance Period ends.

6

 

 

(iii)
Retirement During the Deferral Performance Period. If a Participant Retires during a Deferral Performance Period, then the Participant shall be entitled to a pro rata payment of any related Deferred Amount equal to the product of: (1) the Deferred Amount, subject to satisfaction of the Deferral Performance Requirements through the date of the Participant’s Retirement; and (2) a fraction, the numerator of which is the number of days that have elapsed in the Deferral Performance Period through the date of the Participant’s Retirement, and the denominator of which is the total number of days in the Deferral Performance Period. Payment shall be made as soon as practicable following the Participant’s Retirement, but in no event later than the earlier of (x) the 75th day following the Participant’s Retirement, or (y) March 15th of the calendar year immediately following the calendar year in which the Participant Retires.
(iv)
Death, Disability or Retirement Following the Deferral Performance Period. If a Participant’s employment terminates due to death, Disability or Retirement after the end of a Deferral Performance Period but prior to payment of any related Deferred Amount, then the Participant shall continue to be entitled to payment of the Deferred Amount for such completed Deferral Performance Period, which shall be paid at the same time and in the same form as payments are payable to actively employed Participants under Section 8(b) or 8(c)(iv), as applicable.
(v)
Change in Control. In the event of a change in control (as defined in the LTIP) occurring after the commencement of a Deferral Performance Period but prior to the payment of any related Deferred Amount, then all Participants with a Deferred Amount who remain employed on the date of the change in control shall be entitled to payment of such Deferred Amount as soon as practicable following the occurrence of the change in control, but in no event later than the earlier of (x) the 75th day following the occurrence of the change in control, (y) March 15th of the calendar year immediately following the calendar year in which the change in control occurs, or (z) March 15th of the calendar year immediately following the end of the calendar year in which the Deferral Performance Period ends.
Section 9.
Miscellaneous
(a)
Amendment. The Committee may, at any time and from time to time, amend, modify or terminate the Plan and/or any Plan Year Schedule. Termination of the Plan after the end of the Performance Period but before Awards are paid for that Plan Year will not reduce Participants' rights to receive the Annual Amount or, if applicable, the Deferred Amount for such Plan Year. Termination or amendment of the Plan and/or any Plan Year Schedule during the Performance Period may be retroactive to the beginning of the Performance Period, at the discretion of the Committee. If a change in control occurs, no amendment or termination of the Plan after the date of the change in control may adversely affect amounts payable to a Participant without the consent of the Participant.
(b)
No Right to Continued Employment. The terms and conditions of the Award, the Award Certificate, any Plan Year Schedule and the Plan shall not be deemed to constitute a contract of employment between the Company or a Subsidiary and a Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, except as otherwise provided in a written employment agreement. Nothing in any Award, any Award Certificate, any Plan Year Schedule or the Plan shall be deemed to give a Participant the right to be retained in the service of the Company or a Subsidiary as an employee or to interfere with the right of the Company or a Subsidiary to discipline or discharge a Participant at any time.

7

 

 

(c)
Withholding Taxes. The Company or a Subsidiary shall be permitted to deduct the amounts required to be withheld by federal, state or local tax law from the Annual Amount and the Deferred Amount.
(d)
Notices. All notices relating to the Plan to the Company shall be in writing and sent to the CHRO at 220 Liberty Street, Warsaw, NY 14569 or such other address designated by the Company. Notices to the Participant shall be addressed to the Participant at the Participant's home or work address, including via interoffice mail, as it appears on the records of Participant's employer. Any such notices may be made in electronic format or through means of online or other electronic transmission.
(e)
Officer Titles. If the Company or the Bank changes the current titles of its officers, the references to specific officer titles in the Plan will be construed to mean the title of the officer in the new or revised system that, in the Company's discretion, most closely approximates the title of the officer under the current system.
(f)
Compensation Recovery Policy. Notwithstanding any other provision of the Plan to the contrary, any amount received under the Plan shall be subject to potential cancellation, recoupment, rescission, payback, recovery, or other action in accordance with the terms of the Financial Institutions, Inc. Clawback Policy, as amended from time to time, and any other compensation recovery policy, if any, that the Company may adopt from time to time (collectively, the "Policy"). The Participant agrees and consents to the Company's application, implementation and enforcement of (i) the Policy that may apply to the Participant and (ii) any provision of applicable law relating to cancellation, rescission, payback, recovery or recoupment of compensation, and expressly agrees that the Company may take such actions as are necessary to effectuate the Policy or applicable law without further consent or action being required by the Participant. To the extent that the terms of the Plan and the Policy or any similar policy conflict, then the terms of such Policy shall prevail.
(g)
Section 409A. The compensation under the Plan is intended to be exempt from or comply with the requirements of Section 409A of the Code and any regulations promulgated and other guidance issued thereunder (collectively, "Section 409A"), and the Plan shall be administered and interpreted consistent with such intention. Accordingly, references to “termination of employment” and similar terms used in the Plan mean, to the extent necessary to comply with Section 409A, the date that the Participant incurs a “separation from service” within the meaning of Section 409A. In addition, to the extent necessary to comply with Section 409A, a change in control under the Plan must represent a change in control event under Section 409A. Notwithstanding anything in the Plan to the contrary, if at the time of a Participant’s separation from service, the Participant is a “specified employee” for purposes of Section 409A, and payment under the Plan as a result of such separation from service is required by Section 409A to be delayed by six months, then the Company shall make such payment on the day following the six-month anniversary of the Participant’s separation from service to the extent required to comply with Code Section 409A. The preceding sentences, however, shall not be construed as a guarantee by the Company or any Subsidiary of any particular tax effect to Participants under the Plan. The Company and its Subsidiaries shall not be liable to any Participant for any adverse tax consequences incurred by a Participant under Section 409A, nor for reporting in good faith any amount or payment under the Plan as being includible in gross income under Section 409A.

8

 

 

(h)
Governing Law. The Plan, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of New York, without reference to principles of conflict of laws, and construed accordingly.

* * * * *

9

 

EXHIBIT A

FINANCIAL INSTITUTIONS, INC.

EXECUTIVE INCENTIVE PLAN

PLAN YEAR SCHEDULE

Performance Period: 2024 Plan Year

Performance Requirements. The Performance Requirements, the Weighting Percentage for each Performance Requirement, the applicable Performance Goals for each Performance Requirement and the Funding Percentage for each Performance Goal are as follows:

Performance Requirement

Weighting Percentage

Performance Goals 1

 Threshold 2

Target

Maximum 3

Pre-Provision Net Income (PPNI $MM)

[40%]

$44.87

$59.83

$68.80

Total Loan Growth

[20%]

0.94%

1.45%

1.81%

Non-Public Deposit Growth

[20%]

4.22%

6.49%

8.11%

Net Charge-offs (NCO)

[20%]

0.43%

0.34%

0.26%

Funding Percentage

 

50%

100%

150%

1 If actual performance for the Performance Period is between a Performance Requirement's Performance Goals, the Funding Percentage for such Performance Requirement will be determined using straight line interpolation between the Funding Percentage for the Performance Goal above and below the actual performance achieved for that Performance Requirement.

2 In the event that actual performance for the Performance Period is below a Performance Requirement's Threshold, the Funding Percentage for such Performance Requirement will be zero.

3 If actual performance for a Performance Period is at or above Maximum, the Funding Percentage for such Performance Requirement will be the Funding Percentage at Maximum.

Definitions. In addition to the definitions set forth in the Plan set forth above, for purposes of the Award and the Plan, the following terms shall have the following meanings:

(i)
"Non-Public Deposit Growth" means December year-over-year month-to-date average balances in total non-public deposits (includes DDA, NOW, savings, money market and time).
(j)
"Net Charge-off Ratio" means the ratio of the Bank's net charge-offs to average loans outstanding as reported in the Company's annual report to shareholders on Form 10-K.
(k)
"Pre-Provision Net Income" or "PPNI" means net income excluding provision adjustment net of tax (utilizing marginal tax rate).
(l)
"Total Loan Growth" means annual growth in gross loans including loans held for sale, including deferred costs (fees) and prior to reduction for allowance for loan losses of the Bank. The calculation excludes PPP Loan Balances from 2022 and 2023.

 

 

 

 

EXHIBIT B

FINANCIAL INSTITUTIONS, INC.

EXECUTIVE INCENTIVE PLAN

AWARD CERTIFICATE

Excludes ICS, CDARS, municipality, and accounts owned and maintained by FII or the Bank Financial Institutions, Inc., a New York financial holding company (the "Company"), hereby grants to the Participant set forth below, as of the Award Date set forth below, a cash Award (the "Award"), based on attainment of the Performance Requirements and as determined pursuant to the terms of the Financial Institutions, Inc. Executive Incentive Plan (the "Plan") and the applicable Plan Year Schedule.

Participant Tier: Tier X

Award Date: March 7, 2024

Plan Year: 2024

Target Amount: XX% of the Participant’s annualized base salary in effect as of December 31 of the Plan Year, except as follows:

(a)
Subject to any applicable proration under clauses (c) and (d) below, if the Participant incurs a termination of employment during the Performance Period and remains eligible to receive any Earned Amount for the Performance Period, the Participant’s annualized base salary used in determining the Target Amount will be determined as of the date on which the Participant incurs a termination of employment;
(b)
Subject to any applicable proration under clauses (c) and (d) below, if there is a change in control during the Performance Period and the Participant is eligible to receive an Award under Section 7(c)(iv) of the Plan, the Participant’s annualized base salary used in determining the Target Amount will be determined as of the date of the change in control;
(c)
If, during the Performance Period, a Participant receives a base salary increase outside of the Company’s standard merit cycle other than in connection with a promotion of the Participant as set forth in clause (d) below, the annualized base salary increase is greater than 10% of the Participant’s existing annualized base salary, and the increase in the Participant’s annualized base salary is effective after July 1 of the Plan Year, then the Participant’s annualized base salary used in determining the Target Amount will equal the sum of (i) the Participant’s annualized base salary in effect immediately prior to the increase, prorated based on the number of days during the Performance Period before the increase in base salary takes effect, plus (ii) the Participant’s annualized base salary following the increase in base salary, prorated based on the number of days during the Performance Period in which such increased annualized base salary is in effect; and
(d)
If, during the Performance Period, a Participant is promoted or demoted and, in connection with such promotion or demotion, there is an increase or decrease in the Participant’s annualized base salary, then the Participant’s annualized base salary used in determining the Target Amount will equal the sum of (i) the Participant’s annualized base salary in effect immediately prior to the change in base salary in connection with the Participant’s promotion or demotion, prorated based on the number of days during the Performance Period before such change in base salary takes effect, plus (ii) the Participant’s annualized base salary following the change in base salary in connection with the Participant’s promotion or demotion, prorated based on the number of days during the Performance Period after such change in base salary takes effect.

 

 

 

The applicable Performance Period, Performance Requirements, Performance Goals, Weighting Percentages and Funding Percentages are set forth in the attached Plan Year Schedule.

Deferred Amount (if applicable)

Annual Percentage: [___]%

Deferral Percentage: [___]%

Deferral Performance Period: January 1, 2025 - December 31, 2026

Deferral Performance Requirements. The Deferred Amount is subject to the additional Deferral Performance Requirements:

(a)
Net Charge-Off Ratio Requirement. Provided that the Net Charge-Off Ratio for the Deferral Performance Period is less than or equal to one percent, 50% of the Deferred Amount shall become payable to the Participant. If the Net Charge-Off Ratio is greater than one percent, then 50% of the Deferred Amount is forfeited and shall not be paid. "Net Charge-Off Ratio" means the percentage of net charge-offs to average loans outstanding.
(b)
Committee Discretionary Requirement. The remaining 50% of the Deferred Amount shall become payable to the Participant based on factors determined by the Committee, in its sole discretion. The Committee may award all, part or none of the remaining 50% of the Deferred Amount.

The Award is subject to the terms and conditions set forth in this Award Certificate, the applicable Plan Year Schedule and the Plan. All terms and provisions of the Plan, as the same may be amended from time to time, are incorporated and made part of this Award Certificate. If any provision of this Award Certificate is in conflict with the terms of the Plan, then the terms of the Plan shall govern. All capitalized terms used in this Award Certificate and not defined herein shall have the meanings assigned to them in the Plan. The Participant hereby expressly acknowledges receipt of a copy of the Plan.

IN WITNESS WHEREOF, the parties have executed this Award Certificate as of the Award Date.

FINANCIAL INSTITUTIONS, INC.

By: img227012907_0.jpg

Name: Andrew W. Dorn Jr.

Title: Chair – MD&C Committee

By checking the box below, the Participant hereby accepts and agrees to be bound by all of the terms and conditions of this Award Certificate, the applicable Plan Year Schedule and the Plan.

 

 

DOCPROPERTY DOCXDOCID DMS=IManage Format=<<NUM>>v<<VER>> 24855502v5

 

 

 

 

EX-10.2 3 fisi-ex10_2.htm EX-10.2 EX-10.2

Exhibit 10.2

FINANCIAL INSTITUTIONS, INC.

MANAGEMENT INCENTIVE PLAN

 

Section 1.
Establishment of Plan.

Financial Institutions, Inc. (the "Company") intends to provide annual cash incentive award opportunities for eligible employees of the Company and its Subsidiaries (defined below) through the use of this Financial Institutions, Inc. Management Incentive Plan (the "Plan"). The objective of the Plan is to align the interests of Participants (defined below) with the interests of the Company and its Subsidiaries in obtaining superior financial results. The Plan was first approved by the Management Development and Compensation Committee of the Board of Directors of the Company (the "Committee") on March 7, 2024, to be effective as of January 1, 2024.

Section 2.
Definitions.

For purposes of the Plan, the following terms shall have the following meanings:

(a)
"Award" means the cash incentive award opportunity granted to a Participant under the Plan.
(b)
"Award Certificate" means the award certificate given to each Participant evidencing the terms of the Participant's Award opportunity granted under the Plan, substantially in the form attached hereto as Exhibit B.
(c)
"Bank" means Five Star Bank, a Subsidiary of the Company.
(d)
"CEO" means the Chief Executive Officer of the Company.
(e)
“CHRO” means the Chief Human Resource Officer of the Company.
(f)
"Disability" means (i) in the case of a Participant whose employment with the Company or a Subsidiary is subject to the terms of an employment or consulting agreement that includes a definition of "Disability," the meaning set forth in such employment or consulting agreement during the period that such employment or consulting agreement remains in effect; and (ii) in all other cases, the meaning as set forth under the long-term disability plan applicable to the Participant as may be amended from time to time, and in the event there is no such plan applicable to a Participant, a physical or mental condition resulting from bodily injury, disease or mental disorder which renders the Participant incapable of continuing his or her usual and customary employment with the Company or a Subsidiary, as the case may be, for a period of not less than 120 days or such other period as may be required by applicable law.
(g)
"Funding Percentage" of a Performance Requirement means the percentage used to determine the Award Pool, which is based on the Performance Goal achieved for the Performance Requirement.
(h)
"Participant" means an eligible employee of the Company or a Subsidiary who has been selected by the CEO and the CHRO and granted an Award opportunity under the Plan.
(i)
"Performance Goal" means the threshold, target and maximum performance goals for each Performance Requirement, as set forth in the applicable Plan Year Schedule.

 

 

(j)
"Performance Period" means the Plan Year specified in the applicable Plan Year Schedule.
(k)
"Performance Requirement" means a performance requirement measured during a Performance Period, as set forth in the applicable Plan Year Schedule.
(l)
"Plan Year" means January 1 to December 31 of a specified year.
(m)
"Plan Year Schedule" means the Schedule containing the general terms of the Awards for a given Plan Year, substantially in the form attached hereto as Exhibit A.
(n)
"Retire" and "Retirement" mean the resignation or voluntary termination of employment of a Participant after attainment of age 65 and ten or more years of service with the Company or a Subsidiary.
(o)
"Subsidiary" means any subsidiary of the Company within the meaning of Rule 405 of the Securities Act of 1933, as amended.
(p)
"Weighting Percentage" means the weighting given to a Performance Requirement, as set forth in the applicable Plan Year Schedule.
Section 3.
Administration.
(a)
Committee. The Committee has the exclusive power, authority and discretion to: (i) establish and review an Award’s Performance Requirements and their respective Weighting Percentages, Performance Goals and Funding Percentages for a Performance Period; (ii) determine whether and to what extent the Performance Requirements were achieved for the Performance Period; (iii) calculate the Funding Percentages, the Aggregate Funding Percentage (as defined below), the Individual Performance Factor (as defined below) and the amount of the Award Pool resulting from the achievement of the Performance Requirements for a Performance Period and the application of the Individual Performance Factor; and (iv) approve, modify, amend, or terminate the Plan as provided herein.
(b)
CHRO. The Plan shall be administered by the CHRO. The CHRO has the power, authority and discretion to: (i) approve the Earned Amount (as defined below) of an Award payable to any Participant based on such objective or subjective factors as he or she shall deem relevant; (ii) establish, adopt or revise any rules and regulations as he or she may deem necessary or advisable to administer the Plan; (iii) make all other decisions and determinations that may be required under the Plan or as he or she deems necessary or advisable to administer the Plan. The CHRO's interpretation of the Plan and all decisions and determinations by him or her with respect to the Plan are final, binding, and conclusive on all parties.
(c)
Delegation. In accordance with applicable law, the Committee may delegate any of the responsibilities listed above in Section 3(a) to the CEO or the CHRO, or may receive recommendations from such individuals regarding such responsibilities. Any reference herein to the Committee shall be deemed to include any person to whom any duty of the Committee has been delegated pursuant to this Section 3(c).

2

 

Section 4.
Eligibility.
(a)
Eligibility. In order to be eligible to participate in the Plan for a Plan Year, an individual must: (i) be an employee of the Company or one of its Subsidiaries in salary grade C or above, and (ii) not be a participant in the Financial Institutions, Inc. Executive Incentive Plan for such Plan Year.
(b)
Selection. For each Plan Year, the CEO and CHRO will select the eligible employees of the Company and its Subsidiaries who will participate in the Plan for the upcoming Plan Year.
(c)
Notification. Following the selection of Participants by the Committee for a Plan Year, each selected Participant shall be notified of his or her participation in the Plan for the Plan Year, and shall receive an Award Certificate (together with the Plan Year Schedule for the Plan Year) setting forth the terms of his or her participation in the Plan for the Plan Year.
Section 5.
Award Pool.
(a)
Gateway Requirement. As soon as practicable following the end of the Plan Year, the Committee will determine the Tier 1 capital ratio of the Bank as determined under the final US Basel III capital framework (the "Tier 1 Capital Ratio") as of the end of the Plan Year. If the Tier 1 Capital Ratio as of the end of the Plan Year does not meet the requirement set by the Committee, the Award Pool will be zero and no Award shall be paid to any Participant for the Plan Year.
(b)
Performance Results. If the Tier 1 Capital Ratio as of the end of the Plan Year meets or exceeds the requirement set by the Committee, then the Committee will determine the Performance Goal achieved for each Performance Requirement for the Performance Period. The "Aggregate Funding Percentage" for the Performance Period will be equal to the sum of the following for each Performance Requirement: (i) the Weighting Percentage for such Performance Requirement, multiplied by (ii) the Funding Percentage for such Performance Requirement based on the Performance Goal achieved, each as set forth in, and determined pursuant to, the Plan Year Schedule for the Plan Year that includes the Performance Period.
(c)
Individual Performance Factor. For each Performance Period, the Committee will determine an individual performance factor of 100% to 125% (the “Individual Performance Factor”) based on the Participants’ collective individual performance against the individual performance goals established by the Committee for the Participants for the Performance Period.
(d)
Award Pool. The “Award Pool” for a Performance Period will be the Aggregate Funding Percentage for the Performance Period, multiplied by the aggregate sum of the target amount set forth in the Award Certificate for the Plan Year that includes the Performance Period (the “Target Amount”) of each Participant who was employed on the last day of the Performance Period or who is entitled to a pro rata Award pursuant to Section 6(a)(ii), Section 7(c)(i) or Section 7(c)(iv) for the Performance Period, further multiplied by the Individual Performance Factor for the Performance Period.

3

 

Section 6.
Awards.
(a)
Determination of Awards.
(i)
Earned Amount. The CHRO, in consultation with the CEO and executive leaders as appropriate, will determine and approve the amount of each Participant's Award (respectively, a Participant's "Earned Amount"), if any, taking into account the Participant's Target Amount and the Participant's absolute and relative individual performance during the Plan Year; provided, however, the aggregate total of all Participants' Earned Amounts for the Plan Year may not exceed the actual Award Pool unless the Committee determines otherwise.
(ii)
Partial Year Participation. If a person becomes a Participant in the Plan after the beginning of a Plan Year and prior to October 31st of such Plan Year, or a Participant Retires during a Plan Year, then unless the CHRO determines otherwise, the Participant's Award for such Plan Year will be prorated based on the number of days such person participated in the Plan during the Performance Period. If a person becomes a Participant in the Plan after October 31st of a Plan Year, then unless the CHRO determines otherwise, the Participant is not eligible to participate in the Plan until the next Plan Year. If a Participant takes a leave of absence during the Plan Year for any reason, then unless the CHRO determines otherwise, the Participant will receive a pro rata share of an Award, if any, for such Plan Year. Only the portion of the Award actually paid to a Participant pursuant to this Section 6(a)(ii) will count against the Award Pool.
(b)
Payment. Subject to Section 6(c), a Participant must be actively employed by the Company or a Subsidiary on the date that the Earned Amount is paid in order to be eligible to receive payment of the Earned Amount. The Earned Amount shall be paid to the Participant in a lump-sum cash payment as soon as administratively practicable following the end of the Performance Period, but in no event later than March 15th immediately following the end of the Performance Period.
(c)
Effects of Certain Events on the Earned Amount.
(i)
Death, Disability or Retirement During the Performance Period. In the event of a Participant's termination of employment due to death or Disability during the Performance Period, the Participant shall be entitled to a pro rata Award under the Plan for the Plan Year in which the Participant's employment terminates due to death or Disability equal to the product of: (1) the Target Amount of the Award; times (2) a fraction, the numerator of which is the number of days that have elapsed in the Performance Period through the date of the Participant’s termination of employment due to death or Disability, and the denominator of which is the total number of days during the Performance Period. Such amount shall be paid to the Participant as soon as practicable following the Participant's termination of employment due to death or Disability, but in no event later than the earlier of (x) the 75th day following the Participant’s termination of employment due to death or Disability, or (y) March 15th of the calendar year immediately following the end of the Performance Period to which the Award relates. In the event of a Participant's Retirement during the Performance Period, the Participant may be entitled to a pro rata Award under the Plan pursuant to Section 6(a)(ii), in which case any pro rata Award payable to the Participant with respect to the Performance Period shall be paid at the same time and in the same form as payments for the Performance Period are made to actively employed Participants under Section 6(b) or 6(c)(iv), as applicable.
(ii)
Termination of Employment (other than Death, Disability or Retirement) During the Performance Period. If a Participant's employment terminates for any reason other than death, Disability or Retirement during the Performance Period, then such Participant shall not be entitled to payment of the Earned Amount for the Plan Year in which the Participant's employment terminates.

4

 

(iii)
Death, Disability or Retirement Following the Performance Period. In the event of a Participant's termination of employment due to death, Disability or Retirement after the end of a Performance Period but prior to payment of the Earned Amount for that Performance Period, the Participant shall continue to be entitled to payment of the Earned Amount of the Award for such Performance Period, and such Earned Amount shall be paid at the same time and in the same form as payments for the Performance Period are made to actively employed Participants under Section 6(b) or 6(c)(iv), as applicable.
(iv)
Change in Control. In the event of a change in control (as defined in the Financial Institutions, Inc. 2015 Long-Term Incentive Plan, as amended from time to time, and including any successor plan, after the end of a Performance Period but prior to payment of the Earned Amount for that Performance Period, then each Participant who remains employed as of the date of the change in control shall be entitled to payment of the Earned Amount of the Award for such completed Performance Period, and such Earned Amount shall be paid as soon as practicable following the occurrence of the change in control, but in no event later than March 15th immediately following the end of the completed Performance Period. In addition, if a change in control occurs during a Performance Period, then all Participants who remain employed as of the date of the change in control shall be entitled to a pro rata Award under the Plan for the Plan Year in which the change in control occurs equal to the product of: (1) the greater of the Earned Amount under the Award, determined based on actual performance through the date of the change in control, and the Target Amount of the Award; and (2) a fraction, the numerator of which is the number of days that have elapsed in the Performance Period, and the denominator of which is the total number of days during the Performance Period. Such amount shall be paid to any eligible Participants as soon as practicable following the occurrence of the change in control, but in no event later than the earlier of (x) the 75th day following the occurrence of the change in control, or (y) March 15th of the calendar year immediately following the end of the calendar year in which the change in control occurs.
Section 7.
Miscellaneous
(a)
Amendment. The Committee may, at any time and from time to time, amend, modify or terminate the Plan and/or any Plan Year Schedule. Termination of the Plan after the end of the Performance Period but before Awards are paid for that Plan Year will not reduce Participants' rights to receive the Annual Amount. Termination or amendment of the Plan and/or any Plan Year Schedule during the Performance Period may be retroactive to the beginning of the Performance Period, at the discretion of the Committee. If a change in control occurs, no amendment or termination of the Plan after the date of the change in control may adversely affect amounts payable to a Participant without the consent of the Participant.
(b)
No Right to Continued Employment. The terms and conditions of the Award, the Award Certificate, any Plan Year Schedule and the Plan shall not be deemed to constitute a contract of employment between the Company or a Subsidiary and a Participant. Such employment is hereby acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, or no reason, with or without cause, and with or without notice, except as otherwise provided in a written employment agreement. Nothing in any Award, any Award Certificate, any Plan Year Schedule or the Plan shall be deemed to give a Participant the right to be retained in the service of the Company or a Subsidiary as an employee or to interfere with the right of the Company or a Subsidiary to discipline or discharge a Participant at any time.

5

 

(c)
Withholding Taxes. The Company or a Subsidiary shall be permitted deduct the amounts required to be withheld by federal, state or local tax law from the Earned Amount.
(d)
Notices. All notices relating to the Plan to the Company shall be in writing and sent to the CHRO at 220 Liberty Street, Warsaw, NY 14569 or such other address designated by the Company. Notices to the Participant shall be addressed to the Participant at the Participant's home or work address, including via interoffice mail, as it appears on the records of Participant's employer. Any such notices may be made in electronic format or through means of online or other electronic transmission.
(e)
Officer Titles. If the Company or the Bank changes the current titles of its officers, the references to specific officer titles in the Plan will be construed to mean the title of the officer in the new or revised system that, in the Company's discretion, most closely approximates the title of the officer under the current system.
(f)
Compensation Recovery Policy. Notwithstanding any other provision of the Plan to the contrary, any amount received under the Plan shall be subject to potential cancellation, recoupment, rescission, payback, recovery, or other action in accordance with the terms of the Financial Institutions, Inc. Clawback Policy, as amended from time to time, and any other compensation recovery policy, if any, that the Company may adopt from time to time (collectively, the "Policy"). The Participant agrees and consents to the Company's application, implementation and enforcement of (i) the Policy that may apply to the Participant and (ii) any provision of applicable law relating to cancellation, rescission, payback, recovery or recoupment of compensation, and expressly agrees that the Company may take such actions as are necessary to effectuate the Policy or applicable law without further consent or action being required by the Participant. To the extent that the terms of the Plan and the Policy or any similar policy conflict, then the terms of such Policy shall prevail.
(g)
Section 280G of the Code. In the event that any payment or benefit to a Participant under this Plan (together with any other payments or benefits payable to the Participant under any agreement with the Participant, or any other plan or policy of the Company or its Subsidiaries, the “Total Payments”), would result in the Participant being subject to the tax imposed by Section 4999 of the Code, or any similar tax that may hereafter be imposed (the “Excise Tax”), then:
(i)
Within thirty (30) days following the date the payment or benefit under the Plan becomes payable, but in any case before the deadline for paying the payment or benefit under the Plan, the Company will notify the Participant in writing: (1) whether the payments and benefits under this Plan, when added to any other payments and benefits making up the Total Payments, exceed an amount equal to 299% of the Participant’s “base amount” as defined in Section 280G(b)(3) of the Code (the “299% Amount”); and (2) the amount that is equal to the 299% Amount.
(ii)
Any payments or benefits otherwise payable to a Participant under this Plan shall be reduced or eliminated to the extent necessary to avoid any portion of the payments or benefits under this Plan being subject to the Excise Tax. Any payment or benefit so reduced will be permanently forfeited and will not be paid to the Participant.

6

 

(iii)
The calculation of the Total Payments, the 299% Amount and the determination of how much of a Participant’s payments and benefits under the Plan must be reduced in order to avoid application of the Excise Tax will be made by a nationally recognized accounting or law firm (the “280G Firm”). The 280G Firm’s determination of the Total Payments, the 299% Amount, and the reduction of any payments or benefits under the Plan that is necessary to avoid the Excise Tax will be final and binding on the Company and a Participant. All fees and expenses of the 280G Firm will be borne by the Company.
(iv)
For purposes of making the reduction of amounts payable under this Plan, such amounts will be eliminated in compliance with the requirements of Section 409A, to the extent applicable.
(h)
Section 409A. The compensation under the Plan is intended to be exempt from or comply with the requirements of Section 409A of the Code and any regulations promulgated and other guidance issued thereunder (collectively, "Section 409A"), and the Plan shall be administered and interpreted consistent with such intention. Accordingly, references to “termination of employment” and similar terms used in the Plan mean, to the extent necessary to comply with Section 409A, the date that the Participant incurs a “separation from service” within the meaning of Section 409A. In addition, to the extent necessary to comply with Section 409A, a change in control under the Plan must represent a change in control event under Section 409A. Notwithstanding anything in the Plan to the contrary, if at the time of a Participant’s separation from service, the Participant is a “specified employee” for purposes of Section 409A, and payment under the Plan as a result of such separation from service is required by Section 409A to be delayed by six months, then the Company shall make such payment on the day following the six-month anniversary of the Participant’s separation from service to the extent required to comply with Code Section 409A. The preceding sentences, however, shall not be construed as a guarantee by the Company or any Subsidiary of any particular tax effect to Participants under the Plan. The Company and its Subsidiaries shall not be liable to any Participant for any adverse tax consequences incurred by a Participant under Section 409A, nor for reporting in good faith any amount or payment under the Plan as being includible in gross income under Section 409A.
(i)
Governing Law. The Plan, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of New York, without reference to principles of conflict of laws, and construed accordingly.

7

EXHIBIT A

FINANCIAL INSTITUTIONS, INC.

MANAGEMENT INCENTIVE PLAN

PLAN YEAR SCHEDULE

Performance Period: 2024 Plan Year

Performance Requirements. The Performance Requirements, the Weighting Percentage for each Performance Requirement, the applicable Performance Goals for each Performance Requirement and the Funding Percentage for each Performance Goal are as follows:

Performance Requirement

Weighting Percentage

Performance Goals 1

 Threshold 2

Target

Maximum 3

Pre-Provision Net Income (PPNI $MM)

[40%]

$44.87

$59.83

$68.80

Total Loan Growth

[20%]

0.94%

1.45%

1.81%

Non-Public Deposit Growth

[20%]

4.22%

6.49%

8.11%

Net Charge-offs (NCO)

[20%]

0.43%

0.34%

0.26%

Funding Percentage

 

50%

100%

150%

1 If actual performance for the Performance Period is between a Performance Requirement's Performance Goals, the Funding Percentage for such Performance Requirement will be determined using straight line interpolation between the Funding Percentage for the Performance Goal above and below the actual performance achieved for that Performance Requirement.

2 In the event that actual performance for the Performance Period is below a Performance Requirement's Threshold, the Funding Percentage for such Performance Requirement will be zero.

3 If actual performance for a Performance Period is at or above Maximum, the Funding Percentage for such Performance Requirement will be the Funding Percentage at Maximum.

Definitions. In addition to the definitions set forth in the Plan set forth above, for purposes of the Award and the Plan, the following terms shall have the following meanings:

(j)
"Non-Public Deposit Growth" means December year-over-year month-to-date average balances in total non-public deposits (includes DDA, NOW, savings, money market and time). Excludes ICS, CDARS, municipality, and accounts owned and maintained by FII or the Bank.
(k)
"Net Charge-off Ratio" means the ratio of the Bank's net charge-offs to average loans outstanding as reported in the Company's annual report to shareholders on Form 10-K.
(l)
"Pre-Provision Net Income" or "PPNI" means net income excluding provision adjustment net of tax (utilizing marginal tax rate).
(m)
"Total Loan Growth" means annual growth in gross loans including loans held for sale, including deferred costs (fees) and prior to reduction for allowance for loan losses of the Bank. The calculation excludes PPP Loan Balances from 2022 and 2023.

 

 

 

EXHIBIT B

FINANCIAL INSTITUTIONS, INC.

MANAGEMENT INCENTIVE PLAN

AWARD CERTIFICATE

Financial Institutions, Inc., a New York financial holding company (the "Company"), hereby grants to the Participant set forth below, as of the Award Date set forth below, a cash Award (the "Award"), based on attainment of the Performance Requirements and as determined pursuant to the terms of the Financial Institutions, Inc. Management Incentive Plan (the "Plan") and the applicable Plan Year Schedule.

Participant Tier: Tier X

Award Date: March 7, 2024

Plan Year: 2024

Target Amount: XX% of the Participant’s annualized base salary in effect as of December 31 of the Plan Year, except as follows:

(a)
Subject to any applicable proration under clauses (c) and (d) below, if the Participant incurs a termination of employment during the Performance Period and remains eligible to receive any Earned Amount for the Performance Period, the Participant’s annualized base salary used in determining the Target Amount will be determined as of the date on which the Participant incurs a termination of employment;
(b)
Subject to any applicable proration under clauses (c) and (d) below, if there is a change in control during the Performance Period and the Participant is eligible to receive an Award under Section 6(c)(iv) of the Plan, the Participant’s annualized base salary used in determining the Target Amount will be determined as of the date of the change in control;
(c)
If, during the Performance Period, a Participant receives a base salary increase outside of the Company’s standard merit cycle other than in connection with a promotion of the Participant as set forth in clause (d) below, the annualized base salary increase is greater than 10% of the Participant’s existing annualized base salary, and the increase in the Participant’s annualized base salary is effective after July 1 of the Plan Year, then the Participant’s annualized base salary used in determining the Target Amount will equal the sum of (i) the Participant’s annualized base salary in effect immediately prior to the increase, prorated based on the number of days during the Performance Period before the increase in base salary takes effect, plus (ii) the Participant’s annualized base salary following the increase in base salary, prorated based on the number of days during the Performance Period in which such increased annualized base salary is in effect; and
(d)
If, during the Performance Period, a Participant is promoted or demoted and, in connection with such promotion or demotion, there is an increase or decrease in the Participant’s annualized base salary, then the Participant’s annualized base salary used in determining the Target Amount will equal the sum of (i) the Participant’s annualized base salary in effect immediately prior to the change in base salary in connection with the Participant’s promotion or demotion, prorated based on the number of days during the Performance Period before such change in base salary takes effect, plus (ii) the Participant’s annualized base salary following the change in base salary in connection with the Participant’s DOCPROPERTY DOCXDOCID DMS=IManage Format=<<NUM>>v<<VER>> 24948526v3

9

EXHIBIT B

promotion or demotion, prorated based on the number of days during the Performance Period after such change in base salary takes effect.

The applicable Performance Period, Performance Requirements, Performance Goals, Weighting Percentages and Funding Percentages are set forth in the attached Plan Year Schedule.

The Award is subject to the terms and conditions set forth in this Award Certificate, the applicable Plan Year Schedule and the Plan. All terms and provisions of the Plan, as the same may be amended from time to time, are incorporated and made part of this Award Certificate. If any provision of this Award Certificate is in conflict with the terms of the Plan, then the terms of the Plan shall govern. All capitalized terms used in this Award Certificate and not defined herein shall have the meanings assigned to them in the Plan. The Participant hereby expressly acknowledges receipt of a copy of the Plan.

IN WITNESS WHEREOF, the parties have executed this Award Certificate as of the Award Date.

FINANCIAL INSTITUTIONS, INC.

By: img227936428_0.jpg

Name: Andrew W. Dorn Jr.

Title: Chair – MD&C Committee

By checking the box below, the Participant hereby accepts and agrees to be bound by all of the terms and conditions of this Award Certificate, the applicable Plan Year Schedule and the Plan.

 

10

EX-10.3 4 fisi-ex10_3.htm EX-10.3 EX-10.3

Exhibit 10.3

2024 RESTRICTED STOCK UNIT AWARD AGREEMENT

Pursuant to the

FINANCIAL INSTITUTIONS, INC.

AMENDED AND RESTATED

2015 LONG-TERM INCENTIVE PLAN

 

 

 

 

 

 

 

Name of Participant:

[[FIRSTNAME]] [[LASTNAME]]

 

 

Date of Grant:

 

Award Number:

[[GRANTDATE]]

 

[[GRANTNUMBER]]

 

 

Number of Restricted

Stock Units:

[[SHARESGRANTED]]

 

 

Vested Restricted Stock Units and Vesting Schedule:

The Number of Restricted Stock Units set forth above shall become vested Restricted Stock Units in accordance with the terms of this Agreement as of the following Vesting Date(s):

 

 

 

 

Vesting Date

Vested Restricted Stock Units

 

 

Third Anniversary of Date of Grant

 

100%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This RESTRICTED STOCK UNIT AWARD AGREEMENT (this “Agreement”), dated as of [[GRANTDATE]], is made between Financial Institutions, Inc. (the “Company”) and the above-named individual (the “Participant”) to record the grant to the Participant of a Restricted Stock Unit Award (the “Award”) on the Date of Grant set forth above pursuant to Section 6.5 of the Financial Institutions, Inc. Amended and Restated 2015 Long-Term Incentive Plan (the “Plan”). Capitalized terms not defined in this Agreement shall have the meaning given to such terms under the Plan.

The Company and the Participant hereby agree as follows:

Section 1. Grant of Restricted Stock Units. The Company hereby grants to the Participant, as of the Date of Grant, subject to and in accordance with the terms and conditions of the Plan and this Agreement, a Restricted Stock Unit Award for the Number of Restricted Stock Units set forth above (the “Restricted Stock Units”).

Section 2. Vesting of Restricted Stock Units. Subject to Section 4 below, provided that the Participant provides substantial services and remains in continuous employment with the Company or a Subsidiary through the Vesting Date(s) set forth above, the Restricted Stock Units shall vest pursuant to the Vesting Schedule set forth above. Except as otherwise provided by Section 4 below, if the Participant ceases to provide substantial services or remain in continuous employment with the Company or a Subsidiary for any reason prior to the Vesting Date (or the latest of the Vesting Dates) set forth above, then all of the Participant’s unvested Restricted Stock Units as of the date that the Participant ceases to provide substantial services or remain in continuous employment with the Company or a Subsidiary shall be immediately forfeited.

 

 

Section 3. Timing and Form of Payout. Except as otherwise provided by Section 4 below and subject to Section 8 below, within 75 days following a Vesting Date, but in no event later than March 15th of the calendar year immediately following the calendar year that includes the Vesting Date (a “Payment Date”), the vested Restricted Stock Units shall be paid to the Participant by the Company delivering to the Participant a number of shares of Common Stock equal to the number of vested Restricted Stock Units as of the Payment Date. The Company may issue the shares of Common Stock either (a) in certificate form or (b) in book entry form, registered in the name of the Participant. Notwithstanding anything herein to the contrary, the Company shall have no obligation to issue shares of Common Stock in payment of the vested Restricted Stock Units unless such issuance and such payment shall comply with all relevant provisions of law and the requirements of any Stock Exchange on which the shares of Common Stock are traded.

Section 4. Effects of Certain Events.

(a) Change in Control. Subject to the terms of the Plan, if prior to the Vesting Date (or the latest of the Vesting Dates) set forth above there is a Change in Control:

(i) if Replacement Awards are not provided to the Participant to replace unvested Restricted Stock Units, then all of the Participant’s unvested Restricted Stock Units that have not previously been forfeited shall fully vest as of the date of the Change in Control and, subject to Section 8 below, shall be paid to the Participant within 75 days following the Change in Control, but in no event later than March 15th of the calendar year immediately following the calendar year that includes the date of the Change in Control.

(ii) if Replacement Awards are provided to the Participant to replace unvested Restricted Stock Units, then in the event of the Participant’s Involuntary Termination during the period of two (2) years immediately following the Change in Control, all of such Replacement Awards, to the extent not previously vested, shall fully vest as of the date of the Involuntary Termination, and subject to Section 8 below, shall be paid to the Participant within 75 days following the Involuntary Termination, but in no event later than March 15th of the calendar year immediately following the calendar year that includes the date of the Participant’s Involuntary Termination.

(b) Death or Disability. If prior to the Vesting Date (or the latest of the Vesting Dates) set forth above, the Participant’s employment with the Company or a Subsidiary terminates due to death or Disability, then all of the Participant’s unvested Restricted Stock Units shall fully vest as of the date of the Participant’s death or Disability, and subject to Section 8 below, shall be paid to the Participant or the Participant’s legal representative in the event of the Disability of the Participant, or in the event of the death of the Participant, to the legal representative of the Participant’s estate, or if no legal representative has been appointed, to the successor in interest determined under the Participant’s will, within 75 days following the Participant’s termination of employment due to death or Disability, but in no event later than March 15th of the calendar year immediately following the calendar year that includes the date of the Participant’s termination of employment due to death or Disability.

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Section 5. Dividend Equivalents. No dividend equivalents shall accrue or be paid to the Participant with respect to any Restricted Stock Units.

Section 6. Rights as Shareholder. In addition to the transfer and other restrictions set forth elsewhere in this Agreement and in the Plan, the Participant, as holder of the Restricted Stock Units, shall not possess any rights of a holder of Common Stock (including voting and dividend rights) with respect to the shares of Common Stock underlying such Restricted Stock Unit Award until such time as the Restricted Stock Unit Award vests, is paid and the shares of Common Stock are issued to the holder of the Restricted Stock Unit Award.

Section 7. No Transferability. The Restricted Stock Units may not be sold, transferred, pledged, assigned, encumbered, or otherwise alienated or hypothecated other than by will or the laws of descent and distribution. Vested Restricted Stock Units shall be payable only to the Participant during the Participant’s lifetime, or in the event of the Disability of the Participant, to the Participant or the legal representative of the Participant, or in the event of the death of the Participant, to the legal representative of the Participant’s estate, or if no legal representative has been appointed to the successor in interest determined under the Participant’s will.

Section 8. Withholding Taxes. As a condition of and prior to the payout of any Restricted Stock Units, the Company shall be entitled to require the Participant to remit to the Company an amount sufficient to satisfy the amount of any federal, state, or local taxes required to be withheld with respect to the vesting and payout of the vested Restricted Stock Units, or any other taxable event related thereto. The Committee may permit the Participant to make such payment in any form or manner authorized by the Committee in its sole discretion, including, but not limited to one or more of the forms specified below:

(a)
U.S. dollars by personal check, bank draft, or money order payable to the Company, by money transfer or direct account debits;
(b)
Delivery to the Company of a number of shares of Common Stock having an aggregate fair market value of not less than the minimum tax withholding required for the Award;
(c)
Involvement of a stockbroker in accordance with the federal margin rules set forth in Regulation T;
(d)
A cashless exercise if and to the extent permissible by applicable law; or
(e)
Any combination of the above forms and methods.

In the event the Participant fails to provide timely payment of all sums required by the Company pursuant to this Section 8, the Company shall have the right and option, but not obligation, to treat such failure as an election by the Participant to provide all or any portion of such required payment by means of tendering vested shares of Common Stock.

Section 9. Adjustment. As provided by the Plan, in the event of any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, stock dividend, combination or exchange of shares, exchange for other securities, reclassification, reorganization, recapitalization, or any other increase or decrease in the number of outstanding shares of Common Stock effected without consideration to the Company, the specified number of Restricted Stock Units shall be proportionately adjusted to prevent dilution or enlargement of the rights granted to, or available for, the Participant hereunder.

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Section 10. No Employment Rights. Nothing in the Plan or this Agreement confers upon the Participant any right with respect to continuance of employment by the Company or any of its Subsidiaries or affects the right of the Company or any of its Subsidiaries may have to terminate the Participant’s employment at any time.

Section 11. Coordination with Plan. The Participant hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all of the terms and provisions thereof including any that may conflict with those contained in this Agreement.

Section 12. Notices. All notices to the Company shall be in writing and sent to the Company’s Director of Human Resources at the Company’s offices. Notices to the Participant shall be addressed to the Participant at the Participant’s address as it appears on the Company’s records.

Section 13. Amendment. The Company may alter, amend or terminate this Agreement only with the Participant’s consent, except as otherwise expressly provided by the Plan or this Agreement.

Section 14. Governing Law. This Agreement shall be governed by the laws of the State of New York to the extent not preempted by federal law, without reference to principles of conflict of laws, and construed accordingly.

Section 15. Compensation Recovery Policy. Notwithstanding any other provision of this Agreement to the contrary, any Restricted Stock Units granted and/or shares of Common Stock issued hereunder, and/or any amount received with respect to any sale of any such shares of Common Stock, shall be subject to potential cancellation, recoupment, rescission, payback or other action in accordance with the terms of the Financial Institutions, Inc. Clawback Policy, as amended from time to time, and any other compensation recovery policy, if any, that the Company may adopt from time to time (the “Policy”). The Participant agrees and consents to the Company’s application, implementation and enforcement of (i) the Policy that may apply to the Participant and (ii) any provision of applicable law relating to cancellation, rescission, payback or recoupment of compensation, including, but not limited to Section 10D of the Exchange Act, and expressly agrees that the Company may take such actions as are necessary to effectuate the Policy or applicable law without further consent or action being required by the Participant. To the extent that the terms of this Agreement and the Policy conflict, then the terms of the Policy shall prevail.

Section 16. Section 409A. This Agreement and the Restricted Stock Units hereunder are intended to be exempt from, or to the extent they are determined to be not exempt, comply with Code Section 409A, and this Agreement shall be administered and interpreted consistent with such intention. Notwithstanding the foregoing, the Company makes no representations to the Participant regarding the taxation of the Restricted Stock Units under this Agreement, including, but not limited to, the tax effects of Code Section 409A, and the Participant shall be solely responsible for the taxes imposed upon him or her with respect to the Restricted Stock Units. References to “termination of employment” and similar terms used in this Agreement mean, to the extent necessary to comply with Code Section 409A, the date that the Participant first incurs a “separation from service” within the meaning of Code Section 409A. Notwithstanding anything in this Agreement to the contrary, if at the time of the Participant’s separation from service, the DOCPROPERTY DOCXDOCID DMS=IManage Format=<<NUM>>v<<VER>> 24957871v1

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Participant is a “specified employee” for purposes of Code Section 409A, and payment under this Agreement as a result of such separation from service is required by Code Section 409A to be delayed by six months, then the Company shall make such payment on the day following the six-month anniversary of the Participant’s separation from service to the extent required to comply with Code Section 409A.

IN WITNESS WHEREOF, the Company and the Participant have caused this Agreement to be executed on the date set forth opposite their respective signatures, but effective as of the Date of Grant.

 

 

 

 

 

Dated: [[GRANTDATE]] For the Company:

By: img228859949_0.jpg

Name: Martin K. Birmingham

Title: Chief Executive Officer

 

Dated: [[SIGNATURE_DATE]] PARTICIPANT:

By: [[SIGNATURE]]

Name: [[FIRSTNAME]] [[LASTNAME]]

 

 

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EX-10.4 5 fisi-ex10_4.htm EX-10.4 EX-10.4

Exhibit 10.4

2024 PERFORMANCE STOCK UNIT AWARD AGREEMENT

Pursuant to the

AMENDED AND RESTATED

FINANCIAL INSTITUTIONS, INC.

2015 LONG-TERM INCENTIVE PLAN

 

 

 

 

 

 

 

Name of Participant:

[[FIRSTNAME]] [[LASTNAME]]

 

 

 

Date of Grant:

[[GRANTDATE]]

 

 

 

Award Number:

 

Number of Performance Stock Units:

 

Performance Goal:

[[GRANTNUMBER]]

 

[[SHARESGRANTED]]

 

 

[[GRANTCODE1]]

 

 

 

Service Period:

 

The three-year period beginning on March 7, 2024, and ending on March 1, 2027.

 

 

 

Performance Period:

 

Set forth in Exhibit A (attached hereby and incorporated by reference).

 

 

 

Earned PSUs and Vesting Schedule:

 

The Number of Performance Stock Units set forth above shall become “Earned PSUs” in accordance with the terms of this Agreement and based on the achievement of the applicable Performance Goal(s) during the applicable Performance Period(s) in accordance with Exhibit A.

 

 

 

This PERFORMANCE STOCK UNIT AWARD AGREEMENT (this “Agreement”), dated as of [[GRANTDATE]], is made between Financial Institutions, Inc. (the “Company”) and the above-named individual (the “Participant”) to record the grant to the Participant of a Performance Stock Unit Award (the “Award”) on the Date of Grant set forth above pursuant to Section 6.5 of the Financial Institutions, Inc. Amended and Restated 2015 Long-Term Incentive Plan (the “Plan”). Capitalized terms not defined in this Agreement shall have the meaning given to such terms under the Plan.

The Company and the Participant hereby agree as follows:

Section 1. Grant of Performance Stock Units. The Company hereby grants to the Participant, as of the Date of Grant, subject to and in accordance with the terms and conditions of the Plan and this Agreement, a Performance Stock Unit Award for the Number of Performance Stock Units set forth above (the “Performance Stock Units”). The Number of Performance Stock Units set forth above represents the number of Performance Stock Units that may become Earned PSUs at the target level of performance.

Section 2. Achievement and Vesting of Performance Stock Units. Subject to Section 4 below, and the achievement of the applicable Performance Goal(s) during the applicable Performance Period (both as set forth on Exhibit A), provided that the Participant provides substantial services and remains in continuous employment with the Company or a Subsidiary through the end of the Service Period set forth above, the Earned PSUs shall vest on the last day of the Service Period.

 

 

Except as otherwise provided by Section 4 below, if the Participant ceases to provide substantial services or remain in continuous employment with the Company or a Subsidiary for any reason before the completion of the Service Period, the unvested Performance Stock Units shall be immediately forfeited.

Section 3. Timing and Form of Payout. Except as otherwise provided by Section 4 below and subject to Section 8 below, as soon as practicable following the last day of the Service Period or, if later, as soon as practicable after the Committee has determined the level of achievement of the Performance Goal(s), but in no event later than March 15th of the calendar year immediately following the calendar year that includes the last day of the Performance Period (the “Payment Date”), the vested Earned PSUs shall be paid to the Participant by the Company delivering to the Participant a number of shares of Common Stock equal to the number of vested Earned PSUs as of the Payment Date. The Company may issue the shares of Common Stock either (a) in certificate form or (b) in book entry form, registered in the name of the Participant. Notwithstanding anything herein to the contrary, the Company shall have no obligation to issue shares of Common Stock in payment of the Earned PSUs unless such issuance and such payment shall comply with all relevant provisions of law and the requirements of any Stock Exchange on which the shares of Common Stock are traded.

Section 4. Effects of Certain Events.

(a) Change in Control. Subject to the terms of the Plan, if prior to the completion of the Service Period set forth above there is a Change in Control:

(i) if Replacement Awards are not provided to the Participant to replace unvested Performance Stock Units that have not previously been forfeited, then the number of the Participant’s Earned PSUs shall be determined at the target level of performance, and such Earned PSUs shall vest as of the date of the Change in Control. Subject to Section 8 below, any vested Earned PSUs shall be paid to the Participant within 75 days following the Change in Control, but in no event later than the earlier of (x) March 15th of the calendar year immediately following the calendar year that includes the date of the Change in Control, or (y) the date any Earned PSUs would otherwise be paid under Section 3.

(ii) if Replacement Awards are provided to the Participant to replace unvested Performance Stock Units, then in the event of the Participant’s Involuntary Termination during the period of two (2) years immediately following the Change in Control, the number of Earned Shares under such Replacement Awards, to the extent not previously vested or forfeited, shall be determined at the target level of performance, and such Earned PSUs shall vest as of the date of the Involuntary Termination. Subject to Section 8 below, any vested Earned PSUs shall be paid to the Participant within 75 days following the Involuntary Termination, but in no event later than March 15th of the calendar year immediately following the calendar year that includes the date of the Participant’s Involuntary Termination.

(b) Death or Disability. If during the Service Period, the Participant’s employment with the Company or a Subsidiary terminates due to death or Disability, then the number of the Participant’s Earned PSUs shall be determined at the target level of performance, and such Earned PSUs shall vest as of such date, and subject to Section 8 below, shall be paid to the

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Participant or the Participant’s legal representative in the event of the Disability of the Participant, or in the event of the death of the Participant, to the legal representative of the Participant’s estate, or if no legal representative has been appointed, to the successor in interest determined under the Participant’s will, on a pro-rata basis within 75 days following the Participant’s termination of employment due to death or Disability, but in no event later than the earlier of (x) March 15th of the calendar year immediately following the calendar year that includes the date of the Participant’s termination of employment due to death or Disability, or (y) the time at which any similar Performance Stock Units are paid to actively employed participants under Section 3 above. Unless Exhibit A provides otherwise, the pro-rata portion of the Earned PSUs shall be determined in accordance with Section 4(d) below.

(c) Retirement. If a Participant terminates employment during the Service Period due to Retirement, then the Award shall continue and a pro-rata number of Earned PSUs shall be eligible to vest based on achievement of the applicable Performance Goal(s) for the applicable Performance Period. Subject to Section 8 below, any vested Earned PSUs will be paid to the Participant within 75 days following the end of the applicable Performance Period, but in no event later than the earlier of (x) March 15th of the calendar year immediately following the calendar year that includes the last day of the applicable Performance Period, or (y) the time at which any similar Performance Stock Units are paid to actively employed participants under Section 3 above. Unless Exhibit A provides otherwise, the pro-rata portion of the Earned PSUs shall be determined in accordance with Section 4(d) below. “Retirement” shall mean the resignation or voluntary termination of employment after attainment of age 65 and ten or more years of service with the Company or a Subsidiary.

(d) Determination of Pro-Rata Portion. Unless Exhibit A provides otherwise, in the event of the death, Disability or a Retirement of a Participant, the pro-rata portion of the Earned PSUs under Section 4(b) or Section 4(c), as applicable, shall be determined separately for each portion of the Award that is subject to a separate Performance Goal based on the Performance Period for the portion of the Award that is subject to that separate Performance Goal. In the event of a Participant’s death, Disability or Retirement prior to the completion of the applicable Performance Period for a portion of the Award that is subject to a given Performance Goal, the pro-rata portion of the Earned PSUs for such portion of the Award shall be determined by multiplying the Earned PSUs for such portion of the Award by a fraction, the numerator of which is the number of completed months in the Performance Period during which the Participant was employed by the Company or a Subsidiary, and the denominator of which is the total number of months in the Performance Period for that portion of the Award. In the event of a Participant’s Retirement after the completion of the applicable Performance Period for a portion of the Award that is subject to a given Performance Goal, the pro-rata portion of the Earned PSUs for such portion of the Award shall be the full number of Earned PSUs for that portion of the Award.

Section 5. Dividend Equivalents. No dividend equivalents shall accrue or be paid to the Participant with respect to any Performance Stock Units.

Section 6. Rights as Shareholder. In addition to the transfer and other restrictions set forth elsewhere in this Agreement and in the Plan, the Participant, as holder of the Performance Stock Units, shall not possess any rights of a holder of Common Stock (including voting and dividend rights) with respect to the shares of Common Stock underlying such Performance Stock Unit Award until such time as the Performance Stock Unit Award vests, is paid and the shares of Common Stock are issued to the holder of the Performance Stock Unit Award.

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Section 7. No Transferability. The Performance Stock Units may not be sold, transferred, pledged, assigned, encumbered, or otherwise alienated or hypothecated other than by will or the laws of descent and distribution. Earned PSUs shall be payable only to the Participant during the Participant’s lifetime, or in the event of the Disability of the Participant, to the Participant or the legal representative of the Participant, or in the event of the death of the Participant, to the legal representative of the Participant’s estate, or if no legal representative has been appointed to the successor in interest determined under the Participant’s will.

Section 8. Withholding Taxes. As a condition of and prior to the payout of any Performance Stock Units, the Company shall be entitled to require the Participant to remit to the Company an amount sufficient to satisfy the amount of any federal, state, or local taxes required to be withheld with respect to the vesting and payout of the Earned PSUs, or any other taxable event related thereto. The Committee may permit the Participant to make such payment in any form or manner authorized by the Committee in its sole discretion, including, but not limited to one or more of the forms specified below:

(a)
U.S. dollars by personal check, bank draft, or money order payable to the Company, by money transfer or direct account debits;
(b)
Delivery to the Company of a number of shares of Common Stock having an aggregate fair market value of not less than the minimum tax withholding required for the Award;
(c)
Involvement of a stockbroker in accordance with the federal margin rules set forth in Regulation T;
(d)
A cashless exercise if and to the extent permissible by applicable law; or
(e)
Any combination of the above forms and methods.

In the event the Participant fails to provide timely payment of all sums required by the Company pursuant to this Section 8, the Company shall have the right and option, but not obligation, to treat such failure as an election by the Participant to provide all or any portion of such required payment by means of tendering vested shares of Common Stock.

In the event that the Participant becomes subject to federal, state or local taxes (e.g., social security or Medicare tax) on the Performance Stock Units before the date that the Performance Stock Units are paid, the Company shall accelerate the vesting and payment of, and shall withhold the number of shares of Common Stock underlying the Performance Stock Units (based on the Fair Market Value on the date that the Performance Stock Units become subject to such taxes) necessary to satisfy the minimum amount of the taxes required to be withheld, including the payment of any federal, state or local taxes (e.g., federal and state income taxes) on the withheld shares pursuant to this paragraph.

Section 9. Adjustments. As provided by the Plan, in the event of any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, stock dividend, combination or exchange of shares, exchange for other securities, reclassification, reorganization, recapitalization, or any other increase or decrease in the number of outstanding shares of Common Stock effected without consideration to the Company, the specified number of Performance Stock Units shall be proportionately adjusted to prevent dilution or enlargement of the rights granted to, or available for, the Participant hereunder.

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Furthermore, the Committee shall adjust the Performance Goal(s) to the extent (if any) it determines that the adjustment is necessary or advisable to preserve the intended incentives and benefits to reflect any material change in corporate capitalization, any material corporate transaction (such as a reorganization, combination, separation, merger, acquisition, or any combination of the foregoing), or any complete or partial liquidation of the Company, or any other similar special circumstances, including the issuance of a significant number of shares of Common Stock.

Section 10. No Employment Rights. Nothing in the Plan or this Agreement confers upon the Participant any right with respect to continuance of employment by the Company or any of its Subsidiaries, or affects the right of the Company or any of its Subsidiaries may have to terminate the Participant’s employment at any time.

Section 11. Coordination with Plan. The Participant hereby acknowledges receipt of a copy of the Plan and agrees to be bound by all of the terms and provisions thereof including any that may conflict with those contained in this Agreement.

Section 12. Notices. All notices to the Company shall be in writing and sent to the Company’s Director of Human Resources at the Company’s offices. Notices to the Participant shall be addressed to the Participant at the Participant’s address as it appears on the Company’s records.

Section 13. Amendment. The Company may alter, amend or terminate this Agreement only with the Participant’s consent, except as otherwise expressly provided by the Plan or this Agreement.

Section 14. Governing Law. This Agreement shall be governed by the laws of the State of New York to the extent not preempted by federal law, without reference to principles of conflict of laws, and construed accordingly.

Section 15. Compensation Recovery Policy. Notwithstanding any other provision of this Agreement to the contrary, any Performance Stock Units granted and/or shares of Common Stock issued hereunder, and/or any amount received with respect to any sale of any such shares of Common Stock, shall be subject to potential cancellation, recoupment, rescission, payback or other action in accordance with the terms of the Financial Institutions, Inc. Clawback Policy, as amended from time to time, and any other compensation recovery policy, if any, that the Company may adopt from time to time (the “Policy”). The Participant agrees and consents to the Company’s application, implementation and enforcement of (i) the Policy that may apply to the Participant and (ii) any provision of applicable law relating to cancellation, rescission, payback or recoupment of compensation, including, but not limited to Section 10D of the Exchange Act, and expressly agrees that the Company may take such actions as are necessary to effectuate the Policy or applicable law without further consent or action being required by the Participant. To the extent that the terms of this Agreement and the Policy conflict, then the terms of the Policy shall prevail.

Section 16. Section 409A. This Agreement and the Performance Stock Units hereunder are intended to be exempt from, or to the extent they are determined to be not exempt, comply with Code Section 409A, and this Agreement shall be administered and interpreted consistent with such intention. Notwithstanding the foregoing, the Company makes no representations to the Participant regarding the taxation of the Performance Stock Units under this Agreement, including, but not limited to, the tax effects of Code Section 409A, and the Participant shall be solely responsible for the taxes imposed upon him or her with respect to the Performance Stock Units. References to “termination of employment”

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and similar terms used in this Agreement mean, to the extent necessary to comply with Code Section 409A, the date that the Participant first incurs a “separation from service” within the meaning of Code Section 409A. Notwithstanding anything in this Agreement to the contrary, if at the time of the Participant’s separation from service, the Participant is a “specified employee” for purposes of Code Section 409A, and payment under this Agreement as a result of such separation from service is required by Code Section 409A to be delayed by six months, then the Company shall make such payment on the day following the six-month anniversary of the Participant’s separation from service to the extent required to comply with Code Section 409A.

IN WITNESS WHEREOF, the Company and the Participant have caused this Agreement to be executed on the date set forth opposite their respective signatures, but effective as of the Date of Grant.

 

 

 

 

 

 

 

 

Dated: [[GRANTDATE]] For the Company:

By: img229783470_0.jpg Name: Martin K. Birmingham

Title: Chief Executive Officer

 

Dated: [[SIGNATURE_DATE]] PARTICIPANT:

By: [[SIGNATURE]]

Name: [[FIRSTNAME]] [[LASTNAME]]

 

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EXHIBIT A

PERFORMANCE PERIOD(S) AND PERFORMANCE GOAL(S)

Performance Goal

Performance

Period

 

Service Period

Performance Goals

Threshold

Target

Maximum

Relative ROAE

The three (3) year average rROAE for years 2024, 2025 and 2026

03/7/2024 –

03/01/2027

30th %ile

50th %ile

80th %ile

ROAA

The three (3) year average ROAA for years 2024, 2025 and 2026

03/7/2024 –

03/01/2027

0.849%

0.884%

0.920%

 

Earned PSUs subject to vesting

Performance is interpolated between performance goals.

50%

100%

150%

 

1.
Definitions

“Relative ROAE” for the Relative ROAE Performance Period has the meaning given to such term by, and is calculated as set forth under, “Calculation of Relative ROAE” below.

“Relative ROAE Performance Period” means the Performance Period for the Relative ROAE component, as set forth in the table above.

“ROAA” means Return on Average Assets as reported in public filings.

“ROAA Performance Period” means the Performance Period for the ROAA component, as set forth in the table above.

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1.
Calculation of Relative ROAE
(a)
“Relative ROAE” for the Relative ROAE Performance Period means the Company’s ROAE relative to the ROAE of each of the Peer Companies for the Relative ROAE Performance Period. “Relative ROAE” for the Relative ROAE Performance Period will be determined by ranking the Company and the Peer Companies from highest to lowest according to their respective ROAEs for the Relative ROAE Performance Period. After this ranking, the percentile performance of the Company relative to the Peer Companies will be determined as follows:

img229783470_1.jpg 

where:

“P” represents the percentile performance which will be rounded, if necessary, to the nearest whole percentile by application of regular rounding.

“N” represents the remaining number of Peer Companies, plus the Company.

“R” represents Company’s ranking among the Peer Companies.

Example: If there are 12 remaining Peer Companies, and the Company ranked 7th, the performance would be at the 50th percentile: .50 = 1 – ((7-1)/(13-1)).

(b)
“ROAE” for a company means the company’s return on average equity as reported in public filings.
(c)
“Peer Companies” means the companies included on the CBNK - NASDAQ Bank Index as of the Date of Grant that remain included on such index on the last day of the Relative ROAE Performance Period. For the avoidance of doubt, any company that leaves the CBNK - NASDAQ Bank Index before the last day of the Relative ROAE Performance Period or is added to the CBNK - NASDAQ Bank Index after the Date of Grant, shall not be includible in the “Peer Companies.” In addition, the Committee may modify the Peer Companies to remove any constituent company in the CBNK - NASDAQ Bank Index that has not timely disclosed data required to complete the calculation of Relative ROAE by the deadline for paying any vested Earned PSUs under the Agreement.
2.
Gateway Requirement

If Five Star Bank’s Tier 1 Capital Ratio (as defined below) as of December 31st of each year in the Performance Period does not meet the requirement set by the MD&C Committee, all Performance Stock Units under this Agreement shall be forfeited and shall not become Earned PSUs. “Tier 1 Capital Ratio” means the Tier 1 capital ratio as determined under the final US Basel III capital framework.

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3.
Individual Performance Requirement

If the Participant’s individual performance for the Performance Period is not satisfactory, as determined by the Company in its sole discretion, all Performance Stock Units under this Agreement shall be forfeited and shall not become Earned PSUs.

4.
Performance Goals

The Performance Stock Units consist of two components: (i) a Relative ROAE component, which shall constitute 50 percent of the Number of Performance Stock Units; and (ii) an ROAA component, which shall constitute 50 percent of the Number of Performance Stock Units. Each component of the Performance Stock Units are earned based on satisfaction of the applicable Performance Goal(s) set forth above on this Exhibit A.

(a)
Below Threshold. In the event that the Company’s actual performance for the Performance Period does not meet the Threshold for a Performance Goal, no Performance Stock Units shall be Earned PSUs for such Performance Goal.
(b)
Performance Goal Achievement. For each Performance Goal, the number of Performance Stock Units that become Earned PSUs based on the achievement of that Performance Goal at Threshold, Target and Maximum is equal to the product of (i) the Number of Performance Stock Units subject to the Performance Goal; and (ii) the percentage set forth above on this Exhibit A at Threshold, Target or Maximum, respectively, rounded down to a whole number.
(c)
Interpolation. If the Company’s actual performance for the Performance Period is between Threshold and Target for a Performance Goal, or between Target and Maximum for a Performance Goal, the number of Earned PSUs for that Performance Goal is equal to the product of: (i) the Number of Performance Stock Units subject to the Performance Goal; and (ii) the percentage determined using straight line interpolation between Threshold and Target (or Target and Maximum, as applicable), rounded down to a whole number.
(d)
Above Maximum. If the Company’s actual performance for the Performance Period is at or above Maximum for a Performance Goal, the number of Earned PSUs is equal to the product of: (i) the Number of Performance Stock Units subject to the Performance Goal; and (ii) the percentage set forth above on this Exhibit A at Maximum, rounded down to a whole number.
(e)
Negative ROAE Modifier. Regardless of the level of achievement against the Relative ROAE Performance Goal, in the event that the Company’s ROAE is less than zero, the number of Earned PSUs for the Relative ROAE Performance Goal shall not exceed the product of: (i) the Number of Performance Stock Units subject to the Relative ROAE Performance Goal; and (ii) the percentage set forth above on this Exhibit A at Target, rounded down to a whole number.
(f)
Preliminary Number of Earned PSUs. The Number of Performance Stock Units that become Earned PSUs shall be the number of Earned PSUs for the Performance Goal(s).

9

DOCPROPERTY DOCXDOCID DMS=IManage Format=<<NUM>>v<<VER>> 24958738v3

 

5.
Actual Performance

The Committee shall review and approve: (a) the Relative ROAE for the Relative ROAE Performance Period; and (b) the ROAA for the ROAA Performance Period.

6.
Final Number of Earned PSUs

Subject to the requirements set forth under “Gateway Requirement” and “Individual Performance Requirement” above, the number of Earned PSUs may be adjusted downward by the Committee, in its sole and absolute discretion, to a whole number.

7.
Vested Earned PSUs

Subject to Section 4 of the Agreement, the Earned PSUs shall become vested Earned PSUs only if the Participant provides substantial services to the Company or a Subsidiary and remains in the continuous employment of the Company or a Subsidiary through the last day of the Service Period.

 

 

 

 

10

EX-31.1 6 fisi-ex31_1.htm EX-31.1 EX-31.1

 

Exhibit 31.1

Certification of Principal Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Martin K. Birmingham, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Financial Institutions, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 6, 2024

 

/s/ Martin K. Birmingham

 

 

Martin K. Birmingham

 

 

President and Chief Executive Officer

 

 

EX-31.2 7 fisi-ex31_2.htm EX-31.2 EX-31.2

 

Exhibit 31.2

Certification of Principal Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, W. Jack Plants II, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Financial Institutions, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 6, 2024

 

/s/ W. Jack Plants II

 

 

W. Jack Plants II

 

 

Chief Financial Officer

 

 

EX-32 8 fisi-ex32.htm EX-32 EX-32

 

Exhibit 32

Certification pursuant to

18 U.S.C. Section 1350,

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

Martin K. Birmingham, President and Chief Executive Officer, and W. Jack Plants II, Chief Financial Officer of Financial Institutions, Inc. (the “Company”), each certify in his capacity as an officer of the Company that he has reviewed the Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2024 and that:

 

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 6, 2024

 

 

 

/s/ Martin K. Birmingham

 

 

 

 

Martin K. Birmingham

 

 

 

 

President and Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

Date: May 6, 2024

 

 

 

/s/ W. Jack Plants II

 

 

 

 

W. Jack Plants

 

 

 

 

Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to Financial Institutions, Inc. and will be retained by Financial Institutions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.