FINANCIAL INSTITUTIONS INC

Previous wording

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.

Current wording

On April 1, 2024, the Company announced and closed the sale of the assets of its wholly owned subsidiary, SDN Insurance Agency, LLC (“SDN”), which provided a broad range of insurance services to personal and business clients, to NFP Property & Casualty Services, Inc. (“NFP”), a subsidiary of NFP Corp. The sale generated $27 million in proceeds, or a pre-tax gain of $13.5 million, after selling costs. The all-cash transaction value represented approximately four times our 2023 insurance revenue. Following the sale of the assets of SDN, we changed the name of the entity to Five Star Advisors LLC and expect to utilize it to serve as a conduit to refer insurance business to NFP.

Previous wording

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.

Current wording

Net income increased $11.3 million to $25.6 million for the second quarter of 2024 compared to $14.4 million for the second quarter of 2023. Net income available to common shareholders for the second quarter of 2024 was $25.3 million, or $1.62 per diluted share, compared with $14.0 million, or $0.91 per diluted share, for the second quarter of 2023. Return on average common equity was 23.51% and return on average assets was 1.68% for the second quarter of 2024 compared to 13.64% and 0.95%, respectively, for the second quarter of 2023. Second quarter 2024 results benefited from a pre-tax gain of $13.5 million, after selling costs, associated with the sale of the assets of SDN on April 1, 2024. First quarter 2024 results were negatively impacted by our deposit-related fraud event, for which we recorded an $18.4 million pre-tax loss that was recorded in deposit-related charged-off items and approximately $660 thousand of related professional services expenses related to legal expenses. In the second quarter of 2024, we recorded a small recovery of $143 thousand and incurred approximately $371 thousand of professional services expenses related to the deposit-related fraud event which included legal expenses as well as expenses associated with the engagement of a third party to support our internal review and advise on best practices for fraud prevention and detection. We continue to aggressively pursue our legal rights and seek any and all recovery avenues to minimize the loss.

Previous wording

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.

Current wording

Net interest income totaled $41.2 million in the second quarter of 2024, a decrease of $1.1 million compared to $42.3 million in the second quarter of 2023. Average interest-earning assets for the second quarter of 2024 were $74.0 million higher than the second quarter of 2023 due to a $107.2 million increase in average loans and a $41.2 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $74.4 million decrease in average investment securities. Average interest-bearing liabilities for the second quarter of 2024 were $113.6 million higher than the second quarter of 2023 due to a $376.6 million increase in average savings and money market account deposits, partially offset by a $154.5 million decrease in average borrowings, a $107.5 million decrease in average interest-bearing demand deposits and a $927 thousand decrease in average time deposits.

Previous wording

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.

Current wording

The provision for credit losses was $2.0 million in the second quarter of 2024 compared to a provision for credit losses of $3.2 million in the second quarter of 2023. The provision for credit losses for the second quarter of 2024 was primarily driven by a combination of factors, including a modest increase in consumer indirect delinquencies during the period, which increased the qualitative factor for that portfolio, partially offset by improvement in forecasted losses. Net charge-offs during the recent quarter were $1.1 million, representing 0.10% of average loans on an annualized basis, compared to $636 thousand, or an annualized 0.06% of average loans, in the second 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.

Previous wording

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.

Current wording

Noninterest income totaled $24.0 million in the second quarter of 2024, compared to $11.5 million in the second quarter of 2023. Noninterest income for the second quarter of 2024 included the gain of $13.5 million from the sale of the assets of SDN, recorded in net gain (loss) on other assets, which resulted in a decrease of insurance income of $1.3 million. Also contributing to the increase in noninterest income for the second quarter of 2024 were increases of $407 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, $334 thousand of income from investments in limited partnerships, and $362 thousand in other income. These increases were partially offset by decreases of $326 thousand in income from derivative instruments, net, and $244 thousand in service charges on deposits.

Previous wording

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.

Current wording

Noninterest expense totaled $33.0 million in the second quarter of 2024, compared to $33.8 million in the second quarter of 2023. The decrease in noninterest expense for the second quarter of 2024 was primarily attributable to a decrease in salaries and employee benefits expense of $2.0 million as a result of the sale of the assets of SDN and the previously disclosed fourth quarter 2023 leadership and organizational changes, which reduced salaries and wages expense, partially offset by increases in computer and data processing expense of $592 thousand, due in part to investments in data efficiency and marketing technology, $521 thousand of professional services expense, due to legal and consulting expenses related to the deposit fraud-related event, and $374 thousand of other expenses.

Previous wording

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.

Current wording

The regulatory Tier 1 Capital Ratio and Total Risk-Based Capital Ratio were 10.36%, and 12.65%, respectively, at June 30, 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.

Previous wording

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.

Current wording

Net interest income is our primary source of revenue, comprising approximately 63% and 70% of revenue during the three and six months ended June 30, 2024, respectively. 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.

Previous wording

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.

Current wording

Net interest income on a taxable equivalent basis for the three months ended June 30, 2024, was $41.3 million, a decrease of $1.2 million versus the comparable quarter last year of $42.5 million. The decrease in net interest income was primarily due to higher funding costs amid the current high interest rate environment.

Previous wording

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.

Current wording

Our net interest margin for the second quarter of 2024 was 2.87%, 12-basis points lower than 2.99% for the same period in 2023 due to higher funding costs as a result of the continued high interest rate environment, partially offset by an increase in the average yield on interest-earning assets.

Previous wording

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.

Current wording

For the second quarter of 2024, the average yield on average interest earning assets of 5.50% was 48-basis points higher than the second quarter of 2023 of 5.02% primarily due to an increase in market interest rates. Average loan yields increased 47-basis points during the second quarter of 2024 to 6.40% from 5.93% for the second quarter of 2023. The average yield on investment securities increased 28-basis points during the second quarter of 2024 to 2.17% from 1.89% for the second quarter of 2023. Overall, the average interest rate changes increased interest income by $5.8 million and volume variance increased interest income by $1.8 million during the second quarter of 2024, which collectively drove a favorable variance of $7.6 million.

Previous wording

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.

Current wording

Average interest-earning assets were $5.77 billion for the second quarter of 2024 compared to $5.69 billion for the second quarter of 2023, an increase of $74.0 million, or 1%, from the comparable quarter last year, with average loans up $107.2 million from $4.33 billion for the second quarter of 2023 to $4.44 billion for the second quarter of 2024, and a $41.2 million increase in average Federal Reserve interest-earning cash, partially offset by a decrease in average securities of $74.4 million from $1.27 billion for the second quarter of 2023 to $1.19 billion for the second quarter of 2024. Average loans comprised 77% of average interest-earning assets during the second quarter of 2024 compared to 76% during the second 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 6.40% for the second quarter of 2024, an increase of 47-basis points compared to 5.93% for the comparable quarter in 2023 due to the impact of the higher market interest rates. Interest rate changes on average loans increased interest income by $4.9 million, and an increase in the volume of average loans resulted in a $1.7 million increase. Average investment securities represented 21% of average interest-earning assets during the second quarter of 2024 compared to 22% during the second 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.

Previous wording

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.

Current wording

For the second quarter of 2024, the average cost of average interest-bearing liabilities of 3.32% was 72-basis points higher than the second quarter of 2023 and the average cost of interest-bearing deposits of 3.29% was 89-basis points higher than the second quarter of 2023 due to the continued repricing of deposits at higher interest rates. The average cost of total borrowings decreased 69-basis points to 3.83% in the second quarter of 2024, compared to 4.52% in the second quarter of 2023. The reduction in the cost of total borrowings was driven by a wholesale mix shift, lower level of outstanding balances, and the benefit of the Bank’s cash flow hedging program.

Previous wording

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.

Current wording

Average interest-bearing liabilities were $4.55 billion for the second quarter of 2024, compared to $4.43 billion for the second quarter of 2023, an increase of $113.6 million, or 3%, driven by increases in average balances of interest-bearing deposits. On average, interest-bearing deposits grew $268.2 million from $4.02 billion for the second quarter of 2023 to $4.28 billion for the current quarter while noninterest-bearing demand deposits (a principal component of net free funds) decreased $78.9 million to $950.8 million for the second 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 $9.1 million increase in interest expense, and volume changes resulted in a $1.9 million increase in interest expense during the second quarter of 2024. Total average borrowings decreased to $264.8 million, down $154.5 million from the second quarter of 2023. A decrease in average interest rates on short term borrowings decreased interest expense by $2.2 million during the second quarter of 2024.

Previous wording

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.

Current wording

Our net interest margin for the six months ended June 30, 2024 was 2.83%, 21-basis points lower than 3.04% for the same period in 2023 due to higher funding costs as a result of the continued high interest rate environment, partially offset by an increase in the average yield on interest-earning assets.

Previous wording

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.

Current wording

The following tables set 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.

Previous wording

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.

Current wording

The provision for credit losses in the second quarter of 2024 was driven by a combination of factors, including a modest increase in consumer indirect delinquencies during the period, which increased the qualitative factors for that portfolio, partially offset by improvement in forecasted losses. Also included in the (benefit) provision for credit losses was a credit loss for unfunded commitments of $43 thousand and $287 thousand for the second quarters of 2024 and 2023, respectively. The benefit for credit losses for the six months ended June 30, 2024 was reflective of the $4.9 million benefit for credit losses – loans for the first quarter of 2024, which was driven by 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 for credit losses for the six months ended June 30, 2024 and 2023 was a credit loss benefit for unfunded commitments of $527 thousand and a credit loss for unfunded commitments of $298 thousand for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

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.

Current wording

Income from company owned life insurance increased $407 thousand, or 43%, to $1.4 million for the second quarter of 2024 compared to $953 thousand for the second quarter of 2023. For the first six months of 2024, income from company owned life insurance increased $711 thousand, or 37%, to $2.7 million compared to $1.9 million for the first six months of 2023. The increase in both periods was primarily due to the higher crediting rate and associated impact to cash surrender value recorded in the linked quarter related to the previously disclosed surrender and redeploy strategy executed in the fourth quarter of 2023.

Previous wording

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.

Current wording

Income from derivative instruments, net decreased $326 thousand, or 46%, to $377 thousand for the second quarter of 2024 compared to $703 thousand for the second quarter of 2023. For the first six months of 2024, income from derivative instruments, net decreased $648 thousand, or 54%, to $551 thousand compared to $1.2 million for the first six months of 2023. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed during the period combined with the impact of changes in the fair value of borrower-facing trades.

Previous wording

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.

Current wording

Salaries and employee benefits expense decreased $2.0 million, or 11%, to $15.7 million for the second quarter of 2024 compared to $17.8 million for the second quarter of 2023. For the first six months of 2024, salaries and employee benefits expense decreased $2.8 million, or 8%, to $33.1 million compared to $35.9 million for the first six months of 2023. The decrease in both periods was driven in part by lower salaries and wages in the 2024, as a result of the sale of the assets of SDN, as well as our previously disclosed leadership and organizational changes completed in the fourth quarter of 2023.

Previous wording

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.

Current wording

Computer and data processing expense increased $592 thousand, or 12%, to $5.3 million for the second quarter of 2024 compared to $4.8 million for the second quarter of 2023. For the first six months of 2024, computer and data processing expense increased $1.3 million, or 14%, to $10.7 million compared to $9.4 million for the first six months of 2023. The increase during the 2024 periods was a result of our strategic investments in data efficiency and marketing technology.

Previous wording

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.

Current wording

Deposit-related charged-off items expense for the first six months of 2024 included an $18.2 million loss associated with the deposit-related fraud event, including the $18.4 million recorded in the first quarter of 2024, partially offset by $143 thousand of recoveries recorded in the second quarter of 2024.

Previous wording

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.

Current wording

Other expense increased $374 thousand, or 10%, to $4.0 million for the second quarter of 2024 compared to $3.6 million for the second quarter of 2023. For the first six months of 2024, other expense increased $938 thousand, or 14%, to $7.7 million compared to $6.7 million for the first six months of 2023. The increase for both periods was primarily driven by an increase in New York State capital base franchise tax accrual.

Previous wording

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.

Current wording

Our efficiency ratio for the second quarter of 2024 and the first six months of 2024 was 50.58% and 74.80%, respectively, compared with 62.66% and 63.17% for the second quarter of 2023 and the first six months of 2023, respectively. The lower efficiency ratio for the second quarter of 2024 was primarily due to the $13.5 million pre-tax gain on sale of the assets of our insurance subsidiary. The higher efficiency ratio for the first six months of 2024 was primarily due to the $18.2 million pre-tax loss in deposit-related charged-off items and approximately $1.0 million of legal and consulting expenses, recorded in professional services expense, related to the deposit-related 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.

Previous wording

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.

Current wording

For the three and six months ended June 30, 2024, we recorded income tax expense of $4.5 million and $4.9 million, versus $2.4 million and $5.2 million for the same periods in the prior year. The increase in income tax expense for the second quarter of 2024 compared to the second quarter of 2023 is reflective of higher net income, due in part to the gain on the sale of the assets of SDN. In the second 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 $1.3 million, versus $761 thousand for the same period in the prior year. The six months ended June 30, 2024 and 2023 also included related benefits of $2.1 million and $1.3 million, respectively.

Previous wording

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.

Current wording

Our effective tax rate for both the three and six months ended June 30, 2024 was 15.0%, versus 14.4% and 16.4%, respectively, for the same periods 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 rates for 2024 and 2023 reflect the New York State tax benefit generated by our real estate investment trust.

Previous wording

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.

Current wording

Our available for sale (“AFS”) investment securities portfolio decreased $7.1 million from December 31, 2023 to June 30, 2024. The AFS portfolio had a net unrealized loss of $159.2 million at June 30, 2024 and $150.3 million at December 31, 2023, respectively. The decrease in the AFS portfolio balance was primarily the result of the purchase of securities for collateral for municipal deposits in the first six months of 2024.

Previous wording

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.

Current wording

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 and six months ended June 30, 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.

Previous wording

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):

Current wording

Total loans were $4.461 billion at June 30, 2024, a decrease of $671 thousand from $4.462 billion at December 31, 2023. Commercial loans and consumer loans represented 63% and 37% of total loans as of June 30, 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):

Previous wording

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.

Current wording

Total commercial loans of $2.80 billion, or 63% of total loans at June 30, 2024, were comprised of commercial business loans of $713.9 million, or 16% of total loans, down $21.8 million, or 3%, from December 31, 2023, and commercial mortgage loans of $2.09 billion, or 47% of total loans, up $80.6 million, or 4%, from December 31, 2023. Commercial loans include both owner-occupied and non-owner occupied commercial real estate loans. As of June 30, 2024, commercial real estate (“CRE”) loans made up approximately 65% of total commercial loans, and 41% of total loans, commercial and industrial loans approximated 31% of total commercial loans, and 20% 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 June 30, 2024 related to approximately 41% multi-family, 18% office, 7% retail, 7% hospitality, 7% industrial property, and 6% home builder. Approximately 70% of our office exposure at June 30, 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.

Previous wording

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.

Current wording

Total consumer loans of $1.66 billion, or 37% of total loans at June 30, 2024, decreased $59.5 million from December 31, 2023. Consumer loans at June 30, 2024 were comprised of residential real estate loans and lines of credit of $723.2 million, or 16% of total loans, consumer indirect loans of $894.6 million, or 20% of total loans, and other consumer loans of $43.9 million, or 1% of total loans. During the six months ended June 30, 2024, we originated $114.7 million in indirect automobile loans with a mix of approximately 22% new automobile and 78% used automobile loans. This compares with the $169.0 million in indirect automobile loans with a mix of approximately 26% new automobile and 74% used automobile loans for the six months ended June 30, 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.

Previous wording

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.

Current wording

Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled $2.1 million and $1.4 million as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

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.

Current wording

We sell certain qualifying newly originated or refinanced residential real estate loans on the secondary market. Residential real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $273.5 million and $269.4 million as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

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.

Current wording

Net charge-offs of $1.1 million for the second quarter of 2024 represented 0.10% of average loans on an annualized basis compared to net charge-offs of $636 thousand, or 0.06% of average loans for the second quarter of 2023. The allowance for credit losses – loans was $44.0 million at June 30, 2024, compared with $49.8 million at June 30, 2023. The ratio of the allowance for credit losses – loans to total loans was 0.99% at June 30, 2024 and 1.13% at June 30, 2023. The ratio of allowance for credit losses – loans to non-performing loans was 174% at June 30, 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 503% at June 30, 2023.

Previous wording

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.

Current wording

Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at June 30, 2024 were $25.3 million, a decrease of $1.5 million from the $26.8 million balance at December 31, 2023. The primary component of non-performing assets is non-performing loans, which were $25.2 million or 0.57% of total loans at June 30, 2024 and $26.7 million or 0.60% of total loans at December 31, 2023.

Previous wording

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.

Current wording

Approximately $1.1 million, or 4%, of the $25.2 million in non-performing loans as of June 30, 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.

Previous wording

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.

Current wording

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 $63 thousand and $142 thousand of properties representing foreclosed asset holdings at June 30, 2024 and December 31, 2023, respectively.

Previous wording

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.

Current wording

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 $21.3 million and $29.9 million in loans that continued to accrue interest which were classified as substandard as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

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.

Current wording

As of June 30, 2024 and December 31, 2023, the aggregate amount of estimated uninsured deposits (deposits in amounts greater than $250 thousand, which is the maximum amount for federal deposit insurance) was $1.83 billion, or 36% 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 $296.3 million and $302.6 million at June 30, 2024 and December 31, 2023, respectively. The maturities of our uninsured time deposits at June 30, 2024 were as follows: $115.1 million in three months or less; $53.9 million between three months and six months; $49.6 million between six months and one year; and $77.8 million over one year. Approximately $980.4 million 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 June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, estimated uninsured nonpublic deposits were approximately 16% of total deposits.

Previous wording

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.

Current wording

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 June 30, 2024, total deposits were $5.13 billion, representing a decrease of $79.6 million from December 31, 2023. The decrease was primarily due to a decrease in brokered deposits, partially offset by growth in reciprocal, public, and non-public deposits. Time deposits were approximately 29% and 27% of total deposits at June 30, 2024 and December 31, 2023, respectively.