FINANCIAL INSTITUTIONS INC

Previous wording

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.

Current wording

statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “continue,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “projects” or similar expressions.

Previous 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.

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 $13.7 million, after selling costs, of which $13.5 million was recognized in the second quarter of 2024. 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

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.

Current wording

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 investment advisory and financial services provided to customers or ancillary services tied to loans and deposits, fees and other revenue from insurance, prior to the sale of the assets of SDN. 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.

Previous wording

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.

Current wording

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. On September 16, 2024, we announced our intent to begin an orderly wind down of our BaaS offerings, following a careful review by the Company’s executive management and Board of Directors undertaken in conjunction with its annual strategic planning process.

Previous 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.

Current wording

Net income decreased $556 thousand to $13.5 million for the third quarter of 2024 compared to $14.0 million for the third quarter of 2023. Net income available to common shareholders for the third quarter of 2024 was $13.1 million, or $0.84 per diluted share, compared with $13.7 million, or $0.88 per diluted share, for the third quarter of 2023. Return on average common equity was 11.18% and return on average assets was 0.89% for the third quarter of 2024 compared to 13.15% and 0.92%, respectively, for the third quarter of 2023. Third quarter 2024 results included $384 thousand of professional services expenses attributed to the deposit-related fraud event disclosed in March 2024 that occurred in the first quarter of 2024. We continue to aggressively pursue our legal rights and seek any and all recovery avenues to minimize the fraud loss.

Previous 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.

Current wording

Net interest income totaled $40.7 million in the third quarter of 2024, a decrease of $1.0 million compared to $41.7 million in the third quarter of 2023. Average interest-earning assets for the third quarter of 2024 were $92.4 million lower than the third quarter of 2023 due to an $83.5 million decrease in average investment securities, and a $13.2 million decrease in the average balance of Federal Reserve interest-earning cash, partially offset by a $4.3 million increase in average loans. Average interest-bearing liabilities for the third quarter of 2024 were $27.2 million lower than the third quarter of 2023 due to a $93.4 million decrease in average borrowings, a $75.2 million decrease in average interest-bearing demand deposits and a $48.3 million decrease in average time deposits, partially offset by a $189.7 million increase in average savings and money market account deposits.

Previous wording

Net interest margin was 2.87% for the second quarter of 2024 compared to 2.99% in the second quarter of 2023, primarily due to higher funding costs amid the continued high interest rate environment, partially offset by an increase in the average yield on interest-earning assets.

Current wording

Net interest margin was 2.89% for the third quarter of 2024 compared to 2.91% in the third quarter of 2023, primarily due to higher funding costs amid the current high interest rate environment, offset by an increase in the average yield on interest-earning assets.

Previous 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.

Current wording

The provision for credit losses was $3.1 million in the third quarter of 2024 compared to a provision for credit losses of $1.0 million in the third quarter of 2023. The provision for credit losses for the third quarter of 2024 was primarily driven by a combination of factors, including a slight increase in the national unemployment forecast and higher qualitative factors overall, partially offset by a lower loan balance. Net charge-offs during the recent quarter were $1.7 million, representing 0.15% of average loans on an annualized basis, compared to $1.6 million, or an annualized 0.14% of average loans, in the third 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 $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.

Current wording

Noninterest income totaled $9.4 million in the third quarter of 2024, compared to $10.5 million in the third quarter of 2023. The sale of the assets of our insurance subsidiary in April 2024 resulted in a decrease in insurance income of $1.7 million compared to the third quarter of 2023. Partially offsetting this decrease were increases of $377 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 $253 thousand in investment advisory income largely due to market-driven increases in assets under management.

Previous 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.

Current wording

Noninterest expense totaled $32.5 million in the third quarter of 2024, compared to $34.7 million in the third quarter of 2023. The decrease in noninterest expense for the third quarter of 2024 was primarily attributable to a decrease in salaries and employee benefits expense of $2.3 million as a result of the sale of the assets of our insurance subsidiary, and the previously disclosed fourth quarter 2023 leadership and organizational changes, which reduced salaries and wages expense, $421 thousand in occupancy and equipment expense due in part to the timing of equipment purchases, and $414 thousand in other expenses. These decreases were partially offset by an $889 thousand increase in professional services expense, due primarily to legal expenses related to the previously disclosed deposit fraud-related event.

Previous 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.

Current wording

The regulatory Tier 1 Capital Ratio and Total Risk-Based Capital Ratio were 10.62%, and 12.95%, respectively, at September 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 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.

Current wording

Net interest income is our primary source of revenue, comprising approximately 81% and 73% of revenue during the three and nine months ended September 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 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.

Current wording

Net interest income on a taxable equivalent basis for the three months ended September 30, 2024, was $40.7 million, a decrease of $1.0 million versus the comparable quarter last year of $41.8 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 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.

Current wording

Our net interest margin for the third quarter of 2024 was 2.89%, 2-basis points lower than 2.91% for the same period in 2023 due to higher funding costs as a result of the continued high interest rate environment, offset by an increase in the average yield on interest-earning assets.

Previous 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.

Current wording

For the third quarter of 2024, the average yield on average interest earning assets of 5.53% was 32-basis points higher than the third quarter of 2023 of 5.21% primarily due to an increase in market interest rates. Average loan yields increased 27-basis points during the third quarter of 2024 to 6.42% from 6.15% for the third quarter of 2023, and the average yield on investment securities increased 26-basis points during the third quarter of 2024 to 2.14% from 1.88% for the third quarter of 2023. Overall, the average interest rate changes increased interest income by $3.8 million and volume variance decreased interest income by $578 thousand during the third quarter of 2024, which collectively drove a favorable variance of $3.2 million.

Previous 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.

Current wording

Average interest-earning assets were $5.61 billion for the third quarter of 2024 compared to $5.70 billion for the third quarter of 2023, a decrease of $92.4 million, or 2%, from the comparable quarter last year, with a decrease in average securities of $83.5 million from $1.23 billion for the third quarter of 2023 to $1.15 billion for the third quarter of 2024, and a $13.2 million decrease in average Federal Reserve interest-earning cash, partially offset by an increase in average loans of $4.3 million from $4.41 billion for the third quarter of 2023 to $4.42 billion for the third quarter of 2024. Average loans comprised 79% of average interest-earning assets during the third quarter of 2024 compared to 77% during the third quarter of 2023. The increase in average loans was primarily due to organic growth in commercial mortgages and stability in residential loans. 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 6.42% for the third quarter of 2024, an increase of 27-basis points compared to 6.15% 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 $2.9 million. Average investment securities represented 20% of average interest-earning assets during the third quarter of 2024 compared to 22% during the third quarter of 2023. The decrease in average investment securities was primarily due to maturities of investment securities, and the use of cash to fund loan originations and reduce short-term borrowings.

Previous 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.

Current wording

For the third quarter of 2024, the average cost of average interest-bearing liabilities of 3.37% was 41-basis points higher than the third quarter of 2023. The average cost of interest-bearing deposits of 3.34% was 50-basis points higher than the third quarter of 2023 due to the continued repricing of deposits at higher interest rates. The average cost of total borrowings decreased 55-basis points to 3.80% in the third quarter of 2024, compared to 4.35% in the third quarter of 2023. The reduction in the cost of total borrowings was driven by a wholesale mix shift, with a lower level of outstanding balances, and the benefit of the Bank’s cash flow hedging program.

Previous 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.

Current wording

Average interest-bearing liabilities were $4.40 billion for the third quarter of 2024, compared to $4.43 billion for the third quarter of 2023, a decrease of $27.2 million, or 1%, driven by the $93.7 million decrease in the average balance of short-term borrowings, partially offset by a $66.2 million increase in average interest-bearing deposits. On average, interest-bearing deposits grew from $4.08 billion for the third quarter of 2023 to $4.15 billion for the current quarter while noninterest-bearing demand deposits (a principal component of net free funds) decreased $69.5 million to $953.0 million for the third quarter of 2024. The increase in average interest-bearing deposits was due to growth in average non-public and public deposits, partially offset by decreases in average brokered and reciprocal deposits. For further discussion of our reciprocal and brokered deposits, refer to the “Funding Activities – Deposits” section of this Management’s Discussion and Analysis. The decrease in noninterest-bearing demand deposits was due to the interest rate environment driving customers to higher interest bearing accounts. Overall, interest-bearing deposit rate changes resulted in a $5.0 million increase in interest expense, and volume changes resulted in a $593 thousand increase in interest expense during the third quarter of 2024 as compared to the prior year quarter. A decrease in average short-term borrowings decreased interest expense by $760 thousand, and a decrease in interest rates on short-term borrowings decreased interest expense by $619 thousand during the third quarter of 2024.

Previous wording

Net interest income on a taxable equivalent basis for the six months ended June 30, 2024, was $81.4 million, a decrease of $2.9 million versus the comparable period in 2023 of $84.4 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 nine months ended September 30, 2024, was $122.2 million, a decrease of $4.0 million versus the comparable period in 2023 of $126.2 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 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.

Current wording

Our net interest margin for the nine months ended September 30, 2024 was 2.85%, 14-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 six months ended June 30, 2024, the average yield on average interest earning assets of 5.47% was 60-basis points higher than the six months ended June 30, 2023 of 4.87%. The average yield on loans increased 59-basis points during the six months ended June 30, 2024, to 6.37% from 5.78% for the comparable period last year. The average yield on investment securities increased 24-basis points to 2.13% for the six months ended June 30, 2024 compared to 1.89% for the six months ended June 30, 2023. Overall, the impact of the interest rate increases in 2023 and 2024 has a positive impact on yields, increasing interest income by $14.3 million, while volume variances in average interest-earning assets and average interest-bearing liabilities increased net interest income by $7.9 million during the six months ended June 30, 2024.

Current wording

For the nine months ended September 30, 2024, the average yield on average interest earning assets of 5.49% was 51-basis points higher than the nine months ended September 30, 2023 of 4.98%. The average yield on loans increased 49-basis points during the nine months ended September 30, 2024, to 6.39% from 5.90% for the comparable period last year. The average yield on investment securities increased 25-basis points to 2.14% for the nine months ended September 30, 2024 compared to 1.89% for the nine months ended September 30, 2023. Overall, the impact of the interest rate increases in 2023 and 2024 has a positive impact on yields, increasing interest income by $18.0 million, while volume variances in average interest-earning assets and average interest-bearing liabilities increased net interest income by $7.4 million during the nine months ended September 30, 2024.

Previous wording

Average interest-earning assets were $5.79 billion for the six months ended June 30, 2024 compared to $5.59 billion for the six months ended June 30, 2023, an increase of $195.9 million, or 3.50%, with average loans up $224.3 million from $4.23 billion for the six months ended June 30, 2023 to $4.45 billion for the six months ended June 30, 2024, and a $67.9 million increase in average Federal Reserve interest-earning cash, partially offset by a decrease in average investment securities of $96.4 million from $1.29 billion for the six months ended June 30, 2023 to $1.19 billion for the six months ended June 30, 2024. Average investment securities represented 20.6% of average interest-earning assets during the six months ended June 30, 2024 compared to 23.0% during the six months ended June 30, 2023. Loans comprised 76.9% of average interest-earning assets during the six months ended June 30, 2024 compared to 75.6% during the six months ended June 30, 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. Higher interest rates on loans increased interest income by $12.6 million, and an increase in the volume of average loans resulted in a $7.3 million increase in interest income.

Current wording

Average interest-earning assets were $5.73 billion for the nine months ended September 30, 2024 compared to $5.63 billion for the nine months ended September 30, 2023, an increase of $98.9 million, or 2%, with average loans up $150.2 million from $4.29 billion for the nine months ended September 30, 2023 to $4.44 billion for the nine months ended September 30, 2024, and a $40.7 million increase in average Federal Reserve interest-earning cash, partially offset by a decrease in average investment securities of $92.0 million from $1.27 billion for the nine months ended September 30, 2023 to $1.17 billion for the nine months ended September 30, 2024. Average investment securities represented 21% of average interest-earning assets during the nine months ended September 30, 2024 compared to 23% during the nine months ended September 30, 2023. The decrease in average investment securities was primarily due to maturities of investment securities, and the use of cash to fund loan originations and reduce short-term borrowings. Loans comprised 78% of average interest-earning assets during the nine months ended September 30, 2024 compared to 76% during the nine months ended September 30, 2023. The increase in average loans was primarily due to organic growth in commercial mortgages and residential real estate loans, partially offset by a decrease in consumer indirect loans. 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. Higher interest rates on loans increased interest income by $15.4 million, and an increase in the volume of average loans resulted in a $7.4 million increase in interest income.

Previous wording

For the six months ended June 30, 2024, the average cost of average interest-bearing liabilities of 3.33% was 96-basis points higher than the average cost of 2.37% for the six months ended June 30, 2023, with the average cost of average interest-bearing deposits of 3.29% increasing 109-basis points from 2.20% for the six months ended June 30, 2023 due to the higher interest rate environment that began in 2023 and continued into 2024.

Current wording

For the nine months ended September 30, 2024, the average cost of average interest-bearing liabilities of 3.34% was 77-basis points higher than the average cost of 2.57% for the nine months ended September 30, 2023, with the average cost of average interest-bearing deposits of 3.31% increasing 89-basis points from 2.42% for the nine months ended September 30, 2023 due to the higher interest rate environment that began in 2023 and continued into 2024.

Previous wording

Average interest-bearing liabilities of $4.58 billion in the six months ended June 30, 2024 were $270.0 million, or 6.3%, higher than the six months ended June 30, 2023. The increase was driven by an increase in average interest-bearing deposits, partially offset by a decrease in total average borrowings. Total average borrowings decreased to $284.5 million, down $55.4 million from the six months ended June 30, 2023. On average, interest-bearing deposits increased $325.4 million from $3.97 billion for the six months ended June 30, 2023 to $4.30 billion for the current period, while noninterest-bearing demand deposits (a principal component of net free funds) decreased $90.5 million to $956.7 million for the six months ended June 30, 2024. The increase in average deposits was primarily due to growth in non-public and reciprocal deposits, partially offset by a decrease in brokered and public deposits. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities – Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate changes resulted in a $22.4 million increase in interest expense and volume changes contributed $4.6 million during the six months ended June 30, 2024, primarily due to the higher interest rate environment.

Current wording

Average interest-bearing liabilities of $4.52 billion in the nine months ended September 30, 2024 were $170.1 million, or 3.9%, higher than the nine months ended September 30, 2023. The increase was driven by an increase in average interest-bearing deposits, partially offset by a decrease in total average borrowings. On average, interest-bearing deposits increased $238.3 million from $4.01 billion for the nine months ended September 30, 2023 to $4.25 billion for the current period, while noninterest-bearing demand deposits (a principal component of net free funds) decreased $83.4 million to $955.4 million for the nine months ended September 30, 2024 as compared to the prior year period. Total average borrowings decreased to $274.2 million for the current period, down $68.2 million from the nine months ended September 30, 2023, as deposit growth enabled us to pay down short-term borrowings. The increase in average deposits was primarily due to growth in non-public, reciprocal, and public deposits, partially offset by a decrease in brokered deposits. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities – Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate changes resulted in a $27.1 million increase in interest expense and volume changes contributed $5.5 million during the nine months ended September 30, 2024, primarily due to the higher interest rate environment.

Previous 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.

Current wording

The provision for credit losses in the third quarter of 2024 was driven by a combination of factors, including a slight increase in the national unemployment forecast and higher qualitative factors overall, partially offset by lower loan balances. The benefit for credit losses for the nine months ended September 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.

Previous wording

The April 1, 2024 sale of the assets of our insurance subsidiary, SDN, generated a gain of $13.5 million, after selling costs, which was included in net gain (loss) on other assets. The decrease in insurance income for the second quarter of 2024 and the first six months of 2024 was reflective of the sale.

Current wording

The April 1, 2024 sale of the assets of our insurance subsidiary generated a pre-tax gain of $13.7 million, after selling costs, which was included in net gain (loss) on other assets for the first nine months of 2024. The decrease in insurance income for the third quarter of 2024 and the first nine months of 2024 was reflective of the sale.

Previous 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.

Current wording

Income from company owned life insurance increased $377 thousand, or 37%, to $1.4 million for the third quarter of 2024 compared to $1.0 million for the third quarter of 2023. For the first nine months of 2024, income from company owned life insurance increased $1.1 million, or 37%, to $4.1 million compared to $3.0 million for the first nine 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

Investments in limited partnerships income increased $334 thousand, or 71%, to $803 thousand for the second quarter of 2024 compared to $469 thousand for the second quarter of 2023. For the first six months of 2024, income from investments in limited partnerships increased $425 thousand, or 59%, to $1.1 million compared to $720 thousand for the first six months of 2023. The income from our investments in limited partnerships fluctuates based on the maturity and performance of the underlying investments.

Current wording

Income from investments in limited partnerships of $400 thousand for the third quarter of 2024 was relatively flat compared to the third quarter of 2023. For the first nine months of 2024, income from investments in limited partnerships increased $434 thousand, or 39%, to $1.5 million compared to $1.1 million for the first nine months of 2023. We previously made several investments accounted for under the equity method. Income from these investments fluctuates based on the maturity and performance of the underlying investments.

Previous 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.

Current wording

Income from derivative instruments, net of $212 thousand for the third quarter of 2024 was relatively flat compared to the third quarter of 2023. For the first nine months of 2024, income from derivative income from derivative instruments, net decreased $655 thousand, or 46%, to $763 thousand compared to $1.4 million for the first nine months of 2023. Income from derivative instruments, net, is based on the number and value or interest rate swap transactions executed during the quarter combined with the impact of changes in the fair value of borrower-facing trades.

Previous 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.

Current wording

Salaries and employee benefits expense decreased $2.3 million, or 13%, to $15.9 million for the third quarter of 2024 compared to $18.2 million for the third quarter of 2023. For the first nine months of 2024, salaries and employee benefits expense decreased $5.1 million, or 9%, to $49.0 million compared to $54.0 million for the first nine months of 2023. The decrease in both periods was driven in part by lower salaries and wages in the 2024 periods, 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

Professional services expense increased $521 thousand, or 41%, to $1.8 million for the second quarter of 2024 compared to $1.3 million for the second quarter of 2023. For the first six months of 2024, professional services expense increased $1.4 million, or 51%, to $4.2 million compared to $2.8 million for the first six months of 2023. The increases in both periods were primarily due to higher legal expenses in 2024 related to the deposit-related fraud event, including $660 thousand and $371 thousand for the first and second quarters of 2024, respectively. The second quarter of 2024 expenses also included professional expense associated with the engagement of a third party to support the Company’s internal review and advise on best practices for fraud prevention and detection.

Current wording

Professional services expense increased $889 thousand, or 83%, to $2.0 million for the third quarter of 2024 compared to $1.1 million for the third quarter of 2023. For the first nine months of 2024, professional services expense increased $2.3 million, or 59%, to $6.1 million compared to $3.8 million for the first nine months of 2023. The increases in both periods were primarily due to higher legal expenses in 2024 attributed to the deposit-related fraud event, including $384 thousand and $1.4 million for the third quarter of 2024 and first nine months of 2024, respectively.

Previous 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.

Current wording

Computer and data processing expense increased $246 thousand, or 5%, to $5.4 million for the third quarter of 2024 compared to $5.1 million for the third quarter of 2023. For the first nine months of 2024, computer and data processing expense increased $1.5 million, or 11%, to $16.1 million compared to $14.5 million for the first nine months of 2023. The increase during the 2024 periods was due in part to an increase in digital banking expense attributable to increased usage along with our strategic investments in data efficiency and marketing technology.

Previous 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.

Current wording

Deposit-related charged-off items expense for the first nine months of 2024 included an $18.2 million loss associated with charge-offs associated with the deposit-related fraudulent activity we experienced in early March 2024, 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 $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.

Current wording

Other expense decreased $414 thousand, or 11%, to $3.4 million for the third quarter of 2024 compared to $3.8 million for the third quarter of 2023. For the first nine months of 2024, other expense increased $524 thousand, or 5%, to $11.1 million compared to $10.5 million for the first nine months of 2023. The increase for the first nine months of 2024 was primarily driven by an increase in New York State capital base franchise tax accrual.

Previous 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.

Current wording

Our efficiency ratio for the third quarter of 2024 and the first nine months of 2024 was 64.70% and 71.75%, respectively, compared with 66.47% and 64.25% for the third quarter of 2023 and the first nine months of 2023, respectively. The higher efficiency ratio for the first nine months of 2024 was reflective of the $18.2 million pre-tax loss in deposit-related charged-off items and approximately $1.4 million of legal and consulting expenses, recorded in professional services expense, attributed to the deposit-related fraud event, partially offset by the $13.7 million gain on the sale of the assets of our insurance subsidiary. 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 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.

Current wording

For the three and nine months ended September 30, 2024, we recorded income tax expense of $1.1 million and $6.0 million, versus $2.4 million and $7.6 million for the same periods in the prior year. In the third 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 $731 thousand for the same period in the prior year. The nine months ended September 30, 2024 and 2023 also included related tax credit investment benefits of $3.4 million and $2.1 million, respectively.

Previous 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.

Current wording

Our effective tax rate for the three and nine months ended September 30, 2024 was 7.4% and 12.6%, versus 14.8% and 15.9%, 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 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.

Current wording

Our available for sale (“AFS”) investment securities portfolio decreased $26.1 million from December 31, 2023 to September 30, 2024. The AFS portfolio had a net unrealized loss of $125.0 million at September 30, 2024 and $150.3 million at December 31, 2023, respectively. The decrease in the AFS portfolio balance was primarily due to maturities of investment securities, and the use of cash to fund loan originations and reduce short-term borrowings in the first nine 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 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.

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 nine months ended September 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 $4.461 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):

Current wording

Total loans were $4.40 billion at September 30, 2024, a decrease of $59.2 million from $4.46 billion at December 31, 2023. 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):