FINANCIAL INSTITUTIONS INC
For the period ended Mar 31, 2025. Filed May 5, 2025.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Mar 31, 2025 · Filed May 5, 2025
FISI$39.73+0.6%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-09-30; filed 2024-11-04.
0000950170-24-120679
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2025-03-31; filed 2025-05-05.
0000950170-25-063527
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 202 previous paragraphs and 216 current paragraphs.
107 unchanged; 64 reworded; 45 added; 27 removed; 4 previous and 0 current paragraphs rearranged.
Tables are not compared: 20 previous and 18 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (45)
Current report
Credit Risks and Risks Related to Banking Activities
Current report
If our non-performing assets increase, our earnings will be adversely affected;
Current report
If our regulators impose limitations on our commercial real estate lending activities, earnings could be adversely affected;
Current report
Municipal deposits are price sensitive and could result in an increase in interest expense or funding fluctuations;
Current report
Legal and Regulatory Risks
Current report
Non-compliance with the USA PATRIOT Act, the Bank Secrecy Act, and Office of Foreign Asset Control sanction requirements, amount other laws and regulations, could subject us to fines, sanctions, or other negative actions;
Current report
We are subject to additional various state and federal laws and regulations, and failure to comply with these laws and regulations could subject us to fines, sanctions, or other negative actions;
Current report
We have implemented a program to provide financial products and services to customers that do business in the cannabis industry and the strict enforcement of federal laws and regulations regarding cannabis could result in our inability to continue to provide financial products and services to these customers and we could have legal action taken against us by the federal government and exposure to additional liabilities and regulatory compliance costs.
Current report
Risks Related to Non-Banking Activities
Current report
Strategic and Operational Risks
Current report
Market Risks
Current report
Technology and Cybersecurity Risks
Current report
Emerging technology, including cloud computing and artificial intelligence (“AI”), introduces new risks while possibly being essential to support business strategy;
Current report
We rely on third parties to provide critical business services and protect the confidentiality, integrity, and availability of confidential data;
Current report
We, or our service providers, may experience a cyber-attack, system failure, natural disaster, or other uncontrollable event that may disrupt business operations; and
Current report
We are subject to evolving laws and regulations relating to cybersecurity protection and data privacy, and failure to comply could expose us to regulatory liability, reputational risk and financial risk.
Current report
Risks Related to our Common Stock
Current report
General Risk Factors
Current report
Loss of key employees may disrupt relationships with certain customers;
Current report
Negative public opinion could damage our reputation and impact business operations and revenues; and
Current report
In April 2025, the Company called $10.0 million of its $40.0 million of fixed-to-floating subordinated debt that was originally issued in April 2015. These notes initially bore interest at a fixed rate of 6.00% and were scheduled to reprice at a rate equal to the then-current three-month term SOFR plus 4.20561% after the April 2025 call date. The Company currently expects to retain the remaining $30.0 million of April 2015 notes, as well as the separate $35.0 million of fixed-to-floating rate subordinated notes that were issued in October 2020, which currently bear interest at a fixed rate of 4.375%, and are set to reprice at a rate of the then-current three-month term SOFR plus 4.265% beginning in October 2025. The April 2015 notes are callable on a quarterly basis going forward and the October 2020 notes become callable beginning in October 2025. The Company will continue to evaluate options relative to the subordinated debt, which may include redemption in part or in full, as well as replacing or refinancing the facilities.
Current report
Settlement of Auto Lending Litigation
Current report
On March 7, 2025, following a mediation held on February 28, 2025, the Company entered into a Settlement Agreement (“the Settlement Agreement ”) with plaintiffs in the previously disclosed class action lawsuit to which the Company and the Bank are parties, brought by borrowers in New York and Pennsylvania in Pennsylvania state court regarding notices the Bank sent to defaulting borrowers after their vehicles were repossessed, which were alleged to have not fully complied with the relevant portions of the Uniform Commercial Code in both states. As part of the Settlement Agreement, which is subject to court approval, we agreed to making a cash payment in the amount of $29.5 million in full resolution of the matter. We do not anticipate that additional amounts will be accrued for this matter in 2025 or other future periods. The Company determined that the March 7, 2025 event met the definition of a recognized subsequent event in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 855, Subsequent Events, at the December 31, 2024 balance sheet date, and has therefore recorded a $23.0 million pre-tax litigation accrual, which reflects the agreed upon settlement less approximately $6.5 million of available related insurance proceeds, in the Company’s December 31, 2024 consolidated financial statements. The settlement resulted in an after-tax loss of approximately $17.1 million in 2024.
Current report
Summary of 2025 First Quarter Results
Current report
Net interest margin was 3.35% for the first quarter of 2025 compared to 2.78% in the first quarter of 2024, primarily due to an increase in the average yield on investment securities, following the previously disclosed restructuring of the available-for-sale securities portfolio in December 2024, which supported an increase in the average yield on interest-earnings assets, while funding costs were reduced, in part reflecting deposit repricing.
Current report
Net interest income on a taxable equivalent basis for the three months ended March 31, 2025, was $46.9 million, an increase of $6.8 million versus the comparable quarter last year of $40.2 million. Our net interest margin for the first quarter of 2025 was 3.35%, 57-basis points higher than 2.78% for the same period in 2024. The increase in net interest income and net interest margin was primarily due to an increase in the average yield on investment securities, following the previously disclosed restructuring of the available-for-sale portfolio in December 2024, which supported an increase in the average yield on interest-earnings assets, while funding costs were reduced, reflecting deposit repricing due in part to the federal funds interest rate cuts totaling 100-basis points that occurred in September 2024 through December 2024.
Current report
For the first quarter of 2025, the average yield on average interest earning assets of 5.80% was 37-basis points higher than the first quarter of 2024 of 5.43% primarily due to an increase in the average yield on investment securities, following the previously disclosed restructuring of the available-for-sale securities portfolio in December 2024, partially offset by a decrease in market interest rates due to the federal funds interest rate cuts that occurred in the latter part of 2024 as previously mentioned. Average loan yields decreased 13-basis points during the first quarter of 2025 to 6.20% from 6.33% for the first quarter of 2024, and the average yield on investment securities increased 216-basis points during the first quarter of 2025 to 4.25% from 2.09% for the first quarter of 2024.
Current report
The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” included elsewhere in this report.
Current report
Rate/Volume Analysis
Current report
The provision for credit losses in the first quarter of 2025 was primarily driven by a combination of factors, including the impact of loan growth and an increase in specific reserves, partially offset by modest improvement in forecasted losses and qualitative factors, primarily reflecting a reduction in consumer indirect delinquencies.
Current report
Investment advisory income increased $155 thousand, or 6%, to $2.7 million for the first quarter of 2025 compared to $2.6 million for the first quarter of 2024, due to a combination of new business and market growth positively impacting assets under management at Courier Capital.
Current report
Income from company owned life insurance increased $1.5 million, to $2.8 million for the first quarter of 2025 compared to $1.3 million for the first quarter of 2024. The increase was primarily due to the surrender and redeployment of a portion of our life insurance into a higher-yielding credit fund in January 2025.
Current report
Professional services expense decreased $681 thousand, or 29%, to $1.7 million for the first quarter of 2025 compared to $2.4 million for the first quarter of 2024. The decrease was primarily due to higher legal expenses in 2024, attributed to the deposit-related fraud event we experienced in early March 2024.
Current report
Deposit-related charged-off items recoveries were $294 thousand for the first quarter of 2025 and included insurance proceeds related to a past commercial deposit charged-off item, while deposit-related charged-off expense of $19.2 million for the first quarter of 2024 included an $18.4 million loss associated with the deposit-related fraud event.
Current report
Our investment policy is contained within our overall Asset-Liability Management and Investment Policy. This policy dictates that investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets, need for collateral and desired risk parameters. In pursuing these objectives, we consider the ability of an investment to provide earnings consistent with factors of quality, maturity, marketability, pledgeable nature and risk diversification. Our Chief Financial Officer and Treasurer, guided by ALCO, is responsible for investment portfolio decisions within the established policies.
Current report
The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date, repricing date or if market yields for such investments decline. We do not believe any of the securities in a loss position are impaired due to reasons of credit quality. Accordingly, as of March 31, 2025, we concluded that unrealized losses on our AFS securities were not impaired due to reasons of credit quality and no allowance for credit losses has been recognized on AFS securities. As the portfolio is managed from a liquidity, earnings, and risk standpoint, sales from the AFS portfolio may be warranted based upon prevailing market factors.
Current report
Agency Mortgage-backed Securities
Current report
With the exception of the non-Agency mortgage-backed securities (“non-Agency MBS”) discussed below, all of the mortgage-backed securities held by us as of March 31, 2025, were issued by U.S. Government sponsored entities and agencies (“Agency MBS”), primarily FNMA and FHLMC. The contractual cash flows of our Agency MBS are guaranteed by FNMA, FHLMC or GNMA. The GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. Government.
Current report
Our AFS portfolio as of March 31, 2025, reflected our strategic investment securities restructuring which occurred in December 2024 following the completion of the public common stock offering. As of March 31, 2025, there were 46 securities in the AFS Agency MBS portfolio with an aggregate fair value of $313.7 million that were in an unrealized loss position with unrealized losses totaling $50.9 million. Of these, 37 were in an unrealized loss position for 12 months or longer and had an aggregate fair value of $178.4 million and unrealized losses of $48.9 million, while eight were in an unrealized loss position for less than 12 months and had an aggregate fair value of $135.3 million and unrealized losses of $2.0 million. The unrealized loss of these securities was driven by the timing of the purchases of fixed-rate securities during the extended low-interest rate environments experienced in prior years, which has been compounded with subsequent increases in benchmark interest rates. However, these fixed-rate securities were purchased with the expectation that they will continue to prepay principal, and the proceeds will be invested at current market rates.
Current report
Given the high credit quality inherent in Agency MBS, we do not consider any of the unrealized losses as of March 31, 2025 on such Agency MBS to be credit related.
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Removed paragraphs (27)
Previous report
The introduction of new products and services may subject us to increased regulation and regulatory scrutiny and may affect our reputation;
Previous report
We face competition in staying current with technological changes and banking alternatives to compete and meet customer demands;
Previous report
We rely on other companies to provide key components of our business infrastructure;
Previous report
A breach in security of our or third-party information systems, including the occurrence of a cyber incident or a deficiency in cybersecurity, or a failure by us to comply with New York State cybersecurity regulations, may subject us to liability, result in a loss of customer business or damage our brand image;
Previous report
Summary of 2024 Third Quarter Results
Previous report
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 report
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 report
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 report
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 report
Analysis of Net Interest Income for the Nine Months Ended September 30, 2024 and 2023
Previous report
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 report
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 report
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 report
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 report
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 report
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 report
(3) Annualized.
Previous report
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 report
Investment advisory income increased $253 thousand, or 10%, to $2.8 million for the third quarter of 2024 compared to $2.5 million for the third quarter of 2023, primarily due to a market-driven increase in assets under management in addition to business development. For the first nine months of 2024, investment advisory income decreased $128 thousand, or 2%, to $8.2 million compared to $8.3 million for the first nine months of 2023.
Previous report
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 report
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 report
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 report
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 report
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 report
Advertising and promotions expense decreased $373 thousand, or 50%, to $371 thousand for the third quarter of 2024 compared to $744 thousand for the third quarter of 2023. For the first nine months of 2024, advertising and promotions expense decreased $448 thousand, or 29%, to $1.1 million, compared to $1.6 million for the first nine months of 2023. The decrease in both periods reflected higher advertising and promotions expense in the prior year periods related to the money market campaign.
Previous report
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 report
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.
Reworded paragraphs (64)
Previous wording
Our commercial business and mortgage loans increase our exposure to credit risks;
Current wording
Our commercial business and commercial mortgage loans increase our exposure to credit risks;
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We are subject to environmental liability risk associated with our lending activities;
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We are subject to environmental liability risk associated with our lending activities; and
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Legal and regulatory proceedings and related matters, such as the action brought by a class of consumers against us as described in Part I, Item 3, “Legal Proceedings,” could adversely affect us and the banking industry in general;
Current wording
Legal and regulatory proceedings and related matters could adversely affect us and the banking industry in general;
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Any future FDIC insurance premium increases may adversely affect our earnings;
Current wording
Any future Federal Deposit Insurance Corporation (“FDIC”) insurance premium increases may adversely affect our earnings;
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We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties;
Current wording
We are subject to the Community Reinvestment Act (the “CRA”) and fair lending laws, and failure to comply with these laws could lead to material penalties;
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The policies of the Federal Reserve have a significant impact on our earnings;
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The policies of the Federal Reserve Board have a significant impact on our earnings; and
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We make certain assumptions and estimates in preparing our financial statements that may prove to be incorrect, which could significantly impact the results of our operations, cash flows and financial condition, and we are subject to new or changing accounting rules and interpretations, and the failure by us to correctly interpret or apply these evolving rules and interpretations could have a material adverse effect;
Current wording
We make certain assumptions and estimates in preparing our financial statements that may prove to be incorrect, which could significantly impact our results of operations, cash flows and financial condition, and we are subject to new or changing accounting rules and interpretations, and the failure by us to correctly interpret or apply these evolving rules and interpretations could have a material adverse effect;
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We rely on dividends from our subsidiaries for most of our revenue;
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We rely on dividends from our subsidiaries for most of our revenue; and
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Fluctuations in market interest rates may affect our interest margins and income, demand for our products, defaults on loans, loan prepayments and the fair value of our financial instruments;
Current wording
We are subject to interest rate risk, and fluctuations in market interest rates may affect our interest margins and income, demand for our products, defaults on loans, loan prepayments and the fair value of our financial instruments;
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The soundness of other financial institutions could adversely affect us;
Current wording
The soundness of other financial institutions could adversely affect us; and
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We may not pay or may reduce the dividends on our common stock;
Current wording
We may not pay or may reduce the dividends on our common stock, and our ability to pay dividends is subject to certain restrictions;
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Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect;
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Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect; and
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Our business may be adversely affected by conditions in the financial markets and economic conditions generally, including macroeconomic pressures such as inflation, supply chain issues, and geopolitical risks associated with international conflict; and
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Our business may be adversely affected by conditions in the financial markets and economic conditions generally, including macroeconomic pressures such as inflation, supply chain issues, and geopolitical risks associated with international conflict;
Previous wording
The Parent is a financial holding company headquartered in New York State, providing diversified financial services through its operating subsidiaries, Five Star Bank (the “Bank”) and Courier Capital, LLC (“Courier Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly owned New York-chartered banking subsidiary, the Bank. The Bank also has commercial loan production offices in Ellicott City (Baltimore), Maryland, and Syracuse, New York, serving the Mid-Atlantic and Central New York regions. Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, and the Capital District of New York. Effective January 1, 2024, we exited the Pennsylvania automobile market to align our focus more fully around our core Upstate New York market. Courier Capital provides customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.
Current wording
The Parent is a financial holding company headquartered in New York State, providing diversified financial services through its operating subsidiaries, Five Star Bank (the “Bank”) and Courier Capital, LLC (“Courier Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly owned New York-chartered banking subsidiary, the Bank. The Bank also has commercial loan production offices in Ellicott City (Baltimore), Maryland, and Syracuse, New York, serving the Mid-Atlantic and Central New York regions. Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, and the Capital District of New York. Courier Capital provides customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.
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 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.
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. 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. 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.
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. We continue to expect the majority of remaining BaaS-related deposits to flow out by mid-2025.
Previous wording
Offering financial products and services to the cannabis industry presents a unique set of regulatory risks due to the conflict between state and federal laws, as marijuana remains illegal at the federal level. In January 2018, the U.S. Department of Justice (the “DOJ”) rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion. The impact of the DOJ’s rescission of the Cole Memo and related memoranda is unclear, but in the future may result in increased enforcement actions against the regulated cannabis industry generally. More recently, the United States Attorney General has indicated that the DOJ, under his leadership, does not intend to pursue cases against parties who comply with the laws in states which have legalized and are effectively regulating marijuana. However, enforcement policies and practices may be highly variable between political administrations. In addition, federal prosecutors have significant discretion and there can be no assurance that the federal prosecutor for any district in which we operate will not choose to strictly enforce the federal laws governing cannabis. In the future, enforcement actions may be taken against cannabis-related businesses or financial services providers that are viewed as aiding and abetting such activities.
Current wording
Offering financial products and services to the cannabis industry presents a unique set of regulatory risks due to the conflict between state and federal laws, as marijuana remains illegal at the federal level. In January 2018, the U.S. Department of Justice (the “DOJ”) rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion. The impact of the DOJ’s rescission of the Cole Memo and related memoranda is unclear, but in the future may result in increased enforcement actions against the regulated cannabis industry generally. Enforcement policies and practices may be highly variable between political administrations. In addition, federal prosecutors have significant discretion and there can be no assurance that the federal prosecutor for any district in which we operate will not choose to strictly enforce the federal laws governing cannabis. In the future, enforcement actions may be taken against cannabis-related businesses or financial services providers that are viewed as aiding and abetting such activities.
Previous 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.
Current wording
Net income increased $14.8 million to $16.9 million for the first quarter of 2025 compared to $2.1 million for the first quarter of 2024. Net income available to common shareholders for the first quarter of 2025 was $16.5 million, or $0.81 per diluted share, compared with $1.7 million, or $0.11 per diluted share, for the first quarter of 2024. Return on average common equity was 11.82% and return on average assets was 1.10% for the first quarter of 2025 compared to 1.83% and 0.13%, respectively, for the first quarter of 2024. First quarter 2024 results were negatively impacted by the previously disclosed deposit-related fraud event, for which we recorded an $18.4 million pre-tax loss in deposit-related charged-off items, and $660 thousand of related legal fees in professional services expenses.
Previous 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.
Current wording
Net interest income totaled $46.9 million in the first quarter of 2025, an increase of $6.8 million compared to $40.1 million in the first quarter of 2024. Average interest-earning assets for the first quarter of 2025 were $153.6 million lower than the first quarter of 2024 due to a $97.3 million decrease in average investment securities, and a $86.3 million decrease in the average balance of Federal Reserve interest-earning cash, partially offset by a $30.0 million increase in average loans. Average interest-bearing liabilities for the first quarter of 2025 were $108.0 million lower than the first quarter of 2024 due to a $105.3 million decrease in average savings and money market account deposits, an $84.2 million decrease in average borrowings, and a $4.3 million decrease in average interest-bearing demand deposits, partially offset by an $85.9 million increase in average time deposits.
Previous 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.
Current wording
The provision for credit losses was $2.9 million in the first quarter of 2025 compared to a benefit for credit losses of $5.5 million in the first quarter of 2024. The provision for credit losses for the first quarter of 2025 was primarily driven by a combination of factors, including the impact of loan growth and an increase in specific reserves, partially offset by modest improvement in forecasted losses and qualitative factors, primarily reflecting a reduction in consumer indirect delinquencies. Net charge-offs during the recent quarter were $2.4 million, representing 0.21% of average loans on an annualized basis, compared to $3.1 million, or an annualized 0.28% of average loans, in the first quarter of 2024. 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 $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.
Current wording
Noninterest income totaled $10.4 million in the first quarter of 2025, compared to $10.9 million in the first quarter of 2024. The sale of the assets of our insurance subsidiary in April 2024 resulted in a decrease in insurance income of $2.1 million compared to the first quarter of 2024. Partially offsetting this decrease were increases of $1.5 million in company owned life insurance income as a result of a surrender and redeploy strategy executed in January 2025.
Previous 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.
Current wording
Noninterest expense totaled $33.7 million in the first quarter of 2025, compared to $54.0 million in the first quarter of 2024. The decrease in noninterest expense for the first quarter of 2025 was primarily attributable to the previously disclosed deposit-related fraud event in March 2024, in which we recorded an $18.4 million pre-tax loss in deposit-related charged-off items, and $660 thousand of related legal fees in professional services expenses, coupled with a $442 thousand decrease in salaries and employee benefits expense primarily due to a decrease in headcount as a result of our insurance subsidiary asset sale.
Previous 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.
Current wording
The regulatory Tier 1 Capital Ratio was 10.71% and 10.87%, respectively, and Total Risk-Based Capital Ratio was 13.09% and 13.25%, respectively, at March 31, 2025 and December 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.
Previous 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.
Current wording
Net interest income is our primary source of revenue, comprising approximately 82% and 79% of revenue during the three months ended March 31, 2025 and 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
We use interest rate spread and net interest margin to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and shareholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.
Current wording
We use interest rate spread and net interest margin to measure and explain changes in net interest income. Interest rate spread is the difference between the average yield on interest-earning assets and the average rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average interest earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and shareholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.
Previous wording
The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis (dollars in thousands):
Current wording
The following table reconciles interest income per the consolidated statements of operations to interest income adjusted to a fully taxable equivalent basis (dollars in thousands):
Previous 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.
Current wording
Average interest-earning assets were $5.65 billion for the first quarter of 2025 compared to $5.80 billion for the first quarter of 2024, a decrease of $153.6 million, or 3%, from the comparable quarter last year, with a decrease in average investment securities of $97.3 million from $1.18 billion for the first quarter of 2024 to $1.09 billion for the first quarter of 2025, and an $86.3 million decrease in average Federal Reserve interest-earning cash, partially offset by an increase in average loans of $30.0 million from $4.46 billion for the first quarter of 2024 to $4.49 billion for the first quarter of 2025. Average loans comprised 80% of average interest-earning assets during the first quarter of 2025 compared to 77% during the first quarter of 2024. The increase in average loans was primarily due to organic growth in commercial mortgages. Average investment securities represented 19% of average interest-earning assets during the first quarter of 2025 compared to 20% during the first quarter of 2024. Overall, the average interest rate changes increased interest income by $3.7 million and volume variance decreased interest income by $1.1 million during the first quarter of 2025, which collectively drove a $2.6 million increase in total interest income during the first quarter of 2025, as compared to the prior year quarter.
Previous 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.
Current wording
For the first quarter of 2025, the average cost of average interest-bearing liabilities of 3.07% was 27-basis points lower than the first quarter of 2024. The average cost of interest-bearing deposits of 3.04% was 25-basis points lower than the first quarter of 2024. The average cost of total borrowings decreased 37-basis points to 3.71% in the first quarter of 2025, compared to 4.08% in the first quarter of 2024. The reduction in the cost of interest-bearing liabilities was primarily driven by the repricing of deposits and borrowings at lower rates given the federal funds interest rate cuts that occurred in the latter part of 2024 as previously mentioned.
Previous 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.
Current wording
Average interest-bearing liabilities were $4.51 billion for the first quarter of 2025, compared to $4.61 billion for the first quarter of 2024, a decrease of $108.0 million, or 2%, driven by an $84.2 million decrease in the average balance of borrowings, couple with a $23.8 million decrease in average interest-bearing deposits. On average, interest-bearing deposits decreased from $4.31 billion for the first quarter of 2024 to $4.29 billion for the current quarter while noninterest-bearing demand deposits (a principal component of net free funds) decreased $35.8 million to $926.7 million for the first quarter of 2025. The decrease in average interest-bearing deposits was due to lower average brokered and reciprocal deposits, partially offset by higher average non-public and public deposits. For further discussion of deposits, refer to the “Funding Activities–Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing liability rate changes resulted in a $3.8 million decrease in interest expense, and volume changes resulted in a $387 thousand decrease in interest expense during the first quarter of 2025 as compared to the prior year quarter.
Previous wording
The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands). No out-of-period adjustments were included in the rate/volume analysis.
Current wording
The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest income or interest expense not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands). No out-of-period adjustments were included in the rate/volume analysis.
Previous 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.
Current wording
The decrease in insurance income for the first quarter of 2025 was reflective of the sale of our insurance subsidiary, SDN, on April 1, 2024.
Previous 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.
Current wording
Salaries and employee benefits expense decreased $442 thousand, or 3%, to $16.9 million for the first quarter of 2025 compared to $17.3 million for the first quarter of 2024. The decrease was driven in part by lower salaries and wages as a result of the sale of SDN.
Previous 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.
Current wording
Our efficiency ratio for the first quarter of 2025 was 58.79%, compared with 105.77% for the first quarter of 2024. The higher efficiency ratio for the first quarter of 2024 was reflective of 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, attributed 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 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.
Current wording
For the first quarter of 2025, we recorded income tax expense of $3.7 million, compared to $356 thousand for the first quarter of 2024. The lower level of income tax expense incurred during the first quarter of 2024 was primarily due to a lower level of pre-tax income, reflecting the impact of the deposit-related fraud event. In the first quarter of 2025, 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 $1.1 million, compared to $785 thousand for the same period in the prior year.
Previous 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.
Current wording
Our effective tax rate for the first quarter of 2025 was 18.2%, versus 14.7%, for the first quarter of 2024. 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 2025 and 2024 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 $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.
Current wording
Our available for sale (“AFS”) investment securities portfolio increased $15.9 million from December 31, 2024 to March 31, 2025. The AFS portfolio had a net unrealized loss of $46.6 million at March 31, 2025 and $61.6 million at December 31, 2024, respectively. The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change.
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 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.
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 months ended March 31, 2025 and 2024, 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 $4.40 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):
Current wording
Total loans were $4.55 billion at March 31, 2025, an increase of $74.1 million from $4.48 billion at December 31, 2024. 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 $2.76 billion represented 63% of total loans as of September 30, 2024, compared to $2.74 billion, or 61% of total loans as of December 31, 2023. Commercial business loans of $654.5 million, or 15% of total loans, were down $81.2 million, or 11%, from December 31, 2023, and total commercial mortgage loans of $2.11 billion, or 48% of total loans, were up $100.3 million, or 5% from December 31, 2023. The increase in commercial mortgage loans was attributable to increases in construction, multifamily, owner and non-owner occupied loans. As of September 30, 2024, commercial real estate (“CRE”) loans made 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 September 30, 2024 related to approximately 42% multi-family, 18% office, 8% industrial property, 7% retail, 7% hospitality, and 6% home builder. Approximately 70% of our office exposure at September 30, 2024, or 12% of our total CRE exposure, related to Class B or medical office space. More than 70% of our office and 90% of our multifamily CRE loans have full or limited personal or corporate recourse.
Current wording
Total commercial loans of $2.94 billion represented 65% of total loans as of March 31, 2025, compared to $2.86 billion, or 64% of total loans as of December 31, 2024. Commercial business loans of $709.1 million, or 16% of total loans, were up $43.8 million, or 7%, from December 31, 2024, and total commercial mortgage loans of $2.23 billion, or 49% of total loans, were up $28.7 million, or 1.3% from $2.20 billion as of December 31, 2024. The increase in total commercial mortgage loans was attributable to increases in non-owner occupied and multifamily loans, partially offset by decreases in construction and owner-occupied loans. As of March 31, 2025, commercial real estate (“CRE”) loans made up approximately 66% of total commercial loans, and 43% 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, 2025 related to approximately 43% multi-family, 16% office, 9% retail, 8% hospitality, 7% industrial property, and 5% home builder properties. Approximately 68% of our office exposure at March 31, 2025, or 11% of our total CRE exposure, related to Class B or medical office space. More than 70% of our office and 90% of our multifamily CRE loans have full or limited personal or corporate recourse.
Previous wording
Total consumer loans of $1.64 billion, or 37% of total loans at September 30, 2024, decreased $78.3 million from December 31, 2023. Consumer loans at September 30, 2024 were comprised of residential real estate loans and lines of credit of $724.4 million, or 16% of total loans, consumer indirect loans of $874.7 million, or 20% of total loans, and other consumer loans of $43.7 million, or 1% of total loans. During the nine months ended September 30, 2024, we originated $170.5 million in indirect automobile loans with a mix of approximately 25% new automobile and 75% used automobile loans. This compares with the $238.2 million originated of indirect automobile loans with a mix of approximately 27% new automobile and 73% used automobile loans for the nine months ended September 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.
Current wording
Total consumer loans of $1.62 billion, or 35% of total loans at March 31, 2025, increased $1.6 million from December 31, 2024. Consumer loans at March 31, 2025 were comprised of residential real estate loans and lines of credit of $718.8 million, or 16% of total loans, consumer indirect loans of $853.2 million, or 19% of total loans, and other consumer loans of $44.0 million, or 1% of total loans. During the first quarter of 2025, we originated $89.1 million in indirect automobile loans with a mix of approximately 27% new automobile and 73% used automobile loans. This compares with the $57.9 million originated of indirect automobile loans with a mix of approximately 18% new automobile and 82% used automobile loans for the first quarter of 2024. Origination volumes and the mix of new and used vehicles financed fluctuate depending on general market conditions.
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Previous report — wording carried elsewhere
On September 16, 2024, we announced our intent to begin an orderly wind down of our BaaS offerings, following a careful review by the executive management and Board of Directors undertaken in conjunction with our annual strategic planning process. As of September 30, 2024, deposits and loans related to the Bank’s BaaS offerings totaled $103 million and $29 million, respectively. We continue to preliminarily target completion of the wind down sometime in 2025.
Previous report — wording carried elsewhere
(1)Investment securities are shown at amortized cost.
Previous report — wording carried elsewhere
(2)The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.
Previous report — wording carried elsewhere
(4) Loans include net unearned income, net deferred loan fees and costs and non-accruing loans. Net deferred loan fees (costs) included in interest income were as follows (in thousands):