FINANCIAL INSTITUTIONS INC

Previous wording

Financial Institutions, Inc. (the “Parent” and together with all its subsidiaries, “we,” “our,” or “us”), is a financial holding company headquartered in New York State. We offer a broad array of deposit, lending, and other financial services to individuals, municipalities and businesses in Western and Central New York through our wholly-owned New York-chartered banking subsidiary, Five Star Bank (the “Bank”). We have loan production offices in Baltimore, Maryland, and Syracuse, New York, which expands our footprint into 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 in order to align our focus more fully around our core Upstate New York market. We offer customized investment advice, wealth management, investment consulting and retirement plan services through our wholly-owned subsidiary Courier Capital, LLC (“Courier Capital”) an SEC-registered investment advisory and wealth management firm.

Current wording

Financial Institutions, Inc. (the “Parent” and together with all its subsidiaries, “we,” “our,” or “us”), is a financial holding company headquartered in New York State. We offer a broad array of deposit, lending, and other financial services to individuals, municipalities and businesses in Western and Central New York through our wholly-owned New York-chartered banking subsidiary, Five Star Bank (the “Bank”). We have loan production offices in Baltimore, Maryland, and Syracuse, New York, which expands our footprint into 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. We offer customized investment advice, wealth management, investment consulting and retirement plan services through our wholly-owned subsidiary Courier Capital, LLC (“Courier Capital”) an SEC-registered investment advisory and wealth management firm.

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 $13.7 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.

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. Following the sale of the assets of SDN, we changed the name of the entity to Five Star Advisors LLC to serve as a conduit for the Bank 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 investment advisory and financial services provided to customers or ancillary services tied to loans and deposits, and 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 our results of 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 our results of operations and financial condition.

Previous wording

We reported a net loss of $41.6 million for 2024, compared to net income of $50.3 million for 2023. This resulted in a -0.68% return on average assets and a -8.74% return on average equity. After preferred dividends, net loss available to common shareholders was $43.1 million or ($2.75) per diluted share for 2024, compared to net income available to common shareholders of $48.8 million or $3.15 per diluted share for 2023. The net loss for 2024 was primarily the result of a strategic investment securities restructuring, in which a portion of the proceeds from our December 2024 common stock offering was used to fund losses on the sale of $653.5 million of available-for-sale securities (“AFS”) with a weighted average book yield of 1.74% for a pre-tax loss of $100.2 million. The after-tax impact of the loss was approximately $75 million. We declared cash dividends of $1.20 per common share during 2024, consistent with 2023.

Current wording

We reported net income of $74.9 million for 2025, compared to a net loss of $41.6 million for 2024. This resulted in a 1.20% return on average assets and a 12.38% return on average equity. After preferred dividends, net income available to common shareholders was $73.4 million or $3.61 per diluted share for 2025, compared to net loss available to common shareholders of $43.1 million or $2.75 per diluted share for 2024. The net loss for 2024 was primarily the result of a strategic investment securities restructuring, in which a portion of the proceeds from our December 2024 common stock offering was used to fund losses on the sale of $653.5 million of available-for-sale securities (“AFS”) for a pre-tax loss of $100.2 million, or approximately $75 million after taxes. We declared cash dividends of $1.24 per common share during 2025, an increase of more than 3% compared with 2024.

Previous wording

Net interest income was $163.6 million for 2024, compared to $165.7 million for 2023, a decrease of $2.1 million. Fully-taxable equivalent net interest income was $163.9 million in 2024, a decrease of $2.3 million, compared to 2023. Average interest-earning assets were $71.3 million higher than 2023 due to a $114.9 million increase in average loans and a $35.2 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $78.8 million decrease in average investment securities.

Current wording

Net interest income was $200.0 million for 2025, compared to $163.6 million for 2024, an increase of $36.4 million. Fully-taxable equivalent net interest income was $200.2 million in 2025, an increase of $36.3 million, compared to 2024. Average interest-earning assets were $47.7 million lower than 2024 due to a $100.3 million decrease in average investment securities, and a $68.1 million decrease in the average balance of Federal Reserve interest-earning cash, partially offset by a $120.8 million increase in average loans.

Previous wording

The provision for credit losses was $6.2 million in 2024 compared to a provision of $13.7 million in 2023. Net charge-offs were $8.7 million in 2024, representing 0.20% of average loans, which were relatively flat compared with $8.5 million, or 0.20% of average loans in 2023. Non-performing loans increased $14.7 million to $41.4 million compared to a year ago and represented 0.92% of total loans at December 31, 2024, compared to 0.60% of total loans at December 31, 2023. The increase in non-performing loans in the current year was primarily driven by one $15.5 million commercial loan relationship that was placed on nonaccrual status during the third quarter of 2024. We have remained strategically focused on the importance of credit discipline, allocating resources to credit and risk management functions as the loan portfolio has grown. The ratio of allowance for credit losses on loans to non-performing loans was 116% at December 31, 2024, compared to 192% at December 31, 2023, with the decrease reflective of the higher level of nonperforming loans at December 31, 2024.

Current wording

The provision for credit losses was $11.6 million in 2025 compared to a provision of $6.2 million in 2024. Net charge-offs were $10.9 million in 2025, representing 0.24% of average loans, compared with $8.7 million, or 0.20% of average loans in 2024. Non-performing loans decreased $5.7 million to $35.8 million compared to a year ago and represented 0.77% of total loans at December 31, 2025, compared to 0.92% of total loans at December 31, 2024. The decrease in non-performing loans in the current year reflected a foreclosed participated loan and partial charge-off of a credit facility recognized in the second quarter of 2025, both of which related to a commercial business relationship placed on nonaccrual status in 2023. We have remained strategically focused on the importance of credit discipline, allocating resources to credit and risk management functions as the loan portfolio has grown. The ratio of allowance for credit losses on loans to non-performing loans was 133% at December 31, 2025, compared to 116% at December 31, 2024, with the increase reflective of the lower level of nonperforming loans at December 31, 2025.

Previous wording

We reported a net loss in noninterest income of $46.7 million for 2024, compared to noninterest income of $48.2 million for 2023. The decrease in noninterest income was primarily attributable to an increase in net loss on investment securities, a decrease in income from company owned life insurance, and a decrease in insurance income, partially offset by an increase in net gain (loss) on other assets. The net loss on investments securities of $100.1 million for 2024 was reflective of the strategic investment securities portfolio restructuring in late December 2024 described above. Net loss on investment securities of $3.6 million for 2023 reflected the loss on the sale of approximately $54 million of lower yielding AFS securities agency mortgage-backed securities, reinvesting the proceeds of such sale into higher yielding bonds. Income from company owned life insurance decreased $6.6 million in 2024 compared to 2023, due to a normalized crediting rate associated with the separate account policies purchased in the fourth quarter of 2023. The decrease in insurance income was reflective of the sale of the assets of our insurance agency subsidiary, SDN, in April 2024. The gain from this sale of $13.7 million was included in net gain (loss) on other assets.

Current wording

Noninterest income was $45.0 million for 2025, compared to a net loss in noninterest income of $46.7 million for 2024. The 2024 net loss was reflective of the strategic investment securities portfolio restructuring in late December 2024 described above. Income from company owned life insurance (“COLI”) increased $5.9 million in 2025 compared to 2024, due to our surrender and redeploy strategy initiated in January 2025. The decrease in insurance income was reflective of the sale of the assets of our insurance agency subsidiary, SDN, in April 2024. The gain from this sale of $13.7 million was included in net gain (loss) on other assets in 2024.

Previous wording

Noninterest expense for the full year 2024 totaled $178.9 million, a $41.7 million increase compared to $137.2 million in the prior year. The increase in noninterest expense was primarily attributable to the previously disclosed fraud matter and the provision for the litigation settlement. Computer and data processing expense increased $2.6 million year-over-year, as a result of strategic investments in data efficiency and marketing technology. Professional services expense of $7.7 million increased $2.4 million from 2023 primarily due to legal expenses associated with the previously mentioned fraud event. Other expense of $15.3 million increased $1.0 million from 2023, due in part to New York State capital base tax. Salaries and benefits expense of $66.1 million decreased $5.8 million from 2023, primarily due to the decrease in headcount as a result of the sale of our SDN subsidiary and organizational changes made in the fourth quarter of 2023.

Current wording

Noninterest expense for the full year 2025 totaled $142.0 million, a $36.9 million decrease compared to $178.9 million in the prior year. The decrease in noninterest expense was primarily attributable to higher expenses in 2024 related to the fraud matter in the first quarter of 2024, and the provision for a litigation settlement for a long-standing automobile lending litigation in the fourth quarter of 2024. Salaries and benefits expense of $72.8 million increased $6.7 million from 2024, primarily driven by an increase in health insurance benefit expense, reflecting continued elevated medial claims under our self-insured plan, annual merit increases, incentive compensation, and investments in personnel. Professional services expense of $6.5 million decreased $1.2 million from 2024 primarily due to legal expenses associated with the previously mentioned fraud event that incurred in 2024.

Previous wording

Income tax benefit for full year 2024 was $26.5 million, representing an effective tax rate of (38.9%), which was reflective of the net loss for the year. Income tax expense for 2023 was $12.8 million, representing an effective tax rate of 20.3%. Income tax expense for 2023 included $5.4 million of incremental taxes associated with the COLI surrender and redeployment strategy executed in 2023. Effective tax rates are impacted by items of income and expense not subject to federal or state taxation. The Company’s effective tax rates differ from statutory rates primarily because of interest income from tax-exempt securities, earnings on COLI and tax credit investments placed in service.

Current wording

Income tax expense for full year 2025 was $16.5 million, representing an effective tax rate of 18.05%, while income tax benefit for 2024 was -$26.5 million, which was reflective of the net loss for the year, representing an effective tax rate of 38.9%. Effective tax rates are impacted by items of income and expense not subject to federal or state taxation. The Company’s effective tax rates differ from statutory rates primarily because of interest income from tax-exempt securities, earnings on COLI and tax credit investments placed in service.

Previous wording

Total assets were $6.12 billion at December 31, 2024, down $43.8 million from $6.16 billion at December 31, 2023.

Current wording

Total assets were $6.27 billion at December 31, 2025, up $157.1 million from $6.12 billion at December 31, 2024.

Previous wording

Investment securities were $1.03 billion at December 31, 2024, down $8.8 million from December 31, 2023. The decrease from year-end 2023 was primarily due to repayment, sales, and maturities of investment securities, and the use of cash to fund loan originations and reduce short-term borrowings.

Current wording

Investment securities were $1.01 billion at December 31, 2025, down $19.9 million from December 31, 2024. The decrease from year-end 2024 was primarily due to repayment, sales, and maturities of investment securities, and the use of cash to fund loan originations.

Previous wording

Total loans were $4.48 billion at December 31, 2024, up $17.1 million, or 0.4%, from December 31, 2023. The increase in loans in 2024 was primarily driven by strong commercial mortgage loan growth. The following discusses significant changes within our loan portfolio for the current year:

Current wording

Total loans were $4.66 billion at December 31, 2025, up $178.7 million, or 4.0%, from December 31, 2024. The increase in loans in 2025 was primarily driven by organic commercial loan growth. The following discusses significant changes within our loan portfolio for the current year:

Previous wording

Commercial mortgage– non-owner occupied loans totaled $858.0 million, an increase of $69.5 million, or 9%.

Current wording

Commercial mortgage–non-owner occupied loans were $942.2 million, an increase of $84.2 million, or 10%.

Previous wording

Short-term borrowings were $99.0 million at December 31, 2024, a decrease of $86.0 million from December 31, 2023. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits.

Current wording

Short-term borrowings were $109.0 million at December 31, 2025, an increase of $10.0 million from December 31, 2024. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits. Long-term borrowings, net, were $193.7 million at December 31, 2025, compared to $124.8 million at December 31, 2024, reflecting the December 2025 subordinated-debt offering.

Previous wording

Shareholders’ equity was $569.0 million at December 31, 2024, compared to $454.8 million at December 31, 2023. Common book value per share was $27.48 at December 31, 2024, a decrease of $0.92, or 3.2%, from $28.40 at December 31, 2023. Tangible common book value per share(1) was $24.45 at December 31, 2024, an increase of $0.76, or 3%, from $23.69 at December 31, 2023. The increase in shareholders’ equity as compared to December 31, 2023, was reflective of the $108.6 million net proceeds from the common stock offering and a decrease in our accumulated other comprehensive loss associated with unrealized losses on AFS securities portfolio, due to the investment securities restructuring, partially offset by the net loss for the year. Management believes the unrealized losses on the AFS securities portfolio are temporary in nature. The securities portfolio continues to generate cash flow and given the high quality of our agency mortgaged-backed securities portfolio, management expects the bonds to ultimately mature at a terminal value equivalent to par.

Current wording

Shareholders’ equity was $628.9 million at December 31, 2025, compared to $569.0 million at December 31, 2024. Common book value per share was $30.89 at December 31, 2025, an increase of $3.41, or 12.4%, from $27.48 at December 31, 2024. Tangible common book value per share(1) was $27.84 at December 31, 2025, an increase of $3.39, or 14%, from $24.45 at December 31, 2024. The increase in shareholders’ equity as compared to December 31, 2024, was reflective of net income retained, net of dividends, and a decrease in our accumulated other comprehensive loss associated with unrealized losses on AFS securities portfolio, partially offset by the impact of the shares repurchased under the 2025 Share Repurchase Program. Management believes the unrealized losses on the AFS securities portfolio are temporary in nature. The securities portfolio continues to generate cash flow and given the high quality of our agency mortgaged-backed securities portfolio, management expects the bonds to ultimately mature at a terminal value equivalent to par.

Previous wording

Our leverage ratio was 9.15% at December 31, 2024 compared to 8.18% at December 31, 2023. The Bank’s leverage ratio and total risk-based capital ratio were 9.79% and 12.60%, respectively, at December 31, 2024, compared to 9.06% and 11.76%, respectively, at December 31, 2023.

Current wording

Our leverage ratio was 9.69% at December 31, 2025, compared to 9.15% at December 31, 2024. Our total risk-based capital ratio was 14.90% at December 31, 2025, compared to 13.25% at December 31, 2024. The increase in the total risk-based capital ratio was reflective of the additional $80.0 million of capital on the balance sheet at year-end related to the 2025 Notes, which impacted the ratio by approximately 150 basis points. The Bank’s leverage ratio and total risk-based capital ratio were 10.44% and 13.33%, respectively, at December 31, 2025, compared to 9.79% and 12.60%, respectively, at December 31, 2024.

Previous wording

The Federal Reserve influences the general market rates of interest, which impacts the deposit and loan rates offered by many financial institutions. Throughout 2022 and 2023, the Federal Reserve increased the intended federal funds rate, which is the cost of immediately available overnight funds in an attempt by the Federal Reserve to curb inflation, resulting in a federal funds rate of 4.25% to 4.50% as of December 31, 2022. The Federal Reserve further increased the federal funds rate by 25-basis points each in February, March, May, and July 2023 resulting in a federal funds rate of 5.25% to 5.50% as of December 31, 2023. The federal funds rate remained at 5.50% until a 50-basis point reduction in September 2024. Amid cooling inflation, the rate decreased 25-basis points in both November and December, resulting in a federal funds rate of 4.25% to 4.50% as of December 31, 2024. Our loan portfolio is significantly affected by changes in the prime interest rate, which generally follow changes in the federal funds rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, was 7.50% at December 31, 2024, compared to 8.50% and 7.50% at December 31, 2023 and 2022, respectively.

Current wording

The Federal Reserve influences the general market rates of interest, which impacts the deposit and loan rates offered by many financial institutions. Throughout 2022 and 2023, the Federal Reserve increased the intended federal funds rate, which is the cost of immediately available overnight funds in an attempt by the Federal Reserve to curb inflation, resulting in a federal funds rate of 5.25% to 5.50% as of December 31, 2023. The federal funds rate remained at 5.50% until a 50-basis point reduction in September 2024. Amid cooling inflation, the rate decreased 25-basis points in both November and December 2024, resulting in a federal funds rate of 4.25% to 4.50% as of December 31, 2024. This level was maintained until three consecutive 25-basis point rate cuts were made in September, October, and December 2025, in an attempt to allow inflation to resume its downward trend, decreasing the federal funds rate to 3.50% to 3.75% as of December 31, 2025.

Previous wording

Our net interest margin for 2024 was 2.86%, 8-basis points lower than 2.94% from the prior year. This decrease was a function of a 16-basis points decrease in the interest rate spread, partially offset by an 8-basis points higher contribution from net free funds. The change in interest rate spread was a net result of a 57-basis points increase in the average cost of interest-bearing liabilities, partially offset by a 41-basis points increase in the average yield on average interest-earning assets.

Current wording

Net interest income on a taxable equivalent basis for 2025 was $200.2 million, an increase of $36.3 million compared to $163.9 million for 2024. Our net interest margin for 2025 was 3.53%, 67-basis points higher than 2.86% from the prior year. This increase was a function of a 76-basis points increase in the interest rate spread, partially offset by a 9-basis points lower contribution from net free funds. The increase in interest rate spread was comprised of a 39-basis points increase in the average yield on average interest-earning assets, and a 37-basis points decrease in the average cost of interest-bearing liabilities.

Previous wording

Average interest-earning assets were $5.72 billion for 2024 compared to $5.65 billion for 2023, an increase of $71.3 million, or 1%, with average loans up $114.9 million from $4.32 billion for 2023 to $4.44 billion for 2024, while average investment securities were down $78.8 million from $1.25 billion for 2023 to $1.17 billion for 2024. Average investment securities represented 20.5% of average interest-earning assets during 2024 compared to 22.1% in 2023. The decrease in the average balance of investment securities was primarily due to repayment and maturities of investment securities, and the use of cash to fund loan originations and reduce short-term borrowings. Loans comprised 77.5% of average interest-earning assets during 2024 compared to 76.5% during 2023. The growth in average loans was primarily due to organic growth in commercial mortgage loans, as well as organic growth in residential and other consumer loans, partially offset by a planned reduction in our consumer indirect portfolio. 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. An increase in the volume of average loans resulted in a $7.6 million increase in interest income and higher interest rates increased interest income by $16.0 million.

Current wording

Average interest-earning assets were $5.68 billion for 2025 compared to $5.72 billion for 2024, a decrease of $47.7 million, or 1%. The $100.3 million decrease in average investment securities and the $68.1 million decrease in average federal reserve interest-earning cash in 2025 was partially offset by an increase in average loans of $120.8 million. Average investment securities represented 18.9% of average interest-earning assets during 2025 compared to 20.5% in 2024, and decreased interest income by $2.5 million. 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. Loans comprised 80.3% of average interest-earning assets during 2025 compared to 77.5% during 2024. The growth in average loans was primarily due to organic growth in commercial loans, partially offset by a planned reduction in our consumer indirect portfolio. An increase in the volume of average loans resulted in an $8.1 million increase in interest income.

Previous wording

For the year ended December 31, 2024, the average cost of total interest-bearing liabilities of 3.32% was 57-basis points higher than 2023. The average cost of total interest-bearing deposits of 3.29% was 66-basis points higher than 2023 primarily due to the continued repricing of deposits at higher rates due to the higher interest rate environment that began in 2023 and persisted for the majority of 2024. The average cost of total borrowings decreased 39-basis points to 3.84% in 2024, compared to 4.23% in 2023.

Current wording

For the year ended December 31, 2025, the average cost of total average interest-bearing liabilities of 2.95% was 37-basis points lower than 2024. The average cost of total average interest-bearing deposits of 2.90% was 39-basis points lower than 2024 primarily due to the continued repricing of deposits at lower rates, which decreased interest expense $18.6 million. The average cost of total borrowings increased 21-basis points to 4.05% in 2025, compared to 3.84% in 2024.

Previous wording

Average interest-bearing liabilities of $4.51 billion in 2024 were $122.5 million, or 3%, higher than 2023. On average, interest-bearing deposits grew $180.5 million from $4.08 billion for 2023 to $4.26 billion for 2024, while noninterest-bearing demand deposits (a principal component of net free funds) decreased $77.2 million, or 7%, to $953.4 million. The increase in average deposits was due to growth in non-public deposits, public deposits, and reciprocal deposits, partially offset by a decrease in brokered deposits. Average short-term borrowings decreased $60.7 million from $186.9 million in 2023 to $126.2 million in 2024 as deposit growth enabled us to pay down short-term borrowings. 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 interest rate changes and volume changes resulted in an increase in interest expense of $26.2 million and $6.4 million, respectively, as compared to 2023, and total borrowings volume and interest rate changes contributed $1.8 million and $1.7 million, respectively, of lower interest expense during 2024.

Current wording

Average interest-bearing liabilities of $4.50 billion in 2025 were generally flat with 2024. On average, interest-bearing deposits grew $27.9 million from $4.26 billion for 2024 to $4.29 billion for 2025, while noninterest-bearing demand deposits (a principal component of net free funds) decreased $11.8 million, or 1%, to $941.7 million for 2025. The increase in average deposits was primarily due to growth in public and brokered deposits, partially offset by a decrease in reciprocal deposits. Brokered deposits were utilized to offset the anticipated reduction in BaaS-related deposits, which totaled $7 million and $100 million at December 31, 2025, and 2024, respectively. Average short-term borrowings decreased $33.4 million from $126.2 million in 2024 to $92.8 million in 2025 as deposit growth enabled us to pay down short-term borrowings. 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 volume changes resulted in an increase in interest expense of $2.9 million, as compared to 2024, and total borrowings volume contributed $897 thousand of lower interest expense during 2025.

Previous wording

(3) 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):

Current wording

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

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 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.

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 years 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

A net loss on investment securities of $100.1 million was recognized in 2024 due to the sale of $653.5 million of AFS securities as part of the strategic investment securities restructuring resulting from the common stock offering. The after-tax impact of the loss was approximately $75 million. The net loss on investment securities in 2023 was reflective of the sale of $54 million in lower yielding AFS agency mortgage-backed securities at an after-tax loss of $2.8 million.

Current wording

A net gain on investment securities of $931 thousand was recognized in 2025. The net loss in 2024 was due to the sale of $653.5 million of AFS securities as part of the strategic investment securities restructuring resulting from the common stock offering.

Previous wording

The sale of the assets of our insurance subsidiary in April 2024 resulted in a gain on other assets of $13.7 million. The $4.6 million decline in insurance income was also attributed to this transaction.

Current wording

The sale of the assets of our insurance subsidiary in April 2024 resulted in a gain on other assets of $13.7 million. The $2.1 million decline in insurance income in 2025 was also attributed to this transaction.

Previous wording

Professional services expense increased $2.4 million, or 46%, to $7.7 million in 2024, compared to $5.6 million in 2023. Professional services expense for 2024 included $1.4 million of legal and other professional expense related to the deposit-related fraud event.

Current wording

Professional services expense decreased $1.2 million, or 15%, to $6.5 million in 2025, compared to $7.7 million in 2024. Professional services expense for 2024 included $1.4 million of legal and other professional expense associated with the deposit-related fraud event.

Previous wording

Provision for litigation settlement of $23.0 million in 2024 represented the pre-tax litigation accrual, which reflects the agreed upon settlement of $29.5 million less $6.5 million of available related insurance proceeds.

Current wording

Provision for litigation settlement of $23.0 million in 2024 represented the pre-tax litigation accrual, which reflected the final resolution of the long-standing automobile lending litigation.

Previous wording

Deposit related charged-off items of $20.3 million in 2024 included an $18.2 million loss associated with charge-offs related to the deposit-related fraudulent activity we experienced in early March 2024.

Current wording

Deposit related charged-off items in 2024 included an $18.2 million loss associated with charge-offs related to the deposit-related fraud event we experienced in early March 2024.

Previous wording

The efficiency ratio for the year ended December 31, 2024 was 82.35% compared with 62.96% for 2023. The higher efficiency ratio was primarily the result of the increase in noninterest expense in 2024 as described above. 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

The efficiency ratio for the year ended December 31, 2025 was 58.13% compared with 82.35% for 2024. The lower efficiency ratio was reflective of the increase in net interest income, as a result of the AFS restructuring in 2024, and our focus on effectively managing expenses in 2025 as described above. Our 2024 efficiency ratio reflected the increased expenses associated with the fraud event, as well as the automobile litigation settlement. 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

Income tax benefit was $26.5 million for 2024, reflective of the net loss reported for the year, compared to income tax expense of $12.8 million for 2023. In 2023, we incurred additional taxes of approximately $5.4 million associated with the capital gains of the previously mentioned COLI surrenders coupled with a 10% modified endowment contract penalty that is typical of general account surrenders. In 2024 and 2023, we recognized tax credit investments resulting in a $4.6 million and $3.0 million, respectively, reduction in income tax expense, in each year, and a $775 thousand and $252 thousand net loss recorded in noninterest income, respectively.

Current wording

Income tax expense was $16.5 million for 2025, compared to an income tax benefit of $26.5 million for 2024, which was reflective of the net loss reported for the year. In 2025 and 2024, we recognized tax credit investments resulting in a $4.5 million and $4.6 million, respectively, reduction in income tax expense, in each year, and a $2.0 million and $775 thousand net loss recorded in noninterest income, respectively.

Previous wording

Our effective tax rate was -38.9% for 2024, compared to 20.3% for 2023. Effective tax rates are typically impacted by items of income and expense that are not subject to federal or state taxation. Our effective tax rates reflect the impact of these items, which include, but are not limited to, interest income from tax-exempt securities, earnings on company owned life insurance and the impact of tax credit investments. In addition, our effective tax rate for 2024 and 2023 reflects the New York State tax benefit generated by our real estate investment trust.

Current wording

Our effective tax rate was 18.1% for 2025, compared to (38.9%) for 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 rate for 2025 and 2024 reflects the New York State tax benefit generated by our real estate investment trust.

Previous wording

At December 31, 2024, we had total assets of $6.12 billion, a decrease of 1% from $6.16 billion as of December 31, 2023, reflective of a decrease in cash resulting from the decreased deposits and borrowings and a decrease in other assets, partially offset by a slight increase in loans, and the sale of the assets of our insurance subsidiary. Net loans were $4.43 billion as of December 31, 2024, up $20.1 million, compared to $4.41 billion as of December 31, 2023. The increase in net loans was primarily due to organic growth in our commercial mortgage loan portfolio, partially offset by a decrease in consumer indirect loans and commercial business loans. Non-performing assets totaled $41.5 million as of December 31, 2024, up $14.7 million compared to December 31, 2023. The increase in non-performing assets was primarily driven by one $15.5 million commercial loan relationship that was placed on nonaccrual status during the third quarter of 2024. Total deposits amounted to $5.10 billion as of December 31, 2024, down $108.2 million, or 2%, compared to December 31, 2023. As of December 31, 2024, borrowings totaled $223.8 million, compared to $309.5 million as of December 31, 2023. Common book value per common share was $27.48 and $28.40 as of December 31, 2024 and 2023, respectively. As of December 31, 2024, our total shareholders’ equity was $569.0 million compared to $454.8 million as of December 31, 2023. The increase in shareholders’ equity as compared to December 31, 2023, was reflective of the $108.6 million in net proceeds from the common stock offering, and a decrease in our accumulated other comprehensive loss associated with unrealized losses on AFS securities portfolio, due to the investment securities restructuring, partially offset by the net loss for the year.

Current wording

At December 31, 2025, we had total assets of $6.27 billion, an increase of 3% from $6.12 billion as of December 31, 2024, primarily due to an increase in loans. Net loans were $4.61 billion as of December 31, 2025, up $179.3 million, or 4%, compared to $4.43 billion as of December 31, 2024. The increase in net loans was primarily due to organic growth in our commercial business and commercial mortgage loan portfolios, partially offset by a decrease in consumer indirect loans. Non-performing assets totaled $35.8 million as of December 31, 2025, down $5.6 million compared to December 31, 2024. The decrease in non-performing assets reflected a foreclosed participated loan and partial charge-off of a credit facility in 2025, both of which related to a commercial business relationship placed on nonaccrual status in 2023. Total deposits amounted to $5.21 billion as of December 31, 2025, up $101.6 million, or 2%, compared to December 31, 2024. As of December 31, 2025, borrowings totaled $302.7 million, compared to $223.8 million as of December 31, 2024, and included $80.0 million related to our December 2025 sub-debt offering, in addition to the $65.0 million balance of our 2025 and 2020 Notes, which were subsequently redeemed on January 15, 2026. Common book value per common share was $30.89 and $27.48 as of December 31, 2025 and 2024, respectively. As of December 31, 2025, our total shareholders’ equity was $628.9 million compared to $569.0 million as of December 31, 2024. The increase in shareholders’ equity as compared to December 31, 2024, was reflective of net income retained, net of dividends, and a reduction in accumulated other comprehensive loss associated with unrealized losses on the AFS securities portfolio, partially offset by the increase in treasury stock due to the impact of the common shares repurchased under our 2025 Share Repurchase Program.

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 year ended December 31, 2024 and 2023 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.

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 years ended December 31, 2025 and 2024 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.

Previous wording

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 December 31, 2024, 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 wording

All of the mortgage-backed securities held by us as of December 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.

Previous wording

Our AFS portfolio as of December 31, 2024, reflected our strategic investment securities restructuring as a result of the common stock offering. As of December 31, 2024, there were 76 securities in the AFS Agency MBS portfolio with an aggregate fair value of $854.2 million that were in an unrealized loss position with unrealized losses totaling $62.5 million. Of these, 39 were in an unrealized loss position for 12 months or longer and had an aggregate fair value of $176.6 million and unrealized losses of $53.4 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 wording

As of December 31, 2025, there were 46 securities in the AFS Agency MBS portfolio with an aggregate fair value of $355.8 million that were in an unrealized loss position with unrealized losses totaling $46.0 million. Of these, 36 were in an unrealized loss position for 12 months or longer and had an aggregate fair value of $219.0 million and unrealized losses of $43.7 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 environment 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.

Previous wording

As a member of the FHLB, the Bank is required to hold FHLB stock. The amount of required FHLB stock is based on the Bank’s asset size and the amount of borrowings from the FHLB. We have assessed the ultimate recoverability of our FHLB stock and believe that no impairment currently exists. As a member of the FRB system, we are required to maintain a specified investment in FRB stock based on a ratio relative to our capital. At December 31, 2024, our ownership of FHLB and FRB stock totaled $11.3 million and $7.0 million, respectively, and is included in other assets and recorded at cost, which approximates fair value.

Current wording

As a member of the FHLB, the Bank is required to hold FHLB stock. The amount of required FHLB stock is based on the Bank’s asset size and the amount of borrowings from the FHLB. We have assessed the ultimate recoverability of our FHLB stock and believe that no impairment currently exists. As a member of the FRB system, we are required to maintain a specified investment in FRB stock based on a ratio relative to our capital. At December 31, 2025, our ownership of FHLB and FRB stock totaled $12.4 million and $9.2 million, respectively, and is included in other assets on our statement of financial position, and recorded at cost, which approximates fair value.

Previous wording

Total loans were $4.48 billion at December 31, 2024, an increase of $17.1 million, from 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 (in thousands):

Current wording

Total loans were $4.66 billion at December 31, 2025, an increase of $178.7 million, or 4%, from 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 (in thousands):

Previous wording

Total commercial loans of $2.86 billion, represented 64% of total loans at December 31, 2024, compared to $2.74 billion, or 61% of total loans as of December 31, 2023. Commercial business loans of $665.3 million, or 15% of total loans, were down $70.4 million, or 10%, from December 31, 2023, and total commercial mortgage loans of $2.20 billion, or 49% of total loans, were up $194.3 million, or 10%, 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 December 31, 2024, commercial real estate (“CRE”) loans made up approximately 67% of total commercial loans, and 43% of total loans, commercial and industrial loans approximated 29% 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 December 31, 2024 related to approximately 44% multi-family, 17% office, 8% retail, 8% hospitality, 7% industrial property, and 5% home builder. Approximately 68% of our office exposure at December 31, 2024, or 12% of our total CRE exposure, related to Class B or medical office space. More than 75% of our office and 90% of our multifamily CRE loans have full or limited personal or corporate recourse.

Current wording

Total commercial loans of $3.08 billion, represented 66% of total loans at December 31, 2025, compared to $2.86 billion, or 64% of total loans as of December 31, 2024. Commercial business loans of $738.3 million, or 16% of total loans, were up $73.0 million, or 11%, from December 31, 2024, and total commercial mortgage loans of $2.34 billion, or 50% of total loans, were up $142.7 million, or 6%, from December 31, 2024. The increase in commercial mortgage loans was attributable to increases in construction, multifamily, owner and non-owner occupied loans. As of December 31, 2025, commercial real estate (“CRE”) loans made up approximately 68% of total commercial loans, and 44% of total loans, commercial and industrial loans approximated 27% of total commercial loans, and 18% of total loans, and business banking unit loans were approximately 5% of total commercial loans and 3% of total loans. Our CRE committed credit exposure at December 31, 2025 related to approximately 46% multi-family, 19% office, 9% retail, 8% hospitality, 6% industrial property, and 8% land. Approximately 74% of our office exposure at December 31, 2025, or 14% of our total CRE exposure, related to Class B or medical office space. More than 75% of our office and 90% of our multifamily CRE loans have full or limited personal or corporate recourse.

Previous wording

We participate in various lending programs in which guarantees are supplied by U.S. government agencies, such as the SBA, U.S. Department of Agriculture, Rural Economic and Community Development and Farm Service Agency, among others. As of December 31, 2024, the principal balance of such loans (included in commercial loans) was $21.8 million, and the guaranteed portion amounted to $13.4 million.

Current wording

We participate in various lending programs in which guarantees are supplied by U.S. government agencies, such as the SBA, U.S. Department of Agriculture, Rural Economic and Community Development and Farm Service Agency, among others. As of December 31, 2025, the principal balance of such loans (included in commercial loans) was $40.9 million, and the guaranteed portion amounted to $30.9 million.

Previous wording

Consumer loans totaled $1.61 billion at December 31, 2024, down $106.8 million compared to 2023, and represented 36% of the 2024 year-end loan portfolio versus 39% at December 31, 2023. Loans in this classification include residential real estate loans, residential real estate lines, indirect consumer and other consumer installment loans. Credit risk for these types of loans is generally influenced by general economic conditions, including inflation, the characteristics of individual borrowers, and the nature of the loan collateral. Risks of loss are generally on smaller average balances per loan spread over many borrowers. Once charged off, there is usually less opportunity for recovery on these smaller retail loans. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and guaranty positions.

Current wording

Consumer loans totaled $1.58 billion at December 31, 2025, down $37.0 million compared to year end 2024, and represented 34% of the 2025 year-end loan portfolio versus 36% at December 31, 2024. Loans in this classification include residential real estate loans, residential real estate lines, indirect consumer and other consumer installment loans. Credit risk for these types of loans is generally influenced by general economic conditions, including inflation, the characteristics of individual borrowers, and the nature of the loan collateral. Risks of loss are generally on smaller average balances per loan spread over many borrowers. Once charged off, there is usually less opportunity for recovery on these smaller retail loans. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking appropriate collateral and guaranty positions.