Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 20212022

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number: 000-26481

 

 

Financial Institutions, Inc.

(Exact name of registrant as specified in its charter)

 

 

New York

 

16-0816610

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

220 LIBERTY STREET, WARSAW, New York

 

14569

(Address of principal executive offices)

 

(Zip Code)

(585) 786-1100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

FISI

Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

☐

Accelerated filer

☑

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The registrant had 15,837,72515,335,033 shares of Common Stock, $0.01 par value, outstanding as of October 31, 2021.2022.

Table of Contents

FINANCIAL INSTITUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 20212022

TABLE OF CONTENTS

 

PAGE

PART I.

FINANCIAL INFORMATION

ITEM 1.

Financial Statements

Consolidated Statements of Financial Condition (Unaudited) - at September 30, 20212022 and December 31, 20202021

3

Consolidated Statements of Income (Unaudited) - Three and nine months ended September 30, 20212022 and 20202021

4

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) - Three and nine months ended September 30, 20212022 and 20202021

5

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three and nine months ended September 30, 20212022 and 20202021

6

Consolidated Statements of Cash Flows (Unaudited) - Nine months ended September 30, 20212022 and 20202021

8

Notes to Consolidated Financial Statements (Unaudited)

9

ITEM 2.

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

44

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

6768

ITEM 4.

Controls and Procedures

6869

PART II.

OTHER INFORMATION

ITEM 1.

Legal Proceedings

6970

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70

ITEM 6.

Exhibits

7072

Signatures

7173

 

2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)

(Dollars in thousands, except share and per share data)

 

September 30,
2021

 

 

December 31,
2020

 

 

September 30,
2022

 

 

December 31,
2021

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

288,426

 

$

93,878

 

 

$

118,581

 

 

$

79,112

 

Securities available for sale, at fair value

 

1,097,950

 

628,059

 

 

 

965,531

 

 

 

1,178,515

 

Securities held to maturity, at amortized cost (net of allowance for credit losses of $5 and $7, respectively) (fair value of $224,164 and $282,035, respectively)

 

218,135

 

271,966

 

Securities held to maturity, at amortized cost (net of allowance for credit losses of $5 in each period) (fair value of $180,438 and $209,820, respectively)

 

 

197,538

 

 

 

205,581

 

Loans held for sale

 

5,916

 

4,305

 

 

 

2,074

 

 

 

6,202

 

Loans (net of allowance for credit losses of $45,444 and $52,420, respectively)

 

3,608,455

 

3,542,718

 

Loans (net of allowance for credit losses of $44,106 and $39,676, respectively)

 

 

3,822,745

 

 

 

3,639,760

 

Company owned life insurance

 

123,034

 

100,895

 

 

 

138,564

 

 

 

123,898

 

Premises and equipment, net

 

40,605

 

40,610

 

 

 

40,907

 

 

 

40,111

 

Goodwill and other intangible assets, net

 

74,659

 

73,789

 

 

 

73,653

 

 

 

74,400

 

Other assets

 

 

166,013

 

 

156,086

 

 

 

264,889

 

 

 

173,200

 

Total assets

 

$

5,623,193

 

$

4,912,306

 

 

$

5,624,482

 

 

$

5,520,779

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

1,144,852

 

$

1,018,549

 

 

$

1,135,125

 

 

$

1,107,561

 

Interest-bearing demand

 

893,976

 

731,885

 

 

 

946,431

 

 

 

864,528

 

Savings and money market

 

2,015,855

 

1,642,340

 

 

 

1,800,321

 

 

 

1,933,047

 

Time deposits

 

 

920,280

 

 

885,593

 

 

 

1,023,277

 

 

 

921,954

 

Total deposits

 

4,974,963

 

4,278,367

 

 

 

4,905,154

 

 

 

4,827,090

 

Short-term borrowings

 

—

 

5,300

 

 

 

69,000

 

 

 

30,000

 

Long-term borrowings, net of issuance costs of $1,166 and $1,377, respectively

 

73,834

 

73,623

 

Long-term borrowings, net of issuance costs of $933 and $1,089, respectively

 

 

74,144

 

 

 

73,911

 

Other liabilities

 

 

80,383

 

 

86,653

 

 

 

182,136

 

 

 

84,636

 

Total liabilities

 

 

5,129,180

 

 

4,443,943

 

 

 

5,230,434

 

 

 

5,015,637

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% preferred stock, $100 par value; 1,533 shares authorized;
1,435 shares issued

 

143

 

143

 

 

 

143

 

 

 

143

 

Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized;
171,486 and 171,847 shares issued, respectively

 

 

17,149

 

 

17,185

 

Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized;
171,486 shares issued

 

 

17,149

 

 

 

17,149

 

Total preferred equity

 

17,292

 

17,328

 

 

 

17,292

 

 

 

17,292

 

Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares issued

 

161

 

161

 

 

 

161

 

 

 

161

 

Additional paid-in capital

 

125,785

 

125,118

 

 

 

126,230

 

 

 

126,105

 

Retained earnings

 

369,019

 

324,850

 

 

 

414,062

 

 

 

384,007

 

Accumulated other comprehensive (loss) income

 

(12,116

)

 

2,128

 

Treasury stock, at cost – 257,475 and 57,630 shares, respectively

 

 

(6,128

)

 

 

(1,222

)

Accumulated other comprehensive loss

 

 

(141,183

)

 

 

(13,207

)

Treasury stock, at cost – 765,465 and 354,103 shares, respectively

 

 

(22,514

)

 

 

(9,216

)

Total shareholders’ equity

 

 

494,013

 

 

468,363

 

 

 

394,048

 

 

 

505,142

 

Total liabilities and shareholders’ equity

 

$

5,623,193

 

$

4,912,306

 

 

$

5,624,482

 

 

$

5,520,779

 

See accompanying notes to the consolidated financial statements.

3

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

(In thousands, except per share amounts)

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

36,242

 

$

35,602

 

$

109,694

 

$

107,659

 

 

$

44,408

 

 

$

36,242

 

 

$

119,578

 

 

$

109,694

 

Interest and dividends on investment securities

 

4,918

 

4,086

 

13,603

 

13,206

 

 

 

6,079

 

 

 

4,918

 

 

 

18,409

 

 

 

13,603

 

Other interest income

 

 

67

 

 

31

 

 

155

 

 

266

 

 

 

188

 

 

 

67

 

 

 

315

 

 

 

155

 

Total interest income

 

 

41,227

 

 

39,719

 

 

123,452

 

 

121,131

 

 

 

50,675

 

 

 

41,227

 

 

 

138,302

 

 

 

123,452

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,894

 

3,370

 

6,294

 

15,066

 

 

 

5,875

 

 

 

1,894

 

 

 

9,946

 

 

 

6,294

 

Short-term borrowings

 

0

 

232

 

119

 

1,408

 

 

 

672

 

 

 

—

 

 

 

952

 

 

 

119

 

Long-term borrowings

 

 

1,060

 

 

618

 

 

3,177

 

 

1,853

 

 

 

1,060

 

 

 

1,060

 

 

 

3,181

 

 

 

3,177

 

Total interest expense

 

 

2,954

 

 

4,220

 

 

9,590

 

 

18,327

 

 

 

7,607

 

 

 

2,954

 

 

 

14,079

 

 

 

9,590

 

Net interest income

 

38,273

 

35,499

 

113,862

 

102,804

 

 

 

43,068

 

 

 

38,273

 

 

 

124,223

 

 

 

113,862

 

(Benefit) provision for credit losses

 

 

(541

)

 

 

4,028

 

 

(7,144

)

 

 

21,689

 

Net interest income after (benefit) provision for credit losses

 

 

38,814

 

 

31,471

 

 

121,006

 

 

81,115

 

Provision (benefit) for credit losses

 

 

4,314

 

 

 

(541

)

 

 

7,196

 

 

 

(7,144

)

Net interest income after provision (benefit) for credit losses

 

 

38,754

 

 

 

38,814

 

 

 

117,027

 

 

 

121,006

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposits

 

1,502

 

1,254

 

4,081

 

3,321

 

 

 

1,597

 

 

 

1,502

 

 

 

4,403

 

 

 

4,081

 

Insurance income

 

1,864

 

1,357

 

4,407

 

3,525

 

 

 

1,571

 

 

 

1,864

 

 

 

4,902

 

 

 

4,407

 

Card interchange income

 

2,118

 

1,943

 

6,270

 

5,321

 

 

 

2,076

 

 

 

2,118

 

 

 

6,131

 

 

 

6,270

 

Investment advisory

 

2,969

 

2,443

 

8,627

 

6,940

 

 

 

2,722

 

 

 

2,969

 

 

 

8,669

 

 

 

8,627

 

Company owned life insurance

 

776

 

470

 

2,126

 

1,397

 

 

 

2,965

 

 

 

776

 

 

 

4,667

 

 

 

2,126

 

Investments in limited partnerships

 

694

 

(105

)

 

1,787

 

(136

)

 

 

65

 

 

 

694

 

 

 

1,102

 

 

 

1,787

 

Loan servicing

 

105

 

49

 

293

 

106

 

 

 

139

 

 

 

105

 

 

 

383

 

 

 

293

 

Income from derivative instruments, net

 

377

 

1,931

 

1,660

 

4,617

 

 

 

99

 

 

 

377

 

 

 

1,263

 

 

 

1,660

 

Net gain on sale of loans held for sale

 

600

 

1,397

 

2,468

 

2,261

 

 

 

308

 

 

 

600

 

 

 

1,045

 

 

 

2,468

 

Net gain on investment securities

 

0

 

554

 

71

 

1,449

 

Net gain (loss) on other assets

 

138

 

(55

)

 

286

 

8

 

Net (loss) gain on investment securities

 

 

—

 

 

 

—

 

 

 

(15

)

 

 

71

 

Net (loss) gain on other assets

 

 

(22

)

 

 

138

 

 

 

(15

)

 

 

286

 

Net (loss) gain on tax credit investments

 

(129

)

 

(40

)

 

62

 

(120

)

 

 

(385

)

 

 

(129

)

 

 

(704

)

 

 

62

 

Other

 

 

1,069

 

 

1,019

 

 

3,094

 

 

3,151

 

 

 

1,517

 

 

 

1,069

 

 

 

3,503

 

 

 

3,094

 

Total noninterest income

 

 

12,083

 

 

12,217

 

 

35,232

 

 

31,840

 

 

 

12,652

 

 

 

12,083

 

 

 

35,334

 

 

 

35,232

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

15,798

 

15,085

 

44,782

 

45,173

 

 

 

17,950

 

 

 

15,798

 

 

 

51,532

 

 

 

44,782

 

Occupancy and equipment

 

3,834

 

3,263

 

10,502

 

10,407

 

 

 

3,793

 

 

 

3,834

 

 

 

11,564

 

 

 

10,502

 

Professional services

 

1,600

 

1,242

 

5,098

 

4,974

 

 

 

1,247

 

 

 

1,600

 

 

 

4,172

 

 

 

5,098

 

Computer and data processing

 

3,579

 

3,250

 

10,160

 

��

8,622

 

 

 

4,407

 

 

 

3,579

 

 

 

12,959

 

 

 

10,160

 

Supplies and postage

 

447

 

463

 

1,361

 

1,533

 

 

 

440

 

 

 

447

 

 

 

1,450

 

 

 

1,361

 

FDIC assessments

 

697

 

594

 

1,942

 

1,505

 

 

 

651

 

 

 

697

 

 

 

1,785

 

 

 

1,942

 

Advertising and promotions

 

474

 

955

 

1,234

 

2,055

 

 

 

651

 

 

 

474

 

 

 

1,437

 

 

 

1,234

 

Amortization of intangibles

 

264

 

280

 

801

 

861

 

 

 

244

 

 

 

264

 

 

 

747

 

 

 

801

 

Restructuring charges

 

0

 

1,362

 

0

 

1,362

 

 

 

—

 

 

 

—

 

 

 

1,269

 

 

 

—

 

Other

 

 

2,476

 

 

1,981

 

 

6,973

 

 

6,228

 

 

 

3,444

 

 

 

2,476

 

 

 

8,934

 

 

 

6,973

 

Total noninterest expense

 

 

29,169

 

 

28,475

 

 

82,853

 

 

82,720

 

 

 

32,827

 

 

 

29,169

 

 

 

95,849

 

 

 

82,853

 

Income before income taxes

 

21,728

 

15,213

 

73,385

 

30,235

 

 

 

18,579

 

 

 

21,728

 

 

 

56,512

 

 

 

73,385

 

Income tax expense

 

 

4,553

 

 

2,940

 

 

15,300

 

 

5,703

 

 

 

4,725

 

 

 

4,553

 

 

 

12,027

 

 

 

15,300

 

Net income

 

$

17,175

 

$

12,273

 

$

58,085

 

$

24,532

 

 

$

13,854

 

 

$

17,175

 

 

$

44,485

 

 

$

58,085

 

Preferred stock dividends

 

 

364

 

 

365

 

 

1,095

 

 

1,096

 

 

 

365

 

 

 

364

 

 

 

1,095

 

 

 

1,095

 

Net income available to common shareholders

 

$

16,811

 

$

11,908

 

$

56,990

 

$

23,436

 

 

$

13,489

 

 

$

16,811

 

 

$

43,390

 

 

$

56,990

 

Earnings per common share (Note 4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.06

 

$

0.74

 

$

3.60

 

$

1.46

 

 

$

0.88

 

 

$

1.06

 

 

$

2.82

 

 

$

3.60

 

Diluted

 

$

1.05

 

$

0.74

 

$

3.58

 

$

1.46

 

 

$

0.88

 

 

$

1.05

 

 

$

2.80

 

 

$

3.58

 

Cash dividends declared per common share

 

$

0.27

 

$

0.26

 

$

0.81

 

$

0.78

 

 

$

0.29

 

 

$

0.27

 

 

$

0.87

 

 

$

0.81

 

See accompanying notes to the consolidated financial statements.

4

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

(Dollars in thousands)

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income

 

$

17,175

 

$

12,273

 

$

58,085

 

$

24,532

 

 

$

13,854

 

 

$

17,175

 

 

$

44,485

 

 

$

58,085

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities

 

(6,400

)

 

(69

)

 

(15,800

)

 

13,778

 

 

 

(42,866

)

 

 

(6,400

)

 

 

(132,054

)

 

 

(15,800

)

Hedging derivative instruments

 

80

 

123

 

1,143

 

(174

)

 

 

1,360

 

 

 

80

 

 

 

3,935

 

 

 

1,143

 

Pension and post-retirement obligations

 

 

138

 

 

233

 

 

413

 

 

700

 

 

 

48

 

 

 

138

 

 

 

143

 

 

 

413

 

Total other comprehensive income (loss), net of tax

 

 

(6,182

)

 

 

287

 

 

(14,244

)

 

 

14,304

 

Comprehensive income

 

$

10,993

 

$

12,560

 

$

43,841

 

$

38,836

 

Total other comprehensive loss, net of tax

 

 

(41,458

)

 

 

(6,182

)

 

 

(127,976

)

 

 

(14,244

)

Comprehensive (loss) income

 

$

(27,604

)

 

$

10,993

 

 

$

(83,491

)

 

$

43,841

 

See accompanying notes to the consolidated financial statements.

5

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Three and nine months ended September 30, 20212022 and 20202021

(Dollars in thousands, except per share data)

 

Preferred
Equity

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Treasury
Stock

 

 

Total
Shareholders’
Equity

 

 

Preferred
Equity

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Treasury
Stock

 

 

Total
Shareholders’
Equity

 

Balance at December 31, 2020

 

$

17,328

 

$

161

 

$

125,118

 

$

324,850

 

$

2,128

 

$

(1,222

)

 

$

468,363

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—

 

—

 

—

 

20,710

 

—

 

—

 

20,710

 

Other comprehensive loss, net of tax

 

—

 

—

 

—

 

—

 

(12,700

)

 

—

 

(12,700

)

Common stock issued

 

—

 

—

 

3

 

—

 

—

 

298

 

301

 

Purchases of common stock for treasury

 

—

 

—

 

—

 

—

 

—

 

(5,963

)

 

(5,963

)

Purchases of 8.48% preferred stock

 

(6

)

 

—

 

—

 

—

 

—

 

—

 

(6

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

—

 

—

 

216

 

—

 

—

 

—

 

216

 

Restricted stock units released

 

—

 

—

 

(446

)

 

—

 

—

 

446

 

—

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

—

 

—

 

—

 

(1

)

 

—

 

—

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

—

 

—

 

—

 

(364

)

 

—

 

—

 

(364

)

Common-$0.27 per share

 

 

—

 

 

—

 

 

—

 

 

(4,272

)

 

 

—

 

 

—

 

 

(4,272

)

Balance at March 31, 2021

 

$

17,322

 

$

161

 

$

124,891

 

$

340,923

 

$

(10,572

)

 

$

(6,441

)

 

$

466,284

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—

 

—

 

—

 

20,200

 

—

 

—

 

20,200

 

Other comprehensive income, net of tax

 

—

 

—

 

—

 

—

 

4,638

 

—

 

4,638

 

Purchases of common stock for treasury

 

—

 

—

 

—

 

—

 

—

 

(1

)

 

(1

)

Purchases of 8.48% preferred stock

 

(30

)

 

—

 

(7

)

 

—

 

—

 

—

 

(37

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

—

 

—

 

562

 

—

 

—

 

—

 

562

 

Restricted stock awards issued

 

—

 

—

 

(223

)

 

—

 

—

 

223

 

—

 

Stock awards

 

—

 

—

 

30

 

—

 

—

 

88

 

118

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

—

 

—

 

—

 

(1

)

 

—

 

—

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

—

 

—

 

—

 

(365

)

 

—

 

—

 

(365

)

Common-$0.27 per share

 

 

—

 

 

—

 

 

—

 

 

(4,272

)

 

 

—

 

 

—

 

 

(4,272

)

Balance at June 30, 2021

 

$

17,292

 

$

161

 

$

125,253

 

$

356,485

 

$

(5,934

)

 

$

(6,131

)

 

$

487,126

 

Balance at December 31, 2021

 

$

17,292

 

 

$

161

 

 

$

126,105

 

 

$

384,007

 

 

$

(13,207

)

 

$

(9,216

)

 

$

505,142

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—

 

—

 

—

 

17,175

 

—

 

—

 

17,175

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

14,983

 

 

 

—

 

 

 

—

 

 

 

14,983

 

Other comprehensive loss, net of tax

 

—

 

—

 

—

 

—

 

(6,182

)

 

—

 

(6,182

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(53,887

)

 

 

—

 

 

 

(53,887

)

Purchases of common stock for treasury

 

—

 

—

 

—

 

—

 

—

 

(3

)

 

(3

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(15,026

)

 

 

(15,026

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

—

 

—

 

538

 

—

 

—

 

—

 

538

 

 

 

—

 

 

 

—

 

 

 

443

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

443

 

Restricted stock units released

 

—

 

—

 

(6

)

 

—

 

—

 

6

 

—

 

 

 

—

 

 

 

—

 

 

 

(667

)

 

 

—

 

 

 

—

 

 

 

667

 

 

 

—

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

—

 

—

 

—

 

(1

)

 

—

 

—

 

(1

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

—

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

—

 

—

 

—

 

(363

)

 

—

 

—

 

(363

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(364

)

 

 

—

 

 

 

—

 

 

 

(364

)

Common-$0.27 per share

 

 

—

 

 

—

 

 

—

 

 

(4,277

)

 

 

—

 

 

—

 

 

(4,277

)

Balance at September 30, 2021

 

$

17,292

 

$

161

 

$

125,785

 

$

369,019

 

$

(12,116

)

 

$

(6,128

)

 

$

494,013

 

Common-$0.29 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,444

)

 

 

—

 

 

 

—

 

 

 

(4,444

)

Balance at March 31, 2022

 

$

17,292

 

 

$

161

 

 

$

125,881

 

 

$

394,181

 

 

$

(67,094

)

 

$

(23,575

)

 

$

446,846

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

15,648

 

 

 

—

 

 

 

—

 

 

 

15,648

 

Other comprehensive loss, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(32,631

)

 

 

—

 

 

 

(32,631

)

Purchases of common stock for treasury

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(301

)

 

 

(301

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

947

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

947

 

Restricted stock units released

 

 

—

 

 

 

—

 

 

 

(917

)

 

 

—

 

 

 

—

 

 

 

917

 

 

 

—

 

Restricted stock awards issued

 

 

—

 

 

 

—

 

 

 

(332

)

 

 

—

 

 

 

—

 

 

 

332

 

 

 

—

 

Stock awards

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

113

 

 

 

102

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

—

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(363

)

 

 

—

 

 

 

—

 

 

 

(363

)

Common-$0.29 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,446

)

 

 

—

 

 

 

—

 

 

 

(4,446

)

Balance at June 30, 2022

 

$

17,292

 

 

$

161

 

 

$

125,568

 

 

$

405,019

 

 

$

(99,725

)

 

$

(22,514

)

 

$

425,801

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

13,854

 

 

 

—

 

 

 

—

 

 

 

13,854

 

Other comprehensive loss, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(41,458

)

 

 

—

 

 

 

(41,458

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

662

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

662

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

—

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(365

)

 

 

—

 

 

 

—

 

 

 

(365

)

Common-$0.29 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,445

)

 

 

—

 

 

 

—

 

 

 

(4,445

)

Balance at September 30, 2022

 

$

17,292

 

 

$

161

 

 

$

126,230

 

 

$

414,062

 

 

$

(141,183

)

 

$

(22,514

)

 

$

394,048

 

Continued on next page

See accompanying notes to the consolidated financial statements.

6

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (Continued)

Three and nine months ended September 30, 20212022 and 20202021

(Dollars in thousands, except per share data)

 

Preferred
Equity

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Loss

 

 

Treasury
Stock

 

 

Total
Shareholders’
Equity

 

 

Preferred
Equity

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Retained
Earnings

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

Treasury
Stock

 

 

Total
Shareholders’
Equity

 

Balance at December 31, 2019

 

$

17,328

 

$

161

 

$

124,582

 

$

313,364

 

$

(14,513

)

 

$

(1,975

)

 

$

438,947

 

Cumulative-effect adjustment

 

 

—

 

 

—

 

 

—

 

 

(8,719

)

 

 

—

 

 

—

 

 

(8,719

)

Balance at January 1, 2020

 

$

17,328

 

$

161

 

$

124,582

 

$

304,645

 

$

(14,513

)

 

$

(1,975

)

 

$

430,228

 

Balance at December 31, 2020

 

$

17,328

 

 

$

161

 

 

$

125,118

 

 

$

324,850

 

 

$

2,128

 

 

$

(1,222

)

 

$

468,363

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

20,710

 

 

 

—

 

 

 

—

 

 

 

20,710

 

Other comprehensive loss, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(12,700

)

 

 

—

 

 

 

(12,700

)

Common stock issued

 

 

—

 

 

 

—

 

 

 

3

 

 

 

—

 

 

 

—

 

 

 

298

 

 

 

301

 

Purchases of common stock for treasury

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(5,963

)

 

 

(5,963

)

Purchases of 8.48% preferred stock

 

 

(6

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(6

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

216

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

216

 

Restricted stock units released

 

 

—

 

 

 

—

 

 

 

(446

)

 

 

—

 

 

 

—

 

 

 

446

 

 

 

—

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

—

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(364

)

 

 

—

 

 

 

—

 

 

 

(364

)

Common-$0.27 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,272

)

 

 

—

 

 

 

—

 

 

 

(4,272

)

Balance at March 31, 2021

 

$

17,322

 

 

$

161

 

 

$

124,891

 

 

$

340,923

 

 

$

(10,572

)

 

$

(6,441

)

 

$

466,284

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—

 

—

 

—

 

1,127

 

—

 

—

 

1,127

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

20,200

 

 

 

—

 

 

 

—

 

 

 

20,200

 

Other comprehensive income, net of tax

 

—

 

—

 

—

 

—

 

12,431

 

—

 

12,431

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,638

 

 

 

—

 

 

 

4,638

 

Purchases of common stock for treasury

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

(1

)

Purchases of 8.48% preferred stock

 

 

(30

)

 

 

—

 

 

 

(7

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(37

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

—

 

 

 

—

 

 

 

562

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

562

 

Restricted stock awards issued

 

 

—

 

 

 

—

 

 

 

(223

)

 

 

—

 

 

 

—

 

 

 

223

 

 

 

—

 

Stock awards

 

 

—

 

 

 

—

 

 

 

30

 

 

 

—

 

 

 

—

 

 

 

88

 

 

 

118

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

—

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(365

)

 

 

—

 

 

 

—

 

 

 

(365

)

Common-$0.27 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,272

)

 

 

—

 

 

 

—

 

 

 

(4,272

)

Balance at June 30, 2021

 

$

17,292

 

 

$

161

 

 

$

125,253

 

 

$

356,485

 

 

$

(5,934

)

 

$

(6,131

)

 

$

487,126

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

17,175

 

 

 

—

 

 

 

—

 

 

 

17,175

 

Other comprehensive loss, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(6,182

)

 

 

—

 

 

 

(6,182

)

Purchases of common stock for treasury

 

—

 

—

 

—

 

—

 

—

 

(196

)

 

(196

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3

)

 

 

(3

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

—

 

—

 

332

 

—

 

—

 

—

 

332

 

 

 

—

 

 

 

—

 

 

 

538

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

538

 

Restricted stock units released

 

—

 

—

 

(469

)

 

—

 

—

 

469

 

—

 

 

 

—

 

 

 

—

 

 

 

(6

)

 

 

—

 

 

 

—

 

 

 

6

 

 

 

—

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

—

 

—

 

—

 

(1

)

 

—

 

—

 

(1

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

—

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

—

 

—

 

—

 

(364

)

 

—

 

—

 

(364

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(363

)

 

 

—

 

 

 

—

 

 

 

(363

)

Common-$0.26 per share

 

 

—

 

 

—

 

 

—

 

 

(4,164

)

 

 

—

 

 

—

 

 

(4,164

)

Balance at March 31, 2020

 

$

17,328

 

$

161

 

$

124,445

 

$

301,243

 

$

(2,082

)

 

$

(1,702

)

 

$

439,393

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—

 

—

 

—

 

11,132

 

—

 

—

 

11,132

 

Other comprehensive income, net of tax

 

—

 

—

 

—

 

—

 

1,586

 

—

 

1,586

 

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

—

 

—

 

369

 

—

 

—

 

—

 

369

 

Restricted stock awards issued

 

—

 

—

 

(272

)

 

—

 

—

 

272

 

—

 

Stock awards

 

—

 

—

 

(19

)

 

—

 

—

 

114

 

95

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

—

 

—

 

—

 

(1

)

 

—

 

—

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

—

 

—

 

—

 

(365

)

 

—

 

—

 

(365

)

Common-$0.26 per share

 

 

—

 

 

—

 

 

—

 

 

(4,164

)

 

 

—

 

 

—

 

 

(4,164

)

Balance at June 30, 2020

 

$

17,328

 

$

161

 

$

124,523

 

$

307,845

 

$

(496

)

 

$

(1,316

)

 

$

448,045

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—

 

—

 

—

 

12,273

 

—

 

—

 

12,273

 

Other comprehensive income, net of tax

 

—

 

—

 

—

 

—

 

287

 

—

 

287

 

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

—

 

—

 

289

 

—

 

—

 

—

 

289

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

—

 

—

 

—

 

(1

)

 

—

 

—

 

(1

)

Series B-1 8.48% Preferred-$2.12 per
share

 

—

 

—

 

—

 

(364

)

 

—

 

—

 

(364

)

Common-$0.26 per share

 

 

—

 

 

—

 

 

—

 

 

(4,168

)

 

 

—

 

 

—

 

 

(4,168

)

Balance at September 30, 2020

 

$

17,328

 

$

161

 

$

124,812

 

$

315,585

 

$

(209

)

 

$

(1,316

)

 

$

456,361

 

Common-$0.27 per share

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(4,277

)

 

 

—

 

 

 

—

 

 

 

(4,277

)

Balance at September 30, 2021

 

$

17,292

 

 

$

161

 

 

$

125,785

 

 

$

369,019

 

 

$

(12,116

)

 

$

(6,128

)

 

$

494,013

 

See accompanying notes to the consolidated financial statements.

7

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 Nine months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

58,085

 

$

24,532

 

 

$

44,485

 

 

$

58,085

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

6,067

 

5,924

 

 

 

6,038

 

 

 

6,067

 

Net amortization of premiums on securities

 

3,845

 

2,313

 

 

 

3,966

 

 

 

3,845

 

(Benefit) provision for credit losses

 

(7,144

)

 

21,689

 

Provision (benefit) for credit losses

 

 

7,196

 

 

 

(7,144

)

Share-based compensation

 

1,316

 

990

 

 

 

2,052

 

 

 

1,316

 

Deferred income tax benefit

 

(6,885

)

 

(2,692

)

 

 

(1,532

)

 

 

(6,885

)

Proceeds from sale of loans held for sale

 

63,331

 

63,995

 

 

 

28,094

 

 

 

63,331

 

Originations of loans held for sale

 

(62,474

)

 

(64,586

)

 

 

(22,921

)

 

 

(62,474

)

Income on company owned life insurance

 

(2,126

)

 

(1,397

)

 

 

(4,667

)

 

 

(2,126

)

Net gain on sale of loans held for sale

 

(2,468

)

 

(2,261

)

 

 

(1,045

)

 

 

(2,468

)

Net gain on investment securities

 

(71

)

 

(1,449

)

Net gain on other assets

 

(286

)

 

(8

)

Net loss (gain) on investment securities

 

 

15

 

 

 

(71

)

Net loss (gain) on other assets

 

 

15

 

 

 

(286

)

Noncash restructuring charges against assets

 

76

 

—

 

 

 

1,269

 

 

 

76

 

Increase in other assets

 

(2,513

)

 

(42,243

)

 

 

(32,242

)

 

 

(2,513

)

(Decrease) increase in other liabilities

 

 

(9,286

)

 

 

15,491

 

Increase (decrease) in other liabilities

 

 

86,705

 

 

 

(9,286

)

Net cash provided by operating activities

 

 

39,467

 

 

20,298

 

 

 

117,428

 

 

 

39,467

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Purchases of available for sale securities

 

(650,713

)

 

(215,433

)

 

 

(75,269

)

 

 

(650,713

)

Purchases of held to maturity securities

 

(17,009

)

 

(6,008

)

 

 

(37,384

)

 

 

(17,009

)

Proceeds from principal payments, maturities and calls on available for sale securities

 

115,688

 

85,766

 

 

 

101,014

 

 

 

115,688

 

Proceeds from principal payments, maturities and calls on held to maturity securities

 

69,954

 

73,120

 

 

 

44,890

 

 

 

69,954

 

Proceeds from sales of securities available for sale

 

51,891

 

50,207

 

 

 

6,252

 

 

 

51,891

 

Net loan originations

 

(59,841

)

 

(361,935

)

 

 

(189,315

)

 

 

(59,841

)

Purchases of company owned life insurance, net of proceeds received

 

(20,013

)

 

(8

)

Purchases of company owned life insurance

 

 

(35,521

)

 

 

(20,013

)

Proceeds received from surrender of company owned life insurance

 

 

25,522

 

 

 

—

 

Proceeds from sales of other assets

 

3,425

 

482

 

 

 

—

 

 

 

3,425

 

Purchases of premises and equipment

 

(8,357

)

 

(2,800

)

 

 

(5,641

)

 

 

(8,357

)

Cash consideration paid for acquisition, net of cash acquired

 

 

(1,420

)

 

 

0

 

 

 

—

 

 

 

(1,420

)

Net cash used in investing activities

 

 

(516,395

)

 

 

(376,609

)

 

 

(165,452

)

 

 

(516,395

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Net increase in deposits

 

696,596

 

809,253

 

 

 

78,064

 

 

 

696,596

 

Net decrease in short-term borrowings

 

(5,300

)

 

(270,200

)

Net increase (decrease) in short-term borrowings

 

 

39,000

 

 

 

(5,300

)

Repurchase of preferred stock

 

(43

)

 

—

 

 

 

—

 

 

 

(43

)

Purchases of common stock for treasury

 

(5,967

)

 

(196

)

 

 

(15,327

)

 

 

(5,967

)

Cash dividends paid to common and preferred shareholders

 

 

(13,810

)

 

 

(13,423

)

 

 

(14,244

)

 

 

(13,810

)

Net cash provided by financing activities

 

 

671,476

 

 

525,434

 

 

 

87,493

 

 

 

671,476

 

Net increase in cash and cash equivalents

 

194,548

 

169,123

 

 

 

39,469

 

 

 

194,548

 

Cash and cash equivalents, beginning of period

 

 

93,878

 

 

112,947

 

 

 

79,112

 

 

 

93,878

 

Cash and cash equivalents, end of period

 

$

288,426

 

$

282,070

 

 

$

118,581

 

 

$

288,426

 

See accompanying notes to the consolidated financial statements.

8

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

Nature of Operations

Financial Institutions, Inc. (the “Company”) is a financial holding company organized in 1931 under the laws of New York State (“New York”). The Company provides diversified financial services through its subsidiaries, Five Star Bank, SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP 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, Five Star Bank (the “Bank”). The Bank also has a commercial loan production office in Ellicott City (Baltimore), Maryland and indirect lending network relationships with franchised automobile dealers in the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation of the consolidated statements of financial condition, income, comprehensive income, changes in shareholders’ equity and cash flows for the periods indicated and contain adequate disclosure to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s 20202021 Annual Report on Form 10-K for the year ended December 31, 2020.2021. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year.year or any other period.

Operational, Accounting and Reporting Impacts Related to the COVID-19 Pandemic

The COVID-19 pandemic has negatively impacted the global economy, including our operating footprint of Western and Central New York. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:

•
Accounting for Loan Modifications - The CARES Act provided that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 made between March 1, 2020 and January 1, 2022 that would otherwise be categorized as a troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.
•
Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. On December 27, 2020, the Consolidated Appropriations Act, 2021 provided approximately $284 billion for PPP loans in an additional round of funding under the program and extended the PPP through March 31, 2021. This additional round of PPP loan funding iswas authorized for first-time borrowers and for second draws by certain borrowers who have previously received PPP loans. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extended the program to May 31, 2021.
•
Mortgage Forbearance - Under the CARES Act, a borrower with a federally backed mortgage loan that was experiencing financial hardship due to COVID-19 was able to request a forbearance until September 30,December 31, 2021.

9

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1.)BASIS OF PRESENTATIOYPRESENTATION OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Also, in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

•
Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.
•
Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.
•
Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

Effective March 23, 2020 through July 9, 2020, for consumer customers,As of September 30, 2022, the Bank waived early CD penalty fees for withdrawals up to $20,000 (limited to one penalty-free withdrawal per CD account); eliminated all insufficient funds (overdrafts) and returned item fees; eliminated all Pay by Phone fees; waived all late fees; offered the opportunity for monthly mortgage, home equity loan or home equity line payment relief; offered the opportunity to defer unsecured consumer loans or lines of credit and secured consumer loans and lines of credit payments; and offered unsecured personal loans up to $5,000, up to 60 months at 2.95% APR subject to credit approval. ATM access fees were reinitiated on September 19, 2020.

As part of the first round of PPP loans we havehas helped more than 1,7002,900 customers obtain more than $270378 million in loans as of December 31, 2020. We havethrough the PPP and helped customers complete the forgiveness process for approximately $239375 million of PPP loans in the first nine months of 2021. Also, during the first nine months of 2021, we have helped customers obtain approximatelyloans.

The Company had $107532.4 million of new PPP loans under the second round of the PPP. Additionally,with modifications related to COVID-19 during 2020, with $2.2 million and $46.2 million still on deferral as of September 30, 2022 and December 31, 2021, respectively, and provided payment deferrals for approximately 6,6002 borrowers, the majority being consumer indirect loan customers. Less than 1% of our commercial loan and mortgage customers, 1% of our residential real estate loans and lines customers and less than 1% of our indirect loans customers have active payment deferrals in accordance withas of September 30, 2022, as the previously noted loan modifications under the CARES Act or agencies guidelines.majority of customers whose loans were subject to COVID-19 related deferrals have returned to making regular payments.

Reclassifications

Certain reclassifications of previously reported amounts have been made to conform to the current year presentation. Such reclassifications did not impact net income or shareholders’ equity as previously reported.

Use of Estimates

The preparation of these financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates relate to the determination of the allowance for credit losses, the carrying value of goodwill and deferred tax assets, and assumptions used in the defined benefit pension plan accounting.

10

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

Cash Flow Reporting

Supplemental cash flow information is summarized as follows for the nine months ended September 30, 2022 and 2021 (in thousands):

 

2021

 

 

2020

 

 

2022

 

 

2021

 

Supplemental information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

12,100

 

$

23,533

 

 

$

15,613

 

 

$

12,100

 

Cash paid for income taxes

 

10,800

 

5,656

 

 

 

1,128

 

 

 

10,800

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate and other assets acquired in settlement of loans

 

—

 

2,966

 

Accrued and declared unpaid dividends

 

4,641

 

4,534

 

 

 

4,810

 

 

 

4,641

 

Common stock issued for acquisition

 

301

 

—

 

 

 

—

 

 

 

301

 

Assets acquired and liabilities assumed in business combinations:

 

 

 

 

 

 

 

 

 

 

 

 

Fair value of assets acquired

 

712

 

—

 

 

 

—

 

 

 

712

 

Recent Accounting Pronouncements

In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), who is responsible for regulating the London Interbank Offered Rate (“LIBOR”), announced its intention that it would no longer be necessary to persuade or compel its panel banks to submit LIBOR rates after December 31, 2021. On March 5, 2021, the ICE Benchmark Administration (“IBA”), the administrator of LIBOR, released the results of its consultation on the cessation timeline for certain LIBOR tenors. In coordination with the IBA, the FCA also confirmed when certain LIBOR tenors will cease to exist. The results of the consultation indicated that certain LIBOR tenors (overnight, one-month, three-month, six-month, and twelve-month USD LIBOR) will be extended to June 30, 2023 to allow some legacy contracts that cannot be easily amended to mature on their current terms. Notwithstanding the extension of certain LIBOR tenors to 2023, banks may no longer offer new LIBOR-based contracts after December 31, 2021. Given that LIBOR is a widely used pricing index for loan and derivative contracts, a Company-wide initiative was introduced to assess all LIBOR exposures through the Company’s loan, deposit, borrowing and derivative categories, while developing a plan for the ultimate cessation of the index. In developing the transition plan, the Company has followed best practice recommendations from the Federal Reserve’s Alternative Reference Rate Committee, our third-party derivative advisor and the Internal Swaps and Derivatives Association. To date, the Company has identified the portion of loan notes that reference LIBOR, which are primarily representative of commercial relationships. Additionally, the Company has 1one designated derivative instrument that is utilized to hedge the LIBOR characteristic of a future dated borrowing (i.e. Federal Home Loan Bank Advance)Advance, Brokered Time Deposits, etc.). In 2015, the Company issued $40 million in fixed to floating rate subordinated notes that currently bear a fixed rate of interest at 6.00% until April 2025, when the rate converts to a floating rate equal to three-month LIBOR plus 3.944%; the indenture under which the notes were issued includes language allowing an alternate index to be applied in the event that LIBOR becomes unavailable at the floating rate determination date. At this time, no other borrowing or deposit relationships have been identified that utilize LIBOR as an index.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.Reporting. The ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative rates, such as SOFR. ASU 2020-04 became effective during the first quarter of 2020 and applies to contract modifications and amendments made as of the beginning of the reporting period including the ASU’s issuance date, March 12, 2020, through December 31, 2022. The adoption of this guidance in 2020 resulted in the application of certain practical expedients, which did not have a material effect on the Company's consolidated financial statements.

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope.Scope. The ASU clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and applies through December 31, 2022. The adoption of this guidance resulted in the application of certain practical expedients, which did not have a material effect on the Company's consolidated financial statements.

11

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

Standards Not Yet Effective

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures. The ASU updates the accounting and disclosure for troubled debt restructurings. ASU 2022-02 will be effective for fiscal years beginning after December 15, 2022, including interim periods within those years, with an option to early adopt. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. The ASU expands the scope in which an entity can apply the portfolio layer method of hedge accounting, allowing for more consistent accounting for similar hedges. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.

(2.)BUSINESS COMBINATIONS

2022 Activity – None

2021 Activity

On February 1, 2021, SDN completed the acquisition of the assets of Landmark Group (“Landmark”), an independent insurance brokerage firm. Consideration for the acquisition included common shares of Company stock and cash. As a result of the acquisition, SDN recorded goodwill of $611 thousand and other intangible assets of $399 thousand. The goodwill and other intangible assets are expected to be deductible for income tax purposes. The allocation of acquisition cost to the assets acquired and liabilities assumed and pro forma results of operations for this acquisition have not been presented because the effect of this acquisition was not material to the Company’s consolidated financial statements.

On August 2, 2021, SDN completed the acquisition of the assets of North Woods Capital Benefits LLC ("North Woods"), an employee benefits and human resources advisory firm. As a result of the acquisition, SDN recorded goodwill of $399 thousand and other intangible assets of $263 thousand. The goodwill and other intangible assets are expected to be deductible for income tax purposes. The allocation of acquisition cost to the assets acquired and liabilities assumed and pro forma results of operations for this acquisition have not been presented because the effect of this acquisition was not material to the Company’s consolidated financial statements.

2020 Activity – No Activity

(3.)RESTRUCTURING CHARGES

On July 17, 2020, the Bank announced management’s decision to adapt to a full-service branch model to streamline retail branches to better align with shifting customer needs and preferences. The transformation resulted in 6six branch closures and a reduction in staffing. The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conducted in partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping service areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and facilitate the long-term sustainability of current and future branches. The announced consolidations represented about 10ten percent of the branch network and impacted approximately 6six percent of the total Company workforce. Where possible, those impacted were offered alternative roles or the opportunity to apply for open positions in other areas of the Company. Separated associates received a comprehensive severance package based on tenure.

In October 2020, the Company announced the planned closure of 1one additional branch that closed in January 2021. This location was not included in the branch consolidations announced in July 2020, as alternative options were being considered and consolidation was not possible given its significant distance from other Bank branches.

The Company incurred total pre-tax expense related to the branch closures of approximately $1.7 million, including approximately $0.2 million in employee severance, $0.5 million in lease termination costs and $1.0 million in valuation adjustments on branch facilities. The Company recognized allAdditional related restructuring charges of these expenses during 2020. The Company expects $0.81.3 million of total costs will result in future cash expenditures. The Company anticipates annual expense savings of approximately $2.7 millionwere incurred during the nine months ended September 30, 2022 as a result of these branch closures.property valuation adjustments to write-down certain real estate assets to fair market value based on existing purchase offers and current market conditions.

The following table represents the consolidated statements of income classification of the Company's restructuring charges (in thousands):

 

 

 

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

 

Income Statement Location

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance costs

 

Salaries and employee benefits

 

$

—

 

 

$

224

 

 

$

—

 

 

$

224

 

Lease termination costs

 

Restructuring charges

 

 

—

 

 

 

454

 

 

 

—

 

 

 

454

 

Valuation adjustments

 

Restructuring charges

 

 

—

 

 

 

908

 

 

 

—

 

 

 

908

 

Total

 

 

 

$

—

 

 

$

1,586

 

 

$

—

 

 

$

1,586

 

12

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(3.)RESTRUCTURING CHARGES (Continued)

The following table represents the changes in the restructuring reserve (in thousands):

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Balance at beginning of period

 

$

1,088

 

 

$

—

 

 

$

1,245

 

 

$

—

 

 

$

326

 

 

$

1,088

 

 

$

445

 

 

$

1,245

 

Restructuring charges

 

—

 

 

 

1,586

 

 

 

—

 

 

 

1,586

 

 

 

—

 

 

 

—

 

 

 

1,269

 

 

 

—

 

Cash payments

 

(33

)

 

 

(249

)

 

 

(179

)

 

 

(249

)

 

 

(11

)

 

 

(33

)

 

 

(46

)

 

 

(179

)

Charges against assets

 

 

(456

)

 

 

—

 

 

 

(467

)

 

 

—

 

 

 

—

 

 

 

(456

)

 

 

(1,353

)

 

 

(467

)

Balance at end of period

 

$

599

 

 

$

1,337

 

 

$

599

 

 

$

1,337

 

 

$

315

 

 

$

599

 

 

$

315

 

 

$

599

 

In contemplation of the transactions noted above, certain long-lived assets have met the held for sale criteria as of September 30, 2021. The Company reclassified2022. Long lived assets held for sale totaled $4.71.9 million from premises and equipment, net to other assets on the consolidated statement of financial condition$3.2 million as of September 30, 2021. NaN long-lived assets were reclassified as held for sale as of2022 and December 31, 2020.2021, respectively.

(4.)EARNINGS PER COMMON SHARE (“EPS”)

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS (in thousands, except per share amounts).

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Net income available to common shareholders

 

$

16,811

 

$

11,908

 

$

56,990

 

$

23,436

 

 

$

13,489

 

 

$

16,811

 

 

$

43,390

 

 

$

56,990

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total shares issued

 

16,100

 

16,100

 

16,100

 

16,100

 

 

 

16,100

 

 

 

16,100

 

 

 

16,100

 

 

 

16,100

 

Unvested restricted stock awards

 

(5

)

 

(7

)

 

(6

)

 

(5

)

 

 

(6

)

 

 

(5

)

 

 

(5

)

 

 

(6

)

Treasury shares

 

 

(258

)

 

 

(62

)

 

 

(244

)

 

 

(77

)

 

 

(765

)

 

 

(258

)

 

 

(692

)

 

 

(244

)

Total basic weighted average common shares outstanding

 

15,837

 

16,031

 

15,850

 

16,018

 

 

 

15,329

 

 

 

15,837

 

 

 

15,403

 

 

 

15,850

 

Incremental shares from assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

—

 

—

 

—

 

—

 

Vesting of restricted stock awards

 

 

99

 

 

27

 

 

90

 

 

40

 

 

 

64

 

 

 

99

 

 

 

81

 

 

 

90

 

Total diluted weighted average common shares outstanding

 

15,936

 

16,058

 

15,940

 

16,058

 

 

 

15,393

 

 

 

15,936

 

 

 

15,484

 

 

 

15,940

 

Basic earnings per common share

 

$

1.06

 

$

0.74

 

$

3.60

 

$

1.46

 

 

$

0.88

 

 

$

1.06

 

 

$

2.82

 

 

$

3.60

 

Diluted earnings per common share

 

$

1.05

 

$

0.74

 

$

3.58

 

$

1.46

 

 

$

0.88

 

 

$

1.05

 

 

$

2.80

 

 

$

3.58

 

For each of the periods presented, average shares subject to the following instruments were excluded from the computation of diluted EPS because the effect would be antidilutive (in thousands):

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Stock options

 

—

 

—

 

—

 

—

 

Stock option

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Restricted stock awards

 

 

0

 

 

71

 

 

4

 

 

49

 

 

 

1

 

 

 

—

 

 

 

1

 

 

 

4

 

Total

 

 

0

 

 

71

 

 

4

 

 

49

 

 

 

1

 

 

 

—

 

 

 

1

 

 

 

4

 

13

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.)INVESTMENT SECURITIES

The amortized cost and fair value of investment securities are summarized below (in thousands):

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

6,253

 

$

278

 

$

—

 

$

6,531

 

 

$

24,535

 

 

$

—

 

 

$

3,428

 

 

$

21,107

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

575,861

 

8,847

 

4,973

 

579,735

 

 

 

556,883

 

 

 

—

 

 

 

83,012

 

 

 

473,871

 

Federal Home Loan Mortgage Corporation

 

390,062

 

1,257

 

6,195

 

385,124

 

 

 

419,428

 

 

 

—

 

 

 

74,634

 

 

 

344,794

 

Government National Mortgage Association

 

92,793

 

468

 

935

 

92,326

 

 

 

114,019

 

 

 

1

 

 

 

16,587

 

 

 

97,433

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

17,689

 

67

 

132

 

17,624

 

 

 

12,569

 

 

 

—

 

 

 

2,489

 

 

 

10,080

 

Federal Home Loan Mortgage Corporation

 

16,318

 

—

 

128

 

16,190

 

 

 

22,041

 

 

 

—

 

 

 

4,139

 

 

 

17,902

 

Privately issued

 

 

—

 

 

420

 

 

—

 

 

420

 

 

 

—

 

 

 

344

 

 

 

—

 

 

 

344

 

Total mortgage-backed securities

 

 

1,092,723

 

 

11,059

 

 

12,363

 

 

1,091,419

 

 

 

1,124,940

 

 

 

345

 

 

 

180,861

 

 

 

944,424

 

Total available for sale securities

 

$

1,098,976

 

$

11,337

 

$

12,363

 

$

1,097,950

 

 

$

1,149,475

 

 

$

345

 

 

$

184,289

 

 

$

965,531

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

16,325

 

 

$

—

 

 

$

850

 

 

$

15,475

 

State and political subdivisions

 

$

116,812

 

$

2,897

 

$

196

 

$

119,513

 

 

 

102,419

 

 

 

16

 

 

 

8,975

 

 

 

93,460

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

9,535

 

539

 

—

 

10,074

 

 

 

8,576

 

 

 

—

 

 

 

658

 

 

 

7,918

 

Federal Home Loan Mortgage Corporation

 

8,835

 

203

 

132

 

8,906

 

 

 

8,009

 

 

 

—

 

 

 

1,485

 

 

 

6,524

 

Government National Mortgage Association

 

29,172

 

1,009

 

—

 

30,181

 

 

 

23,854

 

 

 

—

 

 

 

2,508

 

 

 

21,346

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

21,668

 

644

 

—

 

22,312

 

 

 

15,190

 

 

 

—

 

 

 

1,084

 

 

 

14,106

 

Federal Home Loan Mortgage Corporation

 

26,125

 

894

 

—

 

27,019

 

 

 

18,749

 

 

 

—

 

 

 

1,247

 

 

 

17,502

 

Government National Mortgage Association

 

 

5,993

 

 

166

 

 

—

 

 

6,159

 

 

 

4,421

 

 

 

—

 

 

 

314

 

 

 

4,107

 

Total mortgage-backed securities

 

 

101,328

 

 

3,455

 

 

132

 

 

104,651

 

 

 

78,799

 

 

 

—

 

 

 

7,296

 

 

 

71,503

 

Total held to maturity securities

 

218,140

 

$

6,352

 

$

328

 

$

224,164

 

 

 

197,543

 

 

$

16

 

 

$

17,121

 

 

$

180,438

 

Allowance for credit losses - securities

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

Total held to maturity securities, net

 

$

218,135

 

 

 

 

 

 

 

 

 

 

$

197,538

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

6,239

 

$

396

 

$

—

 

$

6,635

 

U.S. Government agencies and government sponsored enterprises

 

$

15,793

 

 

$

195

 

 

$

97

 

 

$

15,891

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

350,627

 

15,549

 

44

 

366,132

 

 

 

576,163

 

 

 

6,565

 

 

 

5,242

 

 

 

577,486

 

Federal Home Loan Mortgage Corporation

 

225,645

 

3,155

 

24

 

228,776

 

 

 

430,010

 

 

 

952

 

 

 

6,435

 

 

 

424,527

 

Government National Mortgage Association

 

22,107

 

830

 

—

 

22,937

 

 

 

122,266

 

 

 

298

 

 

 

2,082

 

 

 

120,482

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

3,047

 

97

 

—

 

3,144

 

 

 

15,346

 

 

 

26

 

 

 

433

 

 

 

14,939

 

Federal Home Loan Mortgage Corporation

 

—

 

—

 

—

 

—

 

 

 

25,257

 

 

 

—

 

 

 

477

 

 

 

24,780

 

Privately issued

 

 

—

 

 

435

 

 

—

 

 

435

 

 

 

—

 

 

 

410

 

 

 

—

 

 

 

410

 

Total mortgage-backed securities

 

 

601,426

 

 

20,066

 

 

68

 

 

621,424

 

 

 

1,169,042

 

 

 

8,251

 

 

 

14,669

 

 

 

1,162,624

 

Total available for sale securities

 

$

607,665

 

$

20,462

 

$

68

 

$

628,059

 

 

$

1,184,835

 

 

$

8,446

 

 

$

14,766

 

 

$

1,178,515

 

14

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.)INVESTMENT SECURITIES (Continued)

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

December 31, 2020 (continued)

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021 (continued)

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

$

144,506

 

$

4,478

 

$

—

 

$

148,984

 

 

$

111,399

 

 

$

2,412

 

 

$

300

 

 

$

113,511

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

10,776

 

703

 

—

 

11,479

 

 

 

9,275

 

 

 

411

 

 

 

—

 

 

 

9,686

 

Federal Home Loan Mortgage Corporation

 

5,858

 

382

 

—

 

6,240

 

 

 

8,706

 

 

 

137

 

 

 

144

 

 

 

8,699

 

Government National Mortgage Association

 

37,084

 

1,578

 

—

 

38,662

 

 

 

27,400

 

 

 

706

 

 

 

2

 

 

 

28,104

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

29,988

 

1,075

 

—

 

31,063

 

 

 

19,485

 

 

 

368

 

 

 

3

 

 

 

19,850

 

Federal Home Loan Mortgage Corporation

 

35,897

 

1,581

 

—

 

37,478

 

 

 

23,840

 

 

 

565

 

 

 

—

 

 

 

24,405

 

Government National Mortgage Association

 

 

7,864

 

 

265

 

 

—

 

 

8,129

 

 

 

5,481

 

 

 

84

 

 

 

—

 

 

 

5,565

 

Total mortgage-backed securities

 

 

127,467

 

 

5,584

 

 

—

 

 

133,051

 

 

 

94,187

 

 

 

2,271

 

 

 

149

 

 

 

96,309

 

Total held to maturity securities

 

271,973

 

$

10,062

 

$

—

 

$

282,035

 

 

 

205,586

 

 

$

4,683

 

 

$

449

 

 

$

209,820

 

Allowance for credit losses - securities

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

Total held to maturity securities, net

 

$

271,966

 

 

 

 

 

 

 

 

 

 

$

205,581

 

 

 

 

 

 

 

 

 

 

The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. For available for sale (“AFS”) debt securities, AIR totaled $1.9 million and $1.22.1 million as of September 30, 20212022 and December 31, 2020.2021, respectively. For held to maturity (“HTM”) debt securities, AIR totaled $1.0 million and $905696 thousand as of September 30, 20212022 and December 31, 2020,2021, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.

For the three months ended September 30, 20212022 and 2020,2021, credit loss expense (credit) for HTM investment securities was $(less than ($1) thousand and $0, respectively.in each period. For the nine months ended September 30, 20212022 and 2020,2021, credit loss expense (credit) for HTM investment securities was $(less than ($21) thousand and $(($62) thousand, respectively.

Investment securities with a total fair value of $861.2866.4 million and $567.4637.8 million at September 30, 20212022 and December 31, 2020,2021, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

Sales of securities available for sale were as follows (in thousands):

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Proceeds from sales

 

$

0

 

$

20,576

 

$

51,891

 

$

50,207

 

 

$

—

 

 

$

—

 

 

$

6,252

 

 

$

51,891

 

Gross realized gains

 

0

 

554

 

251

 

1,170

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

251

 

Gross realized losses

 

0

 

—

 

180

 

9

 

 

 

—

 

 

 

—

 

 

 

15

 

 

 

180

 

The scheduled maturities of securities available for sale and securities held to maturity at September 30, 20212022 are shown below (in thousands). Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

4,863

 

$

4,891

 

 

$

5,233

 

 

$

5,202

 

Due from one to five years

 

62,802

 

65,773

 

 

 

80,336

 

 

 

75,020

 

Due after five years through ten years

 

175,663

 

180,702

 

 

 

155,699

 

 

 

135,519

 

Due after ten years

 

 

855,648

 

 

846,584

 

 

 

908,207

 

 

 

749,790

 

Total available for sale securities

 

$

1,098,976

 

$

1,097,950

 

 

$

1,149,475

 

 

$

965,531

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

36,191

 

$

36,543

 

 

$

34,464

 

 

$

34,223

 

Due from one to five years

 

72,707

 

75,317

 

 

 

43,515

 

 

 

41,932

 

Due after five years through ten years

 

20,848

 

21,233

 

 

 

38,024

 

 

 

35,284

 

Due after ten years

 

 

88,394

 

 

91,071

 

 

 

81,540

 

 

 

68,999

 

Total held to maturity securities

 

$

218,140

 

$

224,164

 

 

$

197,543

 

 

$

180,438

 

15

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.)INVESTMENT SECURITIES (Continued)

Unrealized losses on investment securities for which an allowance for credit losses has not been recorded and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands):

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored
enterprises

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

328,931

 

4,650

 

9,173

 

323

 

338,104

 

4,973

 

Federal Home Loan Mortgage Corporation

 

335,977

 

5,977

 

7,676

 

218

 

343,653

 

6,195

 

Government National Mortgage Association

 

79,351

 

935

 

—

 

—

 

79,351

 

935

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

7,818

 

132

 

—

 

—

 

7,818

 

132

 

Federal Home Loan Mortgage Corporation

 

16,190

 

128

 

—

 

—

 

16,190

 

128

 

Privately issued

 

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

Total mortgage-backed securities

 

 

768,267

 

 

11,822

 

 

16,849

 

 

541

 

 

785,116

 

 

12,363

 

Total available for sale securities

 

 

768,267

 

 

11,822

 

 

16,849

 

 

541

 

 

785,116

 

 

12,363

 

Total temporarily impaired securities

 

$

768,267

 

$

11,822

 

$

16,849

 

$

541

 

$

785,116

 

$

12,363

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government sponsored
enterprises

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

 

$

13,506

 

 

$

1,494

 

 

$

7,601

 

 

$

1,934

 

 

$

21,107

 

 

$

3,428

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

18,155

 

44

 

—

 

—

 

18,155

 

44

 

 

 

216,629

 

 

 

27,834

 

 

 

257,242

 

 

 

55,178

 

 

 

473,871

 

 

 

83,012

 

Federal Home Loan Mortgage Corporation

 

10,932

 

24

 

—

 

—

 

10,932

 

24

 

 

 

95,195

 

 

 

15,907

 

 

 

249,599

 

 

 

58,727

 

 

 

344,794

 

 

 

74,634

 

Government National Mortgage Association

 

—

 

—

 

—

 

—

 

—

 

—

 

 

 

28,654

 

 

 

3,876

 

 

 

68,779

 

 

 

12,711

 

 

 

97,433

 

 

 

16,587

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

—

 

—

 

8

 

—

 

8

 

—

 

 

 

1,086

 

 

 

100

 

 

 

8,994

 

 

 

2,389

 

 

 

10,080

 

 

 

2,489

 

Federal Home Loan Mortgage Corporation

 

—

 

—

 

—

 

—

 

—

 

—

 

 

 

7,874

 

 

 

1,528

 

 

 

10,028

 

 

 

2,611

 

 

 

17,902

 

 

 

4,139

 

Privately issued

 

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

 

—

 

Total mortgage-backed securities

 

 

29,087

 

 

68

 

 

8

 

 

—

 

 

29,095

 

 

68

 

 

 

349,438

 

 

 

49,245

 

 

 

594,642

 

 

 

131,616

 

 

 

944,080

 

 

 

180,861

 

Total available for sale securities

 

 

29,087

 

 

68

 

 

8

 

 

—

 

 

29,095

 

 

68

 

 

 

362,944

 

 

 

50,739

 

 

 

602,243

 

 

 

133,550

 

 

 

965,187

 

 

 

184,289

 

Total temporarily impaired securities

 

$

29,087

 

$

68

 

$

8

 

$

—

 

$

29,095

 

$

68

 

 

$

362,944

 

 

$

50,739

 

 

$

602,243

 

 

$

133,550

 

 

$

965,187

 

 

$

184,289

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government
sponsored enterprises

 

$

9,438

 

 

$

97

 

 

$

—

 

 

$

—

 

 

$

9,438

 

 

$

97

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

333,489

 

 

 

3,597

 

 

 

61,249

 

 

 

1,645

 

 

 

394,738

 

 

 

5,242

 

Federal Home Loan Mortgage Corporation

 

 

283,965

 

 

 

3,353

 

 

 

110,931

 

 

 

3,082

 

 

 

394,896

 

 

 

6,435

 

Government National Mortgage Association

 

 

108,448

 

 

 

2,082

 

 

 

—

 

 

 

—

 

 

 

108,448

 

 

 

2,082

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

13,364

 

 

 

433

 

 

 

—

 

 

 

—

 

 

 

13,364

 

 

 

433

 

Federal Home Loan Mortgage Corporation

 

 

24,780

 

 

 

477

 

 

 

—

 

 

 

—

 

 

 

24,780

 

 

 

477

 

Total mortgage-backed securities

 

 

764,046

 

 

 

9,942

 

 

 

172,180

 

 

 

4,727

 

 

 

936,226

 

 

 

14,669

 

Total available for sale securities

 

 

773,484

 

 

 

10,039

 

 

 

172,180

 

 

 

4,727

 

 

 

945,664

 

 

 

14,766

 

Total temporarily impaired securities

 

$

773,484

 

 

$

10,039

 

 

$

172,180

 

 

$

4,727

 

 

$

945,664

 

 

$

14,766

 

16

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.)INVESTMENT SECURITIES (Continued)

The total number of available for sale securities positions in the investment portfolio in an unrealized loss position at September 30, 20212022 was 99226 compared to 8116 at December 31, 2020.2021. At September 30, 2021,2022, the Company had positions in 6101 investment securities with a fair value of $16.8602.2 million and a total unrealized loss of $541133.5 thousand dollarsmillion that hashad been in a continuous unrealized loss position for more than 12 months. At September 30, 2021,2022, there were a total of 93125 securities positions in the Company’s investment portfolio with a fair value of $768.3362.9 million and a total unrealized loss of $11.850.7 million that had been in a continuous unrealized loss position for less than 12 months. At December 31, 2020,2021, the Company had a position in 128 investment securitysecurities with a fair value of $8172.2 thousand dollarsmillion and a total unrealized loss of less than $14.7 thousand dollarsmillion that had been in a continuous unrealized loss position for more than 12 months. At December 31, 2020,2021, there were a total of 788 securities positions in the Company’s investment portfolio with a fair value of $29.1773.5 million and a total unrealized loss of $6810.0 thousandmillion that had been in a continuous unrealized loss position for less than 12 months. The unrealized loss on investment securities was predominantly caused by changes in market interest rates subsequent to purchase. The fair value of most of the investment securities in the Company’s portfolio fluctuates as market interest rates change.

Securities Available for Sale

As of September 30, 20212022 and December 31, 2020,2021, 0no allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities were impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

Securities Held to Maturity

The Company’s HTM investment securities include debt securities that are issued by U.S. government agencies or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. In addition, the Company’s HTM investment securities include debt securities that are issued by state and local government agencies, or municipal bonds.

The Company monitors the credit quality of our municipal bonds through the use of a credit rating agency or by ratings that are derived by an internal scoring model. The scoring methodology for the internally derived ratings is based on a series of financial ratios for the municipality being reviewed as compared to typical industry figures. This information is used to determine the financial strengths and weaknesses of the municipality, which is indicated with a numeric rating. This number is then converted into a letter rating to better match the system used by the credit rating agencies. As of September 30, 2021,2022, $111.094.7 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $5.86.9 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating.rating, and $0.8 million in non-rated bonds, of which $0.6 million mature in 2022 and $0.2 million mature in 2023. Additionally, no municipal bonds were rated below investment grade. As of December 31, 2020,2021, $135.7105.6 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $8.55.8 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating. Additionally, one municipal bond was rated below investment grade, with a BB+ Standard & Poor’s equivalent rating. The below investment grade bond represented exposure of $279 thousand, or 0.19% of the municipal bond portfolio and had been closely monitored for repayment.

As of September 30, 20212022 and December 31, 2020,2021, the Company had 0no past due or nonaccrual held to maturity investment securities.

17

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(6.)LOANS

The Company’s loan portfolio consisted of the following as of the dates indicated (in thousands):

 

Principal
Amount
Outstanding

 

 

Net Deferred
Loan (Fees)
Costs

 

 

Loans,
Net

 

 

Principal
Amount
Outstanding

 

 

Net Deferred
Loan (Fees)
Costs

 

 

Loans,
Net

 

September 30, 2021

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

Commercial business

 

$

689,819

 

$

(3,628

)

 

$

686,191

 

 

$

633,129

 

 

$

765

 

 

$

633,894

 

Commercial mortgage

 

1,350,932

 

(2,382

)

 

1,348,550

 

 

 

1,567,888

 

 

 

(3,343

)

 

 

1,564,545

 

Residential real estate loans

 

570,435

 

13,656

 

584,091

 

 

 

564,180

 

 

 

13,641

 

 

 

577,821

 

Residential real estate lines

 

76,214

 

2,982

 

79,196

 

 

 

74,148

 

 

 

3,188

 

 

 

77,336

 

Consumer indirect

 

907,185

 

33,352

 

940,537

 

 

 

959,719

 

 

 

37,704

 

 

 

997,423

 

Other consumer

 

 

15,206

 

 

128

 

 

15,334

 

 

 

15,719

 

 

 

113

 

 

 

15,832

 

Total

 

$

3,609,791

 

$

44,108

 

 

3,653,899

 

 

$

3,814,783

 

 

$

52,068

 

 

 

3,866,851

 

Allowance for credit losses - loans

 

 

 

 

 

 

 

 

(45,444

)

 

 

 

 

 

 

 

 

(44,106

)

Total loans, net

 

 

 

 

 

 

 

$

3,608,455

 

 

 

 

 

 

 

 

$

3,822,745

 

December 31, 2020

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

Commercial business

 

$

798,409

 

$

(4,261

)

 

$

794,148

 

 

$

639,368

 

 

$

(1,075

)

 

$

638,293

 

Commercial mortgage

 

1,256,525

 

(2,624

)

 

1,253,901

 

 

 

1,415,486

 

 

 

(2,698

)

 

 

1,412,788

 

Residential real estate loans

 

586,537

 

13,263

 

599,800

 

 

 

563,579

 

 

 

13,720

 

 

 

577,299

 

Residential real estate lines

 

86,708

 

3,097

 

89,805

 

 

 

75,515

 

 

 

3,016

 

 

 

78,531

 

Consumer indirect

 

812,816

 

27,605

 

840,421

 

 

 

923,052

 

 

 

34,996

 

 

 

958,048

 

Other consumer

 

 

16,913

 

 

150

 

 

17,063

 

 

 

14,355

 

 

 

122

 

 

 

14,477

 

Total

 

$

3,557,908

 

$

37,230

 

 

3,595,138

 

 

$

3,631,355

 

 

$

48,081

 

 

 

3,679,436

 

Allowance for credit losses - loans

 

 

 

 

 

 

 

 

(52,420

)

 

 

 

 

 

 

 

 

(39,676

)

Total loans, net

 

 

 

 

 

 

 

$

3,542,718

 

 

 

 

 

 

 

 

$

3,639,760

 

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $5.92.1 million and $4.36.2 million as of September 30, 20212022 and December 31, 2020,2021, respectively.

The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act established the PPP, an expansion of the SBA’s 7(a) loan program and the EIDL, administered directly by the SBA. The Company had $121.42.9 million and $253.157.5 million of PPP loans (included in Commercialcommercial business above) as of September 30, 20212022 and December 31, 2020,2021, respectively. In addition, the CARES Act provides that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 made between March 1, 2020 and January 1, 2022 that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Accordingly, the Company had $532.4 million of loans with modifications related to COVID-19 during 2020, with $61.4 million and $113.0 million stillloans on deferral as of September 30, 20212022 and December 31, 2020,2021 of $2.2 million and $46.2 million, respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, 20212022 and December 31, 2020,2021, AIR for loans totaled $12.813.7 million and $13.612.7 million, respectively, and is included in other assets on the Company’s consolidated statements of financial condition.

18

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(6.)LOANS (Continued)

Past Due Loans Aging

The Company’s recorded investment, by loan class, in current and nonaccrual loans, as well as an analysis of accruing delinquent loans is set forth as of the dates indicated (in thousands):

 

30-59
Days
Past
Due

 

 

60-89
Days
Past
Due

 

 

Greater
Than
90 Days

 

 

Total
Past
Due

 

 

Nonaccrual

 

 

Current

 

 

Total
Loans

 

 

Nonaccrual
with no
allowance

 

 

30-59 Days
Past Due

 

 

60-89 Days
Past Due

 

 

Greater
Than
90 Days

 

 

Total Past
Due

 

 

Nonaccrual

 

 

Current

 

 

Total
Loans

 

 

Nonaccrual
with no
allowance

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

11,489

 

$

—

 

$

—

 

$

11,489

 

$

1,046

 

$

677,284

 

$

689,819

 

$

498

 

 

$

1,062

 

 

$

165

 

 

$

973

 

 

$

2,200

 

 

$

385

 

 

$

630,544

 

 

$

633,129

 

 

$

334

 

Commercial mortgage

 

272

 

—

 

—

 

272

 

874

 

1,349,786

 

1,350,932

 

344

 

 

 

—

 

 

 

—

 

 

 

13

 

 

 

13

 

 

 

830

 

 

 

1,567,045

 

 

 

1,567,888

 

 

 

807

 

Residential real estate loans

 

543

 

80

 

—

 

623

 

2,457

 

567,355

 

570,435

 

2,457

 

 

 

1,221

 

 

 

40

 

 

 

—

 

 

 

1,261

 

 

 

3,550

 

 

 

559,369

 

 

 

564,180

 

 

 

3,550

 

Residential real estate lines

 

55

 

24

 

—

 

79

 

192

 

75,943

 

76,214

 

192

 

 

 

86

 

 

 

—

 

 

 

—

 

 

 

86

 

 

 

119

 

 

 

73,943

 

 

 

74,148

 

 

 

119

 

Consumer indirect

 

4,499

 

899

 

—

 

5,398

 

2,104

 

899,683

 

907,185

 

2,104

 

 

 

7,533

 

 

 

2,015

 

 

 

—

 

 

 

9,548

 

 

 

2,666

 

 

 

947,505

 

 

 

959,719

 

 

 

2,666

 

Other consumer

 

 

85

 

 

0

 

 

1

 

 

86

 

 

2

 

 

15,118

 

 

15,206

 

 

2

 

 

 

134

 

 

 

5

 

 

 

—

 

 

 

139

 

 

 

—

 

 

 

15,580

 

 

 

15,719

 

 

 

—

 

Total loans, gross

 

$

16,943

 

$

1,003

 

$

1

 

$

17,947

 

$

6,675

 

$

3,585,169

 

$

3,609,791

 

$

5,597

 

 

$

10,036

 

 

$

2,225

 

 

$

986

 

 

$

13,247

 

 

$

7,550

 

 

$

3,793,986

 

 

$

3,814,783

 

 

$

7,476

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

264

 

$

87

 

$

—

 

$

351

 

$

1,975

 

$

796,083

 

$

798,409

 

$

1,502

 

 

$

659

 

 

$

34

 

 

$

797

 

 

$

1,490

 

 

$

602

 

 

$

637,276

 

 

$

639,368

 

 

$

477

 

Commercial mortgage

 

822

 

26

 

—

 

848

 

2,906

 

1,252,771

 

1,256,525

 

2,709

 

 

 

69

 

 

 

—

 

 

 

—

 

 

 

69

 

 

 

6,414

 

 

 

1,409,003

 

 

 

1,415,486

 

 

 

781

 

Residential real estate loans

 

984

 

60

 

—

 

1,044

 

2,587

 

582,906

 

586,537

 

2,587

 

 

 

1,148

 

 

 

141

 

 

 

—

 

 

 

1,289

 

 

 

2,373

 

 

 

559,917

 

 

 

563,579

 

 

 

2,373

 

Residential real estate lines

 

40

 

15

 

—

 

55

 

323

 

86,330

 

86,708

 

323

 

 

 

18

 

 

 

3

 

 

 

—

 

 

 

21

 

 

 

200

 

 

 

75,294

 

 

 

75,515

 

 

 

200

 

Consumer indirect

 

3,966

 

1,348

 

—

 

5,314

 

1,495

 

806,007

 

812,816

 

1,495

 

 

 

5,706

 

 

 

770

 

 

 

—

 

 

 

6,476

 

 

 

1,780

 

 

 

914,796

 

 

 

923,052

 

 

 

1,780

 

Other consumer

 

 

133

 

 

18

 

 

231

 

 

382

 

 

—

 

 

16,531

 

 

16,913

 

 

—

 

 

 

121

 

 

 

1

 

 

 

—

 

 

 

122

 

 

 

—

 

 

 

14,233

 

 

 

14,355

 

 

 

—

 

Total loans, gross

 

$

6,209

 

$

1,554

 

$

231

 

$

7,994

 

$

9,286

 

$

3,540,628

 

$

3,557,908

 

$

8,616

 

 

$

7,721

 

 

$

949

 

 

$

797

 

 

$

9,467

 

 

$

11,369

 

 

$

3,610,519

 

 

$

3,631,355

 

 

$

5,611

 

The Company had $11.4973 millionthousand and $797 thousand of PPP loans 30-59greater than 90 days past due (included in Commercial business above)and still accruing interest as of September 30, 2021.2022 and December 31, 2021, respectively (included in commercial business above). Repayment of PPP loans is 100% secured by guarantees from the SBA.

There were 0 loans past due greaterless than 90 days and still accruing interest as of September 30, 2021 and December 31, 2020. There were $1 thousand and $231 thousand in consumer overdrafts which were past due greater than 90 days as of September 30, 20212022 and December 31, 2020, respectively.2021. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

The CompanyInterest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was 0no interest income recognized on nonaccrual loans during the nine months ended September 30, 2022 and 2021. Estimated interest income of $447 thousand and $832 thousand for the nine months ended September 30, 2022 and 2021, and 2020.respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

Troubled Debt Restructurings

A modification of a loan constitutes a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. Commercial loans modified in a TDR may involve temporary interest-only payments, term extensions, reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, collateral concessions, forgiveness of principal, forbearance agreements, or substituting or adding a new borrower or guarantor.

There were 0no loans modified as a TDR during the nine months ended September 30, 20212022 and 2020.2021. There were 0no loans modified as a TDR within the previous 12 months that defaulted during the nine months ended September 30, 20212022 and 2020.2021. For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due.

19

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(6.)LOANS (Continued)

Collateral Dependent Loans

Management has determined that specific commercial loans on nonaccrual status, all loans that have had their terms restructured in a troubled debt restructuring, and other loans deemed appropriate by management where repayment is expected to be provided substantially through the operation or sale of the collateral to be collateral dependent loans. Collateral dependent loans at September 30, 20212022 and December 31, 20202021 included certain criticized COVID-19 bridge loans not otherwise classified as nonaccrual. The following table presents the amortized cost basis of collateral dependent loans by collateral type as of September 30, 20212022 and December 31, 20202021 (in thousands):

 

Collateral type

 

 

 

 

 

 

 

Collateral type

 

 

 

 

 

 

 

Business assets

 

 

Real property

 

 

Total

 

Specific Reserve

 

 

Business assets

 

 

Real property

 

 

Total

 

 

Specific Reserve

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

596

 

$

1,062

 

$

1,658

 

$

1,370

 

 

$

181

 

 

$

964

 

 

$

1,145

 

 

$

188

 

Commercial mortgage

 

 

—

 

 

64,216

 

 

64,216

 

 

9,950

 

 

 

—

 

 

 

22,833

 

 

 

22,833

 

 

 

2,527

 

Total

 

$

596

 

$

65,278

 

$

65,874

 

$

11,320

 

 

$

181

 

 

$

23,797

 

 

$

23,978

 

 

$

2,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

2,379

 

$

—

 

$

2,379

 

$

1,383

 

 

$

326

 

 

$

993

 

 

$

1,319

 

 

$

1,055

 

Commercial mortgage

 

 

—

 

 

36,625

 

 

36,625

 

 

8,187

 

 

 

—

 

 

 

37,936

 

 

 

37,936

 

 

 

4,716

 

Total

 

$

2,379

 

$

36,625

 

$

39,004

 

$

9,570

 

 

$

326

 

 

$

38,929

 

 

$

39,255

 

 

$

5,771

 

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors such as the fair value of collateral. The Company analyzes commercial business and commercial mortgage loans individually by classifying the loans as to credit risk. Risk ratings are updated any time the situation warrants. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans that do not meet the criteria above that are analyzed individually as part of the process described above are considered “uncriticized” or pass-rated loans and are included in groups of homogeneous loans with similar risk and loss characteristics.

20

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(6.)LOANS (Continued)

The following tables set forth the Company’s commercial loan portfolio, categorized by internally assigned asset classification, as of the dates indicated (in thousands):

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

2019

 

2018

 

2017

 

Prior

 

Revolving
Loans
Amortized
Cost Basis

 

Revolving
Loans
Converted
to Term

 

Total

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

111,558

 

$

109,269

 

 

$

78,305

 

 

$

49,811

 

 

$

16,289

 

 

$

13,906

 

 

$

296,861

 

 

$

0

 

 

$

675,999

 

 

$

94,295

 

 

$

112,228

 

 

$

74,868

 

 

$

33,470

 

 

$

40,635

 

 

$

26,151

 

 

$

244,693

 

 

$

—

 

 

$

626,340

 

Special mention

 

164

 

41

 

 

 

153

 

 

 

23

 

 

 

360

 

 

 

1,034

 

 

 

1,745

 

 

 

0

 

 

 

3,520

 

 

 

263

 

 

 

2,337

 

 

 

11

 

 

 

73

 

 

 

13

 

 

 

33

 

 

 

1,155

 

 

 

—

 

 

 

3,885

 

Substandard

 

0

 

215

 

 

 

160

 

 

 

722

 

 

 

696

 

 

 

283

 

 

 

4,596

 

 

 

0

 

 

 

6,672

 

 

 

—

 

 

 

38

 

 

 

76

 

 

 

22

 

 

 

567

 

 

 

1,001

 

 

 

1,965

 

 

 

—

 

 

 

3,669

 

Doubtful

 

 

0

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

111,722

 

$

109,525

 

 

$

78,618

 

 

$

50,556

 

 

$

17,345

 

 

$

15,223

 

 

$

303,202

 

 

$

0

 

 

$

686,191

 

 

$

94,558

 

 

$

114,603

 

 

$

74,955

 

 

$

33,565

 

 

$

41,215

 

 

$

27,185

 

 

$

247,813

 

 

$

—

 

 

$

633,894

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

208,019

 

$

343,976

 

 

$

181,132

 

 

$

143,005

 

 

$

142,828

 

 

$

172,277

 

 

$

3,736

 

 

$

0

 

 

$

1,194,973

 

 

$

319,245

 

 

$

371,251

 

 

$

276,113

 

 

$

171,289

 

 

$

119,365

 

 

$

244,827

 

 

$

3,641

 

 

$

—

 

 

$

1,505,731

 

Special mention

 

11,742

 

3,041

 

 

 

49,691

 

 

 

9,622

 

 

 

13,624

 

 

 

39,755

 

 

 

0

 

 

 

0

 

 

 

127,475

 

 

 

—

 

 

 

473

 

 

 

2,345

 

 

 

9,877

 

 

 

129

 

 

 

22,688

 

 

 

—

 

 

 

—

 

 

 

35,512

 

Substandard

 

1,001

 

389

 

 

 

2,938

 

 

 

11,610

 

 

 

300

 

 

 

9,864

 

 

 

0

 

 

 

0

 

 

 

26,102

 

 

 

2,987

 

 

 

347

 

 

 

104

 

 

 

80

 

 

 

9,977

 

 

 

9,807

 

 

 

—

 

 

 

—

 

 

 

23,302

 

Doubtful

 

 

0

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

220,762

 

$

347,406

 

 

$

233,761

 

 

$

164,237

 

 

$

156,752

 

 

$

221,896

 

 

$

3,736

 

 

$

0

 

 

$

1,348,550

 

 

$

322,232

 

 

$

372,071

 

 

$

278,562

 

 

$

181,246

 

 

$

129,471

 

 

$

277,322

 

 

$

3,641

 

 

$

—

 

 

$

1,564,545

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Revolving
Loans
Amortized
Cost Basis

 

Revolving
Loans
Converted
to Term

 

Total

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

350,992

 

$

112,469

 

 

$

82,029

 

 

$

31,990

 

 

$

8,195

 

 

$

16,600

 

 

$

179,770

 

 

$

0

 

 

$

782,045

 

 

$

141,925

 

 

$

91,338

 

 

$

68,433

 

 

$

42,631

 

 

$

24,847

 

 

$

12,033

 

 

$

248,338

 

 

$

—

 

 

$

629,545

 

Special mention

 

0

 

360

 

 

 

21

 

 

 

709

 

 

 

41

 

 

 

1,025

 

 

 

2,995

 

 

 

0

 

 

 

5,151

 

 

 

—

 

 

 

132

 

 

 

166

 

 

 

44

 

 

 

180

 

 

 

1,344

 

 

 

1,993

 

 

 

—

 

 

 

3,859

 

Substandard

 

193

 

211

 

 

 

1,183

 

 

 

464

 

 

 

202

 

 

 

309

 

 

 

4,390

 

 

 

0

 

 

 

6,952

 

 

 

45

 

 

 

256

 

 

 

169

 

 

 

745

 

 

 

415

 

 

 

49

 

 

 

3,210

 

 

 

—

 

 

 

4,889

 

Doubtful

 

 

0

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

351,185

 

$

113,040

 

 

$

83,233

 

 

$

33,163

 

 

$

8,438

 

 

$

17,934

 

 

$

187,155

 

 

$

0

 

 

$

794,148

 

 

$

141,970

 

 

$

91,726

 

 

$

68,768

 

 

$

43,420

 

 

$

25,442

 

 

$

13,426

 

 

$

253,541

 

 

$

—

 

 

$

638,293

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

310,364

 

$

227,406

 

 

$

163,839

 

 

$

161,771

 

 

$

74,915

 

 

$

154,399

 

 

$

731

 

 

$

0

 

 

$

1,093,425

 

 

$

342,483

 

 

$

339,988

 

 

$

176,753

 

 

$

147,247

 

 

$

128,381

 

 

$

167,739

 

 

$

3,712

 

 

$

—

 

 

$

1,306,303

 

Special mention

 

14,299

 

42,305

 

 

 

19,505

 

 

 

27,530

 

 

 

12,256

 

 

 

28,744

 

 

 

43

 

 

 

0

 

 

 

144,682

 

 

 

11,184

 

 

 

2,450

 

 

 

29,759

 

 

 

2,344

 

 

 

8,269

 

 

 

27,635

 

 

 

—

 

 

 

—

 

 

 

81,641

 

Substandard

 

189

 

2,521

 

 

 

1,890

 

 

 

1,648

 

 

 

3

 

 

 

9,344

 

 

 

199

 

 

 

0

 

 

 

15,794

 

 

 

1,001

 

 

 

77

 

 

 

2,950

 

 

 

11,607

 

 

 

3,209

 

 

 

6,000

 

 

 

—

 

 

 

—

 

 

 

24,844

 

Doubtful

 

 

0

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

324,852

 

$

272,232

 

 

$

185,234

 

 

$

190,949

 

 

$

87,174

 

 

$

192,487

 

 

$

973

 

 

$

0

 

 

$

1,253,901

 

 

$

354,668

 

 

$

342,515

 

 

$

209,462

 

 

$

161,198

 

 

$

139,859

 

 

$

201,374

 

 

$

3,712

 

 

$

—

 

 

$

1,412,788

 

21

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(6.)LOANS (Continued)

The Company utilizes payment status as a means of identifying and reporting problem and potential problem retail loans. The Company considers nonaccrual loans and loans past due greater than 90 days and still accruing interest to be non-performing. The following tables set forth the Company’s retail loan portfolio, categorized by performance status, as of the dates indicated (in thousands):

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

2019

 

2018

 

2017

 

Prior

 

Revolving
Loans
Amortized
Cost Basis

 

Revolving
Loans
Converted
to Term

 

Total

 

 

2022

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

72,522

 

$

132,594

 

 

$

89,736

 

 

$

71,263

 

 

$

54,733

 

 

$

160,786

 

 

$

0

 

 

$

0

 

 

$

581,634

 

 

$

53,282

 

 

$

86,500

 

 

$

121,667

 

 

$

77,987

 

 

$

57,406

 

 

$

177,429

 

 

$

—

 

 

$

—

 

 

$

574,271

 

Nonperforming

 

 

0

 

 

305

 

 

 

240

 

 

 

600

 

 

 

688

 

 

 

624

 

 

 

0

 

 

 

0

 

 

 

2,457

 

 

 

—

 

 

 

320

 

 

 

357

 

 

 

585

 

 

 

775

 

 

 

1,513

 

 

 

—

 

 

 

—

 

 

 

3,550

 

Total

 

$

72,522

 

$

132,899

 

 

$

89,976

 

 

$

71,863

 

 

$

55,421

 

 

$

161,410

 

 

$

0

 

 

$

0

 

 

$

584,091

 

 

$

53,282

 

 

$

86,820

 

 

$

122,024

 

 

$

78,572

 

 

$

58,181

 

 

$

178,942

 

 

$

—

 

 

$

—

 

 

$

577,821

 

Residential Real Estate Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

0

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

70,898

 

 

$

8,106

 

 

$

79,004

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

70,364

 

 

$

6,853

 

 

$

77,217

 

Nonperforming

 

 

0

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

61

 

 

 

131

 

 

 

192

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

57

 

 

 

62

 

 

 

119

 

Total

 

$

0

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

70,959

 

 

$

8,237

 

 

$

79,196

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

70,421

 

 

$

6,915

 

 

$

77,336

 

Consumer Indirect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

370,536

 

$

230,468

 

 

$

139,884

 

 

$

106,545

 

 

$

63,216

 

 

$

27,784

 

 

$

0

 

 

$

0

 

 

$

938,433

 

 

$

347,722

 

 

$

359,064

 

 

$

141,033

 

 

$

69,141

 

 

$

47,378

 

 

$

30,419

 

 

$

—

 

 

$

—

 

 

$

994,757

 

Nonperforming

 

 

371

 

 

406

 

 

 

656

 

 

 

334

 

 

 

298

 

 

 

39

 

 

 

0

 

 

 

0

 

 

 

2,104

 

 

 

197

 

 

 

1,276

 

 

 

551

 

 

 

263

 

 

 

233

 

 

 

146

 

 

 

—

 

 

 

—

 

 

 

2,666

 

Total

 

$

370,907

 

$

230,874

 

 

$

140,540

 

 

$

106,879

 

 

$

63,514

 

 

$

27,823

 

 

$

0

 

 

$

0

 

 

$

940,537

 

 

$

347,919

 

 

$

360,340

 

 

$

141,584

 

 

$

69,404

 

 

$

47,611

 

 

$

30,565

 

 

$

—

 

 

$

—

 

 

$

997,423

 

Other Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

4,091

 

$

4,273

 

 

$

2,010

 

 

$

964

 

 

$

376

 

 

$

812

 

 

$

2,806

 

 

$

0

 

 

$

15,332

 

 

$

5,900

 

 

$

3,077

 

 

$

2,392

 

 

$

938

 

 

$

301

 

 

$

349

 

 

$

2,875

 

 

$

—

 

 

$

15,832

 

Nonperforming

 

 

0

 

 

0

 

 

 

2

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

4,091

 

$

4,273

 

 

$

2,012

 

 

$

964

 

 

$

376

 

 

$

812

 

 

$

2,806

 

 

$

0

 

 

$

15,334

 

 

$

5,900

 

 

$

3,077

 

 

$

2,392

 

 

$

938

 

 

$

301

 

 

$

349

 

 

$

2,875

 

 

$

—

 

 

$

15,832

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

2018

 

2017

 

2016

 

Prior

 

Revolving
Loans
Amortized
Cost Basis

 

Revolving
Loans
Converted
to Term

 

Total

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving
Loans
Amortized
Cost Basis

 

 

Revolving
Loans
Converted
to Term

 

 

Total

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

137,926

 

$

103,923

 

 

$

87,153

 

 

$

66,446

 

 

$

67,473

 

 

$

134,292

 

 

$

0

 

 

$

0

 

 

$

597,213

 

 

$

92,620

 

 

$

129,240

 

 

$

85,876

 

 

$

65,866

 

 

$

50,932

 

 

$

150,392

 

 

$

—

 

 

$

—

 

 

$

574,926

 

Nonperforming

 

 

0

 

 

199

 

 

 

765

 

 

 

665

 

 

 

233

 

 

 

725

 

 

 

0

 

 

 

0

 

 

 

2,587

 

 

 

79

 

 

 

55

 

 

 

225

 

 

 

557

 

 

 

899

 

 

 

558

 

 

 

—

 

 

 

—

 

 

 

2,373

 

Total

 

$

137,926

 

$

104,122

 

 

$

87,918

 

 

$

67,111

 

 

$

67,706

 

 

$

135,017

 

 

$

0

 

 

$

0

 

 

$

599,800

 

 

$

92,699

 

 

$

129,295

 

 

$

86,101

 

 

$

66,423

 

 

$

51,831

 

 

$

150,950

 

 

$

—

 

 

$

—

 

 

$

577,299

 

Residential Real Estate Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

0

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

79,257

 

 

$

10,225

 

 

$

89,482

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

70,521

 

 

$

7,810

 

 

$

78,331

 

Nonperforming

 

 

0

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

65

 

 

 

258

 

 

 

323

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

39

 

 

 

161

 

 

 

200

 

Total

 

$

0

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

79,322

 

 

$

10,483

 

 

$

89,805

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

—

 

 

$

70,560

 

 

$

7,971

 

 

$

78,531

 

Consumer Indirect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

295,216

 

$

202,187

 

 

$

166,773

 

 

$

111,008

 

 

$

47,793

 

 

$

15,949

 

 

$

0

 

 

$

0

 

 

$

838,926

 

 

$

452,601

 

 

$

206,472

 

 

$

122,849

 

 

$

90,998

 

 

$

51,598

 

 

$

31,750

 

 

$

—

 

 

$

—

 

 

$

956,268

 

Nonperforming

 

 

70

 

 

652

 

 

 

319

 

 

 

287

 

 

 

132

 

 

 

35

 

 

 

0

 

 

 

0

 

 

 

1,495

 

 

 

417

 

 

 

515

 

 

 

436

 

 

 

230

 

 

 

136

 

 

 

46

 

 

 

—

 

 

 

—

 

 

 

1,780

 

Total

 

$

295,286

 

$

202,839

 

 

$

167,092

 

 

$

111,295

 

 

$

47,925

 

 

$

15,984

 

 

$

0

 

 

$

0

 

 

$

840,421

 

 

$

453,018

 

 

$

206,987

 

 

$

123,285

 

 

$

91,228

 

 

$

51,734

 

 

$

31,796

 

 

$

—

 

 

$

—

 

 

$

958,048

 

Other Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

6,774

 

$

3,177

 

 

$

1,765

 

 

$

907

 

 

$

369

 

 

$

508

 

 

$

3,563

 

 

$

0

 

 

$

17,063

 

 

$

4,422

 

 

$

3,738

 

 

$

1,681

 

 

$

763

 

 

$

280

 

 

$

1,044

 

 

$

2,549

 

 

$

—

 

 

$

14,477

 

Nonperforming

 

 

0

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

$

6,774

 

$

3,177

 

 

$

1,765

 

 

$

907

 

 

$

369

 

 

$

508

 

 

$

3,563

 

 

$

0

 

 

$

17,063

 

 

$

4,422

 

 

$

3,738

 

 

$

1,681

 

 

$

763

 

 

$

280

 

 

$

1,044

 

 

$

2,549

 

 

$

—

 

 

$

14,477

 

22

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(6.)LOANS (Continued)

Allowance for Credit Losses - Loans

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. The Company adopted ASU 2016-13 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net reduction of retained earnings of $8.7 million upon adoption. The transition adjustment includes an increase in credit-related reserves of $9.6 million, $14 thousand, and $2.1 million for loans, held to maturity investment securities and unfunded commitments, respectively, net of the corresponding increase in deferred tax assets of $3.0 million.

The following table sets forth the changes in the allowance for credit losses - loans for the three-three and nine-month periodsnine months ended as of the dates indicatedSeptember 30, 2022 and 2021 (in thousands):

 

Commercial
Business

 

 

Commercial
Mortgage

 

 

Residential
Real Estate
Loans

 

 

Residential
Real Estate
Lines

 

 

Consumer
Indirect

 

 

Other
Consumer

 

 

Total

 

Three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

10,140

 

 

$

12,064

 

 

$

2,140

 

 

$

509

 

 

$

17,332

 

 

$

267

 

 

$

42,452

 

Charge-offs

 

 

(20

)

 

 

—

 

 

 

—

 

 

 

(38

)

 

 

(4,058

)

 

 

(398

)

 

 

(4,514

)

Recoveries

 

 

116

 

 

 

1

 

 

 

4

 

 

 

3

 

 

 

2,168

 

 

 

69

 

 

 

2,361

 

Provision (benefit)

 

 

1,288

 

 

 

2,054

 

 

 

210

 

 

 

180

 

 

 

(260

)

 

 

335

 

 

 

3,807

 

Ending balance

 

$

11,524

 

 

$

14,119

 

 

$

2,354

 

 

$

654

 

 

$

15,182

 

 

$

273

 

 

$

44,106

 

Nine months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

11,099

 

 

$

14,777

 

 

$

1,604

 

 

$

379

 

 

$

11,611

 

 

$

206

 

 

$

39,676

 

Charge-offs

 

 

(262

)

 

 

—

 

 

 

(56

)

 

 

(38

)

 

 

(9,216

)

 

 

(1,083

)

 

 

(10,655

)

Recoveries

 

 

305

 

 

 

2,020

 

 

 

19

 

 

 

20

 

 

 

6,129

 

 

 

262

 

 

 

8,755

 

Provision (benefit)

 

 

382

 

 

 

(2,678

)

 

 

787

 

 

 

293

 

 

 

6,658

 

 

 

888

 

 

 

6,330

 

Ending balance

 

$

11,524

 

 

$

14,119

 

 

$

2,354

 

 

$

654

 

 

$

15,182

 

 

$

273

 

 

$

44,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial
Business

 

 

Commercial
Mortgage

 

 

Residential
Real Estate
Loans

 

 

Residential
Real Estate
Lines

 

 

Consumer
Indirect

 

 

Other
Consumer

 

 

Total

 

 

Commercial
Business

 

 

Commercial
Mortgage

 

 

Residential
Real Estate
Loans

 

 

Residential
Real Estate
Lines

 

 

Consumer
Indirect

 

 

Other
Consumer

 

 

Total

 

Three months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

11,005

 

$

21,662

 

$

2,299

 

$

395

 

$

10,748

 

$

256

 

$

46,365

 

 

$

11,005

 

 

$

21,662

 

 

$

2,299

 

 

$

395

 

 

$

10,748

 

 

$

256

 

 

$

46,365

 

Charge-offs

 

(218

)

 

0

 

(36

)

 

(60

)

 

(1,395

)

 

(250

)

 

(1,959

)

 

 

(218

)

 

 

—

 

 

 

(36

)

 

 

(60

)

 

 

(1,395

)

 

 

(250

)

 

 

(1,959

)

Recoveries

 

168

 

0

 

15

 

0

 

1,130

 

59

 

1,372

 

 

 

168

 

 

 

—

 

 

 

15

 

 

 

—

 

 

 

1,130

 

 

 

59

 

 

 

1,372

 

Provision (credit)

 

 

889

 

 

(2,210

)

 

 

(302

)

 

 

10

 

 

1,096

 

 

183

 

 

(334

)

Provision (benefit)

 

 

889

 

 

 

(2,210

)

 

 

(302

)

 

 

10

 

 

 

1,096

 

 

 

183

 

 

 

(334

)

Ending balance

 

$

11,844

 

$

19,452

 

$

1,976

 

$

345

 

$

11,579

 

$

248

 

$

45,444

 

 

$

11,844

 

 

$

19,452

 

 

$

1,976

 

 

$

345

 

 

$

11,579

 

 

$

248

 

 

$

45,444

 

Nine months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

13,580

 

$

21,763

 

$

3,924

 

$

674

 

$

12,165

 

$

314

 

$

52,420

 

 

 

13,580

 

 

 

21,763

 

 

 

3,924

 

 

 

674

 

 

 

12,165

 

 

 

314

 

 

 

52,420

 

Charge-offs

 

(396

)

 

(203

)

 

(103

)

 

(130

)

 

(4,965

)

 

(755

)

 

(6,552

)

 

 

(396

)

 

 

(203

)

 

 

(103

)

 

 

(130

)

 

 

(4,965

)

 

 

(755

)

 

 

(6,552

)

Recoveries

 

785

 

7

 

79

 

0

 

4,383

 

218

 

5,472

 

 

 

785

 

 

 

7

 

 

 

79

 

 

 

—

 

 

 

4,383

 

 

 

218

 

 

 

5,472

 

Provision (credit)

 

 

(2,125

)

 

 

(2,115

)

 

 

(1,924

)

 

 

(199

)

 

 

(4

)

 

 

471

 

 

(5,896

)

(Benefit) provision

 

 

(2,125

)

 

 

(2,115

)

 

 

(1,924

)

 

 

(199

)

 

 

(4

)

 

 

471

 

 

 

(5,896

)

Ending balance

 

$

11,844

 

$

19,452

 

$

1,976

 

$

345

 

$

11,579

 

$

248

 

$

45,444

 

 

$

11,844

 

 

$

19,452

 

 

$

1,976

 

 

$

345

 

 

$

11,579

 

 

$

248

 

 

$

45,444

 

 

 

Commercial
Business

 

 

Commercial
Mortgage

 

 

Residential
Real Estate
Loans

 

 

Residential
Real Estate
Lines

 

 

Consumer
Indirect

 

 

Other
Consumer

 

 

Total

 

Three months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

12,399

 

 

$

15,666

 

 

$

5,769

 

 

$

939

 

 

$

11,222

 

 

$

321

 

 

$

46,316

 

Charge-offs

 

 

(15

)

 

 

(640

)

 

 

0

 

 

 

0

 

 

 

(1,388

)

 

 

(160

)

 

 

(2,203

)

Recoveries

 

 

103

 

 

 

37

 

 

 

7

 

 

 

0

 

 

 

1,503

 

 

 

65

 

 

 

1,715

 

Provision (credit)

 

 

507

 

 

 

1,417

 

 

 

(1,224

)

 

 

(121

)

 

 

2,833

 

 

 

155

 

 

 

3,567

 

Ending balance

 

$

12,994

 

 

$

16,480

 

 

$

4,552

 

 

$

818

 

 

$

14,170

 

 

$

381

 

 

$

49,395

 

Nine months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, prior to adoption of ASC 326

 

$

11,358

 

 

$

5,681

 

 

$

1,059

 

 

$

118

 

 

$

11,852

 

 

$

414

 

 

$

30,482

 

Impact of adopting ASC 326

 

 

(246

)

 

 

7,310

 

 

 

3,290

 

 

 

607

 

 

 

(1,234

)

 

 

(133

)

 

 

9,594

 

Beginning balance, after adoption of ASC 326

 

 

11,112

 

 

 

12,991

 

 

 

4,349

 

 

 

725

 

 

 

10,618

 

 

 

281

 

 

 

40,076

 

Charge-offs

 

 

(8,281

)

 

 

(1,712

)

 

 

(100

)

 

 

0

 

 

 

(7,366

)

 

 

(499

)

 

 

(17,958

)

Recoveries

 

 

1,644

 

 

 

37

 

 

 

25

 

 

 

3

 

 

 

4,550

 

 

 

282

 

 

 

6,541

 

Provision

 

 

8,519

 

 

 

5,164

 

 

 

278

 

 

 

90

 

 

 

6,368

 

 

 

317

 

 

 

20,736

 

Ending balance

 

$

12,994

 

 

$

16,480

 

 

$

4,552

 

 

$

818

 

 

$

14,170

 

 

$

381

 

 

$

49,395

 

23

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(6.)LOANS (Continued)

Risk Characteristics

Commercial business loans primarily consist of loans to small to mid-sized businesses in our market area in a diverse range of industries. These loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic conditions, including the impact of the COVID-19 pandemic on small to mid-sized business in our market area, and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, potentially resulting in higher potential losses on an individual customer basis. Loan repayment is often dependent on the successful operation and management of the properties, as well as on the collateral securing the loan. Economic events, including the impact of the COVID-19 pandemic on influencing the ability of the tenants to pay rent at these properties, or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Company’s commercial real estate loans and on the value of such properties.

Residential real estate loans (comprised of conventional mortgages and home equity loans) and residential real estate lines (comprised of home equity lines) are generally made based on the borrower’s ability to make repayment from his or her employment and other income but are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, including the impact of the COVID-19 pandemic on the employment income of these borrowers, the characteristics of individual borrowers, and the nature of the loan collateral.

Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by inflation and adverse personal circumstances such as job loss, illness or personal bankruptcy, including the heightened risk that such circumstances may arise as a result of the COVID-19 pandemic. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

(7.)LEASES

ASC 842, Leases (“ASC 842”), establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. The Company is obligated under a number of non-cancellable operating lease agreements for land, buildings and equipment with terms, including renewal options reasonably certain to be exercised, extending through 2061. NaNTwo building lease wasleases were subleased in 2021 forwith terms that extended through June 30, 2021.December 31, 2022.

The following table represents the consolidated statements of financial condition classification of the Company’s right of use assets and lease liabilities:

 

September 30,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

Balance Sheet Location

 

2021

 

 

2020

 

 

Balance Sheet Location

 

2022

 

 

2021

 

Operating Lease Right of Use Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

Other assets

 

$

26,990

 

 

$

23,697

 

 

Other assets

 

$

35,876

 

 

$

27,063

 

Accumulated amortization

 

Other assets

 

 

(4,536

)

 

 

(3,741

)

 

Other assets

 

 

(5,500

)

 

 

(4,993

)

Net book value

 

 

 

$

22,454

 

 

$

19,956

 

 

 

 

$

30,376

 

 

$

22,070

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Lease Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Right of use lease obligations

 

Other liabilities

 

$

24,212

 

 

$

21,507

 

 

Other liabilities

 

$

32,405

 

 

$

23,867

 

The weighted average remaining lease term for operating leases was 24.022.8 years at September 30, 20212022 and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.703.88%. The Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term for the discount rate.

24

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(7.) LEASES (Continued)

The following table represents lease costs and other lease information:

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Lease costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease costs

 

$

687

 

$

663

 

$

2,162

 

$

2,018

 

 

$

788

 

 

$

687

 

 

$

2,120

 

 

$

2,162

 

Variable lease costs (1)

 

137

 

111

 

325

 

313

 

 

 

116

 

 

 

137

 

 

 

361

 

 

 

325

 

Sublease income

 

 

0

 

 

(12

)

 

 

(23

)

 

 

(35

)

 

 

(23

)

 

 

—

 

 

 

(46

)

 

 

(23

)

Net lease costs

 

$

824

 

$

762

 

$

2,464

 

$

2,296

 

 

$

881

 

 

$

824

 

 

$

2,435

 

 

$

2,464

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other information:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

 

 

 

 

 

 

$

2,008

 

$

1,947

 

 

$

678

 

 

$

659

 

 

$

2,035

 

 

$

2,008

 

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

 

 

 

 

 

 

 

$

4,178

 

$

470

 

 

$

9,612

 

 

$

—

 

 

$

9,802

 

 

$

4,178

 

(1)
Variable lease costs primarily represent variable payments such as common area maintenance, insurance, taxes and utilities.

Future minimum payments under non-cancellable operating leases with initial or remaining terms of one year or more, are as follows at September 30, 20212022 (in thousands):

Twelve months ended September 30,

 

 

 

 

2022

$

2,380

 

2023

 

2,048

 

$

673

 

2024

 

1,508

 

 

2,700

 

2025

 

1,416

 

 

2,530

 

2026

 

1,338

 

 

2,459

 

2027

 

2,378

 

Thereafter

 

30,217

 

 

41,333

 

Total future minimum operating lease payments(1)

 

38,907

 

 

52,073

 

Amounts representing interest

 

(14,695

)

 

(19,668

)

Present value of net future minimum operating lease payments

$

24,212

 

$

32,405

 

(1)
Operating lease payments exclude $448 thousand of future minimum lease payments for leases signed but not yet commenced.

25

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(8.)GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill totaled $67.1 million and $66.1 million as of both September 30, 20212022 and December 31, 2020.2021. The Company performs a goodwill impairment test on an annual basis as of October 1st or more frequently if events and circumstances warrant.

 

 

Banking

 

 

All Other (1)

 

 

Total

 

Balance, December 31, 2020

 

$

48,536

 

 

$

17,526

 

 

$

66,062

 

Acquisitions

 

 

—

 

 

 

1,009

 

 

 

1,009

 

Balance, September 30, 2021

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

 

 

Banking

 

 

All Other (1)

 

 

Total

 

Balance, December 31, 2021

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

Acquisitions

 

 

—

 

 

 

—

 

 

 

—

 

Balance, September 30, 2022

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

(1) All Other includes the SDN, Courier Capital and HNP Capital reporting units

Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and other intangible assets added duringmore frequently if an event occurs or circumstances change that would more likely than not reduce the period relatesfair value of a reporting unit below its carrying amount. Based on the decrease in Company stock price in 2022, along with a reduction in the Company's outstanding shares due to the acquisition of assets of Landmark, which was completed on February 1,share repurchases in 2021 and 2022, a goodwill impairment test was performed in the acquisitionthird quarter of assets2022. Based on its qualitative assessment, the Company concluded that it was not more likely than not that goodwill was impaired as of North Woods, whichSeptember 30, 2022. Therefore, no quantitative assessment was completed on August 2, 2021. See Note 2 – Business Combinations for additional information.

deemed necessary as of September 30, 2022.

Other Intangible Assets

The Company has other intangible assets that are amortized, consisting of core deposit intangibles and other intangibles (primarily related to customer relationships). Gross carrying amount, accumulated amortization and net book value, were as follows (in thousands):

 

September 30,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

Other intangibles assets:

 

 

 

 

 

 

Core deposit intangibles:

 

 

 

 

 

Gross carrying amount

 

$

16,587

 

 

$

15,925

 

 

$

2,042

 

 

$

2,042

 

Accumulated amortization

 

 

(8,999

)

 

 

(8,198

)

 

 

(2,042

)

 

 

(2,039

)

Net book value

 

$

7,588

 

 

$

7,727

 

 

$

—

 

 

$

3

 

 

 

 

 

 

Other intangibles:

 

 

 

 

 

Gross carrying amount

 

$

14,545

 

 

$

14,545

 

Accumulated amortization

 

 

(7,963

)

 

 

(7,219

)

Net book value

 

$

6,582

 

 

$

7,326

 

Amortization expense for total other intangible assets was $264 thousand and $801 thousand for the three and nine months ended September 30, 2021, respectively, and $280244 thousand and $861747 thousand for the three and nine months ended September 30, 2020, respectively. 2022, and $264 thousand and $801 thousand for the three and nine months ended September 30, 2021. As of September 30, 2021,2022, the estimated amortization expense of other intangible assets for the remainder of 20212022 and each of the next five years is as follows (in thousands):

2021 (remainder of year)

$

260

 

2022

 

985

 

2022 (remainder of year)

$

239

 

2023

 

910

 

 

910

 

2024

 

838

 

 

838

 

2025

 

766

 

 

766

 

2026

 

694

 

 

694

 

2027

 

623

 

(9.)OTHER ASSETS

A summary of other assets as of the dates indicated are as follows (in thousands):

 

September 30,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

Operating lease right of use assets

 

$

22,454

 

 

$

19,956

 

 

$

30,376

 

 

$

22,070

 

Tax credit investments

 

50,075

 

 

 

34,370

 

 

 

55,399

 

 

 

57,010

 

Derivative instruments

 

16,139

 

 

 

20,120

 

 

 

56,711

 

 

 

16,504

 

Collateral on derivative instruments

 

6,180

 

 

 

19,630

 

 

 

—

 

 

 

4,640

 

Other

 

 

71,165

 

 

 

62,010

 

 

 

122,403

 

 

 

72,976

 

Total other assets

 

$

166,013

 

 

$

156,086

 

 

$

264,889

 

 

$

173,200

 

26

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(10.)DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities, and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate caps and interest rate swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During the first nine months of 20212022 and in 2020,2021, such derivatives were used to hedge the variable cash flows associated with short-term borrowings. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a period of approximately 60 months. As of September 30, 2021,2022, the Company had 1one outstanding forward starting interest rate derivative with a notional value of $50.0 million that was designated as a cash flow hedge of interest rate risk. The derivative becomesbecame effective in April 2022 at a pay fixed strike price of 0.787% and matures April 2027.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. During the next twelve months, the Company estimates that $1421.2 thousandmillion will be reclassified intoas a decrease to interest expense.

Interest Rate Swaps

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain one or more of the following provisions: (a) if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations, and (b) if the Company fails to maintain its status as a well-capitalized institution, the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

27

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(10.)DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES (Continued)

Mortgage Banking Derivatives

The Company extends rate lock agreements to borrowers related to the origination of residential mortgage loans. To mitigate the interest rate risk inherent in these rate lock agreements when the Company intends to sell the related loan, once originated, as well as closed residential mortgage loans held for sale, the Company enters into forward commitments to sell individual residential mortgages. Rate lock agreements and forward commitments are considered derivatives and are recorded at fair value.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the notional amounts, respective fair values of the Company’s derivative financial instruments, as well as their classification on the balance sheet as of September 30, 20212022 and December 31, 20202021 (in thousands):

 

 

 

 

 

 

 

 

Asset derivatives

 

 

Liability derivatives

 

 

 

 

 

 

 

 

Asset derivatives

 

 

Liability derivatives

 

 

Gross notional
amount

 

 

Balance

 

Fair value

 

 

Balance

 

Fair value

 

 

Gross notional
amount

 

 

 

 

Fair value

 

 

 

 

Fair value

 

 

Sept. 30,
2021

 

 

Dec. 31,
2020

 

 

sheet
line item

 

Sept. 30,
2021

 

 

Dec. 31,
2020

 

 

sheet
line item

 

Sept. 30,
2021

 

 

Dec. 31,
2020

 

 

Sept. 30, 2022

 

 

December 31, 2021

 

 

Balance
sheet
line item

 

Sept. 30, 2022

 

 

December 31, 2021

 

 

Balance
sheet
line item

 

Sept. 30, 2022

 

 

December 31, 2021

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

50,000

 

$

50,000

 

Other assets

 

$

1,112

 

$

—

 

Other liabilities

 

$

—

 

$

311

 

 

$

50,000

 

 

$

50,000

 

 

Other assets

 

$

7,040

 

 

$

1,559

 

 

Other liabilities

 

$

—

 

 

$

—

 

Total derivatives

 

$

50,000

 

$

50,000

 

 

 

$

1,112

 

$

—

 

 

 

$

—

 

$

311

 

 

$

50,000

 

 

$

50,000

 

 

 

 

$

7,040

 

 

$

1,559

 

 

 

 

$

—

 

 

$

—

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

—

 

$

100,000

 

Other assets

 

$

—

 

$

—

 

Other liabilities

 

$

—

 

$

—

 

Interest rate swaps (1)

 

726,910

 

631,907

 

Other assets

 

14,653

 

19,626

 

Other liabilities

 

14,658

 

19,837

 

 

 

986,085

 

 

 

820,693

 

 

Other assets

 

 

49,502

 

 

 

14,702

 

 

Other liabilities

 

 

49,505

 

 

 

14,708

 

Credit contracts

 

109,552

 

113,434

 

Other assets

 

0

 

23

 

Other liabilities

 

1

 

86

 

 

 

99,466

 

 

 

106,671

 

 

Other assets

 

 

—

 

 

 

—

 

 

Other liabilities

 

 

—

 

 

 

1

 

Mortgage banking

 

 

26,748

 

 

28,225

 

Other assets

 

 

374

 

 

471

 

Other liabilities

 

 

5

 

 

1

 

 

 

10,563

 

 

 

18,199

 

 

Other assets

 

 

169

 

 

 

243

 

 

Other liabilities

 

 

363

 

 

 

4

 

Total derivatives

 

$

863,210

 

$

873,566

 

 

 

$

15,027

 

$

20,120

 

 

 

$

14,664

 

$

19,924

 

 

$

1,096,114

 

 

$

945,563

 

 

$

49,671

 

 

$

14,945

 

 

 

 

$

49,868

 

 

$

14,713

 

(1)
The Company has posted collateral of $54.0 million against its net obligations under these contracts at September 30, 2022, and secured its net obligations under these contracts with $6.2 million and $19.64.0 million in cash at September 30, 2021 and December 31, 2020, respectively.2021.

Effect of Derivative Instruments on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three and nine months ended September 30, 20212022 and 20202021 (in thousands):

 

 

 

 

Gain (loss) recognized in income

 

 

Gain (loss) recognized in income

 

 

 

 

Gain (loss) recognized in income

 

 

Gain (loss) recognized in income

 

 

Line item of gain (loss)

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Line item of gain (loss)

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

Undesignated derivatives

 

recognized in income

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

recognized in income

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Cash flow hedges

 

Income from derivative instruments, net

 

$

—

 

$

—

 

$

—

 

$

—

 

Interest rate swaps

 

Income from derivative instruments, net

 

248

 

1,310

 

1,687

 

3,715

 

 

Income from derivative instruments, net

 

 

317

 

 

 

248

 

 

 

1,675

 

 

 

1,687

 

Credit contracts

 

Income from derivative instruments, net

 

38

 

13

 

74

 

136

 

 

Income from derivative instruments, net

 

 

3

 

 

 

38

 

 

 

21

 

 

 

74

 

Mortgage banking

 

Income from derivative instruments, net

 

 

91

 

 

608

 

 

(101

)

 

 

766

 

 

Income from derivative instruments, net

 

 

(221

)

 

 

91

 

 

 

(433

)

 

 

(101

)

Total undesignated

 

 

 

$

377

 

$

1,931

 

$

1,660

 

$

4,617

 

 

 

 

$

99

 

 

$

377

 

 

$

1,263

 

 

$

1,660

 

28

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(11.)SHAREHOLDERS’ EQUITY

Common Stock

The changes in shares of common stock were as follows for the three and nine months ended September 30, 20212022 and 2020:2021:

 

Outstanding

 

 

Treasury

 

 

Issued

 

2022

 

 

 

 

 

 

 

 

 

Shares at December 31, 2021

 

 

15,745,453

 

 

 

354,103

 

 

 

16,099,556

 

Restricted stock units released

 

 

23,271

 

 

 

(23,271

)

 

 

—

 

Treasury stock purchases

 

 

(469,647

)

 

 

469,647

 

 

 

—

 

Shares at March 31, 2022

 

 

15,299,077

 

 

 

800,479

 

 

 

16,099,556

 

Restricted stock awards issued

 

 

11,300

 

 

 

(11,300

)

 

 

—

 

Stock awards

 

 

3,848

 

 

 

(3,848

)

 

 

—

 

Restricted stock units released

 

 

31,141

 

 

 

(31,141

)

 

 

 

Treasury stock purchases

 

 

(11,275

)

 

 

11,275

 

 

 

—

 

Shares at June 30, 2022

 

 

15,334,091

 

 

 

765,465

 

 

 

16,099,556

 

Restricted stock units released

 

 

—

 

 

 

—

 

 

 

—

 

Treasury stock purchases

 

 

—

 

 

 

—

 

 

 

—

 

Shares at September 30, 2022

 

 

15,334,091

 

 

 

765,465

 

 

 

16,099,556

 

 

Outstanding

 

 

Treasury

 

 

Issued

 

 

 

 

 

 

 

 

 

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares at December 31, 2020

 

16,041,926

 

57,630

 

16,099,556

 

 

 

16,041,926

 

 

 

57,630

 

 

 

16,099,556

 

Shares issued for Landmark Group acquisition

 

12,831

 

(12,831

)

 

—

 

 

 

12,831

 

 

 

(12,831

)

 

 

—

 

Restricted stock units released

 

18,819

 

(18,819

)

 

—

 

 

 

18,819

 

 

 

(18,819

)

 

 

—

 

Treasury stock purchases

 

 

(244,677

)

 

 

244,677

 

 

—

 

 

 

(244,677

)

 

 

244,677

 

 

 

—

 

Shares at March 31, 2021

 

15,828,899

 

270,657

 

16,099,556

 

 

 

15,828,899

 

 

 

270,657

 

 

 

16,099,556

 

Restricted stock awards issued

 

9,350

 

(9,350

)

 

—

 

 

 

9,350

 

 

 

(9,350

)

 

 

—

 

Stock awards

 

 

3,680

 

 

(3,680

)

 

 

—

 

 

 

3,680

 

 

 

(3,680

)

 

 

—

 

Shares at June 30, 2021

 

15,841,929

 

257,627

 

16,099,556

 

 

 

15,841,929

 

 

 

257,627

 

 

 

16,099,556

 

Restricted stock units released

 

250

 

(250

)

 

 

 

Restricted stock awards released

 

 

250

 

 

 

(250

)

 

 

—

 

Treasury stock purchases

 

 

(98

)

 

 

98

 

 

—

 

 

 

(98

)

 

 

98

 

 

 

—

 

Shares at September 30, 2021

 

 

15,842,081

 

 

257,475

 

 

16,099,556

 

 

 

15,842,081

 

 

 

257,475

 

 

 

16,099,556

 

2020

 

 

 

 

 

 

 

 

 

Shares at December 31, 2019

 

16,002,899

 

96,657

 

16,099,556

 

Restricted stock units released

 

22,921

 

(22,921

)

 

—

 

Treasury stock purchases

 

 

(6,436

)

 

 

6,436

 

 

—

 

Shares at March 31, 2020

 

16,019,384

 

80,172

 

16,099,556

 

Restricted stock awards issued

 

12,798

 

(12,798

)

 

—

 

Stock awards

 

 

5,403

 

 

(5,403

)

 

 

—

 

Shares at June 30, 2020

 

16,037,585

 

61,971

 

16,099,556

 

No activity during the period

 

—

 

—

 

—

 

Shares at September 30, 2020

 

 

16,037,585

 

 

61,971

 

 

16,099,556

 

Share Repurchase ProgramPrograms

In November 2020,June 2022, the Company’sCompany's Board of Directors (the "Board") authorized a share repurchase program for up to 801,879766,447 shares of common stock.stock (the "2022 Share Repurchase Program"). Repurchased shares are recorded in treasury stock, at cost, which includes any applicable transaction costs. As of September 30, 2022, there were 766,447 shares remaining for repurchase under the 2022 Share Repurchase Program.238,439

In November 2020, the Board authorized a share repurchase program for up to 801,879 shares of common stock (the "2020 Share Repurchase Program"). The 2020 Share Repurchase Program was completed in March 2022. Under the 2020 Share Repurchase Program, 461,191 shares were repurchased at an average price of $31.9924.30 during the nine months ended September 30, 2021. NaN shares were repurchased under this program during the three months ended September 30, 2021March 31, 2022, and340,688 shares were repurchased during the year ended December 31, 2020. As of September 30, 2021, the remaining number of shares authorized for repurchase under the repurchase program was 563,440.2021.

29

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(12.)ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME (LOSS)

The following tables present the components of other comprehensive (loss) income (loss) for the three and nine months ended September 30, 20212022 and 20202021 (in thousands):

 

Pre-tax
Amount

 

 

Tax
Effect

 

 

Net-of-tax
Amount

 

 

Pre-tax
Amount

 

 

Tax
Effect

 

 

Net-of-tax
Amount

 

Three months ended September 30, 2021

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

$

(8,647

)

 

$

(2,216

)

 

$

(6,431

)

 

$

(57,655

)

 

$

(14,773

)

 

$

(42,882

)

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

 

 

42

 

 

11

 

 

31

 

 

 

23

 

 

 

7

 

 

 

16

 

Total securities available for sale and transferred securities

 

(8,605

)

 

(2,205

)

 

(6,400

)

 

 

(57,632

)

 

 

(14,766

)

 

 

(42,866

)

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

108

 

28

 

80

 

 

 

1,829

 

 

 

469

 

 

 

1,360

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

(1

)

 

(1

)

 

0

 

 

 

—

 

 

 

—

 

 

 

—

 

Amortization of net actuarial loss included in income

 

 

186

 

 

48

 

 

138

 

 

 

64

 

 

 

16

 

 

 

48

 

Total pension and post-retirement obligations

 

 

185

 

 

47

 

 

138

 

 

 

64

 

 

 

16

 

 

 

48

 

Other comprehensive loss

 

$

(8,312

)

 

$

(2,130

)

 

$

(6,182

)

 

$

(55,739

)

 

$

(14,281

)

 

$

(41,458

)

Nine months ended September 30, 2021

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2022

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

$

(21,348

)

 

$

(5,470

)

 

$

(15,878

)

 

$

(177,638

)

 

$

(45,514

)

 

$

(132,124

)

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

 

 

105

 

 

27

 

 

78

 

 

 

95

 

 

 

25

 

 

 

70

 

Total securities available for sale and transferred securities

 

(21,243

)

 

(5,443

)

 

(15,800

)

 

 

(177,543

)

 

 

(45,489

)

 

 

(132,054

)

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

1,537

 

394

 

1,143

 

 

 

5,291

 

 

 

1,356

 

 

 

3,935

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

(2

)

 

(1

)

 

(1

)

 

 

—

 

 

 

—

 

 

 

—

 

Amortization of net actuarial loss included in income

 

 

557

 

 

143

 

 

414

 

 

 

192

 

 

 

49

 

 

 

143

 

Total pension and post-retirement obligations

 

 

555

 

 

142

 

 

413

 

 

 

192

 

 

 

49

 

 

 

143

 

Other comprehensive loss

 

$

(19,151

)

 

$

(4,907

)

 

$

(14,244

)

 

$

(172,060

)

 

$

(44,084

)

 

$

(127,976

)

(1) Includes amounts related to the amortization/accretion of unrealized net gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category. The unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield.

30

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

 

 

Pre-tax
Amount

 

 

Tax
Effect

 

 

Net-of-tax
Amount

 

Three months ended September 30, 2021

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

$

(8,647

)

 

$

(2,216

)

 

$

(6,431

)

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

 

 

42

 

 

 

11

 

 

 

31

 

Total securities available for sale and transferred securities

 

 

(8,605

)

 

 

(2,205

)

 

 

(6,400

)

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

 

108

 

 

 

28

 

 

 

80

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

 

(1

)

 

 

(1

)

 

 

—

 

Amortization of net actuarial loss included in income

 

 

186

 

 

 

48

 

 

 

138

 

Total pension and post-retirement obligations

 

 

185

 

 

 

47

 

 

 

138

 

Other comprehensive income

 

$

(8,312

)

 

$

(2,130

)

 

$

(6,182

)

Nine months ended September 30, 2021

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

$

(21,348

)

 

$

(5,470

)

 

$

(15,878

)

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

 

 

105

 

 

 

27

 

 

 

78

 

Total securities available for sale and transferred securities

 

 

(21,243

)

 

 

(5,443

)

 

 

(15,800

)

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

 

1,537

 

 

 

394

 

 

 

1,143

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

 

(2

)

 

 

(1

)

 

 

(1

)

Amortization of net actuarial loss included in income

 

 

557

 

 

 

143

 

 

 

414

 

Total pension and post-retirement obligations

 

 

555

 

 

 

142

 

 

 

413

 

Other comprehensive loss

 

$

(19,151

)

 

$

(4,907

)

 

$

(14,244

)

 

 

Pre-tax
Amount

 

 

Tax
Effect

 

 

Net-of-tax
Amount

 

Three months ended September 30, 2020

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

$

374

 

 

$

96

 

 

$

278

 

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

 

 

(467

)

 

 

(120

)

 

 

(347

)

Total securities available for sale and transferred securities

 

 

(93

)

 

 

(24

)

 

 

(69

)

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

 

165

 

 

 

42

 

 

 

123

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

 

(8

)

 

 

(2

)

 

 

(6

)

Amortization of net actuarial loss included in income

 

 

321

 

 

 

82

 

 

 

239

 

Total pension and post-retirement obligations

 

 

313

 

 

 

80

 

 

 

233

 

Other comprehensive income

 

$

385

 

 

$

98

 

 

$

287

 

Nine months ended September 30, 2020

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

$

19,737

 

 

$

5,057

 

 

$

14,680

 

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

 

 

(1,213

)

 

 

(311

)

 

 

(902

)

Total securities available for sale and transferred securities

 

 

18,524

 

 

 

4,746

 

 

 

13,778

 

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

 

(234

)

 

 

(60

)

 

 

(174

)

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

 

(26

)

 

 

(7

)

 

 

(19

)

Amortization of net actuarial loss included in income

 

 

967

 

 

 

248

 

 

 

719

 

Total pension and post-retirement obligations

 

 

941

 

 

 

241

 

 

 

700

 

Other comprehensive income

 

$

19,231

 

 

$

4,927

 

 

$

14,304

 

(1) Includes amounts related to the amortization/accretion of unrealized net gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category. The unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield.

31

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

Activity in accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 20212022 and 20202021 was as follows (in thousands):

 

Hedging
Derivative
Instruments

 

 

Securities
Available
for Sale and
Transferred
Securities

 

 

Pension and
Post-
retirement
Obligations

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

3,735

 

 

$

(94,159

)

 

$

(9,301

)

 

$

(99,725

)

Other comprehensive income (loss) before reclassifications

 

 

1,360

 

 

 

(42,882

)

 

 

—

 

 

 

(41,522

)

Amounts reclassified from accumulated other comprehensive
income (loss)

 

 

—

 

 

 

16

 

 

 

48

 

 

 

64

 

Net current period other comprehensive income (loss)

 

 

1,360

 

 

 

(42,866

)

 

 

48

 

 

 

(41,458

)

Balance at end of period

 

$

5,095

 

 

$

(137,025

)

 

$

(9,253

)

 

$

(141,183

)

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

1,160

 

 

$

(4,971

)

 

$

(9,396

)

 

$

(13,207

)

Other comprehensive income (loss) before reclassifications

 

 

3,935

 

 

 

(132,124

)

 

 

—

 

 

 

(128,189

)

Amounts reclassified from accumulated other comprehensive
income (loss)

 

 

—

 

 

 

70

 

 

 

143

 

 

 

213

 

Net current period other comprehensive income (loss)

 

 

3,935

 

 

 

(132,054

)

 

 

143

 

 

 

(127,976

)

Balance at end of period

 

$

5,095

 

 

$

(137,025

)

 

$

(9,253

)

 

$

(141,183

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging
Derivative
Instruments

 

 

Securities
Available
for Sale and
Transferred
Securities

 

 

Pension and
Post-
retirement
Obligations

 

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

747

 

$

5,343

 

$

(12,024

)

 

$

(5,934

)

 

$

747

 

 

$

5,343

 

 

$

(12,024

)

 

$

(5,934

)

Other comprehensive income (loss) before reclassifications

 

80

 

(6,431

)

 

—

 

(6,351

)

 

 

80

 

 

 

(6,431

)

 

 

—

 

 

 

(6,351

)

Amounts reclassified from accumulated other comprehensive
income (loss)

 

 

—

 

 

31

 

 

138

 

 

169

 

 

 

—

 

 

 

31

 

 

 

138

 

 

 

169

 

Net current period other comprehensive income (loss)

 

 

80

 

 

(6,400

)

 

 

138

 

 

(6,182

)

 

 

80

 

 

 

(6,400

)

 

 

138

 

 

 

(6,182

)

Balance at end of period

 

$

827

 

$

(1,057

)

 

$

(11,886

)

 

$

(12,116

)

 

$

827

 

 

$

(1,057

)

 

$

(11,886

)

 

$

(12,116

)

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(316

)

 

$

14,743

 

$

(12,299

)

 

$

2,128

 

 

$

(316

)

 

$

14,743

 

 

$

(12,299

)

 

$

2,128

 

Other comprehensive income (loss) before reclassifications

 

1,143

 

(15,878

)

 

—

 

(14,735

)

 

 

1,143

 

 

 

(15,878

)

 

 

—

 

 

 

(14,735

)

Amounts reclassified from accumulated other comprehensive
income (loss)

 

 

—

 

 

78

 

 

413

 

 

491

 

 

 

—

 

 

 

78

 

 

 

413

 

 

 

491

 

Net current period other comprehensive income (loss)

 

 

1,143

 

 

(15,800

)

 

 

413

 

 

(14,244

)

 

 

1,143

 

 

 

(15,800

)

 

 

413

 

 

 

(14,244

)

Balance at end of period

 

$

827

 

$

(1,057

)

 

$

(11,886

)

 

$

(12,116

)

 

$

827

 

 

$

(1,057

)

 

$

(11,886

)

 

$

(12,116

)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(815

)

 

$

14,720

 

$

(14,401

)

 

$

(496

)

Other comprehensive income before reclassifications

 

123

 

278

 

—

 

401

 

Amounts reclassified from accumulated other comprehensive
(loss) income

 

 

—

 

 

(347

)

 

 

233

 

 

(114

)

Net current period other comprehensive income (loss)

 

 

123

 

 

(69

)

 

 

233

 

 

287

 

Balance at end of period

 

$

(692

)

 

$

14,651

 

$

(14,168

)

 

$

(209

)

Nine months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(518

)

 

$

873

 

$

(14,868

)

 

(14,513

)

Other comprehensive (loss) income before reclassifications

 

(174

)

 

14,680

 

—

 

14,506

 

Amounts reclassified from accumulated other comprehensive
(loss) income

 

 

—

 

 

(902

)

 

 

700

 

 

(202

)

Net current period other comprehensive income (loss)

 

 

(174

)

 

 

13,778

 

 

700

 

 

14,304

 

Balance at end of period

 

$

(692

)

 

$

14,651

 

$

(14,168

)

 

$

(209

)

32

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

The following table presents the amounts reclassified out of each component of accumulated other comprehensive (loss) income (loss) for the three and nine months ended September 30, 20212022 and 20202021 (in thousands):

Details About Accumulated Other
Comprehensive Income (Loss) Components

 

Amount Reclassified from
Accumulated Other
Comprehensive
Income (Loss)

 

 

Affected Line Item in the
Consolidated Statement of Income

 

Amount Reclassified from
Accumulated Other
Comprehensive
(Loss) Income

 

 

Affected Line Item in the
Consolidated Statement of Income

 

Three months ended

 

 

 

 

Three months ended
September 30,

 

 

 

 

September 30,

 

 

 

 

2022

 

 

2021

 

 

 

 

2021

 

 

2020

 

 

 

Realized gain (loss) on sale of investment securities

 

$

0

 

$

554

 

Net gain on investment securities

Amortization of unrealized holding losses
on investment securities transferred from
available for sale to held to maturity

 

 

(42

)

 

 

(87

)

 

Interest income

Realized loss on sale of investment securities

 

$

—

 

 

$

—

 

 

Net (loss) gain on investment securities

Amortization of unrealized holding gain
on investment securities transferred from
available for sale to held to maturity

 

 

(23

)

 

 

(42

)

 

Interest income

 

(42

)

 

467

 

Total before tax

 

 

(23

)

 

 

(42

)

 

Total before tax

 

 

11

 

 

(120

)

 

Income tax expense

 

 

7

 

 

 

11

 

 

Income tax expense

 

(31

)

 

347

 

Net of tax

 

 

(16

)

 

 

(31

)

 

Net of tax

Amortization of pension and post-retirement items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service credit (1)

 

1

 

8

 

Salaries and employee benefits

 

 

—

 

 

 

1

 

 

Salaries and employee benefits

Net actuarial losses (1)

 

 

(186

)

 

 

(321

)

 

Salaries and employee benefits

 

 

(64

)

 

 

(186

)

 

Salaries and employee benefits

 

(185

)

 

(313

)

 

Total before tax

 

 

(64

)

 

 

(185

)

 

Total before tax

 

 

47

 

 

80

 

Income tax benefit

 

 

16

 

 

 

47

 

 

Income tax benefit

 

 

(138

)

 

 

(233

)

 

Net of tax

 

 

(48

)

 

 

(138

)

 

Net of tax

Total reclassified for the period

 

$

(169

)

 

$

114

 

 

 

$

(64

)

 

$

(169

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

Nine months ended

 

 

 

 

September 30,

 

 

 

 

September 30,

 

 

 

 

2021

 

 

2020

 

 

 

 

2022

 

 

2021

 

 

 

Realized gain on sale of investment securities

 

$

71

 

$

1,449

 

Net gain on investment securities

Amortization of unrealized holding losses
on investment securities transferred from
available for sale to held to maturity

 

 

(176

)

 

 

(236

)

 

Interest income

Realized (loss) gain on sale of investment securities

 

$

(15

)

 

$

71

 

 

Net (loss) gain on investment securities

Amortization of unrealized holding gains
on investment securities transferred from
available for sale to held to maturity

 

 

(80

)

 

 

(176

)

 

Interest income

 

(105

)

 

1,213

 

Total before tax

 

 

(95

)

 

 

(105

)

 

Total before tax

 

 

27

 

 

(311

)

 

Income tax expense

 

 

25

 

 

 

27

 

 

Income tax expense

 

(78

)

 

902

 

Net of tax

 

 

(70

)

 

 

(78

)

 

Net of tax

Amortization of pension and post-retirement items:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service credit (1)

 

2

 

26

 

Salaries and employee benefits

 

 

—

 

 

 

2

 

 

Salaries and employee benefits

Net actuarial losses (1)

 

 

(557

)

 

 

(967

)

 

Salaries and employee benefits

 

 

(192

)

 

 

(557

)

 

Salaries and employee benefits

 

(555

)

 

(941

)

 

Total before tax

 

 

(192

)

 

 

(555

)

 

Total before tax

 

 

142

 

 

241

 

Income tax benefit

 

 

49

 

 

 

142

 

 

Income tax benefit

 

 

(413

)

 

 

(700

)

 

Net of tax

 

 

(143

)

 

 

(413

)

 

Net of tax

Total reclassified for the period

 

$

(491

)

 

$

202

 

 

 

$

(213

)

 

$

(491

)

 

(1) These items are included in the computation of net periodic pension expense. See Note 14 – Employee Benefit Plans for additional information.

33

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(13.)SHARE-BASED COMPENSATION PLANS

The Company maintains certain share-based compensation plans, approved by the Company’s shareholders, that are administered by the Management Development and Compensation Committee (the “MD&C Committee”) of the Board. The share-based compensation plans were established to allow for the grant of compensation awards to attract, motivate and retain employees, executive officers and non-employee directors who contribute to the long-term growth and profitability of the Company and to give such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Company’s success.

The Amended and Restated 2015 Long-Term Incentive Plan uses metrics that measure the Company's performance on a relative basis against a peer group, which was defined as the SNL Small Cap Bank & Thrift Index. The SNL Small Cap Bank & Thrift Index was discontinued August 7, 2021 and was replaced with the S&P U.S. SmallCap Banks Index. As the award agreements do not contain successor language pertaining to the removal or modification of an index, the MD&C Committee approved the application of the survivorship peer group with the S&P U.S. SmallCap Banks Index used as the basis for measuring relative performance of existing awards.

The MD&C Committee approved the grant of restricted stock units (“RSUs”) and performance share units (“PSUs”) shown in the table below to certain members of management during the nine months ended September 30, 2021.2022.

 

Number of
   Underlying
Shares

 

 

Weighted
Average
Per Share
   Grant Date
Fair Value

 

 

Number of
   Underlying
Shares

 

 

Weighted
Average
Per Share
   Grant Date
Fair Value

 

RSUs

 

59,998

 

$

27.50

 

 

 

84,640

 

 

$

28.89

 

PSUs

 

22,178

 

27.58

 

 

 

29,324

 

 

 

29.35

 

The grant-date fair value for the RSUs and PSUs granted during the nine months ended September 30, 20212022 is equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.

The Company awarded grants of PSUs to certain members of management during the nine months ended September 30, 2022. Fifty percent of the PSUsshares subject to each grant that ultimately vest isare contingent on achieving specified return on average equity (“ROAE”) targets relative to the SNL Small Cap Bank & Thrift Index, a market index the MD&C Committee has selected as a peer group for this purpose. These shares will be earned based on the Company’s achievement of a relative ROAE performance requirement, on a percentile basis, compared to the SNL Small Cap Bank & Thrift Indexmarket index over a three-year performance period ended December 31, 2023. During the three months ended September 30, 2021, the SNL Small Cap Bank & Thrift Index was delisted and the Company is currently evaluating an alternative market index.ending March 16, 2025. The shares earned based on the achievement of the ROAE performance requirement, if any, will vest on the third anniversary of the grant date assuming the recipient’srecipient's continuous service to the CompanyCompany.. The remaining fifty percent of the PSUs that ultimately vest isare contingent upon achievement of an average return on average assets (“ROAA”("ROAA") performance requirement over a three-year performance period ended December 31, 2023.ending March 16, 2025. The shares earned based on the achievement of the ROAA performance requirement, if any, will vest onof the third anniversary of the grant date assuming the recipient’srecipient's continuous service to the CompanyCompany. If earned at target level, members of management will receive up to 29,324 shares of our common stock in the aggregate..

The grant-date fair values for both the ROAE and the ROAA portions of PSUs granted during the nine months ended September 30, 20212022 are equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.

During the nine months ended September 30, 2021, the Company issued a total of 3,680 shares of common stock in lieu of cash for the annual retainer of 6 non-employee directors and granted a total of 9,350 restricted shares of common stock to non-employee directors, of which 4,670 shares vested immediately and 4,680 shares will vest after completion of a one-year service requirement. The market value of the stock and restricted stock at the close of the Nasdaq Global Select Market on the date of grant was $32.06.

The following is a summary of restricted stock awards and restricted stock units activity for the nine months ended September 30, 2021:2022:

 

Number of
Shares

 

 

Weighted
Average
Market
Price at
Grant Date

 

 

Number of
Shares

 

 

Weighted
Average
Market
Price at
Grant Date

 

Outstanding at beginning of year

 

168,513

 

$

25.65

 

 

 

195,990

 

 

$

26.56

 

Granted

 

91,526

 

27.99

 

 

 

125,264

 

 

 

28.79

 

Vested

 

(30,138

)

 

26.67

 

 

 

(60,362

)

 

 

26.38

 

Forfeited

 

 

(27,901

)

 

 

26.66

 

 

 

(5,252

)

 

 

27.27

 

Outstanding at end of period

 

 

202,000

 

$

26.42

 

 

 

255,640

 

 

$

27.68

 

At September 30, 2021,2022, there was $2.94.2 million of unrecognized compensation expense related to unvested restricted stock awards and restricted stock units that is expected to be recognized over a weighted average period of 1.952.04 years.

34

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

The Company amortizes the expense related to share-based compensation awards over the vesting period. Share-based compensation expense is recorded as a component of salaries and employee benefits in the consolidated statements of income for awards granted to management and as a component of other noninterest expense for awards granted to directors. The share-based compensation expense included in the consolidated statements of income, is as follows (in thousands):

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Salaries and employee benefits

 

$

500

 

$

261

 

$

1,071

 

$

793

 

 

$

624

 

 

$

500

 

 

$

1,790

 

 

$

1,071

 

Other noninterest expense

 

 

38

 

 

28

 

 

245

 

 

197

 

 

 

38

 

 

 

38

 

 

 

262

 

 

 

245

 

Total share-based compensation expense

 

$

538

 

$

289

 

$

1,316

 

$

990

 

 

$

662

 

 

$

538

 

 

$

2,052

 

 

$

1,316

 

(14.)EMPLOYEE BENEFIT PLANS

The components of the Company’s net periodic benefit expense for its pension and post-retirement obligations were as follows (in thousands):

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service cost

 

$

1,049

 

$

924

 

$

3,147

 

$

2,770

 

 

$

871

 

 

$

1,049

 

 

$

2,614

 

 

$

3,147

 

Interest cost on projected benefit obligation

 

551

 

635

 

1,653

 

1,905

 

 

 

647

 

 

 

551

 

 

 

1,941

 

 

 

1,653

 

Expected return on plan assets

 

(1,306

)

 

(1,284

)

 

(3,919

)

 

(3,852

)

 

 

(1,141

)

 

 

(1,306

)

 

 

(3,423

)

 

 

(3,919

)

Amortization of unrecognized prior service credit

 

(1

)

 

(8

)

 

(2

)

 

(26

)

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

(2

)

Amortization of unrecognized net actuarial loss

 

 

186

 

 

321

 

 

557

 

 

967

 

 

 

64

 

 

 

186

 

 

 

194

 

 

 

557

 

Net periodic benefit expense

 

$

479

 

$

588

 

$

1,436

 

$

1,764

 

 

$

441

 

 

$

479

 

 

$

1,326

 

 

$

1,436

 

The net periodic benefit expense is recorded as a component of salaries and employee benefits in the consolidated statements of income. The Company’s funding policy is to contribute, at a minimum, an actuarially determined amount that will satisfy the minimum funding requirements determined under the appropriate sections of the Internal Revenue Code. The Company has 0no minimum required contribution for the 20212022 fiscal year.

(15.)COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk

The Company has financial instruments with off-balance sheet risk established in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk extending beyond amounts recognized in the financial statements.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is essentially the same as that involved with extending loans to customers. The Company uses the same credit underwriting policies in making commitments and conditional obligations as for on-balance sheet instruments.

Off-balance sheet commitments consist of the following (in thousands):

 

September 30,
2021

 

 

December 31,
2020

 

 

September 30,
2022

 

 

December 31,
2021

 

Commitments to extend credit

 

$

968,157

 

$

1,012,810

 

 

$

1,192,819

 

 

$

936,298

 

Standby letters of credit

 

25,379

 

22,393

 

 

 

15,421

 

 

 

24,913

 

35

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(15.)COMMITMENTS AND CONTINGENCIES (Continued)

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the agreement. Commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee. Commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if any, is based on management’s credit evaluation of the borrower. Standby letters of credit are conditional lending commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers.

Unfunded Commitments

At September 30, 20212022 and December 31, 2020,2021, the allowance for credit losses for unfunded commitments totaled $1.92.7 million and $3.11.8 million, respectively, and was included in other liabilities on the Company's consolidated statements of financial condition. For the three months ended September 30, 2021 and 2020,The credit loss expense (benefit) expense for unfunded commitments was $(as follows (in thousands):206) thousand and $461 thousand, respectively. For the nine months ended September 30, 2021 and 2020, credit loss (benefit) expense for unfunded commitments was $(1.2) million and $959 thousand, respectively.

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Credit loss expense (benefit) for unfunded commitments

 

$

507

 

 

$

(206

)

 

$

867

 

 

$

(1,246

)

Contingent Liabilities and Litigation

In the ordinary course of business, there are various threatened and pending legal proceedings against the Company. Management believes that the aggregate liability, if any, arising from such litigation, except for the matter described below, would not have a material adverse effect on the Company’s consolidated financial statements.

As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 as filed with the SEC on March 15, 202110, 2022 and as disclosed in Part II, Item 1 of this Quarterly Report on Form 10-Q, we arethe Company is party to an action filed against usit on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs sought class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs sought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from usthe Company for the purchase of vehicles that wethe Company later repossessed. The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. We disputeThe Company disputes and believe we havebelieves it has meritorious defenses against these claims and planplans to vigorously defend ourselves.itself.

On September 30, 2021, the Court granted plaintiffs’ motion for class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). We estimate there may beThere are approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes. WeOn December 20, 2021, the Company filed a request for an interlocutory appeal of the denial of its motion to dismiss the case for lack of standing. On February 8, 2022, plaintiffs filed a motion for partial summary judgement for most of the relief they seek. The Company filed a cross motion for partial summary judgement seeking permission to appealthe dismissal of a portion of the class certification rulingand sought an offset in the form of recoupment which reduces any liability that may be imposed against the Company by the amounts that the borrowers owe to the Bank for failing to repay their motor vehicle loans. In addition, on April 25, 2022, the Pennsylvania Supreme Court declared unconstitutional a statute on which the Court may have based jurisdiction in this case. Therefore, on June 27, 2022, the Company filed a motion for reconsideration of the Court's June 5, 2018 decision overruling the Company's preliminary objections based on lack of personal jurisdiction as to the New York plaintiffs. Plaintiffs have responded to that motion claiming an alternative basis for jurisdiction.

On September 26, 2022, the lower Court denied both plaintiffs’ and defendants’ motions for partial summary judgment. In declining to grant Plaintiffs’ motion, the Court found that there were questions of fact as to whether the members of the class had purchased the subject vehicles for “consumer use” within the meaning of the relevant statutes. Defendants’ motion for summary judgment on the recoupment was denied because the Court determined that it could not enter a judgment on recoupment – which is a set off from liability – without first determining whether there was liability.

On October 4, 2022, the Parties agreed to a sixty (60) day stay of all deadlines in the case in order to pursue mediation. On October 7, 2022, the Superior Court of Pennsylvania granted the Company’s December 20, 2021 Request for an Interlocutory Appeal. As such, the case is now stayed until the appeal is briefed and a staydecided by the Superior Court. No briefing schedule has yet been established for the appeal. In addition to the pending appeal, the parties are in the process of proceedings pending any such appeal. We also filed a motionexploring non-binding mediation to dismisspotentially resolve some or all of the action for lack of standing. We haveissues in the matter.

The Company has not accrued a contingent liability for this matter at this time because, given ourits defenses, we areit is unable to conclude whether a liability is reasonably probable to occur nor are weis it able to currently reasonably estimate the amount of potential loss.

If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will insure the legal costs, settlements or judgments we incur in excess of our deductible. If we are unsuccessful in defending ourselves from these claims or if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially adversely affect our business, results of operations and financial condition.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(15.) COMMITMENTS AND CONTINGENCIES (Continued)

If the Company settles these claims or the action is not resolved in its favor, the Company may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by its insurer. The Company can provide no assurances that its insurer will cover the full legal costs, settlements or judgments it incurs. If the Company is unsuccessful in defending itself from these claims or if its insurer does not cover the full amount of legal costs it incurs, the result may materially adversely affect the Company's business, results of operations and financial condition.

(16.)FAIR VALUE MEASUREMENTS

Determination of Fair Value – Assets Measured at Fair Value on a Recurring and Nonrecurring Basis

Valuation Hierarchy

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. There have been no changes in the valuation techniques used during the current period. The fair value hierarchy is as follows:

•
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
•
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
•
Level 3 - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Transfers between levels of the fair value hierarchy are recorded as of the end of the reporting period.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(16.)FAIR VALUE MEASUREMENTS (Continued)

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities available for sale: Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

Derivative instruments: The fair value of derivative instruments is determined using quoted secondary market prices for similar financial instruments and are classified as Level 2 in the fair value hierarchy.

Loans held for sale: The fair value of loans held for sale is determined using quoted secondary market prices and investor commitments. Loans held for sale are classified as Level 2 in the fair value hierarchy.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(16.) FAIR VALUE MEASUREMENTS (Continued)

Collateral dependent loans: Fair value of collateral dependent loans with specific allocations of the allowance for credit losses – loans is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and collateral value is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and the client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Long-lived assets held for sale: The fair value of the long-lived assets held for sale was based on estimated market prices from independently prepared current appraisals and are classified as Level 23 in the fair value hierarchy.

Loan servicing rights: Loan servicing rights do not trade in an active market with readily observable market data. As a result, the Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income. The assumptions used in the discounted cash flow model are those that we believemanagement believes market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. The significant unobservable inputs used in the fair value measurement of the Company’s loan servicing rights are the constant prepayment rates and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions. Loan servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

Other real estate owned (foreclosed assets): Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. The appraisals are sometimes further discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a Level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

Commitments to extend credit and letters of credit: Commitments to extend credit and fund letters of credit are principally at current interest rates, and, therefore, the carrying amount approximates fair value. The fair value of commitments is not material.

38

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(16.)FAIR VALUE MEASUREMENTS (Continued)

Assets Measured at Fair Value

The following tables present for each of the fair-value hierarchy levels the Company’s assets that are measured at fair value on a recurring and nonrecurring basis as of the dates indicated (in thousands).

 

Quoted
Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

 

Quoted
Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

 

Total

 

September 30, 2021

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

—

 

$

6,531

 

$

—

 

$

6,531

 

 

$

—

 

 

$

21,107

 

 

$

—

 

 

$

21,107

 

Mortgage-backed securities

 

—

 

1,091,419

 

—

 

1,091,419

 

 

 

—

 

 

 

944,424

 

 

 

—

 

 

 

944,424

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging derivative instruments

 

—

 

1,112

 

—

 

1,112

 

 

 

—

 

 

 

7,040

 

 

 

—

 

 

 

7,040

 

Fair value adjusted through comprehensive income

 

$

—

 

$

1,099,062

 

$

—

 

$

1,099,062

 

 

$

—

 

 

$

972,571

 

 

$

—

 

 

$

972,571

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - interest rate swaps

 

—

 

14,653

 

—

 

14,653

 

 

 

—

 

 

 

49,502

 

 

 

—

 

 

 

49,502

 

Derivative instruments - credit contracts

 

—

 

0

 

—

 

0

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

-

 

Derivative instruments - mortgage banking

 

—

 

374

 

—

 

374

 

 

 

—

 

 

 

169

 

 

 

—

 

 

 

169

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - interest rate swaps

 

—

 

(14,658

)

 

—

 

(14,658

)

 

 

—

 

 

 

(49,505

)

 

 

—

 

 

 

(49,505

)

Derivative instruments - credit contracts

 

—

 

(1

)

 

—

 

(1

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

-

 

Derivative instruments - mortgage banking

 

 

—

 

 

(5

)

 

 

—

 

 

(5

)

 

 

—

 

 

 

(363

)

 

 

—

 

 

 

(363

)

Fair value adjusted through net income

 

$

—

 

$

363

 

$

—

 

$

363

 

 

$

—

 

 

$

(197

)

 

$

—

 

 

$

(197

)

Measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

—

 

$

5,916

 

$

—

 

$

5,916

 

 

$

—

 

 

$

2,074

 

 

$

—

 

 

$

2,074

 

Collateral dependent loans

 

—

 

—

 

54,554

 

54,554

 

 

 

—

 

 

 

—

 

 

 

21,263

 

 

 

21,263

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

—

 

4,341

 

—

 

4,341

 

 

 

—

 

 

 

—

 

 

 

1,855

 

 

 

1,855

 

Loan servicing rights

 

—

 

—

 

1,484

 

1,484

 

 

 

—

 

 

 

—

 

 

 

1,507

 

 

 

1,507

 

Total

 

$

—

 

$

10,257

 

$

56,038

 

$

66,295

 

 

$

—

 

 

$

2,074

 

 

$

24,625

 

 

$

26,699

 

There were 0no transfers between Levels 1 and 2 during the nine months ended September 30, 2021.2022. There were 0no liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2021.2022.

39

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(16.)FAIR VALUE MEASUREMENTS (Continued)

 

 

Quoted
Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

 

Total

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government sponsored enterprises

 

$

—

 

 

$

15,891

 

 

$

—

 

 

$

15,891

 

Mortgage-backed securities

 

 

—

 

 

 

1,162,624

 

 

 

—

 

 

 

1,162,624

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Hedging derivative instruments

 

 

—

 

 

 

1,559

 

 

 

—

 

 

 

1,559

 

Fair value adjusted through comprehensive income

 

$

—

 

 

$

1,180,074

 

 

$

—

 

 

$

1,180,074

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate products

 

$

—

 

 

$

14,702

 

 

$

—

 

 

$

14,702

 

Derivative instruments – credit contracts

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Derivative instruments – mortgage banking

 

 

—

 

 

 

243

 

 

 

—

 

 

 

243

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments – interest rate products

 

 

—

 

 

 

(14,708

)

 

 

—

 

 

 

(14,708

)

Derivative instruments – credit contracts

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

(1

)

Derivative instruments – mortgage banking

 

 

—

 

 

 

(4

)

 

 

—

 

 

 

(4

)

Fair value adjusted through net income

 

$

—

 

 

$

232

 

 

$

—

 

 

$

232

 

Measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

—

 

 

$

6,202

 

 

$

—

 

 

$

6,202

 

Collateral dependent loans

 

 

—

 

 

 

—

 

 

 

33,484

 

 

 

33,484

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

 

—

 

 

 

—

 

 

 

2,560

 

 

 

2,560

 

Loan servicing rights

 

 

—

 

 

 

—

 

 

 

1,517

 

 

 

1,517

 

Total

 

$

—

 

 

$

6,202

 

 

$

37,561

 

 

$

43,763

 

 

 

Quoted
Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)

 

 

Significant
Other
Observable
Inputs
(Level 2)

 

 

Significant
Unobservable
Inputs
(Level 3)

 

 

Total

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

—

 

 

$

6,635

 

 

$

—

 

 

$

6,635

 

Mortgage-backed securities

 

 

—

 

 

 

621,424

 

 

 

—

 

 

 

621,424

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Hedging derivative instruments

 

 

—

 

 

 

(311

)

 

 

—

 

 

 

(311

)

Fair value adjusted through comprehensive income

 

$

—

 

 

$

627,748

 

 

$

—

 

 

$

627,748

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - cash flow hedges

 

$

—

 

 

$

—

 

 

$

—

 

 

$

-

 

Derivative instruments - interest rate swaps

 

 

—

 

 

 

19,626

 

 

 

—

 

 

 

19,626

 

Derivative instruments - credit contracts

 

 

—

 

 

 

23

 

 

 

—

 

 

 

23

 

Derivative instruments - mortgage banking

 

 

—

 

 

 

471

 

 

 

—

 

 

 

471

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - interest rate swaps

 

 

—

 

 

 

(19,837

)

 

 

—

 

 

 

(19,837

)

Derivative instruments - credit contracts

 

 

—

 

 

 

(86

)

 

 

—

 

 

 

(86

)

Derivative instruments - mortgage banking

 

 

—

 

 

 

(1

)

 

 

—

 

 

 

(1

)

Fair value adjusted through net income

 

$

—

 

 

$

196

 

 

$

—

 

 

$

196

 

Measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

—

 

 

$

4,305

 

 

$

—

 

 

$

4,305

 

Collateral dependent loans

 

 

—

 

 

 

—

 

 

 

29,434

 

 

 

29,434

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing rights

 

 

—

 

 

 

—

 

 

 

1,320

 

 

 

1,320

 

Other real estate owned

 

 

—

 

 

 

—

 

 

 

2,966

 

 

 

2,966

 

Total

 

$

—

 

 

$

4,305

 

 

$

33,720

 

 

$

38,025

 

There were 0 transfers between Levels 1 and 2 during the nine months ended September 30, 2020. There were 0 liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2020.

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value as of September 30, 20212022 (dollars in thousands).

Asset

 

Fair
Value

 

Valuation Technique

 

Unobservable Input

 

Unobservable Input
Value or Range

 

Fair
Value

 

 

Valuation Technique

 

Unobservable Input

 

Unobservable Input
Value or Range

Collateral dependent loans

 

$

54,554

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

27.2% (3) / 0 - 35%

 

$

21,263

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

19.6%(3) / 0 - 60%

Loan servicing rights

 

1,484

 

Discounted cash flow

 

Discount rate

 

10.3% (3)

 

$

1,507

 

 

Discounted cash flow

 

Discount rate

 

10.0% (3)

 

 

 

Constant prepayment rate

 

14.5% (3)

 

 

 

Constant prepayment rate

 

11.7% (3)

Long-lived assets held for sale

 

$

1,855

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

11 - 116%

(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various Level 3 inputs which are not identifiable.

(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3) Weighted averages.

40

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(16.)FAIR VALUE MEASUREMENTS (Continued)

Changes in Level 3 Fair Value Measurements

There were 0no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the nine months ended September 30, 20212022 and 2020.2021.

Disclosures about Fair Value of Financial Instruments

The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the fair value information of financial instruments presented below.

The estimated fair value approximates carrying value for cash and cash equivalents, Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, accrued interest receivable, non-maturity deposits, short-term borrowings and accrued interest payable.

The following presents (in thousands) the carrying amount, estimated fair value, and placement in the fair value measurement hierarchy of the Company’s financial instruments as of the dates indicated.

 

Level in

 

September 30, 2021

 

December 31, 2020

 

 

Level in

 

September 30, 2022

 

 

December 31, 2021

 

 

Fair Value

 

 

 

Estimated

 

 

 

Estimated

 

 

Fair Value

 

 

 

Estimated

 

 

 

Estimated

 

 

Measurement

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

Measurement

 

Carrying

 

Fair

 

Carrying

 

Fair

 

 

Hierarchy

 

Amount

 

Value

 

Amount

 

Value

 

 

Hierarchy

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

 

$

288,426

 

$

288,426

 

$

93,878

 

$

93,878

 

 

Level 1

 

$

118,581

 

 

$

118,581

 

 

$

79,112

 

 

$

79,112

 

Securities available for sale

 

Level 2

 

1,097,950

 

1,097,950

 

628,059

 

628,059

 

 

Level 2

 

 

965,531

 

 

 

965,531

 

 

 

1,178,515

 

 

 

1,178,515

 

Securities held to maturity, net

 

Level 2

 

218,135

 

224,164

 

271,973

 

282,035

 

 

Level 2

 

 

197,538

 

 

 

180,438

 

 

 

205,581

 

 

 

209,820

 

Loans held for sale

 

Level 2

 

5,916

 

5,916

 

4,305

 

4,305

 

 

Level 2

 

 

2,074

 

 

 

2,074

 

 

 

6,202

 

 

 

6,202

 

Loans

 

Level 2

 

3,553,901

 

3,597,936

 

3,513,284

 

3,549,770

 

 

Level 2

 

 

3,801,482

 

 

 

3,772,051

 

 

 

3,606,276

 

 

 

3,642,351

 

Loans (1)

 

Level 3

 

54,554

 

54,554

 

29,434

 

29,434

 

 

Level 3

 

 

21,263

 

 

 

21,263

 

 

 

33,484

 

 

 

33,484

 

Long-lived assets held for sale

 

Level 2

 

4,341

 

4,341

 

—

 

—

 

 

Level 3

 

 

—

 

 

 

—

 

 

 

2,560

 

 

 

2,560

 

Accrued interest receivable

 

Level 1

 

15,742

 

15,742

 

15,635

 

15,635

 

 

Level 1

 

 

16,910

 

 

 

16,910

 

 

 

15,482

 

 

 

15,482

 

Derivative instruments – cash flow hedges

 

Level 2

 

1,112

 

1,112

 

—

 

—

 

 

Level 2

 

 

7,040

 

 

 

7,040

 

 

 

1,559

 

 

 

1,559

 

Derivative instruments – interest rate products

 

Level 2

 

14,653

 

14,653

 

19,626

 

19,626

 

 

Level 2

 

 

49,502

 

 

 

49,502

 

 

 

14,702

 

 

 

14,702

 

Derivative instruments – credit contracts

 

Level 2

 

0

 

0

 

23

 

23

 

Derivative instruments – mortgage banking

 

Level 2

 

374

 

374

 

471

 

471

 

 

Level 2

 

 

169

 

 

 

169

 

 

 

243

 

 

 

243

 

FHLB and FRB stock

 

Level 2

 

9,368

 

9,368

 

8,619

 

8,619

 

 

Level 2

 

 

12,800

 

 

 

12,800

 

 

 

10,770

 

 

 

10,770

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

Level 1

 

4,054,683

 

4,054,683

 

3,392,774

 

3,392,774

 

 

Level 1

 

 

3,881,877

 

 

 

3,881,877

 

 

 

3,905,136

 

 

 

3,905,136

 

Time deposits

 

Level 2

 

920,280

 

920,221

 

885,593

 

887,113

 

 

Level 2

 

 

1,023,277

 

 

 

1,009,621

 

 

 

921,954

 

 

 

920,699

 

Short-term borrowings

 

Level 1

 

—

 

—

 

5,300

 

5,300

 

 

Level 1

 

 

69,000

 

 

 

69,000

 

 

 

30,000

 

 

 

30,000

 

Long-term borrowings

 

Level 2

 

73,834

 

79,275

 

73,623

 

83,953

 

 

Level 2

 

 

74,144

 

 

 

70,616

 

 

 

73,911

 

 

 

77,792

 

Accrued interest payable

 

Level 1

 

3,226

 

3,226

 

4,381

 

4,381

 

 

Level 1

 

 

3,681

 

 

 

3,681

 

 

 

2,147

 

 

 

2,147

 

Derivative instruments – cash flow hedges

 

Level 2

 

—

 

—

 

311

 

311

 

Derivative instruments – interest rate products

 

Level 2

 

14,658

 

14,658

 

19,837

 

19,837

 

 

Level 2

 

 

49,505

 

 

 

49,505

 

 

 

14,708

 

 

 

14,708

 

Derivative instruments – credit contracts

 

Level 2

 

1

 

1

 

86

 

86

 

 

Level 2

 

 

—

 

 

 

—

 

 

 

1

 

 

 

1

 

Derivative instruments – mortgage banking

 

Level 2

 

5

 

5

 

1

 

1

 

 

Level 2

 

 

363

 

 

 

363

 

 

 

4

 

 

 

4

 

(1) Comprised of collateral dependent loans.

41

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(17.)SEGMENT REPORTING

The Company has 1one reportable segment, Banking, which includes all of the company’sCompany’s retail and commercial banking operations. This reportable segment has been identified and organized based on the nature of the underlying products and services applicable to the segment, the type of customers to whom those products and services are offered and the distribution channel through which those products and services are made available.

All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This “All Other” grouping includes the activities of SDN, a full-service insurance agency that provides a broad range of insurance services to both personal and business clients, and Courier Capital and HNP Capital, our investment advisor and wealth management firms that provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans, and Holding Company amounts, which are the primary differences between segment amounts and consolidated totals, along with amounts to eliminate balances and transactions between segments.

The following tables present information regarding our business segments as of and for the periods indicated (in thousands).

 

Banking

 

All Other

 

Consolidated
Totals

 

 

Banking

 

 

All Other

 

 

Consolidated
Totals

 

September 30, 2021

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

Goodwill

 

$

48,536

 

$

18,535

 

$

67,071

 

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

Other intangible assets, net

 

6

 

7,582

 

7,588

 

 

 

—

 

 

 

6,582

 

 

 

6,582

 

Total assets

 

5,583,776

 

39,417

 

5,623,193

 

 

 

5,576,899

 

 

 

47,583

 

 

 

5,624,482

 

December 31, 2020

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

Goodwill

 

$

48,536

 

$

17,526

 

$

66,062

 

 

$

48,536

 

 

$

18,535

 

 

$

67,071

 

Other intangible assets, net

 

28

 

7,699

 

7,727

 

 

 

3

 

 

 

7,326

 

 

 

7,329

 

Total assets

 

4,875,673

 

36,633

 

4,912,306

 

 

 

5,481,889

 

 

 

38,890

 

 

 

5,520,779

 

 

 

Banking

 

 

All Other (1)

 

 

Consolidated
Totals

 

Three months ended September 30, 2022

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

44,129

 

 

$

(1,061

)

 

$

43,068

 

Provision for credit losses

 

 

(4,314

)

 

 

—

 

 

 

(4,314

)

Noninterest income

 

 

8,900

 

 

 

3,752

 

 

 

12,652

 

Noninterest expense

 

 

(29,355

)

 

 

(3,472

)

 

 

(32,827

)

Income (loss) before income taxes

 

 

19,360

 

 

 

(781

)

 

 

18,579

 

Income tax (expense) benefit

 

 

(5,295

)

 

 

570

 

 

 

(4,725

)

Net income (loss)

 

$

14,065

 

 

$

(211

)

 

$

13,854

 

Nine months ended September 30, 2022

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

127,405

 

 

$

(3,182

)

 

$

124,223

 

Provision for credit losses

 

 

(7,196

)

 

 

—

 

 

 

(7,196

)

Noninterest income

 

 

23,228

 

 

 

12,106

 

 

 

35,334

 

Noninterest expense

 

 

(84,119

)

 

 

(11,730

)

 

 

(95,849

)

Income (loss) before income taxes

 

 

59,318

 

 

 

(2,806

)

 

 

56,512

 

Income tax (expense) benefit

 

 

(13,170

)

 

 

1,143

 

 

 

(12,027

)

Net income (loss)

 

$

46,148

 

 

$

(1,663

)

 

$

44,485

 

(1) Reflects activity from the acquisition of assets of North Woods since August 2, 2021 (the date of acquisition).

42

 

 

Banking

 

 

All Other (1)

 

 

Consolidated
Totals

 

Three months ended September 30, 2021

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

39,333

 

 

$

(1,060

)

 

$

38,273

 

Benefit (provision) for credit losses

 

 

541

 

 

 

—

 

 

 

541

 

Noninterest income

 

 

7,733

 

 

 

4,350

 

 

 

12,083

 

Noninterest expense

 

 

(24,351

)

 

 

(4,818

)

 

 

(29,169

)

Income (loss) before income taxes

 

 

23,256

 

 

 

(1,528

)

 

 

21,728

 

Income tax (expense) benefit

 

 

(4,748

)

 

 

195

 

 

 

(4,553

)

Net income (loss)

 

$

18,508

 

 

$

(1,333

)

 

$

17,175

 

Nine months ended September 30, 2021

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

117,039

 

 

$

(3,177

)

 

$

113,862

 

Benefit (provision) for credit losses

 

 

7,144

 

 

 

—

 

 

 

7,144

 

Noninterest income

 

 

23,611

 

 

 

11,621

 

 

 

35,232

 

Noninterest expense

 

 

(70,183

)

 

 

(12,670

)

 

 

(82,853

)

Income (loss) before income taxes

 

 

77,611

 

 

 

(4,226

)

 

 

73,385

 

Income tax (expense) benefit

 

 

(16,563

)

 

 

1,263

 

 

 

(15,300

)

Net income (loss)

 

$

61,048

 

 

$

(2,963

)

 

$

58,085

 

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(17.) SEGMENT REPORTING (Continued)

 

 

Banking

 

 

All Other (1)

 

 

Consolidated
Totals

 

Three months ended September 30, 2021

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

39,333

 

 

$

(1,060

)

 

$

38,273

 

Benefit for credit losses

 

 

541

 

 

 

—

 

 

 

541

 

Noninterest income

 

 

7,733

 

 

 

4,350

 

 

 

12,083

 

Noninterest expense

 

 

(24,351

)

 

 

(4,818

)

 

 

(29,169

)

Income (loss) before income taxes

 

$

23,256

 

 

$

(1,528

)

 

$

21,728

 

Income tax (expense) benefit

 

 

(4,748

)

 

 

195

 

 

 

(4,553

)

Net income (loss)

 

$

18,508

 

 

$

(1,333

)

 

$

17,175

 

Nine months ended September 30, 2021

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

117,039

 

 

$

(3,177

)

 

$

113,862

 

Provision for credit losses

 

 

7,144

 

 

 

—

 

 

 

7,144

 

Noninterest income

 

 

23,611

 

 

 

11,621

 

 

 

35,232

 

Noninterest expense

 

 

(70,183

)

 

 

(12,670

)

 

 

(82,853

)

Income (loss) before income taxes

 

 

77,611

 

 

 

(4,226

)

 

 

73,385

 

Income tax (expense) benefit

 

 

(16,563

)

 

 

1,263

 

 

 

(15,300

)

Net income (loss)

 

$

61,048

 

 

$

(2,963

)

 

$

58,085

 

(1) Reflects activity from the acquisitions of assets of Landmark since February 1, 2021 (the date of acquisition) and North Woods since August 2, 2021 (the date of acquisition).

42

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(17.)SEGMENT REPORTING (Continued)

 

 

Banking

 

 

All Other

 

 

Consolidated
Totals

 

Three months ended September 30, 2020

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

36,117

 

 

$

(618

)

 

$

35,499

 

Provision for credit losses

 

 

(4,028

)

 

 

—

 

 

 

(4,028

)

Noninterest income

 

 

8,917

 

 

 

3,300

 

 

 

12,217

 

Noninterest expense

 

 

(24,320

)

 

 

(4,155

)

 

 

(28,475

)

Income (loss) before income taxes

 

 

16,686

 

 

 

(1,473

)

 

 

15,213

 

Income tax (expense) benefit

 

 

(3,598

)

 

 

658

 

 

 

(2,940

)

Net income (loss)

 

$

13,088

 

 

$

(815

)

 

$

12,273

 

Nine months ended September 30, 2020

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

104,657

 

 

$

(1,853

)

 

$

102,804

 

Provision for credit losses

 

 

(21,689

)

 

 

—

 

 

 

(21,689

)

Noninterest income

 

 

22,814

 

 

 

9,026

 

 

 

31,840

 

Noninterest expense

 

 

(71,653

)

 

 

(11,067

)

 

 

(82,720

)

Income (loss) before income taxes

 

 

34,129

 

 

 

(3,894

)

 

 

30,235

 

Income tax (expense) benefit

 

 

(6,317

)

 

 

614

 

 

 

(5,703

)

Net income (loss)

 

$

27,812

 

 

$

(3,280

)

 

$

24,532

 

 

43

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2020.2021. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

FORWARD LOOKING INFORMATION

Statements and financial analysis contained in this Quarterly Report on Form 10-Q that are based on other than historical data are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations or forecasts of future events and include, among others:

•
statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Financial Institutions, Inc. (the “Parent” or “FII”) and its subsidiaries (collectively, the “Company,” “we,” “our” or “us”); and
•
statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “continue,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “projects” or similar expressions.

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 20202021 (the “Form 10-K”), including, but not limited to, those presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Factors that might cause such material differences include, but are not limited to:

•
We are subject to interest rate risk, and a rising rate environment may reduce our income and result in higher defaults on our loans, whereas a falling rate environment may result in earlier loan prepayments than we expect, which may reduce our income;
•
The COVID-19 pandemic, and governmental and individual efforts to containaddress the pandemic have had a significant negative impact onintroduced volatility into the U.S. and global economy which has and willmay continue to adversely affect our business, financial condition and results of operations;
•
Changes in our operations in response to the COVID-19 pandemic have exposed us to additional risks;
•
The impact of macroeconomic pressures including inflation, supply chain issues, and geopolitical risks associated with the Russia-Ukraine conflict;
•
If we experience greater credit losses than anticipated, earnings may be adversely impacted;
•
Geographic concentration may unfavorably impact our operations;
•
Our commercial business and mortgage loans increase our exposure to credit risks;
•
Our indirect and consumer lending involves risk elements in addition to normal credit risk;
•
Lack of seasoning in portions of our loan portfolio could increase risk of credit defaults in the future;
•
We accept deposits that do not have a fixed term, and which may be withdrawn by the customer at any time for any reason;
•
We are subject to environmental liability risk associated with our lending activities;
•
We operate in a highly competitive industry and market area;
•
Changes to and replacement of the LIBOR Benchmark Interest Rate may adversely affect our business, financial condition, and results of operations;
•
Legal and regulatory proceedings and related matters, such as the action brought by a putative class of consumers against us as described in Part II, Item 1, “Legal Proceedings,” could adversely affect us and the banking industry in general;
•
Any future FDIC insurance premium increases may adversely affect our earnings;
•
We are highly regulated, and any adverse regulatory action may result in additional costs, loss of business opportunities, and reputational damage;
•
The policies of the Federal Reserve have a significant impact on our earnings;
•
Our insurance brokerage subsidiary is subject to risk related to the insurance industry;
•
Our investment advisory and wealth management operations are subject to risk related to the regulation of the financial services industry and market volatility;
•
We make certain assumptions and estimates in preparing our financial statements that may prove to be incorrect, which could significantly impact 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;

44

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

•
The value of our goodwill and other intangible assets may decline in the future;
•
We may be unable to successfully implement our growth strategies, including the integration and successful management of newly-acquired businesses;
•
Acquisitions may disrupt our business and dilute shareholder value;

44

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

•
Our tax strategies and the value of our deferred tax assets and liabilities could adversely affect our operating results and regulatory capital ratios;
•
Liquidity is essential to our businesses;
•
We rely on dividends from our subsidiaries for most of our revenue;
•
If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses;
•
Negative public opinion could damage our reputation and impact business operations and revenues;
•
We face competition in staying current with technological changes and banking alternatives to compete and meet customer demands;
•
We rely on other companies to provide key components of our business infrastructure;
•
A breach in security of our or third-party information systems, including the occurrence of a cyber incident or a deficiency in cybersecurity, or a failure by us to comply with New York State cybersecurity regulations, may subject us to liability, result in a loss of customer business or damage our brand image;
We are subject to interest rate risk, and a rising rate environment may reduce our income and result in higher defaults on our loans, whereas a falling rate environment may result in earlier loan prepayments than we expect, which may reduce our income;
•
The soundness of other financial institutions could adversely affect us;
•
We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all;
•
We may not pay or may reduce the dividends on our common stock;
•
We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, and which could dilute our current shareholders or negatively affect the value of our common stock;
•
Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect;
•
The market price of our common stock may fluctuate significantly in response to a number of factors;
•
We may not be able to attract and retain skilled people;
•
We use financial models for business planning purposes that may not adequately predict future results;
•
We depend on the accuracy and completeness of information about or from customers and counterparties;
•
Our business may be adversely affected by conditions in the financial markets and economic conditions generally; and
•
Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other external events could significantly impact our business.

We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advise readers that various factors, including those described above, could affect our financial performance and could cause our actual results or circumstances for future periods to differ materially from those anticipated or projected. See also Item 1A, Risk Factors, in the Form 10-K for further information. Except as required by law, we do not undertake, and specifically disclaim any obligation to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

GENERAL

The Parent is a financial holding company headquartered in New York State, providing diversified financial services through its operating subsidiaries, Five Star Bank (the “Bank”), SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP 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. OurThe Bank also has a commercial loan production office in Ellicott City (Baltimore), Maryland, and our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and other funding sources) and noninterest income, particularly fees and other revenue from insurance, 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.

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Our business strategy has been to maintain a community bank philosophy, which consists of focusing on and understanding the individualized banking and other financial needs of individuals, municipalities and businesses of the local communities surrounding our primary service area. We believe this focus allows us to be more responsive to our customers’ needs and provide a high level of personal service that differentiates us from larger competitors, resulting in long-standing and broad-based banking relationships. Our core customers are primarily small- to medium-sized businesses, individuals and community organizations who prefer to build banking, insurance and wealth management relationships with a community bank that combines high quality, competitively-priced products and services with personalized service. Because of our identity and origin as a locally operated bank, we believe that our level of personal service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local communities.

A key aspect of our current business strategy is to foster a community-oriented culture where our customers and employees establish long-standing and mutually beneficial relationships. We believe that we are well-positioned to be a strong competitor within our market area because of our focus on community banking needs and customer service, our comprehensive suite of deposit, loan, insurance and wealth management products typically found at larger banks, our highly experienced management team and our strategically located banking centers.

We have evolved to meet changing customer needs by opening what we refer to as financial solution center branches. These financial solution center branches have a smaller footprint than our traditional branches, focus on technology to provide solutions that fit our customer preferences for transacting business with us, and these branches are staffed by certified personal bankers who are trained to meet a broad array of customer needs. In recent years, we have opened four financial solution centers in the Rochester and Buffalo markets. We believe that the foregoing factors all help to grow our core deposits, which supports a central element of our business strategy - the growth of a diversified and high-quality loan portfolio.

EXECUTIVE OVERVIEW

Summary of 20212022 Third Quarter Results

Net income increased $4.9income decreased $3.3 million to $13.9 million for the third quarter of 2022 compared to $17.2 million for the third quarter of 2021 compared to $12.3 million for the third quarter of 2020.2021. Net income available to common shareholders for the third quarter of 20212022 was $16.8$13.5 million, or $1.05$0.88 per diluted share, compared with $11.9$16.8 million, or $0.74$1.05 per diluted share, for the third quarter of last year.2021. Return on average common equity was 13.94%12.72% and return on average assets was 1.27%0.98% for the third quarter of 20212022 compared to 10.72%13.94% and 1.02%1.27%, respectively, for the third quarter of 2020.2021.

The increasedecrease in net income for the third quarter of 20212022 reflected a $541 thousand benefit$4.3 million provision for credit losses as compared to a benefit of $541 thousand in the third quarter of 2021. Loan loss provision returned to a more normalized level in the third quarter of $4.02022 due to the impact of an increase in the national unemployment forecast and qualitative factors reflecting economic uncertainty associated with higher interest rates and global political unrest, partially offset by a reduction in overall specific reserve levels. Also contributing to the decrease in net income was a $3.7 million increase in noninterest expense, including $2.2 million of increased salaries and employee benefits expense.

Net interest income totaled $43.1 million in the third quarter of 2020. Continued improvement in the national unemployment forecast, positive trends in qualitative factors and a relatively low level2022, an increase of net charge-offs resulted in a release of credit loss reserves and the corresponding benefit for credit losses in the quarter.

Net interest income totaled$4.8 million compared to $38.3 million in the third quarter of 2021, up from $35.5 million in2021. Average interest-earning assets for the third quarter of 2020. The increase was primarily2022 were $264.0 million higher than the resultthird quarter of an increase in interest-earning assets and a decrease in interest expense. The decrease in interest expense was primarily2021 due to a favorable shift$191.9 million increase in deposit categories, with a lower allocation of time deposits, coupled with a lower interest-bearing cost of funds. Average Federal Reserve interest-earning cash, average investment securities, and a $187.1 million increase in average loans, were up $35.3partially offset by a $115.0 million $407.6 million and $110.1 million, respectively,decrease in the average balance of Federal Reserve interest-earning cash.

Net interest margin was 3.28% for the third quarter of 2022 compared to 3.07% in the third quarter of 2021, comparedan improvement of 21 basis points. The improvement in our net interest margin was primarily due to the same quarterimpact of 2022 interest rate increases and a decrease in 2020.the level of lower yield Federal Reserve interest-earning cash in comparison to the prior year.

The provision for credit losses - loans was a $334 thousand benefit in the third quarter of 2021 compared to a provision of $3.6$3.8 million in the third quarter of 2020.2022 compared to a benefit of $334 thousand in the third quarter of 2021. Net charge-offs during the recent quarter were $587 thousand$2.2 million compared to $488$587 thousand in the third quarter of 2020.2021. Net charge-offs expressed as an annualized percentage of average loans outstanding was 0.22% during the third quarter of 2022 compared to 0.06% during the third quarter of 2021 and 2020.2021. 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 (benefit) for credit losses - loans and net charge-offs.

Noninterest income totaled $12.7 million in the third quarter of 2022, compared to $12.1 million in the third quarter of 2021, compared to $12.2 million in the third quarter of 2020.2021. The decreaseincrease in noninterest income for the third quarter of 2022 was primarily due to decreasesincreases in income from derivative instruments,company owned life insurance, partially offset by decreases in investments in limited partnerships income, net gain on sale of loans held for sale, investment advisory and net gain on investment securities, partiallyinsurance income. Contributing to the increase in company owned life insurance income was a $2.0 million enhancement from the surrender and redeployment of $25.5 million in cash surrender value of company owned life insurance, which was offset by increases in insuranceapproximately $1.5 million of incremental income investment advisory income and income from investments in limited partnerships. Income from derivative instruments, net was $1.6 million lower than the third quarter of 2020. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executedtax expense during the quarter combined with the impact of changes in the fair market value of borrower-facing trades. Net gain on sale of loans held for sale was $797 thousand lower than the third quarter of 2020, primarily due to lower transaction volume. Sale volume and margin were at historically high levels in the third quarter of 2020, driven by mortgage refinancing activity. No gain or loss was recognized on investment securities in the quarter compared to a gain of $554 thousand in the third quarter of 2020. The increase in insurance income of $507 thousand from the third quarter of 2020 was driven by the two 2021 bolt on acquisitions (North Woods in August and Landmark in February) and growth in the legacy SDN business, including the impact of increasing insurance premiums. The increase in investment advisory income of $526 thousand was primarily due to an increase in assets under management driven by a combination of market gains, new customer accounts and contributions to existing accounts. Income from investments in limited partnerships increased $799 thousand compared to the third quarter of 2020.quarter.

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Noninterest expense totaled $32.8 million in the third quarter of 2022, compared to $29.2 million in the third quarter of 2021, compared to $28.5 million in the third quarter of 2020.2021. The increase in noninterest expense was primarily the result of increases in salaries and employee benefits expense, occupancy and equipment expense and computer and data processing expense, partially offset by decreasesand other expenses. The increase in restructuring chargessalaries and advertising and promotions expense. Salaries andemployee benefits expense increasedwas primarily due to higher incentive compensation and commissions,the result of investments in personnel and wage pressures driven by the impact of 2021 acquisitions. Occupancy and equipmentcurrent competitive labor market, coupled with an increase in health insurance benefits expense increased primarily as a result of the purchase of security equipment for multiple locations, timing differences relateddue to the outsourcing of property management services and expenses related to two Five Star Bank branches opened in Buffalo in June 2021.higher medical claims. Computer and data processing expense increased primarily as a result of the Company’s investmentsour strategic investment in technology, including digital banking initiatives, a customer relationship management solution across all business lines, and Banking-as-a-Service, or Baas, initiatives. Restructuring charges The increase in the third quarter of 2020 represents non-recurring real estate related charges related to the closure of six bank branches and a staffing reduction. The decrease in advertising and promotionsother expense was relateddue to a combination of factors including overdraft charge-offs, as well as an increase in travel and entertainment expenses as the ongoing evolutionimpacts of our long-term marketing strategy and a temporary reduction in external advertising expense.the pandemic recede.

The regulatory Common Equity Tier 1 Ratio and Total Risk-Based Capital Ratio were 10.24%10.12%, and 13.25%12.53%, respectively, at September 30, 2021.2022. 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.

AcquisitionOn June 13, 2022, we announced a stock repurchase program for up to 766,447 shares of North Woods Capital Benefits

On August 2, 2021, North Woods Capital Benefits LLC (“North Woods”) was acquired by the Company’s insurance subsidiary SDN. North Woods was a Buffalo-based employee benefitsour common stock, or approximately 5% of our then outstanding common shares. Shares may be repurchased in open market transactions and human resources advisory firmpursuant to any trading plan adopted in accordance with a mission of helping clients of all sizes navigate the complexities of employee benefits, human resources and compliance to control costs and maximize long-term savings.

The acquisition expands SDN’s employee benefits business and adds important expertise in employee benefits and human resources consulting. William (Bill) Wadsworth, North Woods’ Founder, continues his long-term client relationships in his new role leading SDN’s employee benefits practice. Sarah Kirke, former Director of Client Service and HR Consulting at North Woods, serves as Employee Benefits Account Manager and HR Consultant at SDN.

Elmira Branch Relocation

Five Star Bank opened its relocated branch in the City of Elmira on August 2, 2021. The new branch is in a newly-constructed building that is part of the New York State Downtown Revitalization Initiative. Consumers and businesses can access a full spectrum of banking and lending services, insurance and wealth management and investment services at the new branch.

The branch is designed to serve as a financial solution center, with no teller lines and no barriers between bank associates and customers. It features a blend of new technology including Interactive Teller Machines and the comfort of community banking with Certified Personal Bankers. Our new design aligns services with shifting customer needs and preferences including rapid advancements in financial technology that enable consumers to bank virtually from anywhere, anytime.

Five Star Bank is committed to the use of green and energy efficient materials in construction. Materials sourcedRule 10b5-1 for the Elmira branch received certifications from CradleSecurities Exchange Act of 1934. The timing and number of shares repurchased will depend on a variety of factors, including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate us to Cradle, Declare, Forest Stewardship Council, Green Squarepurchase any shares and GreenGuard. Materials with a high percentage of recycled content were used when possible and energy-efficient LED lighting was used throughout the interior and exterior.it may be extended, modified, or discontinued at any time. No shares have been repurchased to-date under this program.

Operational, Accounting and Reporting Impacts Related to the COVID-19 Pandemic

The COVID-19 pandemic has negatively impacted the global economy, including our operating footprint of Western and Central New York. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:

•
Accounting for Loan Modifications - The CARES Act provided that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 made between March 1, 2020 and January 1, 2022 that would otherwise be categorized as a troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.
•
Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. On December 27, 2020, the Consolidated Appropriations Act, 2021 provided approximately $284 billion for PPP loans in an additional round of funding under the program and extended the PPP through March 31, 2021. This additional round of PPP loan funding iswas authorized for first-time borrowers and for second draws befor certain borrowers who have previously received PPP loans. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extended the program to May 31, 2021.
•
Mortgage Forbearance - Under the CARES Act, a borrower with a federally backed mortgage loan that was experiencing financial hardship due to COVID-19 was able to request a forbearance until September 30,December 31, 2021.

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Also, in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

•
Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.
•
Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.
•
Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.classified.

Effective March 23, 2020 through July 9, 2020, for consumer customers, the Bank waived early CD penalty fees for withdrawals up to $20,000 (limited to one penalty-free withdrawal per CD account); eliminated all insufficient funds (overdrafts) and returned item fees; eliminated all Pay by Phone fees; waived all late fees; offered the opportunity for monthly mortgage, home equity loan or home equity line payment relief; offered the opportunity to defer unsecured consumer loans or lines47

Table of credit and secured consumer loans and lines of credit payments; and offered unsecured personal loans up to $5,000, up to 60 months at 2.95% APR subject to credit approval. ATM access fees were reinitiated on September 19, 2020.Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

As part of the first round of PPP loans we have

We helped more than 1,7002,900 customers obtain more than $270$378 million in loans as of December 31, 2020.through the PPP. We have helped customers complete the forgiveness process for approximately $239$375 million of these PPP loans in the first nine months of 2021. Also, during the first nine months of 2021, we have helped customers obtain approximately $107loans.

We had $532.4 million of new PPP loans under the second round of the PPP. Additionally,with modifications related to COVID-19 during 2020, with $2.2 million and $46.2 million still on deferral as of September 30, 2022 and December 31, 2021, respectively. We have provided payment deferrals for approximately 2% of our commercial6,600 borrowers, the majority being consumer indirect loan and mortgage customers, 1% of our residential real estate loans and lines customers and lesscustomers. Less than 1% of our indirect loansloan customers have active payment deferrals in accordance withas of September 30, 2022 as the previously noted loan modifications under the CARES Act or agencies guidelines.majority of customers whose loans were subject to COVID-19 related deferrals have returned to making regular payments.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Net interest income is our primary source of revenue, comprising 76%77% and 78% of revenue during the three and nine months ended September 30, 2021.2022, 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 earninginterest-earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities and repricing frequencies.

We use interest rate spread and net interest margin to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earninginterest-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.

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The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis (dollars in thousands):

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Interest income per consolidated statements of income

 

$

41,227

 

$

39,719

 

$

123,452

 

$

121,131

 

 

$

50,675

 

 

$

41,227

 

 

$

138,302

 

 

$

123,452

 

Adjustment to fully taxable equivalent basis

 

 

140

 

 

201

 

 

493

 

 

680

 

 

 

129

 

 

 

140

 

 

 

420

 

 

 

493

 

Interest income adjusted to a fully taxable equivalent basis

 

41,367

 

39,920

 

123,945

 

121,811

 

 

 

50,804

 

 

 

41,367

 

 

 

138,722

 

 

 

123,945

 

Interest expense per consolidated statements of income

 

 

2,954

 

 

4,220

 

 

9,590

 

 

18,327

 

 

 

7,607

 

 

 

2,954

 

 

 

14,079

 

 

 

9,590

 

Net interest income on a taxable equivalent basis

 

$

38,413

 

$

35,700

 

$

114,355

 

$

103,484

 

 

$

43,197

 

 

$

38,413

 

 

$

124,643

 

 

$

114,355

 

Analysis of Net Interest Income for the Three Months Ended September 30, 20212022 and 20202021

Net interest income on a taxable equivalent basis for the three months ended September 30, 2021,2022, was $38.4$43.2 million, an increase of approximately $2.7$4.8 million versus the comparable quarter last year of $35.7 million.$38.4 million. The increase in net interest income was primarily due to increasesan increase in average loans and average investment securities of $110.1$191.9 million, or 3%16%, and $407.6an increase in average loans of $187.1 million, or 53%5%, respectively, compared toas well as the third quarterimpact of 2020, andthe interest rate increases in 2022 having a decreasepositive impact on yields. The increases in interest income were partially offset by an increase in interest expense of $1.3$4.7 million. The decreaseincrease in interest expense was primarily due to a favorable shift in deposit categories, with a lower allocationthe result of continued repricing of time deposits coupled with a lower interest-bearing cost of funds.at higher rates throughout 2021 and into 2022. Average PPP loans, net of deferred fees were $5.6 million for the three months ended September 30, 2022 compared to $141.3 million for the three months ended September 30, 2021 compared2021. Revenue related to $263.0PPP loans was $1.1 million forlower in the three months ended September 30, 2020.third quarter of 2022 than the third quarter of 2021. PPP loan balances are significantly lower in 2022 as a result of loan forgiveness and repayment.

Our net interest margin for the third quarter of 20212022 was 3.07%3.28%, 15-basis21 basis points lowerhigher than 3.22%3.07% for the same period in 2020.2021. This comparable period decreaseimprovement was a functionprimarily due to the impact of a six-basis point lower contribution from net free fundsthe interest rate increases that have occurred in 2022 and a nine-basis point decrease in the interest rate spread. The lower interest rate spread was a resultlevel of a 29-basis point decreaseFederal Reserve interest-earning cash in comparison to the yield on average interest-earning assets and a 20-basis point decrease in the cost of average interest-bearing liabilities.prior year period.

For the third quarter of 2021,2022, the average yield on average interest earning assets of 3.31%3.86% was 29-basis55 basis points lowerhigher than the third quarter of 20202021 of 3.60%.3.31% due to the increase in market interest rates. Loan yields decreased six-basisincreased 66 basis points during the third quarter of 20212022 to 4.62% from 3.96% from 4.02%.for the same period in 2021. The average yield on investment securities decreased 51-basisincreased nine basis points during the third quarter of 20212022 to 1.81% from 1.72% from 2.23%.for the same period in 2021. Overall, a favorable volume variance increased interest income by $3.1$2.8 million during the third quarter of 2021, while2022, and the interest earning asset rate changes decreasedincreased interest income by $1.7$6.6 million which collectively drove a $1.4$9.4 million increase in interest income.

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Average interest-earning assets were $5.23 billion for the third quarter of 2022 compared to $4.97 billion for the third quarter of 2021, compared to $4.41 billion for the third quarter of 2020, an increase of $553.0$264.0 million, or 13%5%, from the comparable quarter last year, with average loanssecurities up $110.1$191.9 million from $3.52$1.18 billion to $3.63 billion and average securities up $407.6 million from $769.7 million to $1.18 billion. The growth in average loans reflected increases in our commercial and consumer indirect loan categories. Commercial loans were up $42.5 million from $1.99 billion to $2.03 billion, or 2%, from the third quarter of 2020. The average balances of PPP loans net of deferred fees, which are included in commercial loans, were $141.3 million and $263.0 million infor the third quarter of 2021 to $1.37 billion for the third quarter of 2022 and 2020, respectively. Residential real estate lines andaverage loans were down $15.5up $187.1 million or 16%, and $1.9 million, or less than 1%, respectively, primarily duefrom $3.63 billion for the third quarter of 2021 to consumer behavior. Consumer indirect loans increased by $86.8 million, or 10%, and other consumer loans decreased by $1.7 million, or 11%. Loans comprised 73.1%$3.82 billion for the third quarter of 2022. Securities represented 26.2% of average interest-earning assets during the third quarter of 20212022 compared to 79.8%23.7% during the third quarter of 2020.2021. The increase in average investment securities was due to the redeployment of excess liquidity intended to benefit interest income with the intent of reducing net interest margin compression relative to interest earned on federal funds sold and interest-earning deposits. Loans comprised 73.0% of average interest-earning assets during the third quarter of 2022 compared to 73.1% during the third quarter of 2021. The increase in average loans was primarily due to organic growth in commercial mortgages, bolstered by our February 2022 expansion into the Baltimore and Washington D.C. region. Loans generally have significantly higher yields compared to securities and federal funds sold andother interest-earning depositsassets and, as such, have a more positive effect on the net interest margin. The average yield on average loans was 3.96%4.62% for the third quarter of 2021, a decrease2022, an increase of six-basis66-basis points compared to 4.02%3.96% for the comparable quarter in 2020.2021 due to the impact of the interest rate increases that have occurred in 2022. An increase in the volume of average loans resulted in a $1.4$2.2 million increase in interest income partially offset by a $740 thousand decrease due to the unfavorableand rate variance. Securities represented 23.7% of average interest-earning assets during the third quarter of 2021 compared to 17.4% during the third quarter of 2020. The increase in investment securities is due to the redeployment of excess liquidity intended to benefit interest income. An increase in the volume of average investment securities resulted in a $1.7 million increase inchanges increased interest income partially offset by a $1.0 million decrease due to the unfavorable rate variance.$6.0 million.

The average cost of average interest-bearing liabilities increased by 45 basis points to 0.77% in the third quarter of 2022 compared to 0.32% in the third quarter of 2021 compared to 0.52% inbecause the third quarter of 2020, was 20-basis points lower and theaverage cost of average interest-bearing deposits decreased 22-basisincreased 42 basis points from 0.43% to 0.21%. Average short-term borrowings decreased from $57.9 million to $0 in the third quarter of 2021 compared to the same quarter of 2020. The decrease in average short-term borrowings was a result of the Company’s decision to utilize brokered deposits as a cost-effective alternative to Federal Home Loan Bank borrowings. The cost of long-term borrowings for the third quarter of 2021 decreased 56-basis points from 6.31% to 5.75% compared to0.63% for the samethird quarter of 2020. Overall, interest-bearing liability2022 as a result of the rising interest rate and volume changes resulted in $1.3 million of lower interest expense.environment.

Average interest-bearing liabilities were $3.91 billion for the third quarter of 2022, compared to $3.65 billion infor the third quarter of 2021, were $411.6an increase of $258.4 million, or 13%, higher than the third quarter of 2020.7%. On average, interest-bearing deposits grew $435.0$121.5 million from $3.15 billion to $3.58 billion and noninterest-bearing demand deposits (a principal componentfor the third quarter of net free funds) were up $161.2 million from $987.9 million2021 to $1.15 billion.$3.70 billion for the current quarter. The increase in average deposits was primarily due to growth in brokered, non-public and public, demand deposits, and an increase in reciprocal deposit programs. For further discussion of the

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reciprocal deposit programs, refer to the “Funding Activities - Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in a $1.5 million decrease in interest expense during the third quarter of 2021, primarily due to the overall lower interest rate market conditions. Average borrowings decreased $23.4 million from $97.2 million to $73.8 million compared to the third quarter of 2020. Overall, short and long-term borrowing rate and volume changes resulted in $210 thousand of higher interest expense during the third quarter of 2021.

Analysis of Net Interest Income for the Nine Months Ended September 30, 2021 and 2020

Net interest income on a taxable equivalent basis for the nine months ended September 30, 2021, was $114.4 million, an increase of $10.9 million versus the comparable period last year of $103.5 million. The increase in net interest income was due primarily to increases in deferred fee amortization on PPP loans of $3.8 million, which included accelerated amortization of fees on PPP loans paid-off through the forgiveness process, increases in average loans and average investment securities of $259.4 million, or 8%, and $278.5 million, or 36%, respectively, compared to the first nine months of 2020, and a decrease in interest expense of $8.7 million. The decrease in interest expense was primarily due to a favorable shift in deposit categories, with a lower allocation of time deposits, coupled with a lower interest-bearing cost of funds. Average PPP loans, net of deferred fees were $206.9 million for the nine months ended September 30, 2021 compared to $147.0 million for the nine months ended September 30, 2020.

The net interest margin for the first nine months of 2021 was 3.14%, eleven-basis points lower than 3.25% for the same period in 2020. This comparable period decrease was a function of a nine-basis point lower contribution from net free funds, and a two-basis point decrease in interest rate spread. The lower interest rate spread was a result of a 43-basis point decrease in the yield on average interest-earning assets and a 41-basis point decrease in the cost of average interest-bearing liabilities.

For the first nine months of 2021, the yield on average earning assets of 3.40% was 43-basis points lower than the first nine months of 2020 of 3.83%. Loan yields decreased 23-basis points during the first nine months of 2021 to 4.02% from 4.25%. The yield on investment securities decreased 61-basis points during the first nine months of 2021 to 1.79% from 2.40%. Overall, a favorable volume variance increased interest income by $12.1 million during the first nine months of 2021, while the earning asset rate changes decreased interest income by $9.9 million, which collectively drove a $2.1 million increase in interest income.

Average interest-earning assets were $4.87 billion for the first nine months of 2021 compared to $4.25 billion for the first nine months of 2020, an increase of $623.3 million, or 15%, from the comparable period last year, with average loans up $259.4 million from $3.38 billion to $3.64 billion and average securities up $278.5 million from $772.1 million to $1.05 billion. The growth in average loans reflected increases in most loan categories. Commercial loans, in particular, were up $218.1 million from $1.85 billion to $2.07 billion, or 12%, from the first nine months of 2020. The average balances of PPP loans net of deferred fees, which are included in commercial loans, were $206.9 million and $147.0 million in the first nine months of 2021 and 2020, respectively. Residential real estate loans were up $12.2 million, or 2%, partially offset by a decrease of $15.7 million, or 16%, in residential real estate lines. Consumer indirect loans increased by $45.2 million, or 5%, and other consumer loans decreased by $283 thousand, or 2%. Loans represented 74.8% of average interest-earning assets during the first nine months of 2021 compared to 79.7% during the first nine months of 2020. Loans generally have significantly higher yields compared to securities and federal funds sold and interest-earning deposits and, as such, have a more positive effect on the net interest margin. The yield on average loans was 4.02% for the first nine months of 2021, a decrease of 23-basis points compared to 4.25% for first nine months of 2020. An increase in the volume of average loans resulted in an $8.1 million increase in interest income, partially offset by a $6.1 million decrease due to the unfavorable rate variance. Securities represented 21.6% of average interest-earning assets during first nine months of 2021 compared to 18.2% during the first nine months of 2020. The increase in investment securities is due to the redeployment of excess liquidity intended to benefit interest income. An increase in the volume of investment securities resulted in a $3.8 million increase in interest income, partially offset by a $3.6 million decrease due to the unfavorable rate variance.

The cost of average interest-bearing liabilities of 0.36% in the first nine months of 2021 compared to 0.77% in the first nine months of 2020 was 41-basis points lower and the cost of average interest-bearing deposits decreased 42-basis points from 0.66% to 0.24%. Average short-term borrowings decreased $112.1 million from $112.5 million to $388 thousand in the first nine months of 2021 compared to the same period of 2020. The decrease in average short-term borrowings was a result of the Company’s decision to utilize brokered deposits as a cost-effective alternative to Federal Home Loan Bank borrowings. The cost of long-term borrowings for the first nine months of 2021 decreased 55-basis points from 6.30% to 5.75% in the first nine months of 2021 compared to the same period of 2020. Overall, interest-bearing liability rate and volume decreases resulted in $8.7 million of lower interest expense.

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Average interest-bearing liabilities of $3.61 billion in the first nine months of 2021 were $421.1 million, or 13%, higher than the first nine months of 2020. On average, interest-bearing deposits grew $498.7 million from $3.03 billion to $3.53 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up $221.0 million from $874.5 million to $1.10 billion. The increase in average deposits was primarily due to growth in non-public and public demand deposits and an increasedecline in reciprocal deposit programs. 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 and volume changes resulted in $8.8a $4.7 million of lowerincrease in interest expense during the third quarter of 2022, primarily due to the overall higher rate market conditions.

Analysis of Net Interest Income for the Nine Months Ended September 30, 2022 and 2021

Net interest income on a taxable equivalent basis for the nine months ended September 30, 2022, was $124.6 million, an increase of $10.3 million versus the comparable period in 2021 of $114.4 million. The increase in net interest income was primarily due to an increase in average investment securities of $351.0 million, or 33.4%, and an increase in average loans of $120.5 million, or 3.3%, as well as the impact of interest rate increases in 2022 having a positive impact on yields. The increases in interest income were partially offset by an increase in interest expense of $4.5 million. The increase in interest expense was primarily the result of continued repricing of time deposits at higher rates throughout 2021 and into 2022. Average PPP loans, net of deferred fees were $22.4 million for the nine months ended September 30, 2022 compared to $206.9 million for the nine months ended September 30, 2021. Revenue related to PPP loans was $4.9 million lower in the first nine months of 2021, primarily due to the overall lower interest rate market conditions. Average borrowings decreased $77.6 million from $151.7 million to $74.1 million compared to2022 than the first nine months of 2020.2021. PPP loan balances are significantly lower in 2022 as a result of loan forgiveness and repayment.

Our net interest margin for the nine months ended September 30, 2022 was 3.19%, 5 basis points higher than 3.14% for the same period in 2021. This comparable period increase was a combination of a three basis points increase in the interest rate spread and a two basis point increase in the contribution of interest-free funds. The higher interest rate spread was a result of a 15 basis points increase in the average yield on average interest-earning assets and a 12 basis points increase in the average cost of average interest-bearing liabilities.

For the nine months ended September 30, 2022, the average yield on average interest earning assets of 3.55% was 15-basis points higher than the nine months ended September 30, 2021 of 3.40%. The average yield on loans increased 23-basis points during the nine months ended September 30, 2022, to 4.25% from 4.02% for the comparable period last year. The average yield on investment securities remained consistent at 1.79% for the nine months ended September 30, 2022 and 2021. Overall, shortvolume variances in average interest-earning assets and long-term borrowingaverage interest-bearing liabilities increased net interest income by $7.0 million during the nine months ended September 30, 2022, and the impact of the interest rate increases in 2022 had an overall positive impact on yields, contributing another $3.3 million to interest income.

Average interest-earning assets were $5.22 billion for the nine months ended September 30, 2022 compared to $4.87 billion for the nine months ended September 30, 2021, an increase of $343.9 million, or 7.1%, with average loans up $120.5 million from $3.64 billion for the nine months ended September 30, 2021 to $3.76 billion for the nine months ended September 30, 2022 and average securities up $351.0 million from $1.05 billion for the nine months ended September 30, 2021 to $1.40 billion for the nine months ended September 30, 2022. Securities represented 26.9% of average interest-earning assets during the nine months ended September 30, 2022 compared to 21.6% during the nine months ended September 30, 2021. The increase in investment securities was due to the redeployment of excess liquidity intended to benefit interest income with the intent of reducing net interest margin compression versus federal funds sold and interest-earning deposits. Loans comprised 72.2% of average interest-earning assets during the nine months ended September 30, 2022 compared to 74.8% during the nine months ended September 30, 2021. The increase in average loans was primarily due to organic growth in commercial mortgages, bolstered by our expansion into the Baltimore and Washington D.C. region, as well as organic growth in consumer indirect, partially offset by decreases in commercial business loans, primarily due to lower PPP loan balances in 2022. 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 changesof average loans resulted in $35 thousand ofa $4.2 million increase in interest income and higher interest expense during the first nine months of 2021.rates increased interest income by $5.7 million.

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The average cost of average interest-bearing liabilities was 0.48% in the nine months ended September 30, 2022 compared to 0.36% in the nine months ended September 30, 2021 with the increase the result of the average cost of average interest-bearing deposits increasing 11 basis points from 0.24% for the nine months ended September 30, 2021 to 0.35% for the nine months ended September 30, 2022 due to the rising interest rate environment.

Average interest-bearing liabilities of $3.92 billion in the nine months ended September 30, 2022 were $312.0 million, or 8.7%, higher than the nine months ended September 30, 2021. On average, interest-bearing deposits grew $226.5 million from $3.53 billion for the nine months ended September 30, 2021 to $3.76 billion for the current nine month period, while noninterest-bearing demand deposits (a principal component of net free funds) remained constant at $1.10 billion. The increase in average deposits was primarily due to growth in public, non-public and brokered deposits, partially offset by a decrease in reciprocal 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 and volume changes resulted in a $3.7 million increase in interest expense during the nine months ended September 30, 2022, primarily due to the recent interest rate increases experienced in 2022.

50

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following tables setsset forth certain information relating to the consolidated balance sheets and reflects the average yields earned on interest-earning assets, as well as the average rates paid on interest-bearing liabilities for the periods indicated (in(dollars in thousands). Average balances were derived from daily balances.

 

Three months ended September 30,

 

 

Three months ended September 30,

 

 

2021

 

2020

 

 

2022

 

 

2021

 

 

Average
Balance

 

Interest

 

Average
Rate

 

Average
Balance

 

Interest

 

Average
Rate

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate (3)

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate (3)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-earning deposits

 

$

157,229

 

$

67

 

0.17

%

 

$

121,929

 

$

31

 

0.10

%

 

$

42,183

 

 

$

188

 

 

 

1.77

%

 

$

157,229

 

 

$

67

 

 

 

0.17

%

Investment securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

1,068,226

 

4,392

 

1.64

 

614,465

 

3,330

 

2.17

 

 

 

1,275,390

 

 

 

5,599

 

 

 

1.76

 

 

 

1,068,226

 

 

 

4,392

 

 

 

1.64

 

Tax-exempt (2)

 

 

109,011

 

 

666

 

 

2.44

 

 

155,208

 

 

957

 

 

2.47

 

 

 

93,776

 

 

 

608

 

 

 

2.59

 

 

 

109,011

 

 

 

666

 

 

 

2.44

 

Total investment securities

 

1,177,237

 

5,058

 

1.72

 

769,673

 

4,287

 

2.23

 

 

 

1,369,166

 

 

 

6,207

 

 

 

1.81

 

 

 

1,177,237

 

 

 

5,058

 

 

 

1.72

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

700,797

 

6,321

 

3.58

 

808,582

 

6,792

 

3.34

 

 

 

623,916

 

 

 

7,890

 

 

 

5.02

 

 

 

700,797

 

 

 

6,321

 

 

 

3.58

 

Commercial mortgage

 

1,331,063

 

13,004

 

3.88

 

1,180,747

 

12,160

 

4.10

 

 

 

1,514,138

 

 

 

18,976

 

 

 

4.97

 

 

 

1,331,063

 

 

 

13,004

 

 

 

3.88

 

Residential real estate loans

 

588,585

 

4,950

 

3.36

 

590,483

 

5,314

 

3.60

 

 

 

577,094

 

 

 

4,903

 

 

 

3.40

 

 

 

588,585

 

 

 

4,950

 

 

 

3.36

 

Residential real estate lines

 

79,766

 

672

 

3.35

 

95,288

 

874

 

3.65

 

 

 

76,853

 

 

 

822

 

 

 

4.24

 

 

 

79,766

 

 

 

672

 

 

 

3.35

 

Consumer indirect

 

917,402

 

10,903

 

4.71

 

830,647

 

10,039

 

4.81

 

 

 

1,012,787

 

 

 

11,428

 

 

 

4.48

 

 

 

917,402

 

 

 

10,903

 

 

 

4.71

 

Other consumer

 

 

14,718

 

 

392

 

 

10.58

 

 

16,445

 

 

423

 

 

10.23

 

 

 

14,648

 

 

 

390

 

 

 

10.55

 

 

 

14,718

 

 

 

392

 

 

 

10.58

 

Total loans(4)

 

 

3,632,331

 

 

36,242

 

 

3.96

 

 

3,522,192

 

 

35,602

 

 

4.02

 

 

 

3,819,436

 

 

 

44,409

 

 

 

4.62

 

 

 

3,632,331

 

 

 

36,242

 

 

 

3.96

 

Total interest-earning assets

 

4,966,797

 

 

41,367

 

 

3.31

 

 

4,413,794

 

 

39,920

 

 

3.60

 

 

 

5,230,785

 

 

 

50,804

 

 

 

3.86

 

 

 

4,966,797

 

 

 

41,367

 

 

 

3.31

 

Less: Allowance for credit losses

 

(48,202

)

 

 

 

 

 

 

 

(47,447

)

 

 

 

 

 

 

 

 

(43,088

)

 

 

 

 

 

 

 

 

(48,202

)

 

 

 

 

 

 

Other noninterest-earning assets

 

 

449,459

 

 

 

 

 

 

 

 

408,986

 

 

 

 

 

 

 

 

412,267

 

 

 

 

 

 

 

 

 

449,459

 

 

 

 

 

 

 

Total assets

 

$

5,368,054

 

 

 

 

 

 

 

$

4,775,333

 

 

 

 

 

 

 

$

5,599,964

 

 

 

 

 

 

 

 

$

5,368,054

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

796,371

 

$

291

 

0.15

%

 

$

704,550

 

254

 

0.14

%

 

$

854,015

 

 

 

395

 

 

 

0.18

%

 

$

796,371

 

 

 

291

 

 

 

0.15

%

Savings and money market

 

1,876,394

 

798

 

0.17

 

1,574,068

 

1,102

 

0.28

 

 

 

1,817,413

 

 

 

2,567

 

 

 

0.56

 

 

 

1,876,394

 

 

 

798

 

 

 

0.17

 

Time deposits

 

 

908,351

 

 

805

 

 

0.35

 

 

867,479

 

 

2,014

 

 

0.92

 

 

 

1,031,162

 

 

 

2,913

 

 

 

1.12

 

 

 

908,351

 

 

 

805

 

 

 

0.35

 

Total interest-bearing deposits

 

3,581,116

 

1,894

 

0.21

 

3,146,097

 

3,370

 

0.43

 

 

 

3,702,590

 

 

 

5,875

 

 

 

0.63

 

 

 

3,581,116

 

 

 

1,894

 

 

 

0.21

 

Short-term borrowings

 

—

 

—

 

—

 

57,856

 

232

 

1.60

 

 

 

136,610

 

 

 

672

 

 

 

1.95

 

 

 

—

 

 

 

—

 

 

 

—

 

Long-term borrowings

 

 

73,786

 

 

1,060

 

 

5.75

 

 

39,314

 

 

618

 

 

6.31

 

 

 

74,096

 

 

 

1,060

 

 

 

5.72

 

 

 

73,786

 

 

 

1,060

 

 

 

5.75

 

Total borrowings

 

 

73,786

 

 

1,060

 

 

5.75

 

 

97,170

 

 

850

 

 

3.50

 

 

 

210,706

 

 

 

1,732

 

 

 

3.26

 

 

 

73,786

 

 

 

1,060

 

 

 

5.75

 

Total interest-bearing liabilities

 

3,654,902

 

 

2,954

 

 

0.32

 

 

3,243,267

 

4,220

 

 

0.52

 

 

 

3,913,296

 

 

 

7,607

 

 

 

0.77

 

 

 

3,654,902

 

 

 

2,954

 

 

 

0.32

 

Noninterest-bearing demand deposits

 

1,149,120

 

 

 

 

 

 

 

987,908

 

 

 

 

 

 

 

 

1,115,759

 

 

 

 

 

 

 

 

 

1,149,120

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

68,158

 

 

 

 

 

 

 

88,882

 

 

 

 

 

 

 

 

133,002

 

 

 

 

 

 

 

 

 

68,158

 

 

 

 

 

 

 

Shareholders’ equity

 

 

495,874

 

 

 

 

 

 

 

 

455,276

 

 

 

 

 

 

 

 

437,907

 

 

 

 

 

 

 

 

 

495,874

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,368,054

 

 

 

 

 

 

 

$

4,775,333

 

 

 

 

 

 

 

$

5,599,964

 

 

 

 

 

 

 

 

$

5,368,054

 

 

 

 

 

 

 

Net interest income (tax-equivalent)

 

 

 

 

$

38,413

 

 

 

 

 

 

 

$

35,700

 

 

 

 

 

 

 

$

43,197

 

 

 

 

 

 

 

 

$

38,413

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

2.99

%

 

 

 

 

 

 

 

 

3.08

%

 

 

 

 

 

 

 

 

3.09

%

 

 

 

 

 

 

 

 

2.99

%

Net earning assets

 

$

1,311,895

 

 

 

 

 

 

 

$

1,170,527

 

 

 

 

 

 

 

$

1,317,489

 

 

 

 

 

 

 

 

$

1,311,895

 

 

 

 

 

 

 

Net interest margin (tax-equivalent)

 

 

 

 

 

 

 

 

3.07

%

 

 

 

 

 

 

 

 

3.22

%

 

 

 

 

 

 

 

 

3.28

%

 

 

 

 

 

 

 

 

3.07

%

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

 

 

 

 

 

 

 

 

135.89

%

 

 

 

 

 

 

 

 

136.09

%

 

 

 

 

 

 

 

 

133.67

%

 

 

 

 

 

 

 

 

135.89

%

(1)Investment securities are shown at amortized cost.

(2)The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.

(3) Annualized.

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

51

 

 

 Nine months ended
September 30,

 

 

 

2021

 

 

2020

 

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

 

 

Three months ended
September 30,

 

 

 

2022

 

 

2021

 

Commercial business

 

$

243

 

 

$

1,010

 

Commercial mortgage

 

 

692

 

 

 

413

 

Residential real estate loans

 

 

(438

)

 

 

(593

)

Residential real estate lines

 

 

(94

)

 

 

(114

)

Consumer indirect

 

 

(1,127

)

 

 

(984

)

Other consumer

 

 

6

 

 

 

5

 

Total

 

$

(718

)

 

$

(263

)

 

 

Nine months ended
September 30,

 

 

 

2022

 

 

2021

 

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate (3)

 

 

Average
Balance

 

 

Interest

 

 

Average
Rate (3)

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-earning deposits

 

$

49,048

 

 

$

315

 

 

 

0.86

%

 

$

176,653

 

 

$

155

 

 

 

0.12

%

Investment securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

1,297,216

 

 

 

16,832

 

 

 

1.73

 

 

 

923,162

 

 

 

11,751

 

 

 

1.70

 

Tax-exempt (2)

 

 

104,324

 

 

 

1,997

 

 

 

2.55

 

 

 

127,368

 

 

 

2,345

 

 

 

2.45

 

Total investment securities

 

 

1,401,540

 

 

 

18,829

 

 

 

1.79

 

 

 

1,050,530

 

 

 

14,096

 

 

 

1.79

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

626,121

 

 

 

20,462

 

 

 

4.37

 

 

 

763,332

 

 

 

21,740

 

 

 

3.81

 

Commercial mortgage

 

 

1,458,961

 

 

 

47,533

 

 

 

4.36

 

 

 

1,306,001

 

 

 

38,163

 

 

 

3.91

 

Residential real estate loans

 

 

578,354

 

 

 

14,544

 

 

 

3.35

 

 

 

595,740

 

 

 

15,298

 

 

 

3.42

 

Residential real estate lines

 

 

77,062

 

 

 

2,172

 

 

 

3.77

 

 

 

83,429

 

 

 

2,128

 

 

 

3.41

 

Consumer indirect

 

 

1,009,475

 

 

 

33,725

 

 

 

4.47

 

 

 

879,993

 

 

 

31,173

 

 

 

4.74

 

Other consumer

 

 

14,454

 

 

 

1,142

 

 

 

10.56

 

 

 

15,408

 

 

 

1,192

 

 

 

10.35

 

Total loans (4)

 

 

3,764,427

 

 

 

119,578

 

 

 

4.25

 

 

 

3,643,903

 

 

 

109,694

 

 

 

4.02

 

Total interest-earning assets

 

 

5,215,015

 

 

 

138,722

 

 

 

3.55

 

 

 

4,871,086

 

 

 

123,945

 

 

 

3.40

 

Less: Allowance for credit losses

 

 

(42,067

)

 

 

 

 

 

 

 

 

(51,395

)

 

 

 

 

 

 

Other noninterest-earning assets

 

 

413,363

 

 

 

 

 

 

 

 

 

432,818

 

 

 

 

 

 

 

Total assets

 

 

5,586,311

 

 

 

 

 

 

 

 

$

5,252,509

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

905,224

 

 

$

970

 

 

 

0.14

%

 

$

810,086

 

 

$

848

 

 

 

0.14

%

Savings and money market

 

 

1,882,342

 

 

 

4,451

 

 

 

0.32

 

 

 

1,819,766

 

 

 

2,550

 

 

 

0.19

 

Time deposits

 

 

971,681

 

 

 

4,525

 

 

 

0.62

 

 

 

902,883

 

 

 

2,896

 

 

 

0.43

 

Total interest-bearing deposits

 

 

3,759,247

 

 

 

9,946

 

 

 

0.35

 

 

 

3,532,735

 

 

 

6,294

 

 

 

0.24

 

Short-term borrowings

 

 

85,585

 

 

 

952

 

 

 

1.49

 

 

 

388

 

 

 

119

 

 

 

41.07

 

Long-term borrowings

 

 

74,020

 

 

 

3,181

 

 

 

5.73

 

 

 

73,711

 

 

 

3,177

 

 

 

5.75

 

Total borrowings

 

 

159,605

 

 

 

4,133

 

 

 

3.46

 

 

 

74,099

 

 

 

3,296

 

 

 

5.93

 

Total interest-bearing liabilities

 

 

3,918,852

 

 

 

14,079

 

 

 

0.48

 

 

 

3,606,834

 

 

 

9,590

 

 

 

0.36

 

Noninterest-bearing demand deposits

 

 

1,099,234

 

 

 

 

 

 

 

 

 

1,095,497

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

113,195

 

 

 

 

 

 

 

 

 

69,847

 

 

 

 

 

 

 

Shareholders’ equity

 

 

455,030

 

 

 

 

 

 

 

 

 

480,331

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,586,311

 

 

 

 

 

 

 

 

$

5,252,509

 

 

 

 

 

 

 

Net interest income (tax-equivalent)

 

 

 

 

$

124,643

 

 

 

 

 

 

 

 

$

114,355

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

3.07

%

 

 

 

 

 

 

 

 

3.04

%

Net earning assets

 

$

1,296,163

 

 

 

 

 

 

 

 

$

1,264,252

 

 

 

 

 

 

 

Net interest margin (tax-equivalent)

 

 

 

 

 

 

 

 

3.19

%

 

 

 

 

 

 

 

 

3.14

%

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

 

 

 

 

 

 

 

 

133.08

%

 

 

 

 

 

 

 

 

135.05

%

52

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Federal funds sold and interest-earning deposits

 

$

176,653

 

 

$

155

 

 

 

0.12

%

 

$

91,263

 

 

$

266

 

 

 

0.39

%

Investment securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

923,162

 

 

 

11,751

 

 

 

1.70

 

 

 

596,604

 

 

 

10,649

 

 

 

2.38

 

Tax-exempt (2)

 

 

127,368

 

 

 

2,345

 

 

 

2.45

 

 

 

175,455

 

 

 

3,237

 

 

 

2.46

 

Total investment securities

 

 

1,050,530

 

 

 

14,096

 

 

 

1.79

 

 

 

772,059

 

 

 

13,886

 

 

 

2.40

 

Loans:

 

 

 

 

 

 

 

 

��

 

 

 

 

 

 

 

 

 

Commercial business

 

 

763,332

 

 

 

21,740

 

 

 

3.81

 

 

 

712,703

 

 

 

19,843

 

 

 

3.72

 

Commercial mortgage

 

 

1,306,001

 

 

 

38,163

 

 

 

3.91

 

 

 

1,138,568

 

 

 

37,659

 

 

 

4.42

 

Residential real estate loans

 

 

595,740

 

 

 

15,298

 

 

 

3.42

 

 

 

583,540

 

 

 

16,095

 

 

 

3.68

 

Residential real estate lines

 

 

83,429

 

 

 

2,128

 

 

 

3.41

 

 

 

99,156

 

 

 

2,979

 

 

 

4.01

 

Consumer indirect

 

 

879,993

 

 

 

31,173

 

 

 

4.74

 

 

 

834,810

 

 

 

29,757

 

 

 

4.76

 

Other consumer

 

 

15,408

 

 

 

1,192

 

 

 

10.35

 

 

 

15,691

 

 

 

1,326

 

 

 

11.29

 

Total loans

 

 

3,643,903

 

 

 

109,694

 

 

 

4.02

 

 

 

3,384,468

 

 

 

107,659

 

 

 

4.25

 

Total interest-earning assets

 

 

4,871,086

 

 

 

123,945

 

 

 

3.40

 

 

 

4,247,790

 

 

 

121,811

 

 

 

3.83

 

Less: Allowance for loan losses

 

 

(51,395

)

 

 

 

 

 

 

 

 

(44,228

)

 

 

 

 

 

 

Other noninterest-earning assets

 

 

432,818

 

 

 

 

 

 

 

 

 

389,047

 

 

 

 

 

 

 

Total assets

 

$

5,252,509

 

 

 

 

 

 

 

 

$

4,592,609

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

810,086

 

 

$

848

 

 

 

0.14

%

 

$

694,830

 

 

$

840

 

 

 

0.16

%

Savings and money market

 

 

1,819,766

 

 

 

2,550

 

 

 

0.19

 

 

 

1,349,931

 

 

 

3,724

 

 

 

0.37

 

Time deposits

 

 

902,883

 

 

 

2,896

 

 

 

0.43

 

 

 

989,236

 

 

 

10,502

 

 

 

1.42

 

Total interest-bearing deposits

 

 

3,532,735

 

 

 

6,294

 

 

 

0.24

 

 

 

3,033,997

 

 

 

15,066

 

 

 

0.66

 

Short-term borrowings

 

 

388

 

 

 

119

 

 

 

41.07

 

 

 

112,451

 

 

 

1,408

 

 

 

1.67

 

Long-term borrowings

 

 

73,711

 

 

 

3,177

 

 

 

5.75

 

 

 

39,297

 

 

 

1,853

 

 

 

6.30

 

Total borrowings

 

 

74,099

 

 

 

3,296

 

 

 

5.93

 

 

 

151,748

 

 

 

3,261

 

 

 

2.87

 

Total interest-bearing liabilities

 

 

3,606,834

 

 

 

9,590

 

 

 

0.36

 

 

 

3,185,745

 

 

 

18,327

 

 

 

0.77

 

Noninterest-bearing demand deposits

 

 

1,095,497

 

 

 

 

 

 

 

 

 

874,456

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

69,847

 

 

 

 

 

 

 

 

 

85,069

 

 

 

 

 

 

 

Shareholders’ equity

 

 

480,331

 

 

 

 

 

 

 

 

 

447,339

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,252,509

 

 

 

 

 

 

 

 

$

4,592,609

 

 

 

 

 

 

 

Net interest income (tax-equivalent)

 

 

 

 

$

114,355

 

 

 

 

 

 

 

 

$

103,484

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

3.04

%

 

 

 

 

 

 

 

 

3.06

%

Net earning assets

 

$

1,264,252

 

 

 

 

 

 

 

 

$

1,062,045

 

 

 

 

 

 

 

Net interest margin (tax-equivalent)

 

 

 

 

 

 

 

 

3.14

%

 

 

 

 

 

 

 

 

3.25

%

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

 

 

 

 

 

 

 

 

135.05

%

 

 

 

 

 

 

 

 

133.34

%

(1)Investment securities are shown at amortized cost.

(2)The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%.

(3) Annualized.

(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):

 

 

Nine months ended
September 30,

 

 

 

2022

 

 

2021

 

Commercial business

 

$

1,947

 

 

$

5,455

 

Commercial mortgage

 

 

1,675

 

 

 

1,107

 

Residential real estate loans

 

 

(1,402

)

 

 

(1,663

)

Residential real estate lines

 

 

(248

)

 

 

(316

)

Consumer indirect

 

 

(3,287

)

 

 

(2,834

)

Other consumer

 

 

13

 

 

 

3

 

Total

 

$

(1,302

)

 

$

1,752

 

53

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MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands):. No out-of-period adjustments were included in the rate/volume analysis.

 

Three months ended
September 30, 2021 vs. 2020

 

 

Nine months ended
September 30, 2021 vs. 2020

 

 

Three months ended
September 30, 2022 vs. 2021

 

 

Nine months ended
September 30, 2022 vs. 2021

 

Increase (decrease) in:

 

Volume

 

Rate

 

Total

 

 

Volume

 

Rate

 

Total

 

 

Volume

 

 

Rate

 

 

Total

 

 

Volume

 

 

Rate

 

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-earning deposits

 

$

11

 

$

25

 

$

36

 

$

149

 

$

(260

)

 

$

(111

)

 

$

(82

)

 

$

203

 

 

$

121

 

 

$

(185

)

 

$

345

 

 

$

160

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

2,012

 

(950

)

 

1,062

 

4,732

 

(3,630

)

 

1,102

 

 

 

894

 

 

 

313

 

 

 

1,207

 

 

 

4,850

 

 

 

231

 

 

 

5,081

 

Tax-exempt

 

 

(282

)

 

 

(9

)

 

 

(291

)

 

 

(885

)

 

 

(7

)

 

 

(892

)

 

 

(97

)

 

 

39

 

 

 

(58

)

 

 

(438

)

 

 

90

 

 

 

(348

)

Total investment securities

 

1,730

 

(959

)

 

771

 

3,847

 

(3,637

)

 

210

 

 

 

797

 

 

 

352

 

 

 

1,149

 

 

 

4,412

 

 

 

321

 

 

 

4,733

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

(948

)

 

477

 

(471

)

 

1,434

 

463

 

1,897

 

 

 

(753

)

 

 

2,322

 

 

 

1,569

 

 

 

(4,224

)

 

 

2,946

 

 

 

(1,278

)

Commercial mortgage

 

1,492

 

(648

)

 

844

 

5,178

 

(4,674

)

 

504

 

 

 

1,954

 

 

 

4,018

 

 

 

5,972

 

 

 

4,729

 

 

 

4,641

 

 

 

9,370

 

Residential real estate loans

 

(17

)

 

(347

)

 

(364

)

 

331

 

(1,128

)

 

(797

)

 

 

(98

)

 

 

51

 

 

 

(47

)

 

 

(441

)

 

 

(313

)

 

 

(754

)

Residential real estate lines

 

(135

)

 

(67

)

 

(202

)

 

(436

)

 

(415

)

 

(851

)

 

 

(26

)

 

 

176

 

 

 

150

 

 

 

(169

)

 

 

213

 

 

 

44

 

Consumer indirect

 

1,033

 

(169

)

 

864

 

1,602

 

(186

)

 

1,416

 

 

 

1,095

 

 

 

(570

)

 

 

525

 

 

 

4,399

 

 

 

(1,847

)

 

 

2,552

 

Other consumer

 

 

(45

)

 

 

14

 

 

(31

)

 

 

(24

)

 

 

(110

)

 

 

(134

)

 

 

(2

)

 

 

—

 

 

 

(2

)

 

 

(75

)

 

 

25

 

 

 

(50

)

Total loans

 

 

1,380

 

 

(740

)

 

 

640

 

 

8,085

 

 

(6,050

)

 

 

2,035

 

 

 

2,170

 

 

 

5,997

 

 

 

8,167

 

 

 

4,219

 

 

 

5,665

 

 

 

9,884

 

Total interest income

 

 

3,121

 

 

(1,674

)

 

 

1,447

 

 

12,081

 

 

(9,947

)

 

 

2,134

 

 

 

2,885

 

 

 

6,552

 

 

 

9,437

 

 

 

8,446

 

 

 

6,331

 

 

 

14,777

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

34

 

3

 

37

 

129

 

(121

)

 

8

 

 

 

22

 

 

 

82

 

 

 

104

 

 

 

102

 

 

 

20

 

 

 

122

 

Savings and money market

 

185

 

(489

)

 

(304

)

 

1,032

 

(2,206

)

 

(1,174

)

 

 

(26

)

 

 

1,795

 

 

 

1,769

 

 

 

91

 

 

 

1,810

 

 

 

1,901

 

Time deposits

 

 

91

 

 

(1,300

)

 

 

(1,209

)

 

 

(846

)

 

 

(6,760

)

 

 

(7,606

)

 

 

123

 

 

 

1,985

 

 

 

2,108

 

 

 

235

 

 

 

1,394

 

 

 

1,629

 

Total interest-bearing deposits

 

310

 

(1,786

)

 

(1,476

)

 

315

 

(9,087

)

 

(8,772

)

 

 

119

 

 

 

3,862

 

 

 

3,981

 

 

 

428

 

 

 

3,224

 

 

 

3,652

 

Short-term borrowings

 

(116

)

 

(116

)

 

(232

)

 

(2,744

)

 

1,455

 

(1,289

)

 

 

672

 

 

 

—

 

 

 

672

 

 

 

1,058

 

 

 

(225

)

 

 

833

 

Long-term borrowings

 

 

499

 

 

(57

)

 

 

442

 

 

1,495

 

 

(171

)

 

 

1,324

 

 

 

4

 

 

 

(4

)

 

 

—

 

 

 

13

 

 

 

(9

)

 

 

4

 

Total borrowings

 

 

383

 

 

(173

)

 

 

210

 

 

(1,249

)

 

 

1,284

 

 

35

 

 

 

676

 

 

 

(4

)

 

 

672

 

 

 

1,071

 

 

 

(234

)

 

 

837

 

Total interest expense

 

 

693

 

 

(1,959

)

 

 

(1,266

)

 

 

(934

)

 

 

(7,803

)

 

 

(8,737

)

 

 

795

 

 

 

3,858

 

 

 

4,653

 

 

 

1,499

 

 

 

2,990

 

 

 

4,489

 

Net interest income

 

$

2,428

 

$

285

 

$

2,713

 

$

13,015

 

$

(2,144

)

 

$

10,871

 

 

$

2,090

 

 

$

2,694

 

 

$

4,784

 

 

$

6,947

 

 

$

3,341

 

 

$

10,288

 

ProvisionProvision/Benefit for Credit Losses

The provision for credit losses for the three and nine months ended September 30, 2021 were benefits of $541 thousand2022 was $4.3 million and $7.1$7.2 million, respectively, compared to provisionsa benefit for credit losses of $4.0$0.5 million and $21.7$7.1 million for the corresponding periods in 2020.2021. During the second quarter of 2022 we recorded a $2.0 million recovery in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the second quarter of 2021. Loan loss provision returned to a more normalized level in 2022 due to the impact of an increase in the national unemployment forecast and qualitative factors reflecting economic uncertainty associated with higher interest rates and global political unrest, partially offset by a reduction in overall specific reserve levels. The benefits in the third quarter and first nine months of 2021 were due to continued improvement in the national unemployment forecast following the initial impact of the COVID-19 pandemic, the designated loss driver for our current expected credit loss (“CECL”("CECL") model, and positive trends in qualitative factors, and a relatively low level of net charge-offs, resulting in releasesa release of credit loss reserves. The provisions in the third quarter and first nine months of 2020 were driven by the adoption of the CECL standard and the impact of the COVID-19 pandemic on the economic environment. The provision for credit losses - loans varies based primarily on forecasted unemployment rates, loan growth, net charge-offs, collateral values associated with collateral dependent loans and qualitative factors.

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.

54

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Noninterest Income

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

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Service charges on deposits

 

$

1,502

 

$

1,254

 

$

4,081

 

$

3,321

 

 

$

1,597

 

 

$

1,502

 

 

$

4,403

 

 

$

4,081

 

Insurance income

 

1,864

 

1,357

 

4,407

 

3,525

 

 

 

1,571

 

 

 

1,864

 

 

 

4,902

 

 

 

4,407

 

Card interchange income

 

2,118

 

1,943

 

6,270

 

5,321

 

 

 

2,076

 

 

 

2,118

 

 

 

6,131

 

 

 

6,270

 

Investment advisory

 

2,969

 

2,443

 

8,627

 

6,940

 

 

 

2,722

 

 

 

2,969

 

 

 

8,669

 

 

 

8,627

 

Company owned life insurance

 

776

 

470

 

2,126

 

1,397

 

 

 

2,965

 

 

 

776

 

 

 

4,667

 

 

 

2,126

 

Investments in limited partnerships

 

694

 

(105

)

 

1,787

 

(136

)

 

 

65

 

 

 

694

 

 

 

1,102

 

 

 

1,787

 

Loan servicing

 

105

 

49

 

293

 

106

 

 

 

139

 

 

 

105

 

 

 

383

 

 

 

293

 

Income from derivative instruments, net

 

377

 

1,931

 

1,660

 

4,617

 

 

 

99

 

 

 

377

 

 

 

1,263

 

 

 

1,660

 

Net gain on sale of loans held for sale

 

600

 

1,397

 

2,468

 

2,261

 

 

 

308

 

 

 

600

 

 

 

1,045

 

 

 

2,468

 

Net gain on investment securities

 

—

 

554

 

71

 

1,449

 

Net gain (loss) on other assets

 

138

 

(55

)

 

286

 

8

 

Net (loss) gain on investment securities

 

 

—

 

 

 

—

 

 

 

(15

)

 

 

71

 

Net (loss) gain on other assets

 

 

(22

)

 

 

138

 

 

 

(15

)

 

 

286

 

Net (loss) gain on tax credit investments

 

(129

)

 

(40

)

 

62

 

(120

)

 

 

(385

)

 

 

(129

)

 

 

(704

)

 

 

62

 

Other

 

 

1,069

 

 

1,019

 

 

3,094

 

 

3,151

 

 

 

1,517

 

 

 

1,069

 

 

 

3,503

 

 

 

3,094

 

Total noninterest income

 

$

12,083

 

$

12,217

 

$

35,232

 

$

31,840

 

 

$

12,652

 

 

$

12,083

 

 

$

35,334

 

 

$

35,232

 

Service charges on deposits increased $248Insurance income decreased $293 thousand, or 20%16%, to $1.5$1.6 million for the third quarter of 20212022 compared to $1.3 million for the third quarter of 2020. For the first nine months of 2021, insurance income increased $760 thousand, or 23%, to $4.1 million compared to $3.3 million for the first nine months of 2020. The increases were primarily the result of our COVID-19 relief initiatives implemented between March 23, 2020 to July 9, 2020, including temporarily waiving or eliminating fees. In addition, insufficient fund fees in the remainder of the third quarter of 2020 were lower than historic levels.

Insurance income increased $507 thousand, or 37%, to $1.9 million for the third quarter of 2021 compared to $1.4 million for the third quarter of 2020.2021. For the first nine months of 2021,2022, insurance income increased $882$495 thousand, or 25%11%, to $4.4$4.9 million compared to $3.5$4.4 million for the first nine months of 2020.2021. The increases wereincrease in the first nine months of 2022 was primarily due todriven by the two 2021 bolt on acquisitions of(North Woods in August 2021 and Landmark in February 2021), and North Woodshigher contingent revenues in August as well as growth in the legacy SDN business, including the impact of increasing insurance premiums.2022.

Investment advisoryCompany owned life insurance income increased $526 thousand, or 22%,$2.2 million, to $3.0 million for the third quarter of 2021,2022 compared to $2.4 million$776 thousand for the third quarter of 2020.2021. For the first nine months of 2021, investment advisory2022, company owned life insurance income increased $1.7$2.5 million or 24%, to $8.6$4.7 million compared to $6.9$2.1 million for the first nine months of 2020.2021. The increases were primarily due to the result of an increase in assets under management driven by a combination of market gains, new customer accountspreviously mentioned enhancement from the surrender and contributions to existing accounts in 2021.redeploy strategy.

Company owned life insuranceInvestments in limited partnerships income increased $306decreased $629 thousand or 65%, to $776$65 thousand for the third quarter of 20212022 compared to $470$694 thousand for theor third quarter of 2020.2021. For the first nine months of 2021, company owned life insurance2022, investments in limited partnerships income increased $729decreased $685 thousand or 52%, to $2.1$1.1 million compared to $1.4from $1.8 million for the first nine months of 2020. We2021. The Company has made additional investments in company-owned life insurance of $20.0 million in the third quarter of 2021 and $30.0 million in the fourth quarter of 2020 to take advantage of attractive tax-equivalent yields and partially offset employee benefit expenses.

Income (loss) from investments in limited partnerships increased $799 thousand, to income of $694 thousand for the third quarter of 2021 compared to a loss of $105 thousand for the third quarter of 2020. For the first nine months of 2021, income (loss) from investments in limited partnerships increased $1.9 million, to income of $1.8 million compared to a loss of $136 thousand for the first nine months of 2020. We haveseveral investments in limited partnerships, primarily small business investment companies, and accountaccounts for these investments under the equity method. The incomeIncome from these equity method investments fluctuates based on the maturity and performance of the underlying investments.

Income from derivative instruments, net, decreased $1.6$0.3 million, or 80%74%, to $99 thousand for the third quarter of 2022 compared to $377 thousand for the third quarter of 2021 compared to $1.9 million for the third quarter of 2020.2021. For the first nine months of 2021,2022, income from derivative instruments, net decreased $3.0 million,$397 thousand, or 64%24%, to $1.7$1.3 million compared to $4.6$1.7 million for the first nine months of 2020.2021. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed during the quarterperiod combined with the impact of changes in the fair market value of borrower-facing trades.

Net gain on sale of loans held for sale decreased $797was $308 thousand or 57%,for the third quarter of 2022 compared to $600 thousand for the third quarter of 2021 compared to $1.4 million for the third quarter of 2020. The decrease was due to a lower transaction volumes in third quarter of 2021. Transaction volume and margin were at historically high levels in the third quarter of 2020, driven by mortgage refinancing activity. For the first nine months of 2021,2022, net gain on sale of loans held for sale increased $207 thousand, or 9%, to $2.5was $1.0 million compared to $2.3$2.5 million for the first nine months of 2020.2021. Included in the first nine months of 2022 was a gain of $586 thousand related to the sale of a $31.2 million portfolio of indirect loans in the second quarter of 2022. Sales volumes and margins for residential loans have moderated in 2022, following historically high levels in 2021 as a result of the rising interest rate environment.

Net (loss) gain on tax credit investments was a net loss of $385 thousand for the third quarter of 2022, compared to a $129 thousand net loss for the third quarter of 2021. For the first nine months of 2022, net (loss) gain on tax credit investments was a net loss of $704 thousand compared to a $62 thousand net gain for the first nine months of 2021. These losses include the amortization of tax credit investments, partially offset by New York investment tax credits that are refundable and recorded in noninterest income.

Other income increased $448 thousand, or 42%, to $1.5 million for the third quarter of 2022 compared to $1.1 million for the third quarter of 2021. For the first nine months of 2022, other income increased $409 thousand, or 13%, to $3.5 million compared to $3.1 million for the first nine months of 2021.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Noninterest Expense

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

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Salaries and employee benefits

 

$

15,798

 

$

15,085

 

$

44,782

 

$

45,173

 

 

$

17,950

 

 

$

15,798

 

 

$

51,532

 

 

$

44,782

 

Occupancy and equipment

 

3,834

 

3,263

 

10,502

 

10,407

 

 

 

3,793

 

 

 

3,834

 

 

 

11,564

 

 

 

10,502

 

Professional services

 

1,600

 

1,242

 

5,098

 

4,974

 

 

 

1,247

 

 

 

1,600

 

 

 

4,172

 

 

 

5,098

 

Computer and data processing

 

3,579

 

3,250

 

10,160

 

8,622

 

 

 

4,407

 

 

 

3,579

 

 

 

12,959

 

 

 

10,160

 

Supplies and postage

 

447

 

463

 

1,361

 

1,533

 

 

 

440

 

 

 

447

 

 

 

1,450

 

 

 

1,361

 

FDIC assessments

 

697

 

594

 

1,942

 

1,505

 

 

 

651

 

 

 

697

 

 

 

1,785

 

 

 

1,942

 

Advertising and promotions

 

474

 

955

 

1,234

 

2,055

 

 

 

651

 

 

 

474

 

 

 

1,437

 

 

 

1,234

 

Amortization of intangibles

 

264

 

280

 

801

 

861

 

 

 

244

 

 

 

264

 

 

 

747

 

 

 

801

 

Restructuring charges

 

-

 

1,362

 

-

 

1,362

 

 

 

—

 

 

 

-

 

 

 

1,269

 

 

 

-

 

Other

 

 

2,476

 

 

1,981

 

 

6,973

 

 

6,228

 

 

 

3,444

 

 

 

2,476

 

 

 

8,934

 

 

 

6,973

 

Total noninterest expense

 

$

29,169

 

$

28,475

 

$

82,853

 

$

82,720

 

 

$

32,827

 

 

$

29,169

 

 

$

95,849

 

 

$

82,853

 

Salaries and employee benefits expense increased by $713 thousand,$2.2 million, or 5%14%, to $18.0 million for the third quarter of 2022 compared to $15.8 million for the third quarter of 2021 compared to $15.1 million for the third quarter of 2020. The increase was primarily due to higher incentive compensation and commissions, coupled with investments in experienced personnel to support strategic initiatives including digital banking, retail community banking expansion, customer experience and technology.2021. For the first nine months of 2021,2022, salaries and employee benefits expense decreased by $391 thousand,increased $6.8 million, or 1%15%, to $44.8$51.5 million compared to $45.2$44.8 million for the first nine months of 2020. The decrease reflects a streamlining2021. The increase in salaries and employee benefits expense was primarily the result of retail branches to better aligninvestments in personnel and wage pressures driven by the current labor market, along with shifting customer needs and preferences, including the closure of seven branches in the second half of 2020, partially offset by an increase in health insurance benefit expense in the third quarter of 2021.due to higher medical claims.

Occupancy and equipment expense remained constant at $3.8 million for the third quarters of 2022 and 2021. For the first nine months of 2022, occupancy and equipment expense increased $571$1.1 million, or 10%, to $11.6 million compared to $10.5 million for the first nine months of 2021. The increase in occupancy and equipment expense in 2022 was primarily due to the purchase of laptop computers in the second quarter of 2022 to support our flexible work model, as well as repairs and maintenance in the branch network.

Professional services expense decreased $353 thousand, or 17%22%, to $3.8$1.2 million for the third quarter of 20212022 compared to $3.3 million for the third quarter of 2020. The increase was primarily the result of the purchase of security equipment for multiple locations, timing of maintenance services related to the outsourcing of property management services in the current year and expenses related to two Five Star Bank branches opened in Buffalo in June 2021.

Professional services expense increased $358 thousand, or 29%, to $1.6 million for the third quarter of 20212021. For the first nine months of 2022, professional services expense decreased $926 thousand, or 18%, to $4.2 million compared to $1.2$5.1 million for the third quarterfirst nine months of 2020.2021. The increasedecrease in professional services expense was primarily due toas a result of higher expense incurred in the timing ofprior year for enterprise standardization expense and miscellaneous consulting and advisory projects including financial technology and improvement initiatives.fees.

Computer and data processing expense increased $329 thousand,$0.8 million, or 10%23%, to $4.4 million for the third quarter of 2022 compared to $3.6 million for the third quarter of 2021 compared to $3.3 million for the third quarter of 2020.2021. For the first nine months of 2021,2022, computer and data processing expense increased $1.5$2.8 million, or 18%28%, to $10.2$13.0 million compared to $8.6 million for the first nine months of 2020. The increases were primarily due to investments in technology, including costs related to the Bank’s ongoing digital banking initiatives.

Advertising and promotions expense decreased $481 thousand, or 50%, to $474 thousand for the third quarter of 2021 compared to $1.0 million for the third quarter of 2020. For the first nine months of 2021, advertising and promotions expense decreased $821 thousand, or 40%, to $1.2 million compared to $2.1$10.2 million for the first nine months of 2020.2021. The decreases were related to the ongoing evolutionincrease was a result of our long-term marketing strategystrategic investment in technology, including digital banking initiatives, a customer relationship management solution across all lines of business, and Banking as a temporary reduction in external advertising expense.Service (BaaS) initiatives.

Restructuring charges of $1.4$1.3 million were recognized in the first nine months of 2022 in connection with the write-down of real estate assets to fair market value based upon existing purchase offers and current market conditions for five locations that were closed in the second half of 2020.

Other expense increased $1.0 million, or 39%, to $3.4 million for the third quarter of 2020 represents non-recurring real estate related charges related to the closure of bank branches and a staffing reduction.

Other expense increased $495 thousand, or 25%,2022 compared to $2.5 million for the third quarter of 2021 compared to $2.0 million for the third quarter of 2020.2021. For the first nine months of 2021,2022, other expense increased $745 thousand,$2.0 million, or 12%28%, to $7.0$8.9 million compared to $6.2$7.0 million for the first nine months of 2020.2021. The increases were primarilyincrease was due to lower education,a combination of factors, including inflation and the outsourcing of certain functions previously handled internally, as well as a return to more normal expense levels post-pandemic in areas, such as, training, conferences, travel and business development expenses as a result of the stay-at home orders implemented in the second quarter of 2020 in response to the COVID-19 pandemic and the timing of charitable contributions in the third quarter of 2021.

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entertainment.

Our efficiency ratio for the first nine months of 20212022 was 55.41%59.91% compared with 61.79%55.41% for the first nine months of 2020.2021. The lowerhigher efficiency ratio was primarily the resultresult of an increase in net interest income, associatednoninterest expense in 2022 as described above, coupled with increasesthe $4.9 million decline in average interest-earning assets and deferred fee amortization on PPP loans and a decreaserevenue in interest expense as well as an increase in noninterest income compared to the prior year period.2022 versus 2021. 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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Income Taxes

For the three and nine months ended September 30, 2021,2022, we recorded income tax expense of $15.3$4.7 million and $12.0 million, respectively, versus $5.7$4.6 million and $15.3 million for the same periodperiods in the prior year. Contributing to third quarter 2022 income tax expense were approximately $1.5 million of incremental taxes associated with the previously mentioned company owned life insurance surrender and redeploy strategy, which was offset by a $2.0 million enhancement recorded as noninterest income. In the first nine monthsthird quarter of 2021,2022, we also recognized federal and state tax benefits related to tax credit investments placed in service resulting in a reduction in income tax expense of $1.2 million, and a net gain recorded in noninterest income of $62 thousand. In the first nine months of 2020, we recognized tax credit investments resulting in a reduction in income tax expense of $606$511 thousand, and a net loss recorded in noninterest income of $120 thousand. For the third quarter of 2021, we recorded income tax expense of $4.6 million, versus $2.9 million$535 thousand for the same period in the prior year, primarily driven by our higher pre-tax earnings.year. The nine months ended September 30, 2022 and 2021 also included related benefits of $1.6 million and $1.2 million, respectively.

During the three months ended June 30,second quarter of 2021, New York State enacted legislation that temporarily increases the corporate tax rate from 6.5% to 7.25% for taxable years beginning in 2021 through 2023 for taxpayers with New York State income over $5.0 million. This rate change did not result in a material impact to our tax provisionprovision.

Our effective tax rates for the three and nine months ended September 30, 2021.

Our effective tax rates2022 were 25.4% and 21.3%, respectively, versus 21.0% and 20.8%, respectively, for the first nine months of 2021 and 2020 were 20.8% and 18.9%, respectively. Our effective tax rates for the third quarter of 2021 and 2020 were 21.0% and 19.3%, respectively. The increasesame periods in effective tax rates is the result of higher pre-tax earnings in comparison to 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 Companycompany owned life insurance and the impact of tax credit investments. In addition, our effective tax rate for 20212022 and 20202021 reflects the New York State tax benefit generated by our real estate investment trust.

ANALYSIS OF FINANCIAL CONDITION

INVESTING ACTIVITIES

Investment Securities

The following table summarizes the composition of our investment securities portfolio as of the dates indicated (in thousands):

 

Investment Securities Portfolio Composition

 

 

Investment Securities Portfolio Composition

 

 

September 30, 2021

 

December 31, 2020

 

 

September 30, 2022

 

 

December 31, 2021

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

Cost

 

Value

 

Cost

 

Value

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

6,253

 

$

6,531

 

$

6,239

 

$

6,635

 

 

$

24,535

 

 

$

21,107

 

 

$

15,793

 

 

$

15,891

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

1,092,723

 

1,090,999

 

601,426

 

620,989

 

 

 

1,124,940

 

 

 

944,424

 

 

 

1,169,042

 

 

 

1,162,214

 

Non-Agency mortgage-backed securities

 

 

—

 

 

420

 

 

—

 

 

435

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

410

 

Total available for sale securities

 

1,098,976

 

1,097,950

 

607,665

 

628,059

 

 

 

1,149,475

 

 

 

965,531

 

 

 

1,184,835

 

 

 

1,178,515

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

16,325

 

 

 

15,475

 

 

 

—

 

 

 

—

 

State and political subdivisions

 

116,812

 

119,513

 

144,506

 

148,984

 

 

 

102,419

 

 

 

93,460

 

 

 

111,399

 

 

 

113,511

 

Mortgage-backed securities

 

 

101,328

 

 

104,651

 

 

127,467

 

 

133,051

 

 

 

78,799

 

 

 

71,503

 

 

 

94,187

 

 

 

96,309

 

Total held to maturity securities

 

218,140

 

224,164

 

271,973

 

282,035

 

 

 

197,543

 

 

 

180,438

 

 

 

205,586

 

 

 

209,820

 

Allowance for credit losses - securities

 

 

(5

)

 

 

 

 

 

(7

)

 

 

 

Allowance for credit losses – securities

 

 

(5

)

 

 

 

 

 

(5

)

 

 

 

Total held to maturity securities, net

 

 

218,135

 

 

 

 

 

271,966

 

 

 

 

 

197,538

 

 

 

 

 

 

205,581

 

 

 

 

Total investment securities

 

$

1,317,111

 

$

1,322,114

 

$

879,631

 

$

910,094

 

 

$

1,347,013

 

 

$

1,145,969

 

 

$

1,390,416

 

 

$

1,388,335

 

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MANAGEMENT'S DISCUSSION AND ANALYSIS

TheOur available for sale (“AFS”) investment securities portfolio increased $469.9decreased $35.4 million from $628.1 million at December 31, 20202021 to $1.10 billion at September 30, 2021. The increase from year-end 2020 was primarily due2022. Our primary investment strategy for the past several quarters has been to the deployment ofdeploy excess liquidity into cash flowing agency backed securities.mortgage-backed securities, reallocating excess Federal Reserve cash balances into securities demonstrating higher yields; however, activity has slowed as a portion of the cash flow from the portfolio was utilized to fund loan originations during 2022. The AFS portfolio had a net unrealized loss of $1.0$183.9 million at September 30, 20212022 and a net unrealized gain of $20.4$6.3 million at December 31, 2020,2021, respectively. The decline in the portfolio balance was largely driven by a decrease in the market value of the portfolio, due to rising interest rates. The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Security Yields and Maturities Schedule

The following table sets forth certain information regarding the amortized cost (“Cost”), weighted average yields (“Yield”) and contractual maturities of our debt securities portfolio as of September 30, 2021.2022. In this table, Yield is defined as the book yield weighted against the ending book value. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Actual maturities may differ from the contractual maturities presented because borrowers may have the right to call or prepay certain investments. No tax-equivalent adjustments were made to the weighted average yields (dollars in thousands).

 

Due in one
year or less

 

Due from one
to five years

 

Due after five
years through
ten years

 

Due after ten years

 

Total

 

 

Due in one year or less

 

 

Due from one to five years

 

 

Due after five years through ten years

 

 

Due after
ten years

 

 

Total

 

 

Cost

 

Yield

 

Cost

 

Yield

 

Cost

 

Yield

 

Cost

 

Yield

 

Cost

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

Available for sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and
government-sponsored enterprises

 

$

—

 

 

 

—

%

 

$

6,253

 

 

 

2.42

%

 

$

—

 

 

 

—

%

 

$

—

 

 

 

—

%

 

$

6,253

 

 

 

2.42

%

 

$

—

 

 

 

0.00

%

 

$

15,000

 

 

 

1.70

%

 

$

9,535

 

 

 

1.89

%

 

$

—

 

 

 

—

 

 

$

24,535

 

 

 

1.77

%

Mortgage-backed securities

 

 

4,863

 

 

 

2.03

 

 

 

56,549

 

 

 

2.42

 

 

 

175,663

 

 

 

1.91

 

 

 

855,648

 

 

 

1.49

 

 

 

1,092,723

 

 

 

1.61

 

 

 

5,233

 

 

 

2.19

 

 

 

65,336

 

 

 

2.63

 

 

 

146,164

 

 

 

1.88

 

 

 

908,207

 

 

 

1.65

 

 

 

1,124,940

 

 

 

1.74

 

 

 

4,863

 

 

 

2.03

 

 

 

62,802

 

 

 

2.42

 

 

 

175,663

 

 

 

1.91

 

 

 

855,648

 

 

 

1.49

 

 

 

1,098,976

 

 

 

1.62

 

 

 

5,233

 

 

 

2.19

 

 

 

80,336

 

 

 

2.46

 

 

 

155,699

 

 

 

1.88

 

 

 

908,207

 

 

 

1.65

 

 

 

1,149,475

 

 

 

1.74

 

Held to maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government-sponsored enterprises

 

$

—

 

 

 

0.00

%

 

$

—

 

 

 

0.00

%

 

$

16,325

 

 

 

3.22

%

 

$

—

 

 

 

0.00

%

 

$

16,325

 

 

 

3.22

%

State and political subdivisions

 

 

36,191

 

 

 

2.04

 

 

 

70,429

 

 

 

1.89

 

 

 

5,005

 

 

 

1.62

 

 

 

5,187

 

 

 

1.92

 

 

 

116,812

 

 

 

1.93

 

 

 

32,255

 

 

 

2.08

 

 

 

43,515

 

 

 

1.86

 

 

 

5,005

 

 

 

1.62

 

 

 

21,644

 

 

 

2.44

 

 

 

102,419

 

 

 

2.04

 

Mortgage-backed securities

 

 

—

 

 

 

—

 

 

 

2,278

 

 

 

2.28

 

 

 

15,843

 

 

 

2.23

 

 

 

83,207

 

 

 

2.45

 

 

 

101,328

 

 

 

2.41

 

 

 

2,209

 

 

 

2.19

 

 

 

—

 

 

 

—

 

 

 

16,694

 

 

 

2.45

 

 

 

59,896

 

 

 

2.62

 

 

 

78,799

 

 

 

2.57

 

 

 

36,191

 

 

 

2.04

 

 

 

72,707

 

 

 

1.90

 

 

 

20,848

 

 

 

2.23

 

 

 

88,394

 

 

 

2.45

 

 

 

218,140

 

 

 

2.17

 

 

 

34,464

 

 

 

2.09

 

 

 

43,515

 

 

 

1.86

 

 

 

38,024

 

 

 

2.67

 

 

 

81,540

 

 

 

2.57

 

 

 

197,543

 

 

 

2.35

 

Total investment securities

 

$

41,054

 

 

 

2.04

%

 

$

135,509

 

 

 

2.14

%

 

$

196,511

 

 

 

1.93

%

 

$

944,042

 

 

 

1.58

%

 

$

1,317,116

 

 

 

1.71

%

 

$

39,697

 

 

 

2.10

%

 

$

123,851

 

 

 

2.25

%

 

$

193,723

 

 

 

2.03

%

 

$

989,747

 

 

 

1.73

%

 

$

1,347,018

 

 

 

1.83

%

Impairment Assessment

For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. For the nine months ended September 30, 20212022 and 20202021 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.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

LENDING ACTIVITIES

The following table summarizes the composition of our loan portfolio, excluding loans held for sale and including net unearned income and net deferred fees and costs, as of the dates indicated (in(dollars in thousands).

 

Loan Portfolio Composition

 

 

Loan Portfolio Composition

 

 

September 30, 2021

 

December 31, 2020

 

 

September 30, 2022

 

 

December 31, 2021

 

 

Amount

 

% of
Total

 

Amount

 

% of
Total

 

 

Amount

 

 

% of
Total

 

 

Amount

 

 

% of
Total

 

Commercial business

 

$

686,191

 

18.8

%

 

$

794,148

 

22.1

%

 

$

633,894

 

 

 

16.4

%

 

$

638,293

 

 

 

17.3

%

Commercial mortgage

 

 

1,348,550

 

 

36.9

 

 

1,253,901

 

 

34.9

 

 

 

1,564,545

 

 

 

40.5

 

 

 

1,412,788

 

 

 

38.4

 

Total commercial

 

2,034,741

 

55.7

 

2,048,049

 

57.0

 

 

 

2,198,439

 

 

 

56.9

 

 

 

2,051,081

 

 

 

55.7

 

Residential real estate loans

 

584,091

 

16.0

 

599,800

 

16.7

 

 

 

577,821

 

 

 

14.9

 

 

 

577,299

 

 

 

15.7

 

Residential real estate lines

 

79,196

 

2.2

 

89,805

 

2.5

 

 

 

77,336

 

 

 

2.0

 

 

 

78,531

 

 

 

2.2

 

Consumer indirect

 

940,537

 

25.7

 

840,421

 

23.4

 

 

 

997,423

 

 

 

25.8

 

 

 

958,048

 

 

 

26.0

 

Other consumer

 

 

15,334

 

 

0.4

 

 

17,063

 

 

0.4

 

 

 

15,832

 

 

 

0.4

 

 

 

14,477

 

 

 

0.4

 

Total consumer

 

 

1,619,158

 

 

44.3

 

 

1,547,089

 

 

43.0

 

 

 

1,668,412

 

 

 

43.1

 

 

 

1,628,355

 

 

 

44.3

 

Total loans

 

3,653,899

 

 

100.0

%

 

 

3,595,138

 

 

100.0

%

 

 

3,866,851

 

 

 

100.0

%

 

 

3,679,436

 

 

 

100.0

%

Less: Allowance for credit losses - loans

 

 

45,444

 

 

 

 

 

52,420

 

 

 

Less: Allowance for credit losses – loans

 

 

44,106

 

 

 

 

 

 

39,676

 

 

 

 

Total loans, net

 

$

3,608,455

 

 

 

 

$

3,542,718

 

 

 

 

$

3,822,745

 

 

 

 

 

$

3,639,760

 

 

 

 

Total loans increased $58.8$187.4 million to $3.65$3.87 billion at September 30, 20212022 from $3.60$3.68 billion at December 31, 2020.2021. The increase in loans was primarily attributable to our organic growth initiatives.

CommercialTotal commercial loans decreased $13.3increased $147.4 million during the nine months ended September 30, 20212022 and represented 55.7%56.9% of total loans as of September 30, 2021.2022. The decreaseincrease was due to a decrease of $131.3 million in PPP loans, net of deferred fees, from $248.0 million at December 31, 2020 to $116.7 million at September 30, 2021. The decrease in commercial loans was partially offset by an increase in commercial mortgage loans and commercial business loans, excluding PPP loans, of $94.7 million and $23.3 million, respectively, primarily as a result of our continued commercial business development efforts. PPP loans, net of deferred fees, were $2.8 million and $55.3 million at September 30, 2022 and December 31, 2021, respectively, and are included in our commercial business loans. PPP loan balances were significantly lower in 2022 as a result of the PPP loan forgiveness and repayment. We expect the PPP loan balances will continue to decline as loans are forgiven by the SBA.

TheTotal consumer indirect portfolio totaled $940.5loans increased $40.1 million to $1.67 billion and represented 25.7%43.1% of total loans as of September 30, 2021.2022. During the first nine months of 2022, we originated $383.9 million in indirect automobile loans with a mix of approximately 28% new automobile and 72% used automobile. During the first nine months of 2021, we originated $376.6 million in indirect autoautomobile loans with a mix of approximately 26% new autoautomobile and 74% used auto. During the first nine months of 2020, we originated $135.6 million in indirect auto loans with a mix of approximately 30% new auto and 70% used auto. Our originationautomobile loans. Origination volumes and mix of new and used vehicles financed fluctuate depending on general market conditions. Growth in the consumer indirect portfolio in the current year has been theperiod was primarily a result of pent-up consumerincreased customer demand for automobiles with the Company well-positioned to take advantage of the market opportunity given our deep history and experience in this line of business.

Loans Held for Sale and Loan Servicing Rights

Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled $5.9$2.1 million and $4.3$6.2 million as of September 30, 20212022 and December 31, 2020,2021, respectively.

We sell certain qualifying newly originated or refinanced residential real estate loans on the secondary market. Residential real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $265.2$371.3 million and $241.7$272.7 million as of September 30, 20212022 and December 31, 2020,2021, respectively.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Allowance for Credit Losses - Loans

The following table summarizes the activity in the allowance for credit losses - loans for the periods indicated (in(dollars in thousands).

 

 

Loan Loss Analysis
 

 

 

 

Three months ended
September 30,

 

 

 Nine months ended
September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Allowance for credit losses - loans, beginning of period, prior to adoption
   of ASC 326

 

 

 

 

 

 

 

 

 

 

$

30,482

 

Impact of adopting ASC 326

 

 

 

 

 

 

 

 

 

 

 

9,594

 

Allowance for credit losses - loans, beginning of period, after adoption of
   ASC 326

 

$

46,365

 

 

$

46,316

 

 

$

52,420

 

 

 

40,076

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

218

 

 

 

15

 

 

 

396

 

 

 

8,281

 

Commercial mortgage

 

 

—

 

 

 

640

 

 

 

203

 

 

 

1,712

 

Residential real estate loans

 

 

36

 

 

 

—

 

 

 

103

 

 

 

100

 

Residential real estate lines

 

 

60

 

 

 

—

 

 

 

130

 

 

 

—

 

Consumer indirect

 

 

1,395

 

 

 

1,388

 

 

 

4,965

 

 

 

7,366

 

Other consumer

 

 

250

 

 

 

160

 

 

 

755

 

 

 

499

 

Total charge-offs

 

 

1,959

 

 

 

2,203

 

 

 

6,552

 

 

 

17,958

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

168

 

 

 

103

 

 

 

785

 

 

 

1,644

 

Commercial mortgage

 

 

—

 

 

 

37

 

 

 

7

 

 

 

37

 

Residential real estate loans

 

 

15

 

 

 

7

 

 

 

79

 

 

 

25

 

Residential real estate lines

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3

 

Consumer indirect

 

 

1,130

 

 

 

1,503

 

 

 

4,383

 

 

 

4,550

 

Other consumer

 

 

59

 

 

 

65

 

 

 

218

 

 

 

282

 

Total recoveries

 

 

1,372

 

 

 

1,715

 

 

 

5,472

 

 

 

6,541

 

Net charge-offs

 

 

587

 

 

 

488

 

 

 

1,080

 

 

 

11,417

 

Provision (benefit) for credit losses - loans

 

 

(334

)

 

 

3,567

 

 

 

(5,896

)

 

 

20,736

 

Allowance for credit losses - loans, end of period

 

$

45,444

 

 

$

49,395

 

 

$

45,444

 

 

$

49,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loan charge-offs to average loans (annualized)

 

 

0.06

%

 

 

0.06

%

 

 

0.04

%

 

 

0.45

%

Allowance for credit losses - loans to total loans

 

 

1.24

%

 

 

1.38

%

 

 

1.24

%

 

 

1.38

%

Allowance for credit losses - loans to non-performing loans

 

 

681

%

 

 

453

%

 

 

681

%

 

 

453

%

 

 

Credit Loss - Loans Analysis

 

 

 

 

Three months ended
September 30,

 

 

Nine months ended
September 30,

 

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

Allowance for credit losses - loans, beginning of period

 

$

42,452

 

 

$

46,365

 

 

$

39,676

 

 

$

52,420

 

 

Net charge-offs (recoveries):

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

(96

)

 

 

50

 

 

 

(43

)

 

 

(389

)

 

Commercial mortgage

 

 

(1

)

 

 

—

 

 

 

(2,020

)

 

 

196

 

 

Residential real estate loans

 

 

(4

)

 

 

21

 

 

 

37

 

 

 

24

 

 

Residential real estate lines

 

 

35

 

 

 

60

 

 

 

18

 

 

 

130

 

 

Consumer indirect

 

 

1,890

 

 

 

265

 

 

 

3,087

 

 

 

582

 

 

Other consumer

 

 

329

 

 

 

191

 

 

 

821

 

 

 

537

 

 

Total net charge-offs

 

 

2,153

 

 

 

587

 

 

 

1,900

 

 

 

1,080

 

 

Provision (benefit) for credit losses – loans

 

 

3,807

 

 

 

(334

)

 

 

6,330

 

 

 

(5,896

)

 

Allowance for credit losses – loans, end of period

 

$

44,106

 

 

$

45,444

 

 

$

44,106

 

 

$

45,444

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

(0.06

)

%

 

0.03

%

 

 

(0.01

)

%

 

(0.07

)

%

Commercial mortgage

 

 

-

 

 

 

-

 

 

 

(0.19

)

 

 

0.02

 

 

Residential real estate loans

 

 

-

 

 

 

0.01

 

 

 

0.01

 

 

 

0.01

 

 

Residential real estate lines

 

 

0.18

 

 

 

0.30

 

 

 

0.03

 

 

 

0.21

 

 

Consumer indirect

 

 

0.74

 

 

 

0.11

 

 

 

0.41

 

 

 

0.09

 

 

Other consumer

 

 

8.90

 

 

 

5.15

 

 

 

7.59

 

 

 

4.46

 

 

Total loans

 

 

0.22

%

 

 

0.06

%

 

 

0.07

%

 

 

0.04

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses – loans to total loans

 

 

1.14

%

 

 

1.24

%

 

 

1.14

%

 

 

1.24

%

 

Allowance for credit losses – loans to nonaccrual loans

 

 

584

%

 

 

681

%

 

 

584

%

 

 

681

%

 

Allowance for credit losses – loans to non-performing loans

 

 

517

%

 

 

681

%

 

 

517

%

 

 

681

%

 

The Company adopted CECL effective January 1, 2020, which resulted in an increaseLoans not analyzed for a specific reserve are segmented into "pools" of loans based upon similar risk characteristics. This is referred to as the "pooled loan" component of the allowance for credit losses - loans of $9.6 million and established a reserve for unfunded commitments of $2.1 million, for a total pre-tax cumulative effect adjustment of $11.7 million.

estimate. The allowance for credit losses for Pooled Loanspooled loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information. Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics such as changes in: underwriting standards, delinquency level, regulatory environment, economic condition, Company management and the status of portfolio administration including the Company’s Loan Review function. The Company establishes a specific reserve for individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for credit losses, and include nonaccrual loans, troubled debt restructurings (“TDRs”), and other loans deemed appropriate by management, collectively referred to as collateral dependent loans. See Note 6,6. Loans of the notes to the consolidated financial statements for further details on collateral dependent loans.

Assessing the adequacy of the allowance for credit losses - loans involves substantial uncertainties and is based upon management’s evaluation of the amounts required to meet estimated charge-offs in the loan portfolio after weighing a variety of factors, including the risk profile of our loan products and customers.

The adequacy of the allowance for credit losses - loans is subject to ongoing management review. While management evaluates currently available information in establishing the allowance for credit losses - loans, future adjustments to the allowance may be necessary if conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an integral part of their

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examination process, periodically review a financial institution’s allowance for credit losses - loans. Such agencies may require the financial institution to increase the allowance based on their judgments about information available to them at the time of their examination.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Net charge-offs of $587 thousand$2.2 million in the third quarter of 20212022 represented 0.06%0.22% of average loans on an annualized basis compared to net charge-offs of $488$587 thousand, or 0.06%, in of average loans for the third quarter of 2020.2021. For the nine months ended September 30, 2021,2022, net charge-offs of $1.0$1.9 million represented 0.04%represented 0.07% of average loans, compared to $11.4net charge-offs of $1.1 million, or 0.45%0.04% of average loans for the same period in 2020. The decrease in net2021. Net charge-offs infor the nine months ended September 30, 20212022 included a $2.0 million recovery in connection with the pay-off of a commercial loan that was primarily duedowngraded to an $8.2 millionnon-performing status with a partial charge-off of an $11.9 million commercial loan downgraded in the firstfourth quarter of 2020. The borrower’s business was related to the hospitality industry and the downgrade and charge-off were precipitated by the impact of the COVID-19 pandemic.2021. The allowance for credit losses - loans was $44.1 million at September 30, 2022, compared with $45.4 million at September 30, 2021, compared with $52.4 million at December 31, 2020.2021. The ratio of the allowance for credit losses - loans to total loans was 1.24%1.14% and 1.46%1.24% at September 30, 20212022 and December 31, 2020,September 30, 2021, respectively. The ratio of allowance for credit losses - loans to non-performing loans was 517% at September 30, 2022, compared with 681% at September 30, 2021, compared with 551% at December 31, 2020.2021.

The following table sets forth the allocation of the allowance for credit losses - loans by loan category as of the dates indicated (dollars in thousands). The allocation is made for analytical purposes and is not necessarily indicative of the categories in which actual losses may occur. The total allowance is available to absorb losses from any segment of the loan portfolio.

 

 

Allowance for Credit Losses - Loans by Loan Category

 

 

 

September 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 

Percentage

 

 

 

 

 

Percentage

 

 

 

Credit

 

 

of loans by

 

 

Credit

 

 

of loans by

 

 

 

Loss

 

 

category to

 

 

Loss

 

 

category to

 

 

 

Allowance

 

 

total loans

 

 

Allowance

 

 

total loans

 

Commercial business

 

$

11,524

 

 

 

16.4

%

 

$

11,099

 

 

 

17.3

%

Commercial mortgage

 

 

14,119

 

 

 

40.5

 

 

 

14,777

 

 

 

38.4

 

Residential real estate loans

 

 

2,354

 

 

 

14.9

 

 

 

1,604

 

 

 

15.7

 

Residential real estate lines

 

 

654

 

 

 

2.0

 

 

 

379

 

 

 

2.2

 

Consumer indirect

 

 

15,182

 

 

 

25.8

 

 

 

11,611

 

 

 

26.0

 

Other consumer

 

 

273

 

 

 

0.4

 

 

 

206

 

 

 

0.4

 

Total

 

$

44,106

 

 

 

100.0

%

 

$

39,676

 

 

 

100.0

%

Non-Performing Assets and Potential Problem Loans

The table below summarizes our non-performing assets at the dates indicated (in(dollars in thousands).

 

Non-Performing Assets

 

 

Non-Performing Assets

 

 

September 30,
2021

 

 

December 31,
2020

 

 

September 30,
2022

 

 

December 31,
2021

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

1,046

 

$

1,975

 

 

$

385

 

 

$

602

 

Commercial mortgage

 

874

 

2,906

 

 

 

830

 

 

 

6,414

 

Residential real estate loans

 

2,457

 

2,587

 

 

 

3,550

 

 

 

2,373

 

Residential real estate lines

 

192

 

323

 

 

 

119

 

 

 

200

 

Consumer indirect

 

2,104

 

1,495

 

 

 

2,666

 

 

 

1,780

 

Other consumer

 

 

2

 

 

—

 

 

 

—

 

 

 

—

 

Total nonaccrual loans

 

6,675

 

9,286

 

 

 

7,550

 

 

 

11,369

 

Accruing loans 90 days or more delinquent

 

 

1

 

 

231

 

 

 

986

 

 

 

797

 

Total non-performing loans

 

6,676

 

9,517

 

 

 

8,536

 

 

 

12,166

 

Foreclosed assets

 

 

-

 

 

2,966

 

 

 

—

 

 

 

—

 

Total non-performing assets

 

$

6,676

 

$

12,483

 

 

$

8,536

 

 

$

12,166

 

 

 

 

 

 

 

Nonaccrual loans to total loans

 

 

0.20

%

 

 

0.31

%

Non-performing loans to total loans

 

0.18

%

 

0.26

%

 

 

0.22

%

 

 

0.33

%

Non-performing assets to total assets

 

0.12

%

 

0.25

%

 

 

0.15

%

 

 

0.22

%

Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at September 30, 20212022 were $6.7$8.5 million, a decrease of $5.8$3.6 million from the $12.5$12.2 million balance at December 31, 2020.2021. The decrease in non-performing assets related primarily to the pay-off of a nonaccrual commercial mortgage that resulted in the $2.0 million recovery noted previously. The primary component of non-performing assets is non-performing loans, which were $6.7$8.5 million or 0.12%0.22% of total loans at September 30, 2021, compared with $9.52022, down from $12.2 million or 0.26%0.33% of total loans at December 31, 2020.2021 primarily due to pay-downs or payments received and applied to principal for the non-performing loans.

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Approximately $2.2$2.4 million, or 33%28%, of the $6.7$8.5 million in non-performing loans as of September 30, 20212022 were current with respect to payment of principal and interest but were classified as non-accruing because repayment in full of principal and/or interest was uncertain. We had no TDRs included in nonaccrual loans at September 30, 20212022 and $200 thousand at December 31, 2020. There2021. Additionally, there were no TDRs accruing interest as of September 30, 20212022 and December 31, 2020.2021.

Foreclosed assets consist of real property formerly pledged as collateral for loans, which we have acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. We had no properties representing foreclosed asset holdings at September 30, 20212022 and two properties totaling $3.0 million at December 31, 2020. The decrease in forecl2021.osed assets during the first nine months of 2021 was primarily the result of the sale of an asset on which foreclosure occurred in the third quarter of 2020. The borrower’s business was related to the hospitality industry and the downgrade and partial charge-off in the first quarter of 2020 were precipitated by the impact of the COVID-19 pandemic.

Potential problem loans are loans that are currently performing, but information known about possible credit problems of the borrowers causes us to have concern as to the ability of such borrowers to comply with the present loan payment terms and may result in disclosure of such loans as nonperforming at some time in the future. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and/or personal or government guarantees. We consider loans classified as substandard, which continue to accrue interest, to be potential problem loans. We identified $30.9$25.8 million and $17.9$22.7 million in loans that continued to accrue interest which were classified as substandard as of September 30, 20212022 and December 31, 2020,2021, respectively.

61Contractual Loan Maturity Schedule

The following table summarizes the contractual maturities of our loan portfolio at September 30, 2022. Loans, net of deferred loan origination costs, include principal amortization and non-accruing loans. Demand loans having no stated schedule of repayment or maturity and overdrafts as reported as due in one year or less (in thousands).

 

 

Due in less
than one
year

 

 

Due from
one to
five years

 

 

Due from
five to
fifteen years

 

 

Due after
fifteen years

 

 

Total

 

Commercial business

 

$

114,176

 

 

$

268,120

 

 

$

26,566

 

 

$

225,032

 

 

$

633,894

 

Commercial mortgage

 

 

238,793

 

 

 

591,587

 

 

 

715,018

 

 

 

19,147

 

 

 

1,564,545

 

Residential real estate loans

 

 

64,319

 

 

 

212,393

 

 

 

278,562

 

 

 

22,547

 

 

 

577,821

 

Residential real estate lines

 

 

1,891

 

 

 

8,201

 

 

 

29,436

 

 

 

37,808

 

 

 

77,336

 

Consumer indirect (1)

 

 

403,792

 

 

 

593,631

 

 

 

—

 

 

 

—

 

 

 

997,423

 

Other consumer

 

 

6,025

 

 

 

8,133

 

 

 

776

 

 

 

898

 

 

 

15,832

 

Total loans

 

$

828,996

 

 

$

1,682,065

 

 

$

1,050,358

 

 

$

305,432

 

 

$

3,866,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans maturing after one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With a predetermined interest rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

 

 

$

96,397

 

 

$

18,159

 

 

$

15,003

 

 

$

129,559

 

Commercial mortgage

 

 

 

 

 

315,933

 

 

 

383,535

 

 

 

9,252

 

 

 

708,720

 

Residential real estate loans

 

 

 

 

 

191,666

 

 

 

256,455

 

 

 

19,564

 

 

 

467,685

 

Residential real estate lines

 

 

 

 

 

12

 

 

 

36

 

 

 

2

 

 

 

50

 

Consumer indirect (1)

 

 

 

 

 

593,631

 

 

 

—

 

 

 

—

 

 

 

593,631

 

Other consumer

 

 

 

 

 

8,133

 

 

 

776

 

 

 

898

 

 

 

9,807

 

With a floating or adjustable rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

 

 

 

171,723

 

 

 

8,407

 

 

 

210,029

 

 

 

390,159

 

Commercial mortgage

 

 

 

 

 

275,654

 

 

 

331,483

 

 

 

9,895

 

 

 

617,032

 

Residential real estate loans

 

 

 

 

 

20,727

 

 

 

22,107

 

 

 

2,983

 

 

 

45,817

 

Residential real estate lines

 

 

 

 

 

8,189

 

 

 

29,400

 

 

 

37,806

 

 

 

75,395

 

Consumer indirect (1)

 

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Other consumer

 

 

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Total loans maturing after one year

 

 

 

 

$

1,682,065

 

 

$

1,050,358

 

 

$

305,432

 

 

$

3,037,855

 

_________

(1) Amounts include prepayment assumptions based on actual historical experience.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

FUNDING ACTIVITIES

Deposits

The following table summarizes the composition of our deposits at the dates indicated (dollars in thousands):

 

Deposit Composition

 

 

Deposit Composition

 

 

September 30, 2021

 

 

December 31, 2020

 

 

September 30, 2022

 

 

December 31, 2021

 

 

Amount

 

 

% of
Total

 

 

Amount

 

 

% of
Total

 

 

Amount

 

 

% of
Total

 

 

Amount

 

 

% of
Total

 

Noninterest-bearing demand

 

$

1,144,852

 

23.1

%

 

$

1,018,549

 

23.8

%

 

$

1,135,125

 

 

 

23.1

%

 

$

1,107,561

 

 

 

22.9

%

Interest-bearing demand

 

893,976

 

18.0

 

731,885

 

17.1

 

 

 

946,431

 

 

 

19.3

%

 

 

864,528

 

 

 

17.9

%

Savings and money market

 

2,015,855

 

40.4

 

1,642,340

 

38.4

 

 

 

1,800,321

 

 

 

36.7

%

 

 

1,933,047

 

 

 

40.1

%

Time deposits < $250,000

 

737,299

 

14.8

 

684,885

 

16.0

 

Time deposits of $250,000 or more

 

 

182,981

 

 

3.7

 

 

200,708

 

 

4.7

 

Time deposits

 

 

1,023,277

 

 

 

20.9

%

 

 

921,954

 

 

 

19.1

%

Total deposits

 

$

4,974,963

 

 

100.0

%

 

$

4,278,367

 

 

100.0

%

 

$

4,905,154

 

 

 

100.0

%

 

$

4,827,090

 

 

 

100.0

%

As of September 30, 2022 and December 31, 2021, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is the maximum amount for federal deposit insurance) was $1.35 billion and $1.29 billion, respectively. The portion of our time deposits by account that were in excess of the FDIC insurance limit was $172.4 million and $182.3 million at September 30, 2022 and December 31, 2021, respectively. The maturities of our uninsured time deposits at September 30, 2022 were as follows: $70.8 million in three months or less; $14.7 million between three months and six months; $84.2 million between six months and one year; and $2.7 million over one year.

We offer a variety of deposit products designed to attract and retain customers, with the primary focus on building and expanding long-term relationships. At September 30, 2021,2022, total deposits were $4.97$4.91 billion, representing an increase of $696.6$78.1 million from December 31, 2020.2021. The increase was due to growth in non-public, public non-public demand and brokered deposits, partially offset by lower reciprocal deposits. Time deposits were approximately 19%21% and 21%19% of total deposits at September 30, 20212022 and December 31, 2020,2021, respectively.

NonpublicNon-public deposits, the largest component of our funding sources, totaled $2.73$2.79 billion and $2.55$2.70 billion at September 30, 20212022 and December 31, 2020,2021, respectively, and represented 55%57% and 60%56% of total deposits as of the end of each period,date, respectively. We have managed this segment of funding through a strategy of competitive pricing that minimizes the number of customer relationships that have only a single service high costhigh-cost deposit account.

As an additional source of funding, we offer a variety of public (municipal) deposit products to the towns, villages, counties and school districts within our market.market area. Public deposits generally range from 20% to 30% of our total deposits. There is a high degree of seasonality in this component of funding, because the level of deposits varies with the seasonal cash flows for these public customers. We maintain the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits. Total public deposits were $1.19$1.14 billion and $834.9 million$1.10 billion at September 30, 20212022 and December 31, 2020,2021, respectively, and represented 24% and 20%23% of total deposits as of the end of each period, respectively.date. The increase in public deposits duringas of September 30, 2022 in comparison to December 31, 2021 was due largely to seasonality.

We also participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Prior to the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) enacted on May 14, 2018, all reciprocal deposits were considered brokered deposits for regulatory reporting purposes. With the enactment of EGRRCPA, reciprocal deposits, subject to certain restrictions, are no longer required to be reported as brokered deposits. Reciprocal deposits totaled $806.5$697.5 million at September 30, 2021,2022, compared to $612.3$771.4 million at December 31, 2020.2021, as customers have been withdrawing funds from the program to re-balance operating accounts. Reciprocal deposits represented 16%14% and 14%16% of total deposits as of the end of each period,date, respectively.

Brokered deposits totaled $254.8$276.8 million and $279.6$254.7 million at September 30, 20212022 and December 31, 2020,2021, respectively, and represented 5%6% and 7%5% of total deposits as of the end of each period,date, respectively.

Borrowings

The Company classifies borrowings as short-term or long-term in accordance with the original terms of the applicable agreement. Outstanding borrowings consisted of the following as of the dates indicated (in thousands):

 

 

September 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Short-term borrowings – FHLB

 

$

69,000

 

 

$

30,000

 

Long-term borrowings – Subordinated notes, net

 

 

74,144

 

 

 

73,911

 

Total borrowings

 

$

143,144

 

 

$

103,911

 

63

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Short-term borrowings - FHLB

 

$

—

 

 

$

5,300

 

Long-term borrowings - Subordinated notes, net

 

 

73,834

 

 

 

73,623

 

Total borrowings

 

$

73,834

 

 

$

78,923

 

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

Short-term Borrowings

Short-term Federal Home Loan Bank (“FHLB”) borrowings have original maturities of less than one year and include overnight borrowings which we typically utilize to address short term funding needs as they arise. We had no short-termShort-term FHLB borrowings at September 30, 20212022 and no amount of short-term FHLB borrowings outstanding at any month-end during the nine months ended September 30, 2021. Short-term FHLB borrowings at December 31, 20202021 consisted of $5.3$69.0 million and $30.0 million, respectively, in short-term borrowings. The decline in short-term borrowings at September 30, 2021, was the result of the Company’s decision to utilize brokered deposits as a cost-effective alternative to FHLB borrowings. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

the short-term borrowings balance at September 30, 2022 is designated as a cash-flow hedge, which became effective in April 2022, at a fixed rate of 0.79%.

We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements. We had approximately $206.1$268.9 million of immediate credit capacity with the FHLB as of September 30, 2021.2022. We had approximately $601.8$587.3 million in secured borrowing capacity at the Federal Reserve Bank (“FRB”) discount window, none of which was outstanding at September 30, 2021.2022. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans. We had approximately $130.0$120.0 million and $145.0$130.0 million of credit available under unsecured federal funds purchased lines with various banks as of September 30, 20212022 and December 31, 2020,2021, respectively. Additionally, we had approximately $454.9$545.1 million of unencumbered liquid securities available for pledging.pledging at September 30, 2022.

The Parent has a revolving line of credit with a commercial bank allowing borrowings up to $20.0 million in total as an additional source of working capital. At September 30, 2021,2022, no amounts have been drawn on the line of credit.

Long-term Borrowings

On October 7, 2020, we completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes to qualified institutional buyers and accredited institutional investors that were subsequently exchanged for subordinated notes with substantially the same terms (the “2020 Notes”) registered under the Securities Act of 1933, as amended. The 2020 Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum, until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 4.265%, payable quarterly until maturity. The 2020 Notes are redeemable by us, in whole or in part, on any interest payment date on or after October 15, 2025, and we may redeem the Notes in whole at any time upon certain other specified events. We used the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star Bank. Proceeds, net of debt issuance costs of $740 thousand, were $34.3 million. The 2020 Notes qualify as Tier 2 capital for regulatory purposes.

On April 15, 2015, we issued $40.0 million of subordinated notes (the “2015 Notes”) in a registered public offering. The 2015 Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to the April 15, 2030 maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month London Interbank Offered Rate (“LIBOR”) plus 3.944%, payable quarterly. After the discontinuance of LIBOR, the interest rate will be determined by an alternate method as reasonably selected by the Company. The 2015 Notes are redeemable by us at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. Proceeds, net of debt issuance costs of $1.1 million, were $38.9 million. The 2015 Notes qualify as Tier 2 capital for regulatory purposes.

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity

We continue to actively monitor our liquidity profile and funding concentrations in accordance with our Board approved Liquidity Policy. While funding pressures have not occurred, management is actively monitoring customer activity by way of commercial and consumer line of credit utilization, as well as deposit flows. As of September 30, 2021,2022, all structural liquidity ratios and early warning indicators remain in compliance, with what we believe are ample funding sources available in the event of a stress scenario.

The objective of maintaining adequate liquidity is to assure that we meet our financial obligations. These obligations include the withdrawal of deposits on demand or at their contractual maturity, the repayment of matured borrowings, the ability to fund new and existing loan commitments and the ability to take advantage of new business opportunities. We achieve liquidity by maintaining a strong base of both core customer funds and maturing short-term assets; we also rely on our ability to sell or pledge securities and lines-of-credit and our overall ability to access to the financial and capital markets.

Liquidity for the Bank is managed through the monitoring of anticipated changes in loans, the investment portfolio, deposits and wholesale funds. The strength of the Bank’s liquidity position is a result of its base of core customer deposits. These core deposits are supplemented by wholesale funding sources that include credit lines with other banking institutions, the FHLB, the FRB and brokered deposit relationships. The primary source of our non-deposit short-term borrowings is FHLB advances, of which we had $0$69.0 million outstanding at September 30, 2021 due to the excess liquidity position sustained as a result of continued growth and seasonal inflows of public deposits. 2022. In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately $937.9$976.2 million as of September 30, 2022 from various funding sources which include the FHLB, the FRB and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

The Parent’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of non-bank subsidiaries, repurchases of our stock, and acquisitions. The Parent obtains funding to meet obligations from dividends received from the Bank, net taxes collected from subsidiaries included in the federal consolidated tax return, and the issuance of debt and equity securities. In addition, the Parent maintains a revolving line of credit with a commercial bank for an aggregate amount of up to $20.0 million, all of which was available at September 30, 2021.2022. The line of credit has a one-year term and matures in May 2022.2023. Funds drawn would be used for general corporate purposes and backup liquidity.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

Cash and cash equivalents were $288.4$118.6 million as of September 30, 2021,2022, up $194.5$39.5 million from $93.9$79.1 million as of DecemberDecember 31, 2020.2021. Net cash provided by operating activities totaled $39.5$117.4 million and the principal source of operating activity cash flow was net income adjusted for noncash income and expense items.items and an increase in other liabilities. Net cash used in investing activities totaled $516.4$165.5 million, which included outflows of $59.8$189.3 million for net loan originations, and $430.2$10.0 million from net purchases of company owned life insurance, and $5.6 in million purchases of premises and equipment, partially offset by $39.4 million net cash provided from investment securities transactions.securities. Net cash provided by financing activities of $516.4$87.5 million was attributed to a $696.6$78.0 million net increase in deposits, and a $39.0 million net increase in short-term borrowings, partially offset by a $5.3 million decrease in short-term borrowings, $6.0$15.3 million in common stock repurchases and $13.8$14.2 million in dividend payments. The increase in the period end cash balance was due to growth in public, non-public demand and reciprocal deposits.

Capital Management

We actively manage capital, commensurate with our risk profile, to enhance shareholder value. We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory “well-capitalized” thresholds. Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.

Banks and financial holding companies are subject to various regulatory capital requirements administered by state and federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material impact on our consolidated financial statements. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.

Shareholders’ equity was $494.0$394.0 million at September 30, 2021, an increase2022, a decrease of $25.7$111.1 million from $468.4$505.1 million at December 31, 2020.2021. Accumulated other comprehensive loss included in shareholders’ equity increased $128.0 million during the nine months ended September 30, 2022 due primarily to increased net unrealized losses on securities available for sale as a result of the increase in market interest rates. Net income for the nine months ended September 30, 20212022 increased shareholders’ equity by $58.1$44.5 million, offset by common and preferred stock dividends declared of $13.9$14.4 million. Accumulated other comprehensive loss included in shareholders’ equity increased $14.2 million during the first nine months of 2021 due primarily to lower net unrealized gains on securities available for sale.

The FRB and FDIC have adopted a system using risk-based capital guidelines to evaluate the capital adequacy of banks and bank holding companies. As of September 30, 2021,2022, the Company’s capital levels remained characterized as “well-capitalized” under the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks.

6465

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MANAGEMENT'S DISCUSSION AND ANALYSIS

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

 

September 30,

 

December 31,

 

 

September 30,

 

December 31,

 

 

2021

 

2020

 

 

2022

 

 

2021

 

Common shareholders’ equity

 

$

476,721

 

$

451,035

 

 

$

376,756

 

 

$

487,850

 

Add: CECL transitional amount

 

10,005

 

12,061

 

 

 

6,403

 

 

 

8,537

 

Less: Goodwill and other intangible assets

 

72,052

 

71,235

 

 

 

70,919

 

 

 

71,748

 

Net unrealized gain on investment securities (1)

 

(1,057

)

 

14,743

 

Net unrealized loss on investment securities (1)

 

 

(136,814

)

 

 

(4,971

)

Hedging derivative instruments

 

827

 

(316

)

 

 

5,095

 

 

 

1,160

 

Net periodic pension and postretirement benefits plan adjustments

 

(11,886

)

 

(12,299

)

 

 

(9,253

)

 

 

(9,396

)

Other

 

 

—

 

 

—

 

 

 

(211

)

 

 

—

 

Common Equity Tier 1 (“CET1”) Capital

 

426,790

 

389,733

 

 

 

453,423

 

 

 

437,846

 

Plus: Preferred stock

 

17,292

 

17,328

 

 

 

17,292

 

 

 

17,292

 

Less: Other

 

 

—

 

 

—

 

 

 

—

 

 

 

—

 

Tier 1 Capital

 

444,082

 

407,061

 

 

 

470,715

 

 

 

455,138

 

Plus: Qualifying allowance for credit losses

 

34,341

 

40,509

 

 

 

38,119

 

 

 

29,938

 

Subordinated Notes

 

 

73,834

 

 

73,623

 

 

 

74,144

 

 

 

73,911

 

Total regulatory capital

 

$

552,257

 

$

521,193

 

 

$

582,978

 

 

$

558,987

 

Adjusted average total assets (for leverage capital purposes)

 

$

5,310,329

 

$

4,933,597

 

 

$

5,634,934

 

 

$

5,532,987

 

Total risk-weighted assets

 

$

4,167,165

 

$

3,844,380

 

 

$

4,652,312

 

 

$

4,260,101

 

 

 

 

 

 

 

Regulatory Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

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

 

8.36

%

 

8.25

%

 

 

8.35

%

 

 

8.23

%

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

 

10.24

 

10.14

 

 

 

9.75

%

 

 

10.28

%

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

 

10.66

 

10.59

 

 

 

10.12

%

 

 

10.68

%

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

 

13.25

 

13.56

 

 

 

12.53

%

 

 

13.12

%

(1) Includes unrealized gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category.

We have elected to apply the 2020 CECL transition provision related to the impact of the CECL accounting standard on regulatory capital, as provided by the US banking agencies’ March 2020 interim final rule. Under the 2020 CECL transition provision, the regulatory capital impact of the Day 1 adjustment to the allowance for credit losses (after-tax) upon the January 1, 2020 CECL adoption date has been deferred, and willhas begun to phase in tointo regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, we arewere allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020, and December 31, 2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020, and December 31, 2021, will also began to phase in tointo regulatory capital at 25% per year commencing January 1, 2022.

Basel III Capital Rules

Under the Basel III Capital Rules, the current minimum capital ratios, including an additional capital conservation buffer applicable to the Company and the Bank, are:

•
7.0% CET1 to risk-weighted assets;
•
8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and
•
10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.

Banking institutions with a capital conservation buffer below the minimum level will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to the Company or the Bank. Strict eligibility criteria for regulatory capital instruments were also implemented under the Basel III Capital Rules.

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MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table presents actual and required capital ratios as of September 30, 20212022 and December 31, 20202021 for the Company and the Bank under the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, under the Basel III Capital Rules (in(dollars in thousands):

 

 

 

 

 

 

 

 

 

 

Required to be

 

 

 

 

 

 

 

 

 

 

 

Required to be

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Considered Well

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Considered Well

 

 

Actual

 

 

Required – Basel III

 

 

Capitalized

 

 

Actual

 

 

Required – Basel III

 

 

Capitalized

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

444,082

 

8.36

%

 

$

212,413

 

4.00

%

 

$

265,516

 

5.00

%

 

$

470,715

 

 

 

8.35

%

 

$

225,397

 

 

 

4.00

%

 

$

281,747

 

 

 

5.00

%

Bank

 

483,083

 

9.11

 

212,080

 

4.00

 

265,100

 

5.00

 

 

 

519,491

 

 

 

9.24

 

 

 

224,973

 

 

 

4.00

 

 

 

281,216

 

 

 

5.00

 

CET1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

426,790

 

10.24

 

291,702

 

7.00

 

270,866

 

6.50

 

 

 

453,423

 

 

 

9.75

 

 

 

325,662

 

 

 

7.00

 

 

 

302,400

 

 

 

6.50

 

Bank

 

483,083

 

11.62

 

290,965

 

7.00

 

270,182

 

6.50

 

 

 

519,491

 

 

 

11.21

 

 

 

324,297

 

 

 

7.00

 

 

 

301,133

 

 

 

6.50

 

Tier 1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

444,082

 

10.66

 

354,209

 

8.50

 

333,373

 

8.00

 

 

 

470,715

 

 

 

10.12

 

 

 

395,446

 

 

 

8.50

 

 

 

372,185

 

 

 

8.00

 

Bank

 

483,083

 

11.62

 

353,315

 

8.50

 

332,532

 

8.00

 

 

 

519,491

 

 

 

11.21

 

 

 

393,790

 

 

 

8.50

 

 

 

370,625

 

 

 

8.00

 

Total capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

552,257

 

13.25

 

437,552

 

10.50

 

416,717

 

10.00

 

 

 

582,978

 

 

 

12.53

 

 

 

488,493

 

 

 

10.50

 

 

 

465,231

 

 

 

10.00

 

Bank

 

517,423

 

12.45

 

436,448

 

10.50

 

415,665

 

10.00

 

 

 

557,610

 

 

 

12.04

 

 

 

486,446

 

 

 

10.50

 

 

 

463,282

 

 

 

10.00

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

407,061

 

8.25

%

 

$

197,344

 

4.00

%

 

$

246,680

 

5.00

%

 

$

455,138

 

 

 

8.23

%

 

$

221,319

 

 

 

4.00

%

 

$

276,649

 

 

 

5.00

%

Bank

 

441,929

 

8.97

 

197,064

 

4.00

 

246,330

 

5.00

 

 

 

496,337

 

 

 

8.98

 

 

 

220,963

 

 

 

4.00

 

 

 

276,204

 

 

 

5.00

 

CET1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

389,733

 

10.14

 

269,107

 

7.00

 

249,885

 

6.50

 

 

 

437,846

 

 

 

10.28

 

 

 

298,207

 

 

 

7.00

 

 

 

276,907

 

 

 

6.50

 

Bank

 

441,929

 

11.52

 

268,483

 

7.00

 

249,306

 

6.50

 

 

 

496,337

 

 

 

11.68

 

 

 

297,489

 

 

 

7.00

 

 

 

276,240

 

 

 

6.50

 

Tier 1 capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

407,061

 

10.59

 

326,772

 

8.50

 

307,550

 

8.00

 

 

 

455,138

 

 

 

10.68

 

 

 

362,109

 

 

 

8.50

 

 

 

340,808

 

 

 

8.00

 

Bank

 

441,929

 

11.52

 

326,015

 

8.50

 

306,838

 

8.00

 

 

 

496,337

 

 

 

11.68

 

 

 

361,237

 

 

 

8.50

 

 

 

339,987

 

 

 

8.00

 

Total capital:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

521,193

 

13.56

 

403,660

 

10.50

 

384,438

 

10.00

 

 

 

558,987

 

 

 

13.12

 

 

 

447,311

 

 

 

10.50

 

 

 

426,010

 

 

 

10.00

 

Bank

 

482,439

 

12.58

 

402,725

 

10.50

 

383,547

 

10.00

 

 

 

526,274

 

 

 

12.38

 

 

 

446,233

 

 

 

10.50

 

 

 

424,984

 

 

 

10.00

 

Dividend Restrictions

In the ordinary course of business, the Company is dependent upon dividends from the Bank to provide funds for the payment of dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to the potential impact on earnings or capital arising from movements in interest rates. The Bank’s market risk management framework has been developed to control both short-term and long-term exposure within Board approved policy limits and is monitored by the Asset-Liability Management Committee and Board of Directors. Quantitative and qualitative disclosures about market risk were presented at December 31, 20202021 in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020,2021, as filed with the Securities and Exchange Commission on March 15, 2021.10, 2022. The following is an update of the discussion provided therein.

Portfolio Composition

There was no material change in the composition of assets, deposit liabilities or borrowings from December 31, 20202021 to September 30, 2021, aside from asset growth due to an increased liquidity position. The increased liquidity position resulted from continued deposit growth and drove investment security purchases and an excess Federal Reserve interest earning cash balance at quarter end.2022. See the section titled “Analysis of Financial Condition” in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of asset, deposit and borrowing activity during the period.

Net Interest Income at Risk

A primary tool used to manage interest rate risk is “rate shock” simulation to measure the rate sensitivity. Rate shock simulation is a modeling technique used to estimate the impact of changes in rates on net interest income as well as economic value of equity.

Net interest income at risk is measured by estimating the changes in net interest income resulting from instantaneous and sustained parallel shifts in interest rates of different magnitudes over a period of 12 months. The following table sets forth the estimated changes to net interest income over the 12-month period ending September 30, 20222023 assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):

 

Changes in Interest Rate

 

 

Changes in Interest Rate

 

 

-100 bp

 

 

+100 bp

 

 

+200 bp

 

 

+300 bp

 

 

-100 bp

 

 

+100 bp

 

 

+200 bp

 

 

+300 bp

 

Estimated change in net interest income

 

$

(2,792

)

 

$

2,104

 

$

4,649

 

$

7,063

 

 

$

(2,672

)

 

$

317

 

 

$

631

 

 

$

940

 

% Change

 

-1.90

%

 

1.43

%

 

3.16

%

 

4.81

%

 

 

-1.52

%

 

 

0.18

%

 

 

0.36

%

 

 

0.54

%

In the rising rate scenarios, the static model results indicate that net interest income is modeled to increase compared to the flat rate scenario over a one-year timeframe. This is a result of assumed commercial loan products and investment security cash flow repricinga shift to municipal non-maturity deposits from wholesale funds when comparing on a quarter- over-quarter basis. The municipal non-maturity deposits reprice at a higher frequency than underlying borrowing and deposit costs.slower pace compared to wholesale funding which results in a slightly positive change in net interest income. This simulation does not consider balance sheet growth or a change in the balance sheet mix. As intermediate and longer-term assets continue to mature and are replaced at higher yields, net interest income improvesshould improve over longer termlonger-term timeframes. Model results in the declining rate scenario indicate decreases in net interest income due to assets having the ability to reprice downward near full market rate shocks, while deposit and borrowing liabilities reach modeled floors.

In addition to the changes in interest rate scenarios listed above, other scenarios are typically modeled to measure interest rate risk. These scenarios vary depending on the economic and interest rate environment. Furthermore, given the static balance sheet approach, retained earnings are considered to be reinvested in a non-interest earning asset.

The simulation referenced above is based on our assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case. While this simulation is a useful measure as to net interest income at risk due to a change in interest rates, it is not a forecast of future results, does not measure the effect of changing interest rates on noninterest income and is based on many assumptions that, if changed, could cause a different outcome.

Economic Value of Equity At Risk

The economic (or “fair”) value of financial instruments on our balance sheet will also vary under the interest rate scenarios previously discussed. This variance is measured by simulating changes in our economic value of equity (“EVE”), which is calculated by subtracting the estimated fair value of liabilities from the estimated fair value of assets. Fair values for financial instruments are estimated by discounting projected cash flows (principal and interest) at current replacement rates for each account type, while fair values of non-financial assets and liabilities are assumed to equal book value and do not vary with interest rate fluctuations. An economic value simulation is a static measure for balance sheet accounts at a given point in time, but this measurement can change substantially over time as the characteristics of our balance sheet evolve and as interest rate and yield curve assumptions are updated.

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The amount of change in economic value under different interest rate scenarios depends on the characteristics of each class of financial instrument, including the stated interest rate or spread relative to current market rates or spreads, the likelihood of prepayment, whether the rate is fixed or floating, and the maturity date of the instrument. As a general rule, fixed-rate financial assets become more valuable in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical data (back-testing).

The analysis that follows presents the estimated EVE resulting from market interest rates prevailing at a given quarter-end (“Pre-Shock Scenario”), and under other interest rate scenarios (each a “Rate Shock Scenario”) represented by immediate, permanent, parallel shifts in interest rates from those observed at September 30, 20212022 and December 31, 20202021 (dollars in thousands). The analysis additionally presents a measurement of the interest rate sensitivity at September 30, 20212022 and December 31, 2020.2021. EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock Scenario. An increase in the EVE amount is considered favorable, while a decline is considered unfavorable. The following table sets forth the estimated changes to EVE assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands):

 

September 30, 2021

 

 

December 31, 2020

 

 

September 30, 2022

 

 

December 31, 2021

 

Rate Shock Scenario:

 

EVE

 

 

Change

 

 

Percentage
Change

 

 

EVE

 

 

Change

 

 

Percentage
Change

 

 

EVE

 

 

Change

 

 

Percentage
Change

 

 

EVE

 

 

Change

 

 

Percentage
Change

 

Pre-Shock Scenario

 

$

717,562

 

 

 

 

 

 

 

$

583,156

 

 

 

 

 

 

 

$

985,403

 

 

 

 

 

 

 

 

$

775,697

 

 

 

 

 

 

 

- 100 Basis Points

 

712,612

 

$

(4,950

)

 

-0.69

%

 

574,345

 

$

(8,811

)

 

-1.51

%

 

 

1,010,362

 

 

$

24,959

 

 

 

2.53

%

 

 

746,770

 

 

$

(28,927

)

 

 

-3.73

%

+100 Basis Points

 

737,651

 

20,089

 

2.80

 

617,768

 

34,612

 

5.94

 

 

 

956,514

 

 

 

(28,889

)

 

 

(2.93

)

 

 

782,438

 

 

 

6,741

 

 

 

0.87

 

+ 200 Basis Points

 

753,000

 

35,438

 

4.94

 

638,224

 

55,068

 

9.44

 

 

 

934,542

 

 

 

(50,861

)

 

 

(5.16

)

 

 

786,362

 

 

 

10,665

 

 

 

1.37

 

+ 300 Basis Points

 

760,238

 

42,676

 

5.95

 

651,518

 

68,362

 

11.72

 

 

 

913,693

 

 

 

(71,710

)

 

 

(7.28

)

 

 

784,923

 

 

 

9,226

 

 

 

1.19

 

The increase in the Pre-Shock Scenario EVE at September 30, 20212022 compared to December 31, 20202021 is the result of growththe continued improvement in investments.deposit premiums, due to continued cost control measures in place with the core deposit base, while market rates continue to increase. The slight decrease in sensitivity in the -100+100 basis point Rate Shock Scenario to EVE at September 30, 2022 compared to December 31, 2021 is a result of decreased effective duration of deposits. It is anticipated that the continued growth ineconomic valuation of non-maturity deposits over the last three quarters, compoundedwill not continue to have a linear relationship with the growth ofincreased market rates, while fixed rate long-term assets not receiving the full benefitwill continue to reprice downwards in value appreciation typically observed in downupward rate scenarios.shocked environments.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2021,2022, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b), as adopted by the SEC under the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 20212022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time we are a party to or otherwise involved in legal proceedings arising out of the normal course of business. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense and settlement costs, unfavorable awards, diversion of management resources and other factors.

We are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs sought class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs sought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed. The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. We dispute and believe we have meritorious defenses against these claims and plan to vigorously defend ourselves.

On September 30, 2021, the Court granted plaintiffs’ motion for class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). We estimate there may beThere are approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes. On December 20, 2021, we filed a request for an interlocutory appeal of the denial of our motion to dismiss the case for lack of standing. On February 8, 2022, plaintiffs filed a motion for partial summary judgement for most of the relief they seek. We filed a cross motion for partial summary judgement seeking permission to appealthe dismissal of a portion of the class certification rulingand sought an offset in the form of recoupment which reduces any liability that may be imposed against us by the amounts that the borrowers owe to the Bank for failing to repay their motor vehicle loans. In addition, on April 25, 2022, the Pennsylvania Supreme Court declared unconstitutional a statute on which the Court may have based jurisdiction in this case. Therefore, on June 27, 2022, we filed a motion for reconsideration of the Court's June 5, 2018 decision overruling our preliminary objections based on lack of personal jurisdiction as to the New York plaintiffs. Plaintiffs have responded to that motion claiming an alternative basis for jurisdiction.

On September 26, 2022, the lower Court denied both plaintiffs’ and defendants’ motions for partial summary judgment. In declining to grant Plaintiffs’ motion, the Court found that there were questions of fact as to whether the members of the class had purchased the subject vehicles for “consumer use” within the meaning of the relevant statutes. Defendants’ motion for summary judgment on the recoupment was denied because the Court determined that it could not enter a judgment on recoupment – which is a set off from liability – without first determining whether there was liability.

On October 4, 2022, the Parties agreed to a sixty (60) day stay of all deadlines in the case in order to pursue mediation. On October 7, 2022, the Superior Court of Pennsylvania granted our December 20, 2021 Request for an Interlocutory Appeal. As such, the case is now stayed until the appeal is briefed and a staydecided by the Superior Court. No briefing schedule has yet been established for the appeal. In addition to the pending appeal, the parties are in the process of proceedings pending any such appeal. We also filed a motionexploring non-binding mediation to dismisspotentially resolve some or all of the action for lack of standing. issues in the matter.

We have not accrued a contingent liability for this matter at this time because, given our defenses, we are unable to conclude whether a liability is reasonably probable to occur nor are we able to currently reasonably estimate the amount of potential loss.

If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies.insurer. We can provide no assurances that our insurer will insurecover the full legal costs, settlements or judgments we incur in excess of our deductible.incur. If we are unsuccessful in defending ourselves from these claims or if our insurer does not insure us againstcover the full amount of legal costs we incur, in excess of our deductible, the result may materially adversely affect our business, results of operations and financial condition.

69ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

In June 2022, the Company’s Board of Directors authorized a share repurchase program for up to 766,447 shares of common stock. The program will expire at the earlier of the completion of all share repurchases or a Board vote to retire the program.

The Company’s repurchases of its common stock during the third quarter of 2022 were as follows:

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Table of Contents

Issuer Purchases of Equity Securities

Period

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs

July 1 - July 31, 2022

—

$

—

—

766,447

August 1 - August 31, 2022

—

—

—

766,447

September 1 - September 30, 2022

—

—

—

766,447

Total

—

$

—

—

766,447

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Table of Contents

ITEM 6. Exhibits

(a)The following is a list of all exhibits filed or incorporated by reference as part of this Report:

Exhibit

Number

 

Description

 

Location

31.1

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Principal Executive Officer

 

Filed Herewith

31.2

 

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Principal Financial Officer

 

Filed Herewith

32

 

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed Herewith

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

104

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

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FINANCIAL INSTITUTIONS, INC.

/s/ Martin K. Birmingham

, November 8, 20217, 2022

Martin K. Birmingham

President and Chief Executive Officer

(Principal Executive Officer)

/s/ W. Jack Plants II

, November 8, 20217, 2022

W. Jack Plants II

Senior Vice President and Chief Financial Officer and Treasurer

(Principal Financial Officer)

/s/ Sonia M. Dumbleton

, November 8, 20217, 2022

Sonia M. Dumbleton

Senior Vice President and Controller

(Principal Accounting Officer)

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