UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~Form10-Q~~

Form 10-Q

(Mark One)

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

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

For the quarterly period ended ~~September~~June 30, ~~2017~~2023

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

☐	~~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~~ New York		16-0816610
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

220 LIBERTY STREET, WARSAW ~~NEW YORK~~, New York		14569
(Address of principal executive offices)		(Zip Code)

(585) 786-1100

(Registrant’s telephone number, including area ~~code: (585)786-1100~~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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the

preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or 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 Rule12b-2 of the Exchange Act.


~~Large accelerated filer~~		☐		~~Accelerated filer~~	☒

Large accelerated filer	☐	Accelerated filer	☑

Non-accelerated filer	☐	~~☐ (Do not check if a smaller company)~~		Smaller reporting company	☐

				Emerging growth company	☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒☑

The registrant had ~~15,626,294~~15,401,800 shares of Common Stock, $0.01 par value, outstanding as of ~~October 27, 2017.~~August 1, 2023.

Table of Contents

FINANCIAL INSTITUTIONS, INC.

Form10-Q

For the Quarterly Period Ended ~~September~~June 30, ~~2017~~2023

TABLE OF CONTENTS


			PAGE
PART I.	FINANCIAL INFORMATION

~~ITEM 1.~~	~~Financial Statements~~
ITEM 1.	Financial Statements

	Consolidated Statements of Financial Condition (Unaudited) -– at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~2022			3

	Consolidated Statements of Income (Unaudited) -– Three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022			4

	Consolidated Statements of Comprehensive (Loss) Income (Unaudited) -– Three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022			5

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) ~~- Nine~~– Three and six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022			6

	Consolidated Statements of Cash Flows (Unaudited) ~~- Nine~~– Six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022			7	8

	Notes to Consolidated Financial Statements (Unaudited)			8
		9

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			38
		45

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk			57
		67

ITEM 4.	Controls and Procedures			58
		68
~~PART II.~~	~~OTHER INFORMATION~~

~~ITEM 1.~~PART II.	~~Legal Proceedings~~OTHER INFORMATION			59

~~ITEM 6.~~	~~Exhibits~~			59
ITEM 1.	Legal Proceedings		69
	~~Signatures~~		60
ITEM 1A.	Risk Factors		70

ITEM 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities		71

ITEM 5.	Other Information		71

ITEM 6.	Exhibits		72

	Signatures		73

~~- 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, 2017			December 31, 2016			June 30, 2023			December 31, 2022
ASSETS
Cash and due from banks	$	97,838		$	71,277		$	180,248		$	130,466
Securities available for sale, at fair value		551,491			539,926
Securities held to maturity, at amortized cost (fair value of $539,476 and $539,991, respectively)		538,332			543,338
Securities available for sale, at fair value (amortized cost of $1,082,174 and $1,127,057, respectively)								912,122			954,371
Securities held to maturity, at amortized cost (net of allowance for credit losses of $4 and $5, respectively) (fair value of $146,026 and $174,188, respectively)								159,893			188,975
Loans held for sale		2,407			1,050			805			550
Loans (net of allowance for loan losses of $34,347 and $30,934, respectively)		2,581,888			2,309,227
Loans (net of allowance for credit losses of $49,836 and $45,413, respectively)								4,347,973			4,005,036
Company owned life insurance		64,829			63,455			141,442			139,482
Premises and equipment, net		45,668			42,398			40,681			41,986
Goodwill and other intangible assets, net		74,997			75,640			72,950			73,414
Other assets		64,141			64,029			285,184			262,992

Total assets	$	4,021,591		$	3,710,340		$	6,141,298		$	5,797,272

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	710,865		$	677,076		$	1,022,788		$	1,139,214
Interest-bearing demand		656,703			581,436			823,983			863,822
Savings and money market		1,050,487			1,034,194			1,641,014			1,643,516
Time deposits		863,453			702,516			1,547,076			1,282,872

Total deposits		3,281,508			2,995,222			5,034,861			4,929,424
Short-term borrowings		310,800			331,500			374,000			205,000
Long-term borrowings, net of issuance costs of $886 and $939, respectively		39,114			39,061
Long-term borrowings, net of issuance costs of $623 and $778, respectively								124,377			74,222
Other liabilities		24,167			24,503			182,187			183,021

Total liabilities		3,655,589			3,390,286			5,715,425			5,391,667

Shareholders’ equity:
Series A 3% preferred stock, $100 par value; 1,533 shares authorized; 1,492 shares issued		149			149
SeriesB-1 8.48% preferred stock, $100 par value; 200,000 shares authorized; 171,847 and 171,906 shares issued, respectively		17,185			17,191

Series A 3% preferred stock, $100 par value; 1,533 shares authorized; 1,435 shares issued								143			143
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		17,334			17,340			17,292			17,292
Common stock, $0.01 par value; 50,000,000 shares authorized; 15,761,849 and 14,692,214 shares issued, respectively		158			147
Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares issued								161			161
Additionalpaid-in capital		112,087			81,755			125,457			126,636
Retained earnings		249,878			237,687			437,851			421,340
Accumulated other comprehensive loss		(10,838	)		(13,951	)		(134,472	)		(137,487	)
Treasury stock, at cost –135,555 and 154,617 shares, respectively		(2,617	)		(2,924	)

Treasury stock, at cost – 697,756 and 759,555 shares, respectively								(20,416	)		(22,337	)
Total shareholders’ equity		366,002			320,054			425,873			405,605

Total liabilities and shareholders’ equity	$	4,021,591		$	3,710,340		$	6,141,298		$	5,797,272

See accompanying notes to the consolidated financial statements.

~~- 3 -~~

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)


	Three months ended September 30,					Nine months ended September 30,
*(In thousands, except per share amounts)*	2017			2016		2017		2016		Three months ended June 30,						Six months ended June 30,
										2023			2022			2023			2022
Interest income:
Interest and fees on loans	$	27,455		$	23,619	$	77,540	$	68,044	$	64,052		$	38,872		$	121,150		$	75,170
Interest and dividends on investmentsecurities		5,941			5,741		17,736		17,196
Interest and dividends on investment securities											5,877			6,294			11,934			12,330
Other interest income		—			—		67		1		1,186			110			1,802			127

Total interest income		33,396			29,360		95,343		85,241		71,115			45,276			134,886			87,627
Interest expense:
Deposits		3,089			2,192		7,820		6,237		24,054			2,366			43,348			4,071
Short-term borrowings		1,251			500		2,815		1,183		3,159			252			4,361			280
Long-term borrowings		618			618		1,853		1,853		1,565			1,061			3,025			2,121

Total interest expense		4,958			3,310		12,488		9,273		28,778			3,679			50,734			6,472

Net interest income		28,438			26,050		82,855		75,968		42,337			41,597			84,152			81,155
Provision for loan losses		2,802			1,961		9,415		6,281

Net interest income after provision for loan losses		25,636			24,089		73,440		69,687
Provision for credit losses											3,230			563			7,444			2,882
Net interest income after provision for credit losses											39,107			41,034			76,708			78,273
Noninterest income:
Service charges on deposits		1,901			1,913		5,486		5,392		1,223			1,437			2,250			2,806
Insurance income		1,488			1,407		4,052		4,262		1,328			1,234			3,415			3,331
ATM and debit card		1,445			1,441		4,230		4,187
Card interchange income											2,107			2,103			4,046			4,055
Investment advisory		1,497			1,326		4,357		3,934		2,819			2,906			5,742			5,947
Company owned life insurance		449			486		1,367		2,340		953			869			1,947			1,702
Investments in limited partnerships		(14	)		161		91		253		469			242			720			1,037
Loan servicing		105			104		348		332		114			135			260			244
Income from derivative instruments, net											703			645			1,199			1,164
Net gain on sale of loans held for sale		150			46		270		202		122			828			234			737
Net gain on investment securities		184			426		600		2,426
Net gain on other assets		21			199		25		285
Contingent consideration liability adjustment		—			—		1,200		—
Net loss on investment securities											—			(15	)		—			(15	)
Net (loss) gain on other assets											(7	)		7			32			7
Net gain (loss) on tax credit investments											489			(92	)		288			(319	)
Other		1,348			1,030		3,717		3,059		1,146			1,061			2,257			1,986

Total noninterest income		8,574			8,539		25,743		26,672		11,466			11,360			22,390			22,682
Noninterest expense:
Salaries and employee benefits		12,348			11,325		35,703		33,757		17,754			16,966			35,887			33,582
Occupancy and equipment		4,087			3,617		12,235		10,906		3,538			4,015			7,268			7,771
Professional services		1,313			956		3,741		5,236		1,273			1,269			2,768			2,925
Computer and data processing		1,208			1,089		3,691		3,335		4,750			4,573			9,441			8,552
Supplies and postage		492			490		1,496		1,548		473			469			963			1,010
FDIC assessments		440			406		1,366		1,283		1,239			621			2,354			1,134
Advertising and promotions		188			302		939		1,259		498			406			812			786
Amortization of intangibles		288			309		876		946		230			249			464			503
Goodwill impairment		—			—		1,575		—
Restructuring (recoveries) charges											(19	)		1,269			(19	)		1,269
Other		2,103			2,124		5,728		5,686		4,046			3,050			7,505			5,490

Total noninterest expense		22,467			20,618		67,350		63,956		33,782			32,887			67,443			63,022

Income before income taxes		11,743			12,010		31,833		32,403		16,791			19,507			31,655			37,933
Income tax expense		3,464			3,541		9,365		9,165		2,418			3,859			5,193			7,302

Net income	$	8,279		$	8,469	$	22,468	$	23,238	$	14,373		$	15,648		$	26,462		$	30,631
Preferred stock dividends		366			366		1,097		1,097		364			365			729			729

Net income available to common shareholders	$	7,913		$	8,103	$	21,371	$	22,141	$	14,009		$	15,283		$	25,733		$	29,902

Earnings per common share (Note 3):
Basic	$	0.52		$	0.56	$	1.44	$	1.53	$	0.91		$	1.00		$	1.68		$	1.94
Diluted	$	0.52		$	0.56	$	1.44	$	1.53	$	0.91		$	0.99		$	1.67		$	1.93
Cash dividends declared per common share	$	0.21		$	0.20	$	0.63	$	0.60	$	0.30		$	0.29		$	0.60		$	0.58
Weighted average common shares outstanding:
Basic		15,268			14,456		14,806		14,429
Diluted		15,302			14,500		14,847		14,485

See accompanying notes to the consolidated financial statements.

- 4 -

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

   Three months ended Nine months ended
   September 30, September 30,
(Dollars in thousands)    2017    2016 2017    2016
Net income
   $ 8,279    $ 8,469 $ 22,468    $ 23,238
Other comprehensive income (loss), net of tax:

Net unrealized gains (losses) on securities available for sale
   284    (1,446 ) 2,600    8,948
Pension and post-retirement obligations
   171    139 513    418






Total other comprehensive income (loss), net of tax
   455    (1,307 ) 3,113    9,366






Comprehensive income
   $ 8,734    $ 7,162 $ 25,581    $ 32,604


(Dollars in thousands)	Three months ended June 30,						Six months ended June 30,
	2023			2022			2023		2022
Net income	$	14,373		$	15,648		$	26,462	$	30,631
Other comprehensive (loss) income, net of tax:
Securities available for sale and transferred securities		(8,648	)		(33,415	)		1,986		(89,188	)
Hedging derivative instruments		1,404			737			741		2,575
Pension and post-retirement obligations		144			47			288		95
Total other comprehensive (loss) income, net of tax		(7,100	)		(32,631	)		3,015		(86,518	)
Comprehensive income (loss)	$	7,273		$	(16,983	)	$	29,477	$	(55,887	)

See accompanying notes to the consolidated financial statements.

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

~~Nine~~Three and six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022

(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
Balance at January 1, 2016
   $ 17,340 $ 144    $ 72,690 $ 218,920 $ (11,327 ) $ (3,923 ) $ 293,844
Comprehensive income:

Net income
   —   —      —   23,238 —   —   23,238
Other comprehensive income, net of tax
   —   —      —   —   9,366 —   9,366
Common stock issued
   —   3    8,097 —   —   —   8,100
Share-based compensation plans:

Share-based compensation
   —   —      597 —   —   —   597
Stock options exercised
   —   —      20 —   —   794 814
Restricted stock awards issued, net
   —   —      24 —   —   (24 ) —
Excess tax benefit on share-based compensation
   —   —      10 —   —   —   10
Stock awards
   —   —      21 —   —   43 64
Cash dividends declared:

Series A 3% Preferred-$2.25 per share
   —   —      —   (3 ) —   —   (3 )
SeriesB-1 8.48% Preferred-$6.36 per share
   —   —      —   (1,094 ) —   —   (1,094 )
Common-$0.60 per share
   —   —      —   (8,665 ) —   —   (8,665 )




Balance at September 30, 2016
   $ 17,340 $ 147    $ 81,459 $ 232,396 $ (1,961 ) $ (3,110 ) $ 326,271





Balance at December 31, 2016
   $ 17,340 $ 147    $ 81,755 $ 237,687 $ (13,951 ) $ (2,924 ) $ 320,054
Cumulative-effect adjustment
   —   —      (279 ) 279 —   —   —




Balance at January 1, 2017
   $ 17,340 $ 147    $ 81,476 $ 237,966 $ (13,951 ) $ (2,924 ) $ 320,054
Comprehensive income:

Net income
   —   —      —   22,468 —   —   22,468
Other comprehensive income, net of tax
   —   —      —   —   3,113 —   3,113
Common stock issued
   —   11    29,653 —   —   —   29,664
Purchases of common stock for treasury
   —   —      —   —   —   (148 ) (148 )
Repurchase of SeriesB-1 8.48% preferred stock
   (6 ) —      —   —   —   —   (6 )
Share-based compensation plans:

Share-based compensation
   —   —      885 —   —   —   885
Stock options exercised
   —   —      5 —   —   408 413
Restricted stock awards issued, net
   —   —      29 —   —   (29 ) —
Stock awards
   —   —      39 —   —   76 115
Cash dividends declared:

Series A 3% Preferred-$2.25 per share
   —   —      —   (3 ) —   —   (3 )
SeriesB-1 8.48% Preferred-$6.36 per share
   —   —      —   (1,094 ) —   —   (1,094 )
Common-$0.63 per share
   —   —      —   (9,459 ) —   —   (9,459 )




Balance at September 30, 2017
   $ 17,334 $ 158    $ 112,087 $ 249,878 $ (10,838 ) $ (2,617 ) $ 366,002


(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
Balance at December 31, 2022	$	17,292	$	161	$	126,636		$	421,340		$	(137,487	)	$	(22,337	)	$	405,605
Comprehensive income:
Net income		—		—		—			12,089			—			—			12,089
Other comprehensive income, net of tax		—		—		—			—			10,115			—			10,115
Purchases of common stock for treasury		—		—		—			—			—			(561	)		(561	)
Share-based compensation plans:
Share-based compensation		—		—		551			—			—			—			551
Restricted stock units released		—		—		(1,711	)		—			—			1,711			—
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–$0.30 per share		—		—		—			(4,611	)		—			—			(4,611	)
Balance at March 31, 2023	$	17,292	$	161	$	125,476		$	428,453		$	(127,372	)	$	(21,187	)	$	422,823
Comprehensive income:
Net income		—		—		—			14,373			—			—			14,373
Other comprehensive loss, net of tax		—		—		—			—			(7,100	)		—			(7,100	)
Purchases of common stock for treasury		—		—		—			—			—			(2	)		(2	)
Share-based compensation plans:
Share-based compensation		—		—		657			—			—			—			657
Restricted stock units released		—		—		(9	)		—			—			9			—
Restricted stock awards issued		—		—		(590	)		—			—			590			—
Stock awards						(77	)								174			97
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–$0.30 per share		—		—		—			(4,611	)		—			—			(4,611	)
Balance at June 30, 2023	$	17,292	$	161	$	125,457		$	437,851		$	(134,472	)	$	(20,416	)	$	425,873

Continued on next page

See accompanying notes to the consolidated financial statements.

Table of Contents

~~- 6 -~~

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

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

Three and six months ended June 30, 2023 and 2022

   Nine months ended
September 30,
(Dollars in thousands)    2017 2016
Cash flows from operating activities:

Net income
   $ 22,468 $ 23,238
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
   4,613 4,480
Net amortization of premiums on securities
   2,473 2,325
Provision for loan losses
   9,415 6,281
Share-based compensation
   885 597
Deferred income tax expense (benefit)
   (527 ) (523 )
Proceeds from sale of loans held for sale
   9,439 9,246
Originations of loans held for sale
   (10,526 ) (8,458 )
Income from company owned life insurance
   (1,367 ) (2,340 )
Net gain on sale of loans held for sale
   (270 ) (202 )
Net gain on investment securities
   (600 ) (2,426 )
Goodwill impairment
   1,575 —
Net gain on other assets
   (25 ) (285 )
(Increase) decrease in other assets
   (874 ) 3,548
(Decrease) increase in other liabilities
   (1,266 ) 1,943


Net cash provided by operating activities
   35,413 37,424


Cash flows from investing activities:

Purchases of available for sale securities
   (86,434 ) (192,140 )
Purchases of held to maturity securities
   (70,610 ) (90,602 )
Proceeds from principal payments, maturities and calls on available for sale securities
   29,291 107,418
Proceeds from principal payments, maturities and calls on held to maturity securities
   74,205 48,424
Proceeds from sales of securities available for sale
   49,424 85,772
Net loan originations
   (282,455 ) (204,691 )
Proceeds from company owned life insurance, net of purchases
   (7 ) 2,443
Proceeds from sales of other assets
   189 602
Purchases of premises and equipment
   (6,966 ) (4,242 )
Cash consideration paid for acquisition, net of cash acquired
   (676 ) (868 )


Net cash used in investing activities
   (294,039 ) (247,884 )


Cash flows from financing activities:

Net increase in deposits
   286,286 332,826
Net decrease in short-term borrowings
   (20,700 ) (62,900 )
Proceeds from issuance of common stock
   29,664 —
Repurchase of preferred stock
   (6 ) —
Purchase of common stock for treasury
   (148 ) —
Proceeds from stock options exercised
   413 814
Excess tax benefit on share-based compensation, net
   —   10
Cash dividends paid to common and preferred shareholders
   (10,322 ) (9,690 )


Net cash provided by financing activities
   285,187 261,060


Net increase in cash and cash equivalents
   26,561 50,600
Cash and cash equivalents, beginning of period
   71,277 60,121


Cash and cash equivalents, end of period
   $ 97,838 $ 110,721


Supplemental information:

Cash paid for interest
   $ 10,189 $ 8,144
Cash paid for income taxes, net of refunds received
   8,677 4,708
Noncash investing and financing activities:

Real estate and other assets acquired in settlement of loans
   379 443
Accrued and declared unpaid dividends
   3,637 3,257
Increase in net unsettled security purchases
   75 2,290
Common stock issued for acquisition
   —   8,100
Assets acquired and liabilities assumed in business combinations:

Fair value of assets acquired
   812 4,848
Fair value of liabilities assumed
   44 1,845


(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
Balance at December 31, 2021	$	17,292	$	161	$	126,105		$	384,007		$	(13,207	)	$	(9,216	)	$	505,142
Comprehensive income:
Net income		—		—		—			14,983			—			—			14,983
Other comprehensive loss, net of tax		—		—		—			—			(53,887	)		—			(53,887	)
Purchases of common stock for treasury		—		—		—			—			—			(15,026	)		(15,026	)
Share-based compensation plans:
Share-based compensation		—		—		443			—			—			—			443
Restricted stock units released		—		—		(667	)		—			—			667			—
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–$0.29 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 awards 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

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)	Six months ended June 30,
	2023			2022
Cash flows from operating activities:
Net income	$	26,462		$	30,631
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,090			4,218
Net amortization of premiums on securities		1,792			2,736
Provision for credit losses		7,444			2,882
Share-based compensation		1,208			1,390
Deferred income tax benefit		(510	)		(646	)
Proceeds from sale of loans held for sale		7,791			18,768
Originations of loans held for sale		(7,812	)		(16,094	)
Income on company owned life insurance		(1,947	)		(1,702	)
Net gain on sale of loans held for sale		(234	)		(737	)
Net loss on investment securities		—			15
Net gain on other assets		(32	)		(7	)
Non-cash restructuring (recoveries) charges against assets		(19	)		1,269
Increase in other assets		(21,176	)		(14,393	)
(Decrease) increase in other liabilities		(2,242	)		53,454
Net cash provided by operating activities		14,815			81,784
Cash flows from investing activities:
Purchases of investment securities:
Available for sale		—			(75,269	)
Held to maturity		(1,209	)		(36,035	)
Proceeds from principal payments, maturities and calls on investment securities:
Available for sale securities		43,342			68,269
Held to maturity		30,077			36,265
Proceeds from sales of securities – available for sale		—			6,252
Net loan originations		(350,085	)		(84,329	)
Purchases of company owned life insurance, net of proceeds received		(13	)		(10,011	)
Purchases of premises and equipment		(1,232	)		(3,999	)
Net cash used in investing activities		(279,120	)		(98,857	)
Cash flows from financing activities:
Net increase (decrease) in deposits		105,437			(6,574	)
Net increase in short-term borrowings		169,000			79,000
Proceeds from long-term borrowings		50,000			—
Purchases of common stock for treasury		(563	)		(15,327	)
Cash dividends paid to common and preferred shareholders		(9,787	)		(9,433	)
Net cash provided by financing activities		314,087			47,666
Net increase in cash and cash equivalents		49,782			30,593
Cash and cash equivalents, beginning of period		130,466			79,112
Cash and cash equivalents, end of period	$	180,248		$	109,705

See accompanying notes to the consolidated financial statements.

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, ~~Scott Danahy Naylon,~~SDN Insurance Agency, LLC (“SDN”), and Courier Capital, LLC (“Courier Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York chartered banking subsidiary, Five Star Bank (the “Bank”). The Bank also has commercial loan production offices in Ellicott City (Baltimore), Maryland and Syracuse, New York, 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 across 45 states.~~clients. Courier Capital provides customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement ~~plans across 13 states.~~plans. On May 1, 2023, the Company completed the merger of its wholly-owned SEC-registered investments advisory firms, under which HNP Capital, LLC merged with and into Courier Capital. The merger was accounted for under ASC-805-50-15 – “Transactions Between Entities Under Common Control,” as an exchange of assets in which Courier Capital recognized the assets and liabilities transferred at historical cost basis at the date of transfer. Corn Hill Innovations Lab, LLC (“CHIL”), which oversaw the Company’s Banking-as-a-Service (“BaaS”) and financial technology (“FinTech”) relationships, was dissolved on March 28, 2023, and all assets and liabilities were transferred to the Bank.

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 ~~2016~~ Annual Report on Form10-K for the year ended December 31, ~~2016.~~2022. 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.

Reclassifications

~~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.

~~Subsequent Events~~

The Company has evaluated events and transactions for potential recognition or disclosure through the day the financial statements were issued and determined there were no material recognizable subsequent events.

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 ~~loan~~credit losses, the carrying value of goodwill and deferred tax assets, and assumptions used in the defined benefit pension plan accounting.

Cash Flow Reporting

Supplemental cash flow information is summarized as follows for the six months ended June 30, 2023 and 2022 (in thousands):

~~Derivative Instruments and Hedging Activities~~


	2023		2022
Supplemental information:
Cash paid for interest	$	61,108	$	6,129
Cash paid (refunded) for income taxes		4,678		(871	)
Noncash investing and financing activities:
Real estate and other assets acquired in settlement of loans	163			—
Accrued and declared unpaid dividends		4,975		4,810

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users9

Table of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

Contents

~~- 8 -~~

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Currently, none of the Company’s derivatives are designated in qualifying hedging relationships, as the derivatives are not used to manage risks within the Company’s assets or liabilities. As such, all changes in fair value of the Company’s derivatives are recognized directly in earnings.

In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

Recent Accounting Pronouncements

In ~~May 2014,~~March 2022, the ~~FASB~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. ~~2014-09,~~~~Revenue from Contracts~~2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures. The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors and enhance the disclosure requirements for loan refinancings and restructurings made with ~~Customers (Topic 606).~~ ~~ASU2014-09~~ ~~implements a common revenue standard that clarifies~~borrowers experiencing financial difficulty. In addition, the ~~principles~~amendments require disclosure of current-period gross write-offs for ~~recognizing revenue. The core principle~~financing receivables by year of ~~ASU2014-09~~ is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligationsorigination in the ~~contract, (iii) determine~~vintage disclosures. ASU 2022-02 became effective for the ~~transaction price, (iv) allocate the transaction price to the performance obligations in the contract~~Company on January 1, 2023 and ~~(v) recognize revenue when (or as) the entity satisfies~~was applied on a ~~performance obligation.~~prospective basis. The ~~effective date was deferred for one year to the interim and annual periods beginning on or after December 15, 2017. Early~~ adoption ~~is permitted as~~ of ~~the original effective date – interim and annual periods beginning on or after December 15, 2016. Management has completed the scope assessment and contract review forin-scope~~ ~~revenue streams. The Company’s largest source of revenue is net interest income on financial assets and liabilities, which is explicitly excluded from the scope of ASU2014-09.~~ ~~Revenue streams that are within the scope of ASU2014-09~~ ~~include insurance income, investment advisory fees, service charges on deposits and ATM and debit card fees. Management does~~this guidance did not ~~anticipate~~have a material ~~change in the timing or measurement ofin-scope~~ ~~revenues and continues to evaluate the~~ effect ~~that ASU2014-09~~ ~~will have~~ on the ~~recognition of certain contract acquisition costs, as well as changes in the required~~Company’s consolidated financial statements. See Note 5. Loans, for additional information regarding loan refinancings and restructurings made when a borrower is experiencing financial difficulties and updates to vintage disclosures. ~~The Company plans to adopt ASU2014-09~~ ~~using the modified retrospective transition method with a cumulative effect adjustment to opening retained earnings as of January 1, 2018.~~

In ~~January 2016,~~March 2022, the FASB issued ASUNo. ~~2016-01,~~~~Financial Instruments—Overall (Subtopic825-10)—Recognition~~2022-01, Derivatives and ~~Measurement~~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 ~~Financial Assets and Financial Liabilities. ASU2016-01~~ ~~is intended to improve~~hedge accounting, allowing for more consistent accounting for similar hedges. The amendments in this update became effective for the ~~recognition and measurement~~Company on January 1, 2023. The adoption of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial assetthis guidance did not have a material impact on the ~~balance sheet or the accompanying notes to the~~Company’s consolidated financial statements; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU~~2016-01~~ is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company is assessing the impact of ASU~~2016-01~~ ~~on its financial~~ statements.

Standards Not Yet Effective

In ~~February 2016,~~March 2023, the FASB issued ASUNo. ~~2016-02,~~~~Leases~~2023-02, Investments – Equity Method and Joint Ventures (Topic ~~842)~~.323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. The ASU~~2016-02~~ ~~establishes~~ allows for entities to consistently account for tax credit equity investments utilizing the proportional amortization method across all types of tax credits when certain requirements are met. The election of proportional amortization method must be made on 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~~programmatic basis rather than ~~12 months. Leases~~an individual investment basis. For previously held tax credit investments, the amendments will be ~~classified as~~applied either ~~finance~~on a modified retrospective basis or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. A lease will be treated as sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a ~~financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results.~~retrospective basis. The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for public business entities. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, with certain practical expedients available. Early adoption is permitted. The Company is assessing the impact of ASU~~2016-02~~ ~~on its financial statements.~~

~~- 9 -~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

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

~~In March 2016, the FASB issued ASUNo. 2016-09,~~~~Compensation—Stock Compensation (Topic 718)—Improvements to Employee Share-Based Payment Accounting~~~~. ASU2016-09~~ requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it could previously for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The adoption of ASU~~2016-09~~ ~~did not have a significant impact on the Company’s financial statements.~~

~~In June 2016, the FASB issued ASUNo. 2016-13,~~~~Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments~~~~. ASU2016-13~~ amends guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. Topic 326 eliminates the probable initial recognition threshold in current GAAP and instead, requires an entity to reflect its current estimate of all expected credit losses based on historical experience, current conditions and reasonable and supportable forecasts. 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 guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted beginning after December 15, 2018. The Company is assessing the impact of ASU~~2016-13~~ ~~on its financial statements.~~

~~In August 2016, the FASB issued ASUNo. 2016-15,~~~~Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments~~~~. ASU2016-15~~ ~~provides guidance on the following eight specific cash flow issues: 1) debt prepayment or debt extinguishment costs; 2) settlement ofzero-coupon~~ debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. The guidance is effective for fiscal years beginning after December 15, 2017,2023, including interim periods within those fiscal years. Early adoption is ~~permitted, including adoption in an interim period. As~~permitted. The Company is currently evaluating the impact this guidance ~~only affects~~will have on its consolidated financial statements.

(2.) RESTRUCTURING CHARGES

On July 17, 2020, the ~~classification within~~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 six branch closures and a reduction in staffing. The announcement was the ~~statement~~result of ~~cash flows, this ASU is~~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 ten percent of the branch network and impacted approximately six 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 one additional branch that closed in January 2021. This location was not ~~expected~~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 ~~have~~the branch closures in 2020 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. Additional related restructuring charges of $1.6 million and $111 thousand were incurred in 2022 and 2021, respectively, as a ~~significant impact~~result of property valuation adjustments to write-down certain real estate assets to fair market value based on ~~the Company’s financial statements.~~

~~In January 2017, the FASB issued ASUNo. 2017-04,~~~~Intangibles—Goodwill~~existing purchase offers and ~~Other (Topic 350) – Simplifying the Test for Goodwill Impairment~~~~. ASU2017-04~~ ~~simplifies the subsequent measurement~~current market conditions. There were $19 thousand of ~~goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, an entity will recognize an impairment charge~~restructuring recoveries for the amount by which the carrying value exceeds the fair value. This standard is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU~~2017-04~~ ~~during the quarter~~three and six months ended June 30, ~~2017, in connection~~2023, associated with the ~~interim goodwill impairment test that was performed. For additional details, see Note 6, Goodwill and Other Intangible Assets. The early adoption~~recovery of ~~ASU2017-04~~ ~~did not have a significant impact~~selling costs on ~~the Company’s financial statements.~~these properties.

~~In March 2017, the FASB issued ASUNo. 2017-07,~~~~Compensation – Retirement Benefits (Topic 715) – Improving the Presentation~~

Table of ~~Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~, which provides additional guidance on the presentation of net periodic pension and postretirement benefit costs in the income statement and on the components eligible for capitalization. The amendments in this ASU require that an employer report the service cost component of the net periodic benefit costs in the same income statement line item as other compensation costs arising from services rendered by employees during the period. The~~non-service-cost~~ components of net periodic benefit costs are to be presented in the income statement separately from the service cost components and outside a subtotal of income from operations. The ASU also allows for the capitalization of the service cost components, when applicable (i.e., as a cost of internally manufactured inventory or a self-constructed asset). The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods; early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The amendments in this ASU are to be applied retrospectively. The Company is assessing the impact of ASU~~2017-07~~ ~~on its financial statements.~~Contents

~~- 10 -~~

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(1.~~(2.) ~~BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~RESTRUCTURING CHARGES (Continued)

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


		Three months ended June 30,					Six months ended June 30,
	Income Statement Location	2023			2022		2023			2022
Selling costs	Restructuring (recoveries) charges	$	(19	)	$	—	$	(19	)	$	—
Valuation adjustments	Restructuring (recoveries) charges		—			1,269		—			1,269
Total		$	(19	)	$	1,269	$	(19	)	$	1,269

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


	Three months ended June 30,						Six months ended June 30,
	2023			2022			2023			2022
Balance at beginning of period	$	288		$	445		$	302		$	445
Restructuring (recoveries) charges		(4	)		1,269			(4	)		1,269
Cash payments		(11	)		(37	)		(25	)		(37	)
Charges against assets		—			(1,353	)		—			(1,353	)
Balance at end of period	$	273		$	324		$	273		$	324

In ~~March 2017,~~contemplation of the ~~FASB issued ASUNo. 2017-08,~~~~Receivables—Nonrefundable Fees and Other Costs (Subtopic310-20)~~ ~~– Premium Amortization on Purchased Callable Debt Securities~~~~. These amendments shorten~~transactions noted above, certain long-lived assets have met the ~~amortization period~~held for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflectedsale criteria as of the beginning of the fiscal year that includes that interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earningsJune 30, 2023. Long lived assets held for sale totaled $1.5 million as of ~~the beginning of the period of adoption. The Company is assessing the impact of ASU2017-08~~both June 30, 2023 and December 31, 2022 and are included in other assets on ~~its financial statements.~~

~~In August 2017, the FASB issued ASUNo. 2017-12,~~~~Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities~~~~. These amendments: (a) expand and refine hedge accounting for both financial andnon-financial~~ risk components, (b) align the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and (c) include certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments related to cash flow and net investment hedges existing at the date of adoption should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to presentation and disclosure should be applied prospectively. The Company is assessing the impact of ASU~~2017-12~~ ~~on its financial statements.~~

~~- 11 -~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~(2.) BUSINESS COMBINATIONS~~

~~2017 Activity - Robshaw & Julian Acquisition~~

On August 31, 2017, Courier Capital completed the acquisition of the assets of Robshaw & Julian Associates, Inc. (“Robshaw & Julian”), a registered investment advisor with approximately $175 million in assets under management, which increased Courier Capital’s total assets under management to a total of approximately $1.6 billion. Consideration for the acquisition included cash and potential future cash bonuses contingent upon achievement of certain revenue performance targets through August 2020. As a result of the acquisition, Courier Capital recorded goodwill of $1.0 million and other intangible assets of $810 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 statements of financial ~~statements.~~condition.

~~2016 Activity - Courier Capital Acquisition~~

On January 5, 2016, the Company completed the acquisition of Courier Capital Corporation, a registered investment advisory and wealth management firm with approximately $1.2 billion in assets under management. Consideration for the acquisition totaled $9.0 million and included stock of $8.1 million and $918 thousand of cash. The acquisition also included $2.8 million of potential future payments of stock and $2.2 million of potential future cash bonuses contingent upon Courier Capital meeting certain EBITDA performance targets through 2018. In addition, the Company purchased two pieces of real property in Buffalo and Jamestown, New York used by Courier Capital for total cash consideration of $1.3 million. As a result of the acquisition, the Company recorded goodwill of $6.0 million and other intangible assets of $3.9 million. The goodwill and other intangible assets are not expected to be deductible for income tax purposes. 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.

This acquisition was accounted for under the acquisition method in accordance with FASB ASC Topic 805. Accordingly, the assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of the acquisition date. The following table presents the allocation of acquisition cost to the assets acquired and liabilities assumed, based on their estimated fair values (in thousands).

Cash
   $ 50
Identified intangible assets
   3,928
Premises and equipment, accounts receivable and other assets
   870
Deferred tax liability
   (1,797 )
Other liabilities
   (48 )


Net assets acquired
   $ 3,003

~~The amounts assigned to goodwill and other intangible assets for the Courier Capital acquisition are as follows (dollars in thousands):~~

   Amount
allocated    Useful life
(in years)
Goodwill
   $ 6,015    n/a
Other intangible assets - customer relationships
   3,900    20
Other intangible assets - other
   28    5



   $ 9,943

~~- 12 -~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

(3.) 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						Nine months ended
	September 30,						September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2023			2022			2023			2022
Net income available to common shareholders	$	7,913		$	8,103		$	21,371		$	22,141		$	14,009		$	15,283		$	25,733		$	29,902
Weighted average common shares outstanding:
Total shares issued		15,448			14,692			15,002			14,688			16,100			16,100			16,100			16,100
Unvested restricted stock awards		(44	)		(72	)		(48	)		(76	)		(7	)		(5	)		(10	)		(5	)
Treasury shares		(136	)		(164	)		(148	)		(183	)		(721	)		(789	)		(734	)		(655	)

Total basic weighted average common shares outstanding		15,268			14,456			14,806			14,429			15,372			15,306			15,356			15,440
Incremental shares from assumed:
Exercise of stock options		7			16			11			21
Vesting of restricted stock awards		27			28			30			35			41			79			71			92

Total diluted weighted average common shares outstanding		15,302			14,500			14,847			14,485			15,413			15,385			15,427			15,532
Basic earnings per common share	$	0.52		$	0.56		$	1.44		$	1.53		$	0.91		$	1.00		$	1.68		$	1.94

Diluted earnings per common share	$	0.52		$	0.56		$	1.44		$	1.53		$	0.91		$	0.99		$	1.67		$	1.93

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:~~antidilutive (in thousands):

Stock options
           —              —              —              —
Restricted stock awards
   —      —      2    3








Total
   —      —      2    3


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Restricted stock awards		5		21		—		15

~~- 13 -~~

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(4.) 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, 2017
June 30, 2023
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	163,366	$	890	$	561	$	163,695	$	24,535		$	—	$	3,274	$	21,261
Mortgage-backed securities:
Federal National Mortgage Association		332,172		883		2,226		330,829		524,797			—		73,148		451,649
Federal Home Loan Mortgage Corporation		42,732		128		501		42,359		390,348			—		65,655		324,693
Government National Mortgage Association		12,864		282		12		13,134		110,319			—		21,179		89,140
Collateralized mortgage obligations:
Federal National Mortgage Association		225		1		1		225		11,502			—		2,544		8,958
Federal Home Loan Mortgage Corporation		52		—		—		52		20,673			—		4,584		16,089
Privately issued		—		950		—		950		—			332		—		332

Total mortgage-backed securities		388,045		2,244		2,740		387,549		1,057,639			332		167,110		890,861
Asset-backed securities		—		247		—		247

Total available for sale securities	$	551,411	$	3,381	$	3,301	$	551,491	$	1,082,174		$	332	$	170,384	$	912,122

Securities held to maturity:
U.S. Government agency and government sponsored enterprises									$	16,438		$	—	$	824	$	15,614
State and political subdivisions		293,026		4,580		429		297,177		76,066			25		6,396		69,695
Mortgage-backed securities:
Federal National Mortgage Association		9,904		32		55		9,881		5,990			—		556		5,434
Federal Home Loan Mortgage Corporation		3,232		—		110		3,122		7,727			—		1,365		6,362
Government National Mortgage Association		27,672		15		204		27,483		21,173			—		1,988		19,185
Collateralized mortgage obligations:
Federal National Mortgage Association		81,269		28		1,190		80,107		12,796			—		1,111		11,685
Federal Home Loan Mortgage Corporation		98,399		163		1,418		97,144		15,836			—		1,307		14,529
Government National Mortgage Association		24,830		18		286		24,562		3,871			—		349		3,522

Total mortgage-backed securities		245,306		256		3,263		242,299		67,393			—		6,676		60,717

Total held to maturity securities	$	538,332	$	4,836	$	3,692	$	539,476		159,897		$	25	$	13,896	$	146,026

December 31, 2016
Allowance for credit losses – securities										(4	)
Total held to maturity securities, net									$	159,893
December 31, 2022
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	187,325	$	512	$	1,569	$	186,268
U.S. Government agencies and government sponsored enterprises									$	24,535		$	—	$	3,420	$	21,115
Mortgage-backed securities:
Federal National Mortgage Association		288,949		897		4,413		285,433		545,797			—		76,193		469,604
Federal Home Loan Mortgage Corporation		30,182		114		807		29,489		410,829			—		68,608		342,221
Government National Mortgage Association		15,473		316		15		15,774		112,202			1		18,037		94,166
Collateralized mortgage obligations:
Federal National Mortgage Association		16,921		74		125		16,870		12,175			—		2,603		9,572
Federal Home Loan Mortgage Corporation		5,142		—		65		5,077		21,519			—		4,163		17,356
Privately issued		—		824		—		824		—			337		—		337

Total mortgage-backed securities		356,667		2,225		5,425		353,467		1,102,522			338		169,604		933,256
Asset-backed securities		—		191		—		191

Total available for sale securities	$	543,992	$	2,928	$	6,994	$	539,926	$	1,127,057		$	338	$	173,024	$	954,371

~~- 14 -~~

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(4.) INVESTMENT SECURITIES (Continued)


	Amortized		Unrealized		Unrealized		Fair		Amortized			Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value		Cost			Gains		Losses		Value
December 31, 2016 (continued)
December 31, 2022 (continued)
Securities held to maturity:
U.S. Government agencies and government sponsored enterprises									$	16,363		$	—	$	848	$	15,515
State and political subdivisions		305,248		2,127		1,616		305,759		97,583			24		7,172		90,435
Mortgage-backed securities:
Federal National Mortgage Association		10,362		1		124		10,239		8,332			—		582		7,750
Federal Home Loan Mortgage Corporation		3,290		—		150		3,140		7,959			—		1,396		6,563
Government National Mortgage Association		24,575		18		182		24,411		22,541			—		2,116		20,425
Collateralized mortgage obligations:
Federal National Mortgage Association		83,929		21		1,573		82,377		14,268			—		1,119		13,149
Federal Home Loan Mortgage Corporation		101,025		80		1,827		99,278		17,712			—		1,253		16,459
Government National Mortgage Association		14,909		40		162		14,787		4,222			—		330		3,892

Total mortgage-backed securities		238,090		160		4,018		234,232		75,034			—		6,796		68,238

Total held to maturity securities	$	543,338	$	2,287	$	5,634	$	539,991		188,980		$	24	$	14,816	$	174,188

Allowance for credit losses – securities										(5	)
Total held to maturity securities, net									$	188,975

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 $2.0 million and $2.1 million as of June 30, 2023 and December 31, 2022, respectively. For held to maturity (“HTM”) debt securities, AIR totaled $643 thousand and $695 thousand as of June 30, 2023 and December 31, 2022, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.

For the three months ended June 30, 2023 and 2022, provision for credit loss for HTM investment securities was less than $1 thousand in each period. For the six months ended June 30, 2023 and 2022, provision for credit loss for HTM investment securities was $1 thousand and less than $1 thousand, respectively.

Investment securities with a total fair value of ~~$845.5~~$795.0 million and $850.4 million at ~~September~~June 30, ~~2017~~2023 and December 31, 2022, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

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


	Three months ended				Nine months ended
	September 30,				September 30,				Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016		2023		2022		2023		2022
Proceeds from sales	$	24,117	$	23,497	$	49,424	$	85,772	$	—	$	6,252	$	—	$	6,252
Gross realized gains		190		426		606		2,426		—		—		—		—
Gross realized losses		6		—		6		—		—		15		—		15

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(4.) INVESTMENT SECURITIES (Continued)

The scheduled maturities of securities available for sale and securities held to maturity at ~~September~~June 30, ~~2017~~2023 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	$	—	$	—	$	2,767	$	2,688
Due from one to five years		122,268		122,260		92,004		84,185
Due from five to ten years		314,412		314,212
Due after five years through ten years						134,942		118,659
Due after ten years		114,731		115,019		852,461		706,590

	$	551,411	$	551,491

Total available for sale securities					$	1,082,174	$	912,122
Debt securities held to maturity:
Due in one year or less	$	59,880	$	60,067	$	25,668	$	25,401
Due from one to five years		162,385		165,992		39,346		37,977
Due from five to ten years		81,871		82,139
Due after five years through ten years						30,793		27,351
Due after ten years		234,196		231,278		64,090		55,297

	$	538,332	$	539,476

Total held to maturity securities					$	159,897	$	146,026

~~- 15 -~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~(4.) 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, 2017
Securities available for sale:
U.S. Government agency and government sponsored enterprises	$	57,316	$	477	$	5,043	$	84	$	62,359	$	561
Mortgage-backed securities:
Federal National Mortgage Association		185,246		1,582		39,939		644		225,185		2,226
Federal Home Loan Mortgage Corporation		24,875		101		12,353		400		37,228		501
Government National Mortgage Association		—		—		928		12		928		12
Collateralized mortgage obligations:
Federal National Mortgage Association		—		—		122		1		122		1
Federal Home Loan Mortgage Corporation		—		—		9		—		9		—

Total mortgage-backed securities		210,121		1,683		53,351		1,057		263,472		2,740

Total available for sale securities		267,437		2,160		58,394		1,141		325,831		3,301

Securities held to maturity:
State and political subdivisions		18,523		161		15,068		268		33,591		429
Mortgage-backed securities:
Federal National Mortgage Association		5,249		55		—		—		5,249		55
Federal Home Loan Mortgage Corporation		1,851		64		1,270		46		3,121		110
Government National Mortgage Association		19,617		171		1,428		33		21,045		204
Collateralized mortgage obligations:
Federal National Mortgage Association		30,196		402		39,991		788		70,187		1,190
Federal Home Loan Mortgage Corporation		53,062		703		32,029		715		85,091		1,418
Government National Mortgage Association		18,142		205		3,896		81		22,038		286

Total mortgage-backed securities		128,117		1,600		78,614		1,663		206,731		3,263

Total held to maturity securities		146,640		1,761		93,682		1,931		240,322		3,692

Total temporarily impaired securities	$	414,077	$	3,921	$	152,076	$	3,072	$	566,153	$	6,993

December 31, 2016
June 30, 2023
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	113,261	$	1,566	$	1,458	$	3	$	114,719	$	1,569	$	—	$	—	$	21,261	$	3,274	$	21,261	$	3,274
Mortgage-backed securities:
Federal National Mortgage Association		211,491		4,413		—		—		211,491		4,413		183		4		451,466		73,144		451,649		73,148
Federal Home Loan Mortgage Corporation		24,360		807		—		—		24,360		807		8,376		654		316,317		65,001		324,693		65,655
Government National Mortgage Association		1,111		15		—		—		1,111		15		85		3		89,055		21,176		89,140		21,179
Collateralized mortgage obligations:
Federal National Mortgage Association		8,119		125		—		—		8,119		125		—		—		8,958		2,544		8,958		2,544
Federal Home Loan Mortgage Corporation		5,077		65		—		—		5,077		65		—		—		16,089		4,584		16,089		4,584

Total mortgage-backed securities		250,158		5,425		—		—		250,158		5,425		8,644		661		881,885		166,449		890,529		167,110

Total available for sale securities		363,419		6,991		1,458		3		364,877		6,994		8,644		661		903,146		169,723		911,790		170,384

Total AFS debt securities with unrealized losses													$	8,644	$	661	$	903,146	$	169,723	$	911,790	$	170,384
December 31, 2022
Securities available for sale:
U.S. Government agencies and government sponsored enterprises													$	—	$	—	$	21,115	$	3,420	$	21,115	$	3,420
Mortgage-backed securities:
Federal National Mortgage Association														154,006		14,708		315,598		61,485		469,604		76,193
Federal Home Loan Mortgage Corporation														28,493		2,199		313,728		66,409		342,221		68,608
Government National Mortgage Association														10,301		921		83,841		17,116		94,142		18,037
Collateralized mortgage obligations:
Federal National Mortgage Association														1,000		94		8,572		2,509		9,572		2,603
Federal Home Loan Mortgage Corporation														—		—		17,356		4,163		17,356		4,163
Total mortgage-backed securities														193,800		17,922		739,095		151,682		932,895		169,604
Total available for sale securities														193,800		17,922		760,210		155,102		954,010		173,024
Total AFS debt securities with unrealized losses													$	193,800	$	17,922	$	760,210	$	155,102	$	954,010	$	173,024

~~- 16 -~~

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(4.) INVESTMENT SECURITIES (Continued)

   Less than 12 months    12 months or longer    Total
   Fair    Unrealized    Fair    Unrealized    Fair    Unrealized
   Value    Losses    Value    Losses    Value    Losses
December 31, 2016 (continued)

Securities held to maturity:

State and political subdivisions
   82,644    1,616    —      —      82,644    1,616
Mortgage-backed securities:

Federal National Mortgage Association
   9,253    124    —      —      9,253    124
Federal Home Loan Mortgage Corporation
   3,141    150    —      —      3,141    150
Government National Mortgage Association
   10,736    182    —      —      10,736    182
Collateralized mortgage obligations:

Federal National Mortgage Association
   72,734    1,560    3,107    13    75,841    1,573
Federal Home Loan Mortgage Corporation
   92,256    1,825    430    2    92,686    1,827
Government National Mortgage Association
   8,675    161    531    1    9,206    162












Total mortgage-backed securities
   196,795    4,002    4,068    16    200,863    4,018












Total held to maturity securities
   279,439    5,618    4,068    16    283,507    5,634












Total temporarily impaired securities
   $ 642,858    $ 12,609    $ 5,526    $ 19    $ 648,384    $ 12,628

The total number of ~~security~~available for sale securities positions in the investment portfolio in an unrealized loss position at ~~September~~June 30, ~~2017~~2023 was ~~317~~221 compared to ~~463~~226 at December 31, ~~2016.~~2022. At ~~September~~June 30, ~~2017,~~2023, the Company had positions in ~~115~~196 investment securities with a fair value of ~~$152.1~~$903.1 million and a total unrealized loss of ~~$3.1~~$169.7 million that ~~have~~had been in a continuous unrealized loss position for more than 12 months. At ~~September~~June 30, ~~2017,~~2023, there were a total of ~~202~~25 securities positions in the Company’s investment portfolio with a fair value of ~~$414.1~~$8.6 million and a total unrealized loss of ~~$3.9 million~~$661 thousand that had been in a continuous unrealized loss position for less than 12 months. At December 31, ~~2016,~~2022, the Company had ~~positions~~a position in ~~nine~~127 investment securities with a fair value of ~~$5.5~~$760.2 million and a total unrealized loss of ~~$19 thousand~~$155.1 million that had been in a continuous unrealized loss position for more than 12 months. At December 31, ~~2016,~~2022, there were a total of ~~454~~99 securities positions in the Company’s investment portfolio with a fair value of ~~$642.9~~$193.8 million and a total unrealized loss of ~~$12.6~~$17.9 million 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.

~~The Company reviews investment securities on an ongoing basis~~Securities Available for ~~the presence~~Sale

As of ~~other than temporary impairment (“OTTI”) with formal reviews performed quarterly. When evaluating debt securities~~June 30, 2023 and December 31, 2022, no allowance for ~~OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value~~credit losses has been ~~less than cost, (2) the financial condition and near-term prospects~~recognized on available for sale securities in an unrealized loss position as management does not believe any of the ~~issuer, (3) whether~~securities were impaired due to reasons of credit quality. This is based upon our analysis of the ~~market decline was affected by macroeconomic conditions,~~underlying risk characteristics, including credit ratings, and ~~(4) whether~~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 ~~Company has~~contractual terms of the ~~intention~~securities. Furthermore, management does not have the intent to sell any of the ~~debt security or whether~~securities classified as available for sale in the table above and believes that it is more likely than not that itwe will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information then available to management. There was no impairment recorded during the nine months ended September 30, 2017 and 2016.

~~Based on management’s review and evaluation of the Company’s debt securities as of September 30, 2017, the debt securities with unrealized losses were~~ not ~~considered to be OTTI. As of September 30, 2017, the Company did not intend to sell any of the securities in a loss position and believes that it is not likely that it will be required~~have to sell any such securities before ~~the anticipated~~a recovery of ~~amortized~~ cost. ~~Accordingly, as of September 30, 2017, management has concluded that~~The unrealized losses ~~on its~~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 ~~temporary~~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 June 30, 2023, $71.2 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $4.6 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating, and $0.3 million in non-rated bonds, all of which mature in 2023. Additionally, no municipal bonds were rated below investment grade. As of December 31, 2022, $90.6 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $6.9 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating, and no ~~further impairment loss has been realized in~~municipal bonds were rated below investment grade.

As of June 30, 2023 and December 31, 2022, the ~~Company’s consolidated statements~~Company had no past due or nonaccrual held to maturity investment securities.

Table of ~~income.~~Contents

~~- 17 -~~

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) 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, 2017
June 30, 2023
Commercial business	$	418,873	$	542		$	419,415		$	719,714	$	658		$	720,372
Commercial mortgage		759,898		(1,911	)		757,987			1,965,596		(4,376	)		1,961,220
Residential real estate loans		438,936		7,108			446,044			597,771		13,428			611,199
Residential real estate lines		114,747		2,874			117,621			72,641		3,330			75,971
Consumer indirect		827,154		30,374			857,528			964,466		36,516			1,000,982
Other consumer		17,460		180			17,640			28,036		29			28,065

Total	$	2,577,068	$	39,167			2,616,235		$	4,348,224	$	49,585			4,397,809

Allowance for loan losses							(34,347	)

Allowance for credit losses – loans															(49,836	)
Total loans, net						$	2,581,888							$	4,347,973

December 31, 2016
December 31, 2022
Commercial business	$	349,079	$	468		$	349,547		$	663,611	$	638		$	664,249
Commercial mortgage		671,552		(1,494	)		670,058			1,683,814		(3,974	)		1,679,840
Residential real estate loans		421,476		6,461			427,937			576,279		13,681			589,960
Residential real estate lines		119,745		2,810			122,555			74,432		3,238			77,670
Consumer indirect		725,754		26,667			752,421			985,580		38,040			1,023,620
Other consumer		17,465		178			17,643			15,002		108			15,110

Total	$	2,305,071	$	35,090			2,340,161		$	3,998,718	$	51,731			4,050,449

Allowance for loan losses							(30,934	)

Allowance for credit losses – loans															(45,413	)
Total loans, net						$	2,309,227							$	4,005,036

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled ~~$2.4 million~~$805 thousand and ~~$1.1 million~~$550 thousand as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of June 30, 2023, and December 31, 2022, AIR for loans totaled $17.0 million and $16.6 million, respectively, and is included in other assets on the Company’s consolidated statements of financial condition.

~~- 18 -~~16

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) 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		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, 2017
June 30, 2023
Commercial business	$	99	$	—	$	—	$	99	$	7,182	$	411,592	$	418,873	$	8	$	—	$	—	$	8	$	415	$	719,291	$	719,714	$	205
Commercial mortgage		103		260		—		363		2,539		756,996		759,898		453		4,634		—		5,087		2,477		1,958,032		1,965,596		2,477
Residential real estate loans		473		40		—		513		1,263		437,160		438,936		2,549		20		—		2,569		3,820		591,382		597,771		3,820
Residential real estate lines		444		39		—		483		325		113,939		114,747		53		42		—		95		208		72,338		72,641		208
Consumer indirect		2,603		740		—		3,343		1,250		822,561		827,154		8,896		2,162		—		11,058		2,982		950,426		964,466		2,982
Other consumer		88		4		11		103		15		17,342		17,460		131		11		5		147		—		27,889		28,036		—

Total loans, gross	$	3,810	$	1,083	$	11	$	4,904	$	12,574	$	2,559,590	$	2,577,068	$	12,090	$	6,869	$	5	$	18,964	$	9,902	$	4,319,358	$	4,348,224	$	9,692

December 31, 2016
December 31, 2022
Commercial business	$	1,337	$	—	$	—	$	1,337	$	2,151	$	345,591	$	349,079	$	176	$	10	$	—	$	186	$	340	$	663,085	$	663,611	$	233
Commercial mortgage		48		—		—		48		1,025		670,479		671,552		—		—		—		—		2,564		1,681,250		1,683,814		659
Residential real estate loans		1,073		253		—		1,326		1,236		418,914		421,476		1,306		28		—		1,334		4,071		570,874		576,279		4,071
Residential real estate lines		216		—		—		216		372		119,157		119,745		264		102		—		366		142		73,924		74,432		142
Consumer indirect		2,320		488		—		2,808		1,526		721,420		725,754		12,637		2,073		—		14,710		3,079		967,791		985,580		3,079
Other consumer		134		15		9		158		7		17,300		17,465		111		1		1		113		1		14,888		15,002		1

Total loans, gross	$	5,128	$	756	$	9	$	5,893	$	6,317	$	2,292,861	$	2,305,071	$	14,494	$	2,214	$	1	$	16,709	$	10,197	$	3,971,812	$	3,998,718	$	8,185

There were ~~no loans past due greater than 90 days and still accruing interest as of September 30, 2017 and December 31, 2016. There were $11~~$5 thousand and $9$1 thousand in consumer overdrafts which were past due greater than 90 days as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016, respectively.~~2022. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

~~Troubled Debt Restructurings~~Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was no interest income recognized on nonaccrual loans during the six months ended June 30, 2023 and 2022. Estimated interest income of $122 thousand and $288 thousand for the six months ended June 30, 2023 and 2022, respectively, would have been recorded if all such loans had been accruing interest according to their original contractual terms.

~~A modification of a loan constitutes a troubled debt restructuring (“TDR”)~~Loan Modifications for Borrower Experiencing Financial Difficulty

Loans may be modified when it is determined that a borrower is experiencing financial ~~difficulty~~difficulty. Loan modifications may include principal forgiveness, interest rate reduction, an other-than-insignificant payment delay, and ~~the modification constitutes a concession. Commercial loans modified in a TDR may involve temporary interest-only payments,~~ term extensions, ~~reductions in the interest rate for the remaining term~~or a combination of the loan, extensions of 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.these concessions.

The following table presents ~~information related to~~the amortized cost basis of loans modified ~~in a TDR during the periods indicated (dollars in~~to borrowers experiencing financial difficulty, disaggregated by loan class and type of concession granted as of June 30, 2023 (in thousands).:


	Quarter-to-Date						Year-to-Date						Term Extension
	Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Amortized Cost Basis		% of Total Loans
September 30, 2017
Loan Type
Commercial business		—	$	—	$	—		—	$	—	$	—	$	-		0.00	%
Commercial mortgage		—		—		—		—		—		—		-		0.00	%

Residential real estate loans														255		0.04	%
Residential real estate lines														-		0.00	%
Consumer indirect														-		0.00	%
Other consumer														-		0.00	%
Total		—	$	—	$	—		—	$	—	$	—	$	255		0.01	%

September 30, 2016
Commercial business		—	$	—	$	—		3	$	526	$	526
Commercial mortgage		—		—		—		1		550		550

Total		—	$	—	$	—		4	$	1,076	$	1,076

~~- 19 -~~17

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) LOANS (Continued)

The ~~loans identified as a TDR by~~following table describes the ~~Company during the nine month periods ended September 30, 2016 were previously reported as impaired loans prior to restructuring. Each~~financial effect of the ~~loans restructured during~~modifications made to borrowers experiencing financial difficulty:


Term Extension
Loan Type		Financial Effect
Residential real estate loans		Added a weighted average 10.0 years to the life of the loans, which reduced monthly payment amount for the borrower.

The Company closely monitors the ~~nine months ended September 30, 2016 were on nonaccrual status at the end~~performance of ~~the respective period. The modifications related to collateral concessions. Nonaccrual~~ loans that are ~~restructured remain on nonaccrual status, but may move~~modified to ~~accrual status after they~~borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have ~~performed according to~~been modified in the restructured terms for a period of time. The TDR classifications did not have a material impact on the Company’s determination of the allowance for loan losses because the modified loans were either classified as substandard, with an increased risk allowance allocation, or impaired and evaluated for a specific reserve both before and after restructuring.

~~There were no loans modified as a TDR within the previous 12 months that defaulted during the nine~~six months ended ~~September~~June 30, ~~2017 or 2016. For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due.~~2023 (in thousands):


	Payment Status (Amortized Cost Basis)
	Current		30-89 Days Past Due		90+ Days Past Due
Loan Type
Commercial business	$	-	$	-	$	-
Commercial mortgage		-		-		-
Residential real estate loans		158		97		-
Residential real estate lines		-		-		-
Consumer indirect		-		-		-
Other consumer		-		-		-
Total	$	158	$	97	$	-

Collateral Dependent Loans

~~Impaired Loans~~

Management has determined that specific commercial loans on nonaccrual status, ~~and~~ all loans that have had their terms restructured inwhen a ~~troubled debt restructuring are impaired~~borrower is experiencing financial difficulty, 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. The following table presents the ~~recorded investment, unpaid principal balance and related allowance~~amortized cost basis of ~~impaired~~collateral dependent loans by collateral type as of ~~the dates indicated~~June 30, 2023 and ~~average recorded investment and interest income recognized on impaired loans for the nine and twelve month periods ended as of the dates indicated~~December 31, 2022 (in thousands):


	Collateral type
	Business assets		Real property		Total		Specific Reserve
June 30, 2023
Commercial business	$	3,272	$	78	$	3,350	$	201
Commercial mortgage		—		18,383		18,383		1,004
Total	$	3,272	$	18,461	$	21,733	$	1,205

December 31, 2022
Commercial business	$	147	$	993	$	1,140	$	126
Commercial mortgage		—		21,592		21,592		1,152
Total	$	147	$	22,585	$	22,732	$	1,278

   Recorded
Investment⁽¹⁾    Unpaid
Principal
Balance⁽¹⁾    Related
Allowance    Average
Recorded
Investment    Interest
Income
Recognized
September 30, 2017

With no related allowance recorded:

Commercial business
   $ 991    $ 1,467    $ —      $ 690    $ —
Commercial mortgage
   604    604    —      629    —










   1,595    2,071    —      1,319    —
With an allowance recorded:

Commercial business
   6,339    6,339    2,678    4,342    —
Commercial mortgage
   2,438    2,438    174    1,200    —










   8,777    8,777    2,852    5,542    —










   $ 10,372    $ 10,848    $ 2,852    $ 6,861    $ —










December 31, 2016

With no related allowance recorded:

Commercial business
   $ 645    $ 1,044    $ —      $ 1,338    $ —
Commercial mortgage
   673    882    —      902    —










   1,318    1,926    —      2,240    —
With an allowance recorded:

Commercial business
   1,506    1,506    694    1,467    —
Commercial mortgage
   352    352    124    461    —










   1,858    1,858    818    1,928    —










   $ 3,176    $ 3,784    $ 818    $ 4,168    $ —

⁽¹⁾	~~Difference between recorded investment and unpaid principal balance represents partial charge-offs.~~

Table of Contents

~~- 20 -~~

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) LOANS (Continued)

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.

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


	Commercial Business		Commercial Mortgage		Term Loans Amortized Cost Basis by Origination Year
September 30, 2017
					2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
June 30, 2023
Commercial Business:
Uncriticized	$	396,021	$	738,843	$	55,076	$	155,587	$	91,688	$	40,311	$	24,853	$	59,879	$	245,539	$	—	$	672,933
Special mention		6,569		13,650		8,422		624		2,381		17,697		54		118		13,094		—		42,390
Substandard		16,283		7,405		171		97		963		1,199		16		1,294		1,309		—		5,049
Doubtful		—		—		—		—		—		—		—		—		—		—		—
Total Commercial Business loans					$	63,669	$	156,308	$	95,032	$	59,207	$	24,923	$	61,291	$	259,942	$	—	$	720,372
Current period gross write-offs					$	—	$	5	$	3	$	12	$	8	$	89	$	—	$	—	$	117

Total	$	418,873	$	759,898

December 31, 2016
Commercial Mortgage:
Uncriticized	$	326,254	$	652,550	$	257,865	$	545,092	$	383,806	$	242,513	$	154,625	$	330,668	$	—	$	—	$	1,914,569
Special mention		10,377		12,690		—		340		244		9,545		—		17,007		—		—		27,136
Substandard		12,448		6,312		—		—		422		105		73		18,915		—		—		19,515
Doubtful		—		—		—		—		—		—		—		—		—		—		—

Total	$	349,079	$	671,552

Total Commercial Mortgage loans					$	257,865	$	545,432	$	384,472	$	252,163	$	154,698	$	366,590	$	—	$	—	$	1,961,220
Current period gross write-offs					$	—	$	—	$	—	$	—	$	—	$	18	$	—	$	—	$	18

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) LOANS (Continued)


	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
December 31, 2022
Commercial Business
Uncriticized	$	146,581	$	105,001	$	61,115	$	29,644	$	39,625	$	21,467	$	244,848	$	—	$	648,281
Special mention		238		2,351		8,736		7		5		—		1,809		—		13,146
Substandard		—		72		—		42		516		1,034		1,158		—		2,822
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	146,819	$	107,424	$	69,851	$	29,693	$	40,146	$	22,501	$	247,815	$	—	$	664,249
Commercial Mortgage
Uncriticized	$	464,863	$	380,138	$	260,463	$	171,918	$	116,770	$	248,771	$	—	$	—	$	1,642,923
Special mention		—		—		2,319		136		—		11,784		—		—		14,239
Substandard		2,987		202		105		78		10,104		9,202		—		—		22,678
Doubtful		—		—		—		—		—		—		—		—		—
Total	$	467,850	$	380,340	$	262,887	$	172,132	$	126,874	$	269,757	$	—	$	—	$	1,679,840

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) 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 benon-performing.The following ~~table sets~~tables set forth the Company’s retail loan portfolio, categorized by ~~payment~~performance status, as of the dates indicated (in thousands):


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
June 30, 2023
Residential Real Estate Loans
Performing	$	45,664	$	81,353	$	83,363	$	114,966	$	73,542	$	208,491	$	—	$	—	$	607,379
Nonperforming		—		104		885		570		558		1,703		—		—		3,820
Total Residential Real Estate Loans	$	45,664	$	81,457	$	84,248	$	115,536	$	74,100	$	210,194	$	—	$	—	$	611,199
Current period gross write-offs	$	—	$	—	$	—	$	—	$	32	$	70	$	—	$	—	$	102

Residential Real Estate Lines
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	70,015	$	5,748	$	75,763
Nonperforming		—		—		—		—		—		—		72		136		208
Total Residential Real Estate Lines	$	—	$	—	$	—	$	—	$	—	$	—	$	70,087	$	5,884	$	75,971
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	28	$	13	$	41

Consumer Indirect
Performing	$	148,651	$	389,735	$	280,256	$	100,445	$	43,797	$	35,116	$	—	$	—	$	998,000
Nonperforming		93		1,098		1,047		320		265		159		—		—		2,982
Total Consumer Indirect Loans	$	148,744	$	390,833	$	281,303	$	100,765	$	44,062	$	35,275	$	—	$	—	$	1,000,982
Current period gross write-offs	$	6	$	2,586	$	2,520	$	849	$	801	$	867	$	—	$	—	$	7,629

Other Consumer
Performing	$	16,073	$	4,920	$	1,995	$	1,421	$	428	$	331	$	2,892	$	—	$	28,060
Nonperforming		—		—		—		—		—		—		5		—		5
Total Other Consumer Loans	$	16,073	$	4,920	$	1,995	$	1,421	$	428	$	331	$	2,897	$	—	$	28,065
Current period gross write-offs	$	455	$	89	$	89	$	25	$	17	$	17	$	28	$	—	$	720

   Residential
Real Estate
Loans    Residential
Real Estate
Lines    Consumer
Indirect    Other
Consumer
September 30, 2017

Performing
   $ 437,673    $ 114,422    $ 825,904    $ 17,434
Non-performing
   1,263    325    1,250    26








Total
   $ 438,936    $ 114,747    $ 827,154    $ 17,460








December 31, 2016

Performing
   $ 420,240    $ 119,373    $ 724,228    $ 17,449
Non-performing
   1,236    372    1,526    16








Total
   $ 421,476    $ 119,745    $ 725,754    $ 17,465

- 21 -

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) LOANS (Continued)


	Term Loans Amortized Cost Basis by Origination Year
	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
December 31, 2022
Residential Real Estate Loans
Performing	$	79,882	$	85,821	$	118,819	$	76,437	$	55,520	$	169,410	$	—	$	—	$	585,889
Nonperforming		—		305		510		795		677		1,784		—		—		4,071
Total	$	79,882	$	86,126	$	119,329	$	77,232	$	56,197	$	171,194	$	—	$	—	$	589,960
Residential Real Estate Lines
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	70,942	$	6,586	$	77,528
Nonperforming		—		—		—		—		—		—		34		108		142
Total	$	—	$	—	$	—	$	—	$	—	$	—	$	70,976	$	6,694	$	77,670
Consumer Indirect
Performing	$	440,332	$	331,902	$	126,664	$	59,981	$	39,352	$	22,310	$	—	$	—	$	1,020,541
Nonperforming		748		1,209		432		381		205		104		—		—		3,079
Total	$	441,080	$	333,111	$	127,096	$	60,362	$	39,557	$	22,414	$	—	$	—	$	1,023,620
Other Consumer
Performing	$	6,463	$	2,664	$	2,043	$	761	$	213	$	308	$	2,656	$	—	$	15,108
Nonperforming		—		—		—		—		—		—		2		—		2
Total	$	6,463	$	2,664	$	2,043	$	761	$	213	$	308	$	2,658	$	—	$	15,110

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) LOANS (Continued)

Allowance for ~~Loan~~Credit Losses – Loans

~~Loans and the related allowance for loan losses are presented below as of the dates indicated (in thousands):~~

Residential Residential
Commercial
Business Commercial
Mortgage Real Estate
Loans Real Estate
Lines Consumer
Indirect Other
Consumer Total
September 30, 2017

Loans:

Ending balance
$ 418,873 $ 759,898 $ 438,936 $ 114,747 $ 827,154 $ 17,460 $ 2,577,068

Evaluated for impairment:

Individually
$ 7,126 $ 2,459 $ —   $ —   $ —   $ —   $ 9,585

Collectively
$ 411,747 $ 757,439 $ 438,936 $ 114,747 $ 827,154 $ 17,460 $ 2,567,483

Allowance for loan losses:

Ending balance
$ 15,749 $ 3,727 $ 1,161 $ 157 $ 13,217 $ 336 $ 34,347

Evaluated for impairment:

Individually
$ 2,658 $ 171 $ —   $ —   $ —   $ —   $ 2,829

Collectively
$ 13,091 $ 3,556 $ 1,161 $ 157 $ 13,217 $ 336 $ 31,518

September 30, 2016

Loans:

Ending balance
$ 350,181 $ 637,799 $ 419,547 $ 120,901 $ 703,499 $ 17,700 $ 2,249,627

Evaluated for impairment:

Individually
$ 2,081 $ 1,334 $ —   $ —   $ —   $ —   $ 3,415

Collectively
$ 348,100 $ 636,465 $ 419,547 $ 120,901 $ 703,499 $ 17,700 $ 2,246,212

Allowance for loan losses:

Ending balance
$ 6,524 $ 9,710 $ 1,428 $ 315 $ 11,041 $ 332 $ 29,350

Evaluated for impairment:

Individually
$ 436 $ 122 $ —   $ —   $ —   $ —   $ 558

Collectively
$ 6,088 $ 9,588 $ 1,428 $ 315 $ 11,041 $ 332 $ 28,792

The following table sets forth the changes in the allowance for ~~loan~~credit losses – loans for the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2023 and 2022 (in thousands):


							Residential			Residential												Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
	Commercial Business			Commercial Mortgage			Real Estate Loans			Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended September 30, 2017
Three months ended June 30, 2023
Allowance for credit losses – loans:
Beginning balance	$	14,622		$	3,906		$	1,247		$	232		$	12,833		$	319		$	33,159		$	12,911		$	15,195		$	4,213		$	651		$	14,117		$	441		$	47,528
Charge-offs		(130	)		—			(198	)		(21	)		(2,330	)		(230	)		(2,909	)		(90	)		(18	)		(39	)		(25	)		(3,009	)		(338	)		(3,519	)
Recoveries		86			5			37			2			1,086			79			1,295			57			2			26			—			2,709			89			2,883
Provision (credit)		1,171			(184	)		75			(56	)		1,628			168			2,802

Provision (benefit)																							540			1,647			446			84			(511	)		738			2,944
Ending balance	$	15,749		$	3,727		$	1,161		$	157		$	13,217		$	336		$	34,347		$	13,418		$	16,826		$	4,646		$	710		$	13,306		$	930		$	49,836

Nine months ended September 30, 2017
Six months ended June 30, 2023
Beginning balance	$	7,225		$	10,315		$	1,478		$	303		$	11,311		$	302		$	30,934		$	12,585		$	14,412		$	3,301		$	608		$	14,238		$	269		$	45,413
Charge-offs		(1,908	)		(10	)		(298	)		(64	)		(7,343	)		(620	)		(10,243	)		(117	)		(18	)		(102	)		(41	)		(7,629	)		(720	)		(8,627	)
Recoveries		332			257			85			58			3,259			250			4,241			208			4			31			—			5,491			168			5,902
Provision (credit)		10,100			(6,835	)		(104	)		(140	)		5,990			404			9,415

Provision																							742			2,428			1,416			143			1,206			1,213			7,148
Ending balance	$	15,749		$	3,727		$	1,161		$	157		$	13,217		$	336		$	34,347		$	13,418		$	16,826		$	4,646		$	710		$	13,306		$	930		$	49,836

																						Commercial Business			Commercial Mortgage			Residential Real Estate Loans			Residential Real Estate Lines			Consumer Indirect			Other Consumer			Total
Three months ended June 30, 2022
Allowance for credit losses – loans:
Beginning balance																						$	10,121		$	13,746		$	1,852		$	425		$	14,568		$	254		$	40,966
Charge-offs																							(191	)		—			(56	)		—			(2,672	)		(309	)		(3,228	)
Recoveries																							101			2,018			10			12			2,025			102			4,268
Provision (benefit)																							109			(3,700	)		334			72			3,411			220			446
Ending balance																						$	10,140		$	12,064		$	2,140		$	509		$	17,332		$	267		$	42,452
Six months ended June 30, 2022
Beginning balance																							11,099			14,777			1,604			379			11,611			206			39,676
Charge-offs																							(242	)		—			(56	)		—			(5,158	)		(685	)		(6,141	)
Recoveries																							189			2,019			15			17			3,961			193			6,394
(Benefit) provision																							(906	)		(4,732	)		577			113			6,918			553			2,523
Ending balance																						$	10,140		$	12,064		$	2,140		$	509		$	17,332		$	267		$	42,452

~~- 22 -~~23

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(5.) LOANS (Continued)

~~The following table sets forth the changes in the allowance for loan losses for the three and nine month periods ended September 30, 2016 (in thousands):~~

   Residential Residential
   Commercial
Business Commercial
Mortgage Real Estate
Loans Real Estate
Lines Consumer
Indirect Other
Consumer Total
Three months ended September 30, 2016

Beginning balance
   $ 6,197 $ 9,496 $ 1,444 $ 318 $ 10,696 $ 374 $ 28,525
Charge-offs
   (44 ) (156 ) (78 ) (8 ) (2,056 ) (158 ) (2,500 )
Recoveries
   75 29 17 4 1,160 79 1,364
Provision (credit)
   296 341 45 1 1,241 37 1,961


Ending balance
   $ 6,524 $ 9,710 $ 1,428 $ 315 $ 11,041 $ 332 $ 29,350


Nine months ended September 30, 2016

Beginning balance
   $ 5,540 $ 9,027 $ 1,347 $ 345 $ 10,458 $ 368 $ 27,085
Charge-offs
   (688 ) (168 ) (258 ) (59 ) (6,452 ) (434 ) (8,059 )
Recoveries
   244 40 142 11 3,324 282 4,043
Provision
   1,428 811 197 18 3,711 116 6,281


Ending balance
   $ 6,524 $ 9,710 $ 1,428 $ 315 $ 11,041 $ 332 $ 29,350

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 oftypically associated with higher credit 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 inflation, 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 inflation, 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 of credit (comprised of home equity ~~lines)~~lines of credit) are generally made based on ~~the basis of~~ 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, 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 or boats.~~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.~~bankruptcy, including the heightened risk that such circumstances may arise as a result of inflation. 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.

(6.) LEASES

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. Two building leases were subleased with terms that extended through December 31, 2023.

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

~~- 23 -~~


		June 30,			December 31,
	Balance Sheet Location	2023			2022
Operating Lease Right of Use Assets:
Gross carrying amount	Other assets	$	37,775		$	36,723
Accumulated amortization	Other assets		(6,366	)		(5,603	)
Net book value		$	31,409		$	31,120

Operating Lease Liabilities:
Right of use lease obligations	Other liabilities	$	33,628		$	33,229

The weighted average remaining lease term for operating leases was 21.34 years at June 30, 2023 and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.90%. The Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term for the discount rate.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(6.) LEASES (Continued)

The following table represents lease costs and other lease information:


	Three months ended June 30,						Six months ended June 30,
	2023			2022			2023			2022
Lease costs:
Operating lease costs	$	759		$	664		$	1,535		$	1,332
Variable lease costs (1)		94			132			211			245
Sublease income		(24	)		(11	)		(48	)		(23	)
Net lease costs	$	829		$	785		$	1,698		$	1,554

Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	752		$	714		$	1,442		$	1,357
Right of use assets obtained in exchange for new operating lease liabilities	$	912		$	100		$	1,235		$	190

(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 June 30, 2023 (in thousands):


Twelve months ended June 30,
2024	$	1,497
2025		2,899
2026		2,795
2027		2,641
2028		2,612
Thereafter		39,337
Total future minimum operating lease payments		51,781
Amounts representing interest		(18,153	)
Present value of net future minimum operating lease payments	$	33,628

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(7.) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill totaled ~~$65.8 and $66.4~~$67.1 million as of ~~September~~both June 30, ~~2017~~2023 and December 31, ~~2016, respectively.~~2022. The Company performs a goodwill impairment test on an annual basis as of October 1^st1st or more frequently if events and circumstances warrant.

(in thousands)    Banking    Non-Banking    Total
Balance, December 31, 2016
   $ 48,536    $ 17,881    $ 66,417
Impairment
   —      (1,575 )    (1,575 )
Acquisition
   —      998    998






Balance, September 30, 2017
   $ 48,536    $ 17,304    $ 65,840


	Banking		All Other (1)		Total
Balance, December 31, 2022	$	48,536	$	18,535	$	67,071
Acquisitions		—		—		—
Balance, June 30, 2023	$	48,536	$	18,535	$	67,071

~~Goodwill~~

(1) All Other includes the SDN and other intangible assets added during the period relates to the acquisition of assets of Robshaw & Julian, which was completed on August 31, 2017. See Note 2 – Business Combinations for additional information.Courier Capital reporting units.

Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ~~The Company completed an evaluation~~Based on the continued capital markets downturn for bank stocks due to macroeconomic pressures, including inflation, along with volatility in the banking industry as a result of recent bank failures during the first half of 2023, a quantitative assessment of the contingent earn out liability related to its 2014 acquisition of SDN during the second quarter of 2017, resulting in a contingent consideration liability adjustment of $1.2 million. Based on this event, a goodwill impairment testBanking reporting unit was performed in the second quarter of ~~2017.~~2023. Based on ~~its qualitative~~this quantitative assessment, the Company concluded that it was not more likely than not that ~~the fair value~~goodwill was impaired as of ~~its SDN reporting unit was less than its carrying value. Accordingly, the Company performed a Step 1 review for possible goodwill impairment.~~

Under Step 1 of the goodwill impairment review, the fair value of the SDN reporting unit was calculated using income and market-based approaches. Under Step 1, it was determined that the carrying value of our SDN reporting unit exceeded its fair value. Based on this assessment, the Company recorded a goodwill impairment charge related to the SDN reporting unit of $1.6 million during the quarter ended June 30, ~~2017.~~

~~As discussed above, for the quarter ended June 30, 2017, an ad hoc goodwill impairment test~~2023. A qualitative assessment was performed for the SDN reporting unit was performed due to the above mentioned identified event. The annual goodwill impairment test will be performed during the fourth quarter as of October 1, 2017. Management performs a qualitative review for events or circumstances indicating potential goodwill impairment on a quarterly basis for alland Courier Capital reporting units and ~~will perform goodwill impairment tests on a more frequent basis,~~the Company concluded no quantitative assessment was deemed necessary as ~~warranted.~~of June 30, 2023.

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). ~~Changes in the gross~~Gross carrying amount, accumulated amortization and net book value, were as follows (in thousands):


	June 30,			December 31,
	2023			2022
Core deposit intangibles:
Gross carrying amount	$	2,042		$	2,042
Accumulated amortization		(2,042	)		(2,042	)
Net book value	$	—		$	—

Other intangibles:
Gross carrying amount	$	14,545		$	14,545
Accumulated amortization		(8,666	)		(8,202	)
Net book value	$	5,879		$	6,343

   September 30,    December 31,
   2017    2016
Other intangible assets:

Gross carrying amount
   $ 13,420    $ 12,610
Accumulated amortization
   (4,263 )    (3,387 )




Net book value
   $ 9,157    $ 9,223

Amortization expense for total other intangible assets was ~~$288~~$230 thousand and ~~$876~~$464 thousand for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, and ~~$309~~$249 thousand and ~~$946~~$503 thousand for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016, respectively.~~ 2022. As of ~~September~~June 30, ~~2017,~~2023, the estimated amortization expense of other intangible assets for the remainder of ~~2017~~2023 and each of the next five years is as follows (in thousands):


2023 (remainder of year)	$	446
2024		838
2025		766
2026		694
2027		623
2028		551
Thereafter		1,961
Total	$	5,879

2017 (remainder of year)
   $ 294
2018
   1,112
2019
   1,011
2020
   909
2021
   803
2022
   725

Table of Contents

~~- 24 -~~

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(8.) OTHER ASSETS AND OTHER LIABILITIES

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

~~(7.~~


	June 30,		December 31,
	2023		2022
Other Assets:
Tax credit investments	$	61,713	$	55,568
Net deferred tax asset		53,412		53,427
Derivative instruments		52,041		54,557
Operating lease right of use assets		31,409		31,120
FHLB and FRB stock		28,741		19,385
Accrued interest receivable		21,731		14,503
Other		36,137		34,432
Total other assets	$	285,184	$	262,992


	June 30,		December 31,
	2023		2022
Other Liabilities:
Collateral on derivative instruments	$	48,320	$	54,300
Derivative instruments		43,969		47,751
Operating lease right of use obligations		33,628		33,229
Accrued interest expense		16,356		5,983
Other		39,914		41,758
Total other liabilities	$	182,187	$	183,021

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(9.) 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.~~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 ~~existing credit~~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 ~~result from participations in~~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 ~~provided to external lenders~~ as part of ~~loan participation arrangements, therefore, such derivatives are not used to manage~~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 six months of 2023 and in 2022, such derivatives were used to hedge the variable cash flows associated with short-term borrowings or brokered CDs. 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 following table summarizes the terms of the Company’s outstanding interest rate swap agreements entered into to manage its exposure to the variability in future cash flows at June 30, 2023 (dollars in thousands):


Effective Date	Expiration Date	Notional Amount		Pay Fixed Rate
4/11/2022	4/11/2027	$	50,000	0.787%
1/24/2023	1/24/2026	$	30,000	3.669%
5/5/2023	5/5/2026	$	25,000	3.4615%

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 ~~assets or liabilities.~~borrowings. During the next twelve months, the Company estimates that $3.2 million in accumulated other comprehensive income related to derivatives will be reclassified as 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~~well-capitalized institution, the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(9.) 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~~June 30, ~~2017~~2023 and December 31, ~~2016~~2022 (in thousands):


					Asset derivatives								Liability derivatives															Asset derivatives								Liability derivatives
	Gross notional amount				Balance sheet line item			Fair value					Balance sheet line item			Fair value						Gross notional amount								Fair value								Fair value
	Sept. 30, 2017		Dec. 31, 2016				Sept. 30, 2017			Dec. 31, 2016			Balance sheet line item		Sept. 30, 2017			Dec. 31, 2016			June 30, 2023			December 31, 2022			Balance sheet line item		June 30, 2023			December 31, 2022			Balance sheet line item		June 30, 2023			December 31, 2022
Derivatives designated as hedging instruments
Cash flow hedges																						$	105,000		$	50,000		Other assets		$	7,969		$	6,725		Other liabilities		$	—		$	—
Total derivatives																						$	105,000		$	50,000				$	7,969		$	6,725				$	—		$	—
Derivatives not designated as hedging instruments					Balance sheet line item
Interest rate swaps (1)																							1,109,522			1,006,386		Other assets			43,944			47,736		Other liabilities			43,947			47,738
Credit contracts	$	12,349	$	—		Other assets		$	—		$	—		Other liabilities		$	9		$	—			84,317			104,497		Other assets			—			—		Other liabilities			—			—

Mortgage banking																							8,725			7,884		Other assets			128			96		Other liabilities			22			13
Total derivatives	$	12,349	$	—				$	—		$	—				$	9		$	—		$	1,202,564		$	1,118,767				$	44,072		$	47,832				$	43,969		$	47,751

(1)

The Company was holding collateral of $48.3 million and $54.3 million against its net obligations under these contracts at June 30, 2023 and December 31, 2022, respectively.

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~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 (in thousands):


											Gain (loss) recognized in income				Gain (loss) recognized in income
										Line item of gain (loss)	Three months ended June 30,				Six months ended June 30,
Undesignated derivatives	Line item of gain (loss) recognized in income	Gain (loss) recognized in income								recognized in income	2023		2022		2023		2022
		Three months ended September 30,				Nine months ended September 30,
		2017		2016		2017		2016
Credit contract	Noninterest income - Other	$	127	$	—	$	127	$	—

Interest rate swaps										Income from derivative instruments, net	$	625	$	596	$	1,126	$	1,358
Credit contracts										Income from derivative instruments, net		44		18		51		18
Mortgage banking										Income from derivative instruments, net		34		31		22		(212	)
Total undesignated		$	127	$	—	$	127	$	—		$	703	$	645	$	1,199	$	1,164

~~- 25 -~~

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(8.~~(10.) SHAREHOLDERS’ EQUITY

Common Stock

The changes in shares of common stock were as follows for the ~~nine month periods~~three and six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016:~~2022:

   Outstanding    Treasury    Issued
September 30, 2017

Shares outstanding at December 31, 2016
   14,537,597    154,617    14,692,214
Common stock issued for“at-the-market” equity offering
   1,069,635    —      1,069,635
Restricted stock awards issued
   8,510    (8,510 )    —
Restricted stock awards forfeited
   (10,359 )    10,359    —
Stock options exercised
   21,320    (21,320 )    —
Stock awards
   3,914    (3,914 )    —
Treasury stock purchases
   (4,323 )    4,323    —






Shares outstanding at September 30, 2017
   15,626,294    135,555    15,761,849






September 30, 2016

Shares outstanding at December 31, 2015
   14,190,192    207,317    14,397,509
Common stock issued for Courier Capital acquisition
   294,705    —      294,705
Restricted stock awards issued
   8,800    (8,800 )    —
Restricted stock awards forfeited
   (10,183 )    10,183    —
Stock options exercised
   41,961    (41,961 )    —
Stock awards
   2,244    (2,244 )    —






Shares outstanding at September 30, 2016
   14,527,719    164,495    14,692,214


	Outstanding			Treasury			Issued
2023
Shares at December 31, 2022		15,340,001			759,555			16,099,556
Restricted stock units released		58,188			(58,188	)		—
Treasury stock purchases		(22,710	)		22,710			—
Shares at March 31, 2023		15,375,479			724,077			16,099,556
Restricted stock awards issued		20,185			(20,185	)		—
Stock awards		5,945			(5,945	)		—
Restricted stock units released		296			(296	)		—
Treasury stock purchases		(105	)		105			—
Shares at June 30, 2023		15,401,800			697,756			16,099,556

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

~~On May 30, 2017,~~

Share Repurchase Programs

In June 2022, the ~~Company entered into~~Company’s Board of Directors (the “Board”) authorized a ~~sales agency agreement, with Sandler O’Neill + Partners, L.P. as sales agent, under which it may sell~~share repurchase program for up to ~~$40 million~~766,447 shares of ~~its~~ common stock ~~through an“at-the-market”~~ ~~equity offering program. The Company expects~~(the “2022 Share Repurchase Program”). Repurchased shares are recorded in treasury stock, at cost, which includes any applicable transaction costs. As of June 30, 2023, there were 766,447 shares remaining for repurchase under the 2022 Share Repurchase Program.

In November 2020, the Board authorized a share repurchase program for up to use the net proceeds of this offering to support organic growth and other general corporate purposes, including contributing capital to the Bank. Through the period ended September 30, 2017, the Company has sold 1,069,635801,879 shares of ~~its~~ common stock ~~under this program~~(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 ~~a weighted~~an average price of ~~$29.01, representing gross proceeds~~$31.99 during the three months ended March 31, 2022, and 340,688 shares were repurchased during the year ended December 31, 2021.

Table of ~~approximately $31.0 million. Net proceeds received were approximately $29.7 million.~~Contents

~~- 26 -~~

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(9.~~(11.) ACCUMULATED OTHER COMPREHENSIVE ~~LOSS~~(LOSS) INCOME

The following tables present the components of other comprehensive (loss) income ~~(loss)~~ for the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 (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, 2017
Three months ended June 30, 2023
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	589		$	226		$	363
Change in unrealized loss during the period										$	(11,643	)	$	(2,983	)	$	(8,660	)
Reclassification adjustment for net gains included in net income⁽¹⁾		(127	)		(48	)		(79	)		16			4			12

Total securities available for sale and transferred securities		462			178			284			(11,627	)		(2,979	)		(8,648	)
Pension and post-retirement obligations:
Hedging derivative instruments:
Change in unrealized gain during the period											1,887			483			1,404
Pension obligations:
Amortization of prior service credit included in income		(12	)		(4	)		(8	)		(123	)		(32	)		(91	)
Amortization of net actuarial loss included in income		291			112			179			316			81			235

Total pension and post-retirement obligations		279			108			171

Other comprehensive income	$	741		$	286		$	455

Three months ended September 30, 2016
Total pension obligations											193			49			144
Other comprehensive loss										$	(9,547	)	$	(2,447	)	$	(7,100	)
Six months ended June 30, 2023
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	(1,922	)	$	(742	)	$	(1,180	)
Change in unrealized gain during the period										$	2,635		$	675		$	1,960
Reclassification adjustment for net gains included in net income⁽¹⁾		(433	)		(167	)		(266	)		35			9			26

Total securities available for sale and transferred securities		(2,355	)		(909	)		(1,446	)		2,670			684			1,986
Pension and post-retirement obligations:
Hedging derivative instruments:
Change in unrealized gain during the period											996			255			741
Pension obligations:
Amortization of prior service credit included in income		(12	)		(5	)		(7	)		(245	)		(63	)		(182	)
Amortization of net actuarial loss included in income		238			92			146			632			162			470

Total pension and post-retirement obligations		226			87			139			387			99			288

Other comprehensive loss	$	(2,129	)	$	(822	)	$	(1,307	)

Nine months ended September 30, 2017
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	4,747		$	1,831		$	2,916
Reclassification adjustment for net gains included in net income⁽¹⁾		(514	)		(198	)		(316	)

Total securities available for sale and transferred securities		4,233			1,633			2,600
Pension and post-retirement obligations:
Amortization of prior service credit included in income		(38	)		(14	)		(24	)
Amortization of net actuarial loss included in income		874			337			537

Total pension and post-retirement obligations		836			323			513

Other comprehensive income	$	5,069		$	1,956		$	3,113		$	4,053		$	1,038		$	3,015

Nine months ended September 30, 2016
Securities available for sale and transferred securities:
Change in unrealized gain/loss during the period	$	17,084		$	6,593		$	10,491
Reclassification adjustment for net gains included in net income⁽¹⁾		(2,512	)		(969	)		(1,543	)

Total securities available for sale and transferred securities		14,572			5,624			8,948
Pension and post-retirement obligations:
Amortization of prior service credit included in income		(36	)		(14	)		(22	)
Amortization of net actuarial loss included in income		716			276			440

Total pension and post-retirement obligations		680			262			418

Other comprehensive income	$	15,252		$	5,886		$	9,366

⁽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.

~~- 27 -~~(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.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(9.~~(11.) ACCUMULATED OTHER COMPREHENSIVE ~~LOSS~~(LOSS) INCOME (Continued)


	Pre-tax Amount			Tax Effect			Net-of-tax Amount
Three months ended June 30, 2022
Securities available for sale and transferred securities:
Change in unrealized loss during the period	$	(44,966	)	$	(11,520	)	$	(33,446	)
Reclassification adjustment for net gains included in net income (1)		41			10			31
Total securities available for sale and transferred securities		(44,925	)		(11,510	)		(33,415	)
Hedging derivative instruments:
Change in unrealized gain during the period		991			254			737
Pension and post-retirement obligations:
Amortization of prior service credit included in income		—			—			—
Amortization of net actuarial loss included in income		64			17			47
Total pension and post-retirement obligations		64			17			47
Other comprehensive loss	$	(43,870	)	$	(11,239	)	$	(32,631	)
Six months ended June 30, 2022
Securities available for sale and transferred securities:
Change in unrealized loss during the period	$	(119,983	)	$	(30,741	)	$	(89,242	)
Reclassification adjustment for net gains included in net income (1)		72			18			54
Total securities available for sale and transferred securities		(119,911	)		(30,723	)		(89,188	)
Hedging derivative instruments:
Change in unrealized gain during the period		3,462			887			2,575
Pension and post-retirement obligations:
Amortization of prior service credit included in income		—			—			—
Amortization of net actuarial loss included in income		128			33			95
Total pension and post-retirement obligations		128			33			95
Other comprehensive loss	$	(116,321	)	$	(29,803	)	$	(86,518	)

(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.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

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

Activity in accumulated other comprehensive ~~loss,~~income (loss), net of tax, for the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 was as follows (in thousands):


	Securities Available for Sale and Transferred Securities			Pension and Post- retirement Obligations			Accumulated Other Comprehensive Loss			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, 2017
Three months ended June 30, 2023
Balance at beginning of period	$	(1,413	)	$	(9,880	)	$	(11,293	)	$	4,072	$	(118,000	)	$	(13,444	)	$	(127,372	)
Other comprehensive income (loss) before reclassifications		363			—			363			1,404		(8,660	)		—			(7,256	)
Amounts reclassified from accumulated other comprehensive income (loss)		(79	)		171			92

Amounts reclassified from accumulated other comprehensive income											—		12			144			156
Net current period other comprehensive income (loss)		284			171			455			1,404		(8,648	)		144			(7,100	)

Balance at end of period	$	(1,129	)	$	(9,709	)	$	(10,838	)	$	5,476	$	(126,648	)	$	(13,300	)	$	(134,472	)

Three months ended September 30, 2016
Six months ended June 30, 2023
Balance at beginning of period	$	9,698		$	(10,352	)	$	(654	)	$	4,735	$	(128,634	)	$	(13,588	)	$	(137,487	)
Other comprehensive income (loss) before reclassifications		(1,180	)		—			(1,180	)		741		1,960			—			2,701
Amounts reclassified from accumulated other comprehensive income (loss)		(266	)		139			(127	)

Amounts reclassified from accumulated other comprehensive income											—		26			288			314
Net current period other comprehensive income (loss)		(1,446	)		139			(1,307	)		741		1,986			288			3,015

Balance at end of period	$	8,252		$	(10,213	)	$	(1,961	)	$	5,476	$	(126,648	)	$	(13,300	)	$	(134,472	)

Nine months ended September 30, 2017
Balance at beginning of year	$	(3,729	)	$	(10,222	)	$	(13,951	)

Three months ended June 30, 2022
Balance at beginning of period										$	2,998	$	(60,744	)	$	(9,348	)	$	(67,094	)
Other comprehensive income (loss) before reclassifications		2,916			—			2,916			737		(33,446	)		—			(32,709	)
Amounts reclassified from accumulated other comprehensive income (loss)		(316	)		513			197

Amounts reclassified from accumulated other comprehensive income											—		31			47			78
Net current period other comprehensive income (loss)		2,600			513			3,113			737		(33,415	)		47			(32,631	)

Balance at end of period	$	(1,129	)	$	(9,709	)	$	(10,838	)	$	3,735	$	(94,159	)	$	(9,301	)	$	(99,725	)

Nine months ended September 30, 2016
Balance at beginning of year	$	(696	)	$	(10,631	)	$	(11,327	)
Six months ended June 30, 2022
Balance at beginning of period										$	1,160	$	(4,971	)	$	(9,396	)	$	(13,207	)
Other comprehensive income (loss) before reclassifications		10,491			—			10,491			2,575		(89,242	)		—			(86,667	)
Amounts reclassified from accumulated other comprehensive income (loss)		(1,543	)		418			(1,125	)

Amounts reclassified from accumulated other comprehensive income											—		54			95			149
Net current period other comprehensive income (loss)		8,948			418			9,366			2,575		(89,188	)		95			(86,518	)

Balance at end of period	$	8,252		$	(10,213	)	$	(1,961	)	$	3,735	$	(94,159	)	$	(9,301	)	$	(99,725	)

~~- 28 -~~

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(9.~~(11.) ACCUMULATED OTHER COMPREHENSIVE ~~LOSS~~(LOSS) INCOME (Continued)

The following ~~tables present~~table presents the amounts reclassified out of each component of accumulated other comprehensive ~~loss~~(loss) income for the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 (in thousands):

Details About Accumulated Other
Comprehensive Loss Components
   Amount Reclassified from
Accumulated Other
Comprehensive
Loss
Affected Line Item in the
Consolidated Statement of Income
   Three months ended
   September 30,
   2017 2016
Realized gain on sale of investment securities
   $ 184 $ 426 Net gain on investment securities
Amortization of unrealized holding gains (losses) on investment securities transferred from available for sale to held to maturity
   (57 ) 7 Interest income


   127 433 Total before tax
   (48 ) (167 ) Income tax expense


   79 266 Net of tax
Amortization of pension and post-retirement items:

Prior service credit⁽¹⁾
   12 12 Salaries and employee benefits
Net actuarial losses⁽¹⁾
   (291 ) (238 ) Salaries and employee benefits


   (279 ) (226 ) Total before tax
   108 87 Income tax benefit


   (171 ) (139 ) Net of tax


Total reclassified for the period
   $ (92 ) $ 127




   Nine months ended
   September 30,
   2017 2016
Realized gain on sale of investment securities
   $ 600 $ 2,426 Net gain on investment securities
Amortization of unrealized holding gains (losses) on investment securities transferred from available for sale to held to maturity
   (86 ) 86 Interest income


   514 2,512 Total before tax
   (198 ) (969 ) Income tax expense


   316 1,543 Net of tax
Amortization of pension and post-retirement items:

Prior service credit⁽¹⁾
   38 36 Salaries and employee benefits
Net actuarial losses⁽¹⁾
   (874 ) (716 ) Salaries and employee benefits


   (836 ) (680 ) Total before tax
   323 262 Income tax benefit


   (513 ) (418 ) Net of tax


Total reclassified for the period
   $ (197 ) $ 1,125


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
	Three months ended June 30,
	2023			2022
Realized loss on sale of investment securities	$	—		$	(15	)	Net (loss) gain on investment securities
Amortization of unrealized holding gain on investment securities transferred from available for sale to held to maturity		(16	)		(26	)	Interest income
		(16	)		(41	)	Total before tax
		4			10		Income tax expense
		(12	)		(31	)	Net of tax
Amortization of pension and post-retirement items:
Prior service credit (1)		123			—		Salaries and employee benefits
Net actuarial losses (1)		(316	)		(64	)	Salaries and employee benefits
		(193	)		(64	)	Total before tax
		49			17		Income tax benefit
		(144	)		(47	)	Net of tax
Total reclassified for the period	$	(156	)	$	(78	)
	Six months ended
	June 30,
	2023			2022
Realized (loss) gain on sale of investment securities	$	—		$	(15	)	Net (loss) gain on investment securities
Amortization of unrealized holding gains on investment securities transferred from available for sale to held to maturity		(35	)		(57	)	Interest income
		(35	)		(72	)	Total before tax
		9			18		Income tax expense
		(26	)		(54	)	Net of tax
Amortization of pension and post-retirement items:
Prior service credit (1)		245			—		Salaries and employee benefits
Net actuarial losses (1)		(632	)		(128	)	Salaries and employee benefits
		(387	)		(128	)	Total before tax
		99			33		Income tax benefit
		(288	)		(95	)	Net of tax
Total reclassified for the period	$	(314	)	$	(149	)

⁽¹⁾	~~These items are included in the computation of net periodic pension expense. See Note 11 – Employee Benefit Plans for additional information.~~

~~- 29 -~~(1) These items are included in the computation of net periodic pension expense. See Note 13 – Employee Benefit Plans for additional information.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(10.~~(12.) SHARE-BASED COMPENSATION PLANS

The Company maintains certain ~~stock-based~~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~~granting of compensation awards to attract, motivate and retain employees, executive officers andnon-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 ~~MD&C Committee approved the grant of~~Company granted restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and ~~performance share~~performance-based restricted stock units (“PSUs”) ~~shown in the table below to certain employees and executive officers~~ during the ~~first nine~~six months ended June 30, 2023 as follows:


	Number of Underlying Shares		Weighted Average Grant Date Fair Value
RSAs		20,185	$	16.34
RSUs		139,510	$	16.45
PSUs		53,060	$	16.66

The grant-date fair value for the RSAs granted during the six months ended June 30, 2023 was equal to the closing market price of ~~2017.~~

      Weighted
      Average
   Number of    Per Share
   Underlying    Grant Date
   Shares    Fair Value
RSUs
   25,331    $ 32.22
PSUs
   12,531    33.07

our common stock on the date of grant. The grant-date fair value for the RSUs and PSUs granted during the ~~nine month period~~six months ended ~~September~~June 30, ~~2017 is~~2023 was 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 number~~Fifty percent of ~~PSUs that ultimately vest is contingent on achieving specified total shareholder return (“TSR”) targets relative to~~ the ~~SNL Small Cap Bank & Thrift Index, a market index~~RSAs granted during the ~~MD&C Committee has selected as a peer group for this purpose. The shares will be earned based~~six months ended June 30, 2023 vested on the grant date. The remaining RSAs will vest the day before the Company’s ~~achievement of a relative TSR performance requirement, on a percentile basis, compared to~~next annual meeting. The RSUs and PSUs granted during the ~~SNL Small Cap Bank & Thrift Index over a three-year performance period ending December 31, 2019. The shares earned based on the achievement of the TSR performance requirement, if any,~~six months ended June 30, 2023 will vest on ~~February 22, 2020~~the third anniversary of the grant date assuming the recipient’s continuous service to the Company.

The grant-date fair value of the PSUs granted during the nine month period ended September 30, 2017 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 2.85 years, (ii) risk free interest rate of 1.45%, (iii) expected dividend yield of 2.41% and (iv) expected stock price volatility over the expected term of the TSR award of 21.9%. The Monte Carlo simulation model is a risk analysis method that selects a random value from a range of estimates.

~~During the nine months ended September 30, 2017, the Company issued a total of 3,914 shares of common stockin-lieu~~ ~~of cash for the annual retainer of fivenon-employee~~ ~~directors and granted a total of 8,510 restricted shares of common stock tonon-employee~~ ~~directors, of which 4,260 shares vested immediately and 4,250 shares will vest after completion of aone-year~~ ~~service requirement. The market price of the stock and restricted stock on the date of grant was $29.35.~~

~~The following is a summary of restricted stock award and restricted stock units activity for the nine month period ended September 30, 2017:~~

      Weighted
      Average
      Market
   Number of    Price at
   Shares    Grant Date
Outstanding at beginning of year
   114,565    $ 19.90
Granted
   49,739    31.40
Vested
   (25,053 )    23.84
Forfeited
   (11,359 )    12.81



Outstanding at end of period
   127,892    $ 24.23

At September 30, 2017, the total unrecognized compensation expense related to the nonvested awards granted and expected to vest was $1.7 million. This cost is expected to be recognized over a weighted-average period of 2.0 years.

~~- 30 -~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~(10.) SHARE-BASED COMPENSATION PLANS (Continued)~~

The Company uses the Black-Scholes valuation method to estimate the fair value of its stock option awards. There were no stock options awarded during first nine months of 2017 or 2016. There was no unrecognized compensation expense related to unvested stock options as of September 30, 2017. The following is a summary of stock option activity for the nine months ended September 30, 2017 (dollars in thousands, except per share amounts):

         Weighted
      Weighted    Average
      Average    Remaining    Aggregate
   Number of    Exercise    Contractual    Intrinsic
   Options    Price    Term    Value
Outstanding at beginning of year
   49,099    $ 19.00
Exercised
   (21,320 )    19.45
Expired
   (5,580 )    19.64



Outstanding and exercisable at end of period
   22,199    $ 18.40    0.6    $ 231

The aggregate intrinsic value (the amount by which the market price of the stock on the date of exercise exceeded the market price of the stock on the date of grant) of option exercises for the nine months ended September 30, 2017 and 2016 was $297 thousand and $342 thousand, respectively. The total cash received as a result of option exercises under stock compensation plans for the nine months ended September 30, 2017 and 2016 was $413 thousand and $814 thousand, respectively.

The Company amortizes the expense related to ~~stock-based~~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 June 30,				Six months ended June 30,
	2023		2022		2023		2022
Salaries and employee benefits	$	453	$	760	$	963	$	1,166
Other noninterest expense		204		187		245		224
Total share-based compensation expense	$	657	$	947	$	1,208	$	1,390

Income tax benefit realized for compensation costs	$	69	$	283	$	438	$	474

At June 30, 2023, there was $5.2 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 2.15 years.

   Three months ended    Nine months ended
   September 30,    September 30,
   2017    2016    2017    2016
Salaries and employee benefits
   $ 248    $ 131    $ 676    $ 386
Other noninterest expense
   32    34    209    211








Total share-based compensation expense
   $ 280    $ 165    $ 885    $ 597

~~(11.~~

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(13.) 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						Nine months ended
	September 30,						September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2023			2022			2023			2022
Service cost	$	785		$	722		$	2,355		$	2,164		$	447		$	871		$	895		$	1,742
Interest cost on projected benefit obligation		613			601			1,840			1,804			855			647			1,710			1,294
Expected return on plan assets		(1,193	)		(1,150	)		(3,581	)		(3,450	)		(878	)		(1,141	)		(1,756	)		(2,282	)
Amortization of unrecognized prior service credit		(12	)		(12	)		(38	)		(36	)		(123	)		—			(245	)		—
Amortization of unrecognized net actuarial loss		291			238			874			716			316			64			632			128

Net periodic pension expense	$	484		$	399		$	1,450		$	1,198

Net periodic benefit expense													$	617		$	441		$	1,236		$	882

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 no minimum required contribution for the ~~2017~~2023 fiscal year.

~~- 31 -~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~(12.~~(14.) COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk

The Company has financial instruments withoff-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 foron-balance sheet instruments.

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


	September 30, 2017		December 31, 2016		June 30, 2023		December 31, 2022
Commitments to extend credit	$	644,882	$	555,713	$	1,350,058	$	1,435,323
Standby letters of credit		13,336		12,689		15,999		17,181

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 acase-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.

~~The Company also extends rate lock agreements to borrowers related to~~Unfunded Commitments

At June 30, 2023 and December 31, 2022, 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 heldallowance 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. Forward salescredit losses for unfunded commitments totaled ~~$1.1~~$4.4 million ~~at September 30, 2017. The Company had no forward sales commitments at December 31, 2016. The net change~~and $4.1 million, respectively, and was included in other liabilities on the ~~fair values of these derivatives was recognized as other noninterest income or other noninterest expense in the~~Company’s consolidated statements of ~~income.~~financial condition. The credit loss expense for unfunded commitments was as follows (in thousands):


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Credit loss expense for unfunded commitments	$	287	$	119	$	297	$	360

~~(13.~~36

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(14.) COMMITMENTS AND CONTINGENCIES (Continued)

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, 2022 as filed with the SEC on March 9, 2023 and as disclosed in Part II, Item 1 of this Quarterly Report on Form 10-Q, the Company is party to an action filed against it 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 and were granted class certification to represent classes of consumers in New York and Pennsylvania seeking to recover statutory damages, interest and declaratory relief. 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. The Company disputes and believes it has meritorious defenses against these claims and plans to vigorously defend 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). There are approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes.

On September 26, 2022, the lower Court denied the plaintiffs’ motion for partial summary judgment for most of the relief they seek and 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. The Court also denied the Company’s motion for partial summary judgment and seeking an offset in the form of recoupment reducing any liability that may be imposed against the Company by the amounts that the borrowers owe for failing to repay their motor vehicle loans, determining that the Court could not enter a judgment on recoupment – which is a set off from liability – without first determining whether there was liability. Also pending with the lower Court is the Company’s motion to compel discovery.

On October 7, 2022, the Superior Court of Pennsylvania granted the Company’s December 20, 2021 Request for an Interlocutory Appeal of the denial of the Company’s motion to dismiss the claims brought by New York borrowers for lack of subject matter jurisdiction and lack of standing. The case is stayed until the appeal is decided by the Superior Court.

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

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.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(15.) FAIR VALUE MEASUREMENTS

Determination of Fair Value – Assets ~~and Liabilities~~ 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~~Accounting Standards Codification (“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.

~~- 32 -~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~(13.) 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~~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 – credit contracts:~~instruments: The fair value of derivative instruments ~~– credit contracts~~ 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.

Table of Contents
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
(15.) FAIR VALUE MEASUREMENTS (Continued)

Collateral dependent ~~impaired~~ loans: Fair value of ~~impaired~~collateral dependent loans with specific allocations of the allowance for ~~loan~~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. ~~Impaired~~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 3 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 believe~~management 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~~(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.

Table of Contents

~~- 33 -~~

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(13.~~(15.) FAIR VALUE MEASUREMENTS (Continued)

Assets ~~and Liabilities~~ 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~~non-recurring~~ nonrecurring basis as of the dates indicated (in thousands).


	Quoted Prices in Active Markets for Identical Assets or Liabilities		Significant Other Observable Inputs		Significant Unobservable Inputs				Quoted Prices in Active Markets for Identical Assets or Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
	(Level 1)		(Level 2)		(Level 3)		Total
September 30, 2017
June 30, 2023
Measured on a recurring basis:
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	—	$	163,695	$	—	$	163,695
U.S. Government agency and government sponsored enterprises									$	—	$	21,261		$	—	$	21,261
Mortgage-backed securities		—		387,549		—		387,549		—		890,861			—		890,861
Asset-backed securities		—		247		—		247

	$	—	$	551,491	$	—	$	551,491

Other assets:
Hedging derivative instruments										—		7,969			—		7,969
Fair value adjusted through comprehensive income									$	—	$	920,091		$	—	$	920,091
Other assets:
Derivative instruments – interest rate swaps										—		43,944			—		43,944
Derivative instruments – credit contracts										—		—			—		-
Derivative instruments – mortgage banking										—		128			—		128
Other liabilities:
Derivative instruments – interest rate swaps										—		(43,947	)		—		(43,947	)
Derivative instruments – credit contracts	$	—	$	9	$	—	$	9		—		—			—		-

	$	—	$	9	$	—	$	9

Derivative instruments – mortgage banking										—		(22	)		—		(22	)
Fair value adjusted through net income									$	—	$	103		$	—	$	103
Measured on a nonrecurring basis:
Loans:
Loans held for sale	$	—	$	2,407	$	—	$	2,407	$	—	$	805		$	—	$	805
Collateral dependent impaired loans		—		—		5,812		5,812
Collateral dependent loans										—		—			20,528		20,528
Other assets:
Long-lived assets held for sale										—		—			1,483		1,483
Loan servicing rights		—		—		1,008		1,008		—		—			1,428		1,428
Other real estate owned		—		—		281		281		—		—			163		163

	$	—	$	2,407	$	7,101	$	9,508

December 31, 2016
Measured on a recurring basis:
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	—	$	186,268	$	—	$	186,268
Mortgage-backed securities		—		353,467		—		353,467
Asset-backed securities		—		191		—		191

	$	—	$	539,926	$	—	$	539,926

Other liabilities:
Derivative instruments – credit contracts	$	—	$	—	$	—	$	—

	$	—	$	—	$	—	$	—

Measured on a nonrecurring basis:
Loans:
Loans held for sale	$	—	$	1,050	$	—	$	1,050
Collateral dependent impaired loans		—		—		901		901
Other assets:
Loan servicing rights		—		—		1,075		1,075
Other real estate owned		—		—		107		107

	$	—	$	1,050	$	2,083	$	3,133

Total									$	—	$	805		$	23,602	$	24,407

There were no transfers between Levels 1 and 2 during the ~~nine~~six months ended ~~September~~June 30, ~~2017 and 2016.~~2023. There were no liabilities measured at fair value on a nonrecurring basis during the ~~nine month periods~~six months ended ~~September~~June 30, ~~2017 and 2016.~~2023.

Table of Contents

~~- 34 -~~

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(13.~~(15.) 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, 2022
Measured on a recurring basis:
Securities available for sale:
U.S. Government agencies and government sponsored enterprises	$	—	$	21,115		$	—	$	21,115
Mortgage-backed securities		—		933,256			—		933,256
Other assets:
Hedging derivative instruments		—		6,725			—		6,725
Fair value adjusted through comprehensive income	$	—	$	961,096		$	—	$	961,096
Other assets:
Derivative instruments – interest rate products	$	—	$	47,736		$	—	$	47,736
Derivative instruments – mortgage banking		—		96			—		96
Other liabilities:
Derivative instruments – interest rate products		—		(47,738	)		—		(47,738	)
Derivative instruments – mortgage banking		—		(13	)		—		(13	)
Fair value adjusted through net income	$	—	$	81		$	—	$	81
Measured on a nonrecurring basis:
Loans:
Loans held for sale	$	—	$	550		$	—	$	550
Collateral dependent loans		—		—			21,454		21,454
Other assets:
Long-lived assets held for sale		—		—			1,509		1,509
Loan servicing rights		—		—			1,470		1,470
Other real estate owned		—		—			19		19
Total	$	—	$	550		$	24,452	$	25,002

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 June 30, 2023 (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 impaired loans

5,812

Appraisal of collateral⁽¹⁾

Appraisal adjustments⁽²⁾

0% - 49% discount

Collateral dependent loans

20,528

Appraisal of collateral (1)

Appraisal adjustments (2)

12.5%(3) / 0 - 26.9%

Loan servicing rights

1,008

Discounted cash flow

Discount rate

Constant prepayment rate

5.1%⁽³⁾

12.0%⁽³⁾

1,428

Discounted cash flow

Discount rate

10.4% (3)

Constant prepayment rate

11.8% (3)

Long-lived assets held for sale

1,483

Appraisal of collateral (1)

Appraisal adjustments (2)

9.7 - 41.3%

Other real estate owned

281

Appraisal of collateral⁽¹⁾

Appraisal adjustments⁽²⁾

6% - 43% discount

163

Appraisal of collateral (1)

Appraisal adjustments (2)

42.3%

⁽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.~~

(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.

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(15.) FAIR VALUE MEASUREMENTS (Continued)

Changes in Level 3 Fair Value Measurements

There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2023 and 2022.

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”) andFederal Reserve Bank (“FRB”) stock, accrued interest receivable,non-maturity deposits, short-term borrowings and accrued interest payable. ~~Fair value estimates for other financial instruments not included elsewhere in this disclosure are discussed below.~~

~~Securities held to maturity:~~The fair value of the Company’s investment securities held to maturity is primarily measured using information from a third-party 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.

~~Loans:~~The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made for the same remaining maturities. Loans were first segregated by type such as commercial, residential mortgage, and consumer, and were then further segmented into fixed and variable rate and loan quality categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

~~Time deposits:~~The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

~~Long-term borrowings:~~Long-term borrowings consist of $40 million of subordinated notes issued during the second quarter of 2015. The subordinated notes are valued based on market prices of similar publicly traded subordinated notes, which are characterized as Level 2 liabilities in the fair value hierarchy.

~~- 35 -~~

~~FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES~~

~~Notes to Consolidated Financial Statements (Unaudited)~~

~~(13.) FAIR VALUE MEASUREMENTS (Continued)~~

The following table 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, as well as their carrying amount and estimated fair value.~~indicated.


	Level in		September 30, 2017				December 31, 2016				Level in	June 30, 2023				December 31, 2022
	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	$	97,838	$	97,838	$	71,277	$	71,277	Level 1	$	180,248	$	180,248	$	130,466	$	130,466
Securities available for sale		Level 2		551,491		551,491		539,926		539,926	Level 2		912,122		912,122		954,371		954,371
Securities held to maturity		Level 2		538,332		539,476		543,338		539,991
Securities held to maturity, net											Level 2		159,893		146,026		188,975		174,188
Loans held for sale		Level 2		2,407		2,407		1,050		1,050	Level 2		805		805		550		550
Loans		Level 2		2,576,076		2,552,188		2,308,326		2,285,146	Level 2		4,327,445		4,190,444		3,983,582		3,867,285
Loans⁽¹⁾		Level 3		5,812		5,812		901		901	Level 3		20,528		20,528		21,454		21,454
Long-lived assets held for sale											Level 3		1,483		1,483		1,509		1,509
Accrued interest receivable		Level 1		10,937		10,937		9,192		9,192	Level 1		21,731		21,731		19,371		19,371
Derivative instruments – cash flow hedges											Level 2		7,969		7,969		6,725		6,725
Derivative instruments – interest rate products											Level 2		43,944		43,944		47,736		47,736
Derivative instruments – mortgage banking											Level 2		128		128		96		96
FHLB and FRB stock		Level 2		21,245		21,245		21,780		21,780	Level 2		28,741		28,741		19,385		19,385
Financial liabilities:
Non-maturity deposits		Level 1		2,418,055		2,418,055		2,292,706		2,292,706	Level 1		3,487,785		3,487,785		3,646,552		3,646,552
Time deposits		Level 2		863,453		861,358		702,516		701,097	Level 2		1,547,076		1,536,483		1,282,872		1,268,957
Short-term borrowings		Level 1		310,800		310,800		331,500		331,500	Level 1		374,000		374,000		205,000		205,000
Long-term borrowings		Level 2		39,114		41,678		39,061		40,701	Level 2		124,377		119,878		74,222		70,814
Accrued interest payable		Level 1		7,693		7,693		5,394		5,394	Level 1		16,356		16,356		5,983		5,983
Derivative instruments – interest rate products											Level 2		43,947		43,947		47,738		47,738
Derivative instruments – credit contracts		Level 2		9		9		—		—	Level 2		—		—		—		—
Derivative instruments – mortgage banking											Level 2		22		22		13		13

⁽¹⁾	~~Comprised of collateral dependent impaired loans.~~

~~(14.~~(1) Comprised of collateral dependent loans.

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FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(16.) SEGMENT REPORTING

The Company has ~~two~~one reportable ~~segments:~~segment, Banking, which includes all of the Company’s retail and~~Non-Banking.~~ ~~These~~ commercial banking operations. This reportable ~~segments have~~segment has been identified and organized based on the nature of the underlying products and services applicable to ~~each~~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.

~~The Banking segment includes all of~~All other segments that do not meet the ~~Company’s retail and commercial banking operations. TheNon-Banking~~ ~~segment includes~~quantitative threshold for separate reporting have been grouped as “All Other,” which include the activities of SDN, Courier Capital and HNP, prior to the May 1, 2023 merger. Refer to “Nature of Operations” under Note 1. Basis of Presentation and Summary of Significant Accounting Policies for further details on the merger. SDN is a ~~full service~~full-service insurance agency that provides a broad range of insurance services to both personal and business clients, and Courier Capital anand HNP are our investment advisor and wealth management ~~firm~~firms that ~~provides~~provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans. Also included in “All Other” are Holding ~~company~~Company amounts, which are the primary differences between segment amounts and consolidated totals, ~~and are reflected in the Holding Company and Other column below,~~ 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
June 30, 2023
Goodwill	$	48,536	$	18,535	$	67,071
Other intangible assets, net		—		5,879		5,879
Total assets		6,100,251		41,047		6,141,298
December 31, 2022
Goodwill	$	48,536	$	18,535	$	67,071
Other intangible assets, net		—		6,343		6,343
Total assets		5,756,441		40,831		5,797,272

   Banking    Non-Banking    Holding
Company and
Other    Consolidated
Totals
September 30, 2017

Goodwill
   $ 48,536    $ 17,304    $ —      $ 65,840
Other intangible assets, net
   421    8,736    —      9,157
Total assets
   3,986,979    30,788    3,824    4,021,591
December 31, 2016

Goodwill
   $ 48,536    $ 17,881    $ —      $ 66,417
Other intangible assets, net
   579    8,644    —      9,223
Total assets
   3,678,230    31,166    944    3,710,340


	Banking			All Other			Consolidated Totals
Three months ended June 30, 2023
Net interest income (expense)	$	43,397		$	(1,060	)	$	42,337
Provision for credit losses		(3,230	)		—			(3,230	)
Noninterest income		7,498			3,968			11,466
Noninterest expense		(29,971	)		(3,811	)		(33,782	)
Income (loss) before income taxes		17,694			(903	)		16,791
Income tax (expense) benefit		(2,879	)		461			(2,418	)
Net income (loss)	$	14,815		$	(442	)	$	14,373
Six months ended June 30, 2023
Net interest income (expense)	$	86,272		$	(2,120	)	$	84,152
Provision for credit losses		(7,444	)		—			(7,444	)
Noninterest income		13,873			8,517			22,390
Noninterest expense		(59,744	)		(7,699	)		(67,443	)
Income (loss) before income taxes		32,957			(1,302	)		31,655
Income tax (expense) benefit		(5,509	)		316			(5,193	)
Net income (loss)	$	27,448		$	(986	)	$	26,462

~~- 36 -~~43

Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

~~(14.~~(16.) SEGMENT REPORTING (Continued)


	Banking			Non-Banking⁽¹⁾			Holding Company and Other			Consolidated Totals			Banking			All Other			Consolidated Totals
Three months ended September 30, 2017
Three months ended June 30, 2022
Net interest income (expense)	$	29,056		$	—		$	(618	)	$	28,438		$	42,658		$	(1,061	)	$	41,597
Provision for loan losses		(2,802	)		—			—			(2,802	)
Provision for credit losses														(563	)		—			(563	)
Noninterest income		6,410			2,315			(151	)		8,574			7,701			3,659			11,360
Noninterest expense		(19,939	)		(1,947	)		(581	)		(22,467	)		(28,892	)		(3,995	)		(32,887	)

Income (loss) before income taxes		12,725			368			(1,350	)		11,743		$	20,904		$	(1,397	)	$	19,507
Income tax (expense) benefit		(3,923	)		(144	)		603			(3,464	)		(4,239	)		380			(3,859	)

Net income (loss)	$	8,802		$	224		$	(747	)	$	8,279		$	16,665		$	(1,017	)	$	15,648

Nine months ended September 30, 2017
Six months ended June 30, 2022
Net interest income (expense)	$	84,708		$	—		$	(1,853	)	$	82,855		$	83,276		$	(2,121	)	$	81,155
Provision for loan losses		(9,415	)		—			—			(9,415	)
Provision for credit losses														(2,882	)		—			(2,882	)
Noninterest income		18,203			6,760			780			25,743			14,328			8,354			22,682
Noninterest expense		(58,263	)		(7,209	)		(1,878	)		(67,350	)		(54,764	)		(8,258	)		(63,022	)

Income (loss) before income taxes		35,233			(449	)		(2,951	)		31,833			39,958			(2,025	)		37,933
Income tax (expense) benefit		(10,544	)		(440	)		1,619			(9,365	)		(7,875	)		573			(7,302	)

Net income (loss)	$	24,689		$	(889	)	$	(1,332	)	$	22,468		$	32,083		$	(1,452	)	$	30,631

⁽¹⁾	~~Includes activity from the acquisition of assets of Robshaw & Julian since August 31, 2017 (the date of acquisition).~~

   Banking    Non-Banking⁽²⁾    Holding
Company and
Other    Consolidated
Totals
Three months ended September 30, 2016

Net interest income (expense)
   $ 26,667    $ —      $ (617 )    $ 26,050
Provision for loan losses
   (1,961 )    —      —      (1,961 )
Noninterest income
   6,579    2,086    (126 )    8,539
Noninterest expense
   (18,148 )    (1,759 )    (711 )    (20,618 )








Income (loss) before income taxes
   13,137    327    (1,454 )    12,010
Income tax (expense) benefit
   (3,987 )    (129 )    575    (3,541 )








Net income (loss)
   $ 9,150    $ 198    $ (879 )    $ 8,469








Nine months ended September 30, 2016

Net interest income (expense)
   $ 77,820    $ —      $ (1,852 )    $ 75,968
Provision for loan losses
   (6,281 )    —      —      (6,281 )
Noninterest income
   20,386    6,620    (334 )    26,672
Noninterest expense
   (54,547 )    (5,329 )    (4,080 )    (63,956 )








Income (loss) before income taxes
   37,378    1,291    (6,266 )    32,403
Income tax (expense) benefit
   (10,977 )    (505 )    2,317    (9,165 )








Net income (loss)
   $ 26,401    $ 786    $ (3,949 )    $ 23,238

⁽²⁾	~~Includes activity from Courier Capital since January 5, 2016 (the date of acquisition).~~

~~- 37 -~~44

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 Form10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form10-K for the year ended December 31, ~~2016.~~2022. 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 Form10-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,”~~“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 Form10-Q and our Annual Report on Form10-K for the fiscal year ended December 31, ~~2016, which we refer to as the Form10-K,~~2022 (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 fluctuations in market interest rates may affect our interest margins and income,
demand for our products, defaults on loans, loan prepayments and the fair value of our financial instruments;

•

The soundness of other financial institutions could adversely affect us;

•

Our business may be adversely affected by conditions in the financial markets and economic conditions generally;

•

Recent events involving the failure of three financial institutions may adversely affect our business and the market price of our common stock;

•

Downgrades of the U.S. credit rating and uncertain credit and financial market conditions may affect the stability of securities issued or guaranteed by the federal government, which may affect the valuation or liquidity of our investment securities portfolio and increase future borrowing costs;

•

If we experience greater credit losses than anticipated, earnings may be adversely impacted;

~~Our tax strategies and the value of our deferred tax assets could adversely affect our operating results and regulatory capital ratios;~~

•

Geographic concentration may unfavorably impact our operations;

~~We depend on the accuracy and completeness of information about or from customers and counterparties;~~

~~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 financial services industry;~~

~~We may be unable to successfully implement our growth strategies, including the integration and successful management of newly-acquired businesses;~~

~~We are subject to environmental liability risk associated with our lending activities;~~

•

Our commercial business and mortgage loans increase our exposure to credit risks;

•

If our regulators impose limitations on our commercial real estate lending activities, earnings could be adversely affected;

•

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;

~~Any future FDIC insurance premium increases~~•

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 ~~earnings;~~business, financial condition, and results of operations;

•

Regulatory scrutiny of bank provision of BaaS solutions and related technology considerations has recently increased;

•

We ~~are highly regulated~~have implemented a program to provide financial products and ~~may be adversely affected~~services to customers that do business in the cannabis industry and the strict enforcement of federal laws and regulations regarding cannabis could result in our inability to continue to provide financial products and services to these customers and we could have legal action taken against us by ~~changes in banking laws, regulations~~the federal government and exposure to additional liabilities and regulatory ~~practices;~~compliance costs;

~~New or changing tax and accounting rules and interpretations could significantly impact our strategic initiatives, results of operations, cash flows and financial condition;~~

•

Legal and regulatory proceedings and related matters, such as the action brought by a class of consumers against us as described in Part II, Item 1, “Legal Proceedings,” could adversely affect us and the banking industry in general;

~~A breach in security of~~•

Any future FDIC insurance premium increases, or special assessment may adversely affect our ~~or third party information systems, including the occurrence of a cyber incident or a deficiency in cyber security,~~earnings;

•

We are highly regulated, and any adverse regulatory action may ~~subject us to liability,~~ result in aadditional costs, loss of ~~customer~~ business ~~or damage our brand image;~~opportunities, and reputational damage;

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MANAGEMENT'S DISCUSSION AND ANALYSIS

~~We face competition in staying current withtechnological changes to compete and meet customer demands;~~

~~We rely on other companies to provide key components of our business infrastructure;~~

~~We use financial models for business planning purposes that may not adequately predict future results;~~

~~We may not be able to attract and retain skilled people;~~

~~Acquisitions may disrupt our business and dilute shareholder value;~~

~~We are subject to interest rate risk;~~

~~Our business may be adversely affected by conditions in the financial markets and economic conditions generally;~~

•

The policies of the Federal Reserve have a significant impact on our earnings;

~~The soundness~~•

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 ~~other~~the financial ~~institutions~~services industry and market volatility;

•

Loss of key employees may disrupt relationships with certain customers;

•

We make certain assumptions and estimates in preparing our financial statements that may prove to be incorrect, which could ~~adversely affect us;~~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;

•

The value of our goodwill and other intangible assets may decline in the future;

~~A proxy contest for~~•

We may be unable to successfully implement our growth strategies, including the ~~election~~integration and successful management of ~~directors at our annual meeting or proposals arising out~~newly-acquired businesses;

•

The introduction of ~~shareholder initiatives could cause~~new products and services may subject us to ~~incur substantial costs~~increased regulation and ~~could negatively~~regulatory scrutiny and may affect our ~~business;~~reputation;

~~We operate in a highly competitive industry~~•

Acquisitions may disrupt our business and ~~market area;~~dilute shareholder value;

~~Severe weather, natural disasters, acts~~•

Our tax strategies and the value of ~~war or terrorism,~~our deferred tax assets and ~~other external events~~liabilities could ~~significantly impact~~adversely affect our ~~business;~~operating results and regulatory capital ratios;

~~- 38 -~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

•

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;

•

Public health emergencies, like the COVID-19 outbreak, may have an adverse impact on our business and results of operations;

•

We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all;

•

We face competition in staying current with technological changes and banking alternatives to compete and meet customer demands;

•

We rely on ~~dividends from our subsidiaries for most~~other companies to provide key components of our ~~revenue;~~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 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; ~~and~~

•

The market price of our common stock may fluctuate significantly in response to a number of ~~factors.~~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;

•

Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other external events could significantly impact our business;

•

Negative public opinion could damage our reputation and impact business operations and revenues; and

•

Environmental, social and governance matters, and any related reporting obligations may 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 Annual Report on Form10-K for the year ended December 31, 2022, and Item 1A. Risk Factors in our subsequent Quarterly Reports on Form 10-Q 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~~46

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MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

The Parent is a financial holding company headquartered in New York State, providing ~~banking and nonbanking financial services to individuals, municipalities and businesses primarily in our Western and Central New York footprint. The Company provides~~ diversified financial services through its operating subsidiaries, Five Star Bank (the “Bank”), ~~Scott Danahy Naylon,~~SDN Insurance Agency, LLC (“SDN”) and Courier Capital, LLC (“Courier Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New ~~York chartered~~York-chartered banking subsidiary, the Bank. The Bank also has commercial loan production offices in Ellicott City (Baltimore), Maryland, and Syracuse, New York, serving the Mid-Atlantic and Central New York regions. Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business ~~clients across 45 states.~~clients. Courier Capital provides customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement ~~plans across nine states.~~plans. In May 2023, the Company announced the completion of the merger of HNP Capital, LLC (“HNP Capital”) with and into Courier Capital.

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.

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~~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. We expanded our footprint into the Mid-Atlantic region with the opening of a loan production office in Baltimore, Maryland in February 2022, and further expanded our footprint in Central New York with the opening of a commercial loan production office in Syracuse, New York in January 2023. Additionally, we are focused on the continued expansion of product delivery channels and are investing in our digital banking platform to allow for greater flexibility in the customer experience. We believe that the foregoing factors all help to grow our core deposits, which ~~supports~~support a central element of our business ~~strategy—~~strategy – the growth of a diversified and high-quality loan portfolio.

Our Banking-as-a-Service (“BaaS”) and financial technology (“FinTech”) relationships offer BaaS to technology firms and other non-bank financial service providers, allowing them to provide banking services to their clients. With the help of the Bank’s partners, we can offer banking services and products beyond our traditional footprint.

~~- 39 -~~Cannabis Banking

The Marijuana Regulation and Taxation Act was signed into law on March 31, 2021, legalizing the possession and sale of recreational marijuana in New York State for adults aged 21 or older and the state has issued adult-use cannabis cultivation, processing and retail dispensary licenses. We have implemented a program to provide financial products and services to legal cannabis-related businesses and partner with other financial institutions who provide such services.

Offering financial products and services to the cannabis industry presents a unique set of regulatory risks due to the conflict between state and federal laws, as marijuana remains illegal at the federal level. In January 2018, the U.S. Department of Justice (the “DOJ”) rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion. The impact of the DOJ’s rescission of the Cole Memo and related memoranda is unclear, but in the future may result in increased enforcement actions against the regulated cannabis industry generally. More recently, the United States Attorney General has indicated that the DOJ, under his leadership, does not intend to pursue cases against parties who comply with the laws in states which have legalized and are effectively regulating marijuana. However, enforcement policies and practices may be highly variable between political administrations. In addition, federal prosecutors have significant discretion and there can be no assurance that the federal prosecutor for any district in which we

~~MANAGEMENT’S~~Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

operate will not choose to strictly enforce the federal laws governing cannabis. In the future, enforcement actions may be taken against cannabis-related businesses or financial services providers that are viewed as aiding and abetting such activities.

The Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state-legal cannabis businesses. These guidelines were issued for the explicit purpose so “that financial institutions can provide services to marijuana-related businesses in a manner consistent with their obligations to know their customers and to report possible criminal activity.” The Bank has and will continue to follow this and other FinCEN guidance in the areas of cannabis banking.

EXECUTIVE OVERVIEW

Summary of ~~2017 Third~~2023 Second Quarter Results

Net income decreased ~~$190 thousand or 2%~~$1.3 million to ~~$8.3~~$14.4 million for the ~~third~~second quarter of ~~2017~~2023 compared to ~~$8.5~~$15.6 million for the ~~third~~second quarter of ~~2016.~~2022. Net income available to common shareholders for the ~~third~~second quarter of ~~2017~~2023 was ~~$7.9~~$14.0 million, or ~~$0.52~~$0.91 per diluted share, compared with ~~$8.1~~$15.3 million, or ~~$0.56~~$0.99 per diluted share, for the ~~third~~second quarter of ~~last year.~~2022. Return on average common equity was ~~9.17%~~13.64% and return on average assets was ~~0.83%~~0.95% for the ~~third~~second quarter of ~~2017~~2023 compared to ~~10.34%~~14.64% and ~~0.94%~~1.12%, respectively, for the ~~third~~second quarter of ~~2016.~~2022.

The decrease in net income for the second quarter of 2023 reflected a $3.2 million provision for credit losses as compared to $563 thousand in the second quarter of 2022. The increase in the provision for credit losses for the second quarter of 2023 reflected the impact of strong loan growth and a modest increase in the national unemployment forecast, partially offset by low levels of net charge-offs and a reduction in overall specific reserve levels. The provision for credit losses in the second quarter of 2022 reflected a $2.0 million commercial loan recovery.

Net interest income totaled ~~$28.4~~$42.3 million in the ~~third~~second quarter of ~~2017, up from $26.1~~2023, an increase of $740 thousand compared to $41.6 million in the ~~third~~second quarter of ~~2016.~~2022. Average ~~earning~~interest-earning assets for the second quarter of 2023 were ~~up $351.4~~$445.3 million ~~led by~~higher than the second quarter of 2022 due to a ~~$323.9~~$559.6 million increase in average loans and a $32.5 million increase in the ~~third quarter~~average balance of ~~2017 compared to the same quarter in 2016. The growth in earning assets was~~Federal Reserve interest-earning cash, partially offset by a ~~lower net interest margin. Third quarter of 2017 net~~$146.9 million decrease in average investment securities.

Net interest margin was ~~3.17%, a decrease~~2.99% for the second quarter of ~~six basis points from 3.23% reported~~2023 compared to 3.19% in the ~~third~~second quarter of ~~2016.~~2022, as a result of a shift in our deposit mix from lower cost transactional accounts to higher cost time deposits, as well as seasonality and repricing within the public deposit portfolio.

The provision for credit losses – loans ~~losses~~ was ~~$2.8~~$2.9 million in the ~~third~~second quarter of ~~2017~~2023 compared to ~~$2.0 million~~$446 thousand in the ~~third~~second quarter of ~~2016.~~2022. Net charge-offs during the ~~third~~recent quarter ~~of 2017~~ were ~~$1.6 million, up from $1.1 million from the third quarter of 2016. Net charge-offs expressed as an annualized percentage~~$636 thousand, representing 0.06% of average loans ~~outstanding were 0.25% during~~on an annualized basis, compared to net recoveries of $1.0 million, or an annualized 0.11% of average loans, in the ~~third~~second quarter of ~~2017 compared with 0.20% in the third quarter of 2016.~~2022. See the “Allowance for ~~Loan Losses”~~Credit Losses – Loans” and~~“Non-Performing~~ “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion regarding the ~~increases in the~~ provision for ~~loan~~credit losses – loans and net charge-offs.

Noninterest income totaled ~~$8.6~~$11.5 million in the ~~third~~second quarter of ~~2017,~~2023, compared to ~~$8.5~~$11.4 million in the ~~third~~second quarter of ~~2016.~~2022. Included in ~~these totals~~noninterest income for the second quarter of 2023 was a net gain on tax credit investments of $489 thousand related to tax credit investments placed in service in the current and prior quarters. This net gain includes the New York investment tax credits that are refundable, partially offset by amortization of the tax credit investments. Offsetting the increase in noninterest income was a decrease in net ~~gains realized from~~gain on sale of loans held for sale to $122 thousand for the second quarter of 2023 compared to $828 thousand in the second quarter of 2022, when the Company recorded a $586 thousand gain related to the sale of ~~investment securities totaling $184 thousand for the third quarter~~a $31.3 million portfolio of ~~2017 and $426 thousand for the third quarter of 2016. Exclusive of this item, noninterest income was $8.4~~indirect loans.

Noninterest expense totaled $33.8 million in the ~~third~~second quarter of ~~2017 and $8.1~~2023, compared to $32.9 million in the ~~third~~second quarter of ~~2016.~~

~~Noninterest expense in the third quarter of 2017 totaled $22.5 million compared with $20.6 million in the third quarter of 2016.~~2022. The increase in noninterest expense was primarily the result of ~~higher~~increases in salaries and employee benefits expense, FDIC assessments expense, and other expenses, partially offset by decreases in occupancy and equipment expenses and restructuring charges. The increase in salaries and employee benefits expense was primarily due to annual merit increases. FDIC assessments expense increased in part, due to the increase in the base deposit insurance assessment rate schedules by two basis points. The increase in other expense was due to a combination of factors including interest charges related to ~~our organic growth initiatives, including~~collateral held for derivative transactions, the ~~residential mortgage lending expansion.~~timing of deposit account-related fraud charge-offs, higher insurance costs and the impact of inflationary pressures. The decrease in occupancy and equipment expense primarily related to timing of maintenance and repairs. Restructuring charges in the second quarter of 2022 reflected the write-down of real estate assets to fair market value based upon then-existing purchase offers and current market conditions for five locations that were closed in the second half of 2020.

The regulatory Common ~~equity~~Equity Tier 1 ~~ratio~~Ratio and Total ~~risk-based capital ratio~~Risk-Based Capital Ratio were ~~10.09%~~9.43%, and ~~13.24%~~11.77%, respectively, ~~for the third quarter of 2017.~~at June 30, 2023. 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.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Net interest income is our primary source of ~~revenue.~~revenue, comprising 79% of revenue during both the three and six months ended June 30, 2023, respectively. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and ~~the~~ 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 ~~earning~~interest-earning assets and interest-bearing liabilities, as

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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 ~~earning~~interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and ~~stockholders’~~shareholders’ equity, also support earning assets. To comparetax-exempt asset yields to taxable yields, the yield ontax-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.

~~- 40 -~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

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 June 30,				Six months ended June 30,
	2017		2016		2017		2016		2023		2022		2023		2022
Interest income per consolidated statements of income	$	33,396	$	29,360	$	95,343	$	85,241	$	71,115	$	45,276	$	134,886	$	87,627
Adjustment to fully taxable equivalent basis		776		789		2,395		2,367		113		147		234		293

Interest income adjusted to a fully taxable equivalent basis		34,172		30,149		97,738		87,608		71,228		45,423		135,120		87,920
Interest expense per consolidated statements of income		4,958		3,310		12,488		9,273		28,778		3,679		50,734		6,472

Net interest income on a taxable equivalent basis	$	29,214	$	26,839	$	85,250	$	78,335	$	42,450	$	41,744	$	84,386	$	81,448

Analysis of Net Interest Income for the Three ~~Month Periods ended September~~Months Ended June 30, ~~2017~~2023 and ~~2016~~2022

Net interest income on a taxable equivalent basis for the three months ended ~~September~~June 30, ~~2017,~~2023, was ~~$29.2~~$42.5 million, an increase of ~~$2.4 million~~$706 thousand versus the comparable quarter last ~~year.~~year of $41.7 million. The increase in net interest income was primarily due to a $25.8 million increase in interest income, resulting primarily from the impact of market interest rate increases having a positive impact on yields, as well as an increase in average ~~earning assets~~loans of ~~$351.4~~$559.6 million, or ~~11% compared~~15%, partially offset by a decrease in average investment securities of $146.9 million, or 10%. The increase in interest income was partially offset by an increase in interest expense of $25.1 million. The increase in interest expense was primarily the result of an increase in higher-cost borrowings coupled with continued repricing of deposits, as customers responded to the ~~third quarter of 2016.~~rising interest rate environment.

~~The~~Our net interest margin for the ~~third~~second quarter of ~~2017~~2023 was ~~3.17%~~2.99%, ~~six basis~~20-basis points lower than ~~3.23%~~3.19% for the same period in 2016. This comparable period decrease was a function of an eight basis point decrease in net interest spread, partially offset by a higher contribution from net free funds of two basis points (due principally to increases in average noninterest-bearing deposits and other net free funds). The lower net interest spread was2022 as a result of a ~~17 basis point increase~~shift in our deposit mix from lower cost transactional accounts to higher cost time deposits, as well as seasonality and repricing within the ~~cost of average interest-bearing liabilities partly offset by a nine basis point increase in the yield on earning assets.~~public deposit portfolio.

For the ~~third~~second quarter of ~~2017,~~2023, the average yield on average interest earning assets of ~~3.71%~~5.02% was ~~nine basis~~155-basis points higher than the ~~third~~second quarter of ~~2016. Loan~~2022 of 3.47% due to the increase in market interest rates. Average loan yields increased ~~six basis~~180-basis points ~~to 4.24% when comparing~~during the ~~third~~second quarter of ~~2017~~2023 to 5.93% from 4.13% for the ~~same period in 2016.~~second quarter of 2022. The average yield on investment securities increased ~~one basis point~~7-basis points during the ~~third~~second quarter of ~~2017~~2023 to ~~2.45%.~~1.89% from 1.82% for the second quarter of 2022. Overall, a favorable volume variance increased interest income by $6.4 million during the ~~earning asset rate~~second quarter of 2023, and the average loan yield changes increased interest income by ~~$416 thousand during the third quarter of 2017, along with a favorable volume variance that increased interest income by $3.6~~$18.1 million which collectively drove a ~~$4.0~~$24.5 million increase in interest income.

Average interest-earning assets were ~~$3.67~~$5.69 billion for the ~~third~~second quarter ~~2017,~~of 2023 compared to $5.25 billion for the second quarter of 2022, an increase of ~~$351.4~~$445.3 million, or ~~11%~~8%, from the comparable quarter last year, with average loans up ~~$323.9~~$559.6 million ~~and~~from $3.77 billion for the second quarter of 2022 to $4.33 billion for the second quarter of 2023, partially offset by a decrease in average securities ~~up $27.5 million. The growth in average loans reflected increases in most loan categories. Commercial loans, in particular, were up $180.2~~of $146.9 million ~~or 18%~~ from $1.42 billion for the ~~third~~second quarter of ~~2016. In addition, consumer indirect loans were up $129.1 million or 18% from~~2022 to $1.27 billion for the ~~third~~second quarter of ~~2016.~~2023. Loans ~~represented 70.1%~~comprised 76.1% of average interest-earning assets during the ~~third~~second quarter of ~~2017~~2023 compared to ~~67.8%~~71.9% during the ~~third~~second quarter of ~~2016.~~2022. 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 other interest-earning assets and, as such, have a more positive effect on the net interest margin. The average yield on average loans was 5.93% for the second quarter of 2023, an increase of 180-basis points compared to 4.13% for the comparable quarter in 2022 due to the impact of the increase in market interest rates. An increase in the volume of average loans resulted in a ~~$3.5~~$7.0 million increase in interest income ~~along with a $376 thousand increase due to the favorable~~and rate ~~variance.~~changes increased interest income by $18.1 million. Securities represented ~~29.9%~~22.3% of average interest-earning assets during the ~~third~~second quarter of ~~2017~~2023 compared to ~~32.2%~~27.0% during the ~~third~~second quarter of ~~2016.~~2022. The ~~increase~~decrease in ~~the volume of~~ average investment securities ~~resulted in a $147 thousand increase in interest income, along with a $40 thousand increase~~was due to the ~~favorable rate variance.~~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.

~~The~~For the second quarter of 2023, the average cost of average interest-bearing liabilities of ~~0.68% in the third quarter of 2017~~2.60% was ~~17 basis~~223-basis points higher than the ~~third~~second quarter of ~~2016. The~~2022 and the average cost of ~~average~~ interest-bearing deposits ~~increased 11 basis~~of 2.40% was 215-basis points ~~to 0.50% and~~higher than the ~~cost of short-term borrowings increased 66 basis points to 1.29% in the third~~second quarter of ~~2017 compared~~2022 due to the ~~same quarter of 2016. The cost of long-term borrowings for the third quarter of 2017 decreased one basis point to 6.32% compared to the same quarter of 2016. Overall, interest-bearing liability~~rising interest rate environment that occurred in 2022 and ~~volume increases resulted in $1.6 million of higher interest expense.~~continued into 2023.

Average interest-bearing liabilities ~~of $2.89~~were $4.43 billion infor the ~~third~~second quarter of ~~2017 were $286.2~~2023, compared to $3.95 billion for the second quarter of 2022, an increase of $489.4 million, or ~~11% higher than~~12% driven by increases in both total borrowings and interest-bearing deposits. Total average borrowings

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increased to $419.3 million, up $251.0 million from the ~~third~~second quarter of ~~2016.~~2022. On average, interest-bearing deposits grew ~~$215.7~~$238.4 million from $3.78 billion for the second quarter of 2022 to $4.02 billion for the current quarter while noninterest-bearing demand deposits (a principal component of net free funds) ~~were up $40.9 million.~~decreased $68.4 million to $1.03 billion for the second quarter of 2023. The increase in average interest-bearing deposits was primarily due to growth in ~~part to seasonal inflows of municipal~~reciprocal, non-public, and brokered deposits, ~~successful business development efforts~~partially offset by a decline in ~~retail banking, and an increase in deposits from our Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) programs.~~public deposits. For further discussion of the ~~CDARS and ICS~~reciprocal deposit programs, refer to the “Funding ~~Activities—~~Activities – Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate ~~and volume~~ changes resulted in ~~$897 thousand of higher~~a $21.0 million increase in interest expense during the ~~third~~second quarter of ~~2017. Average borrowings increased $70.5 million compared~~2023, primarily due to the ~~third quarter of 2016. Overall, short and long-term borrowing~~higher rate ~~and volume changes resulted in $751 thousand of higher interest expense during the third quarter of 2017.~~market conditions.

~~- 41 -~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Analysis of Net Interest Income for the ~~Nine~~Six Months ~~ended September~~Ended June 30, ~~2017~~2023 and ~~September 30, 2016~~2022

Net interest income on a taxable equivalent basis for the ~~first nine~~six months ended June 30, 2023, was $84.4 million, an increase of ~~2017 was $85.3~~$2.9 million ~~compared to $78.3 million for~~versus the ~~same~~comparable period ~~last year.~~in 2022 of $81.4 million. The increase in net interest income was primarily due to a $47.2 million increase in interest income, resulting primarily from the impact of the market interest rate increases having a positive impact on yields, as well as an increase in average ~~earning assets~~loans of ~~$342.0~~$489.6 million, or ~~11% compared to~~13%, partially offset by a decrease in average investment securities of $132.7 million, or 9%. The increase in interest income was partially offset by an increase in interest expense of $44.3 million. The increase in interest expense was primarily the ~~first nine months~~result of ~~2016.~~continued repricing of time deposits at higher rates.

~~The~~Our net interest margin for the ~~first nine~~six months ~~of 2017~~ended June 30, 2023 was ~~3.19%~~3.04%, ~~five basis~~11-basis points lower than ~~3.24%~~3.15% for the same period in 2022 as a result of a shift in our deposit mix from lower cost transactional accounts to higher cost time deposits, as well as seasonality and repricing within the public deposit portfolio.

For the six months ended June 30, 2023, the average yield on average interest earning assets of 4.87% was 147-basis points higher than the six months ended June 30, 2022 of 3.40%. The average yield on loans increased 173-basis points during the six months ended June 30, 2023, to 5.78% from 4.05% for the comparable period last year. ~~This comparable period decrease was a function of a~~The average yield on investment securities increased 11-basis points to 1.89% for the six ~~basis point decrease~~months ended June 30, 2023 compared to 1.78% for the six months ended June 30, 2022. Overall, volume variances in average interest-earning assets and average interest-bearing liabilities increased net interest ~~spread to 3.07%~~income by $10.2 million during the ~~first nine~~six months ended June 30, 2023, and the impact of ~~2017,~~the interest rate increases in 2022 and 2023 had an overall positive impact on yields, contributing another $37.0 million to interest income.

Average interest-earning assets were $5.59 billion for the six months ended June 30, 2023 compared to $5.21 billion for the six months ended June 30, 2022, an increase of $382.5 million, or 7.3%, with average loans up $489.6 million from $3.74 billion for the six months ended June 30, 2022 to $4.23 billion for the six months ended June 30, 2023, partially offset by a ~~one basis point higher contribution~~decrease in average securities of $132.7 million from ~~net free funds. The lower net interest spread was a result of a ten basis point increase in the cost of average interest-bearing liabilities.~~

For the first nine months of 2017, the yield on average earning assets of 3.66% was four basis points higher than the first nine months of 2016. Loan yields increased one basis point during the first nine months of 2017 to 4.20%. The yield on investment securities decreased one basis point during the first nine months of 2017 to 2.46%. Overall, the earning asset rate changes increased interest income by $88 thousand during the first nine months of 2017, along with a favorable volume variance that increased interest income by $10.0 million, which collectively drove a $10.1 million increase in interest income.

~~Average interest-earning assets were $3.57~~$1.42 billion for the ~~first nine~~six months ~~of 2017, an increase of $342.0 million or 11% from~~ended June 30, 2022 to $1.29 billion for the comparable period last year, with average loans up $299.9 million and average securities up $33.5 million. The growth in average loans was comprised of increases in most loan categories. Commercial loans, in particular, were up $158.2 million or 17% from the first ninesix months of 2016. Residential real estate loans increased $35.5 million or 9% and consumer indirect loans increased $112.7 million or 16% when comparing the first nine months of 2017 with the same period in 2016. Loansended June 30, 2023. Securities represented ~~69.2%~~23.0% of average interest-earning assets during the ~~first nine~~six months ~~of 2017~~ended June 30, 2023 compared to ~~67.2%~~27.2% during the ~~first nine~~six months ended June 30, 2022. Loans comprised 75.6% of ~~2016.~~average interest-earning assets during the six months ended June 30, 2023 compared to 71.8% during the six months ended June 30, 2022. 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 other interest-earning assets and, as such, have a more positive effect on the net interest margin. An increase in the volume of average loans resulted in ~~a $9.4~~an $11.5 million increase in interest income along with a $124 thousand increase due to the favorable rate variance. Securities represented 30.6% of average interest-earning assets during the first nine months of 2017 compared to 32.8% during the first nine months of 2016. The increase in the volume of average securities resulted in a $604 thousand increase inand higher interest rates increased interest income ~~partially offset~~ by ~~a $36 thousand decrease due to~~$37.0 million.

For the ~~unfavorable rate variance.~~

~~The~~six months ended June 30, 2023, the average cost of average interest-bearing liabilities of ~~0.59% for the first nine months of 2017~~2.37% was ~~ten basis~~204-basis points higher than the ~~same period in 2016. Rates on~~six months ended June 30, 2022 of 0.33% with the average cost of average interest-bearing deposits ~~were up six basis~~of 2.20% increasing 198-basis points ~~to 0.43%~~from 0.22% for the ~~first nine~~six months of 2017 versus the same period in 2016. The cost of short-term borrowings for the first nine months of 2017 was 1.09% or 46 basis points higher than 0.63% for the same period last year. The cost of long-term borrowings for the first nine months of 2017 decreased one basis point to 6.32% comparedended June 30, 2022 due to the ~~same period of 2016. Overall, interest-bearing liability~~rising interest rate environment that occurred in 2022 and ~~volume increases resulted in $3.2 million of higher interest expense.~~continued into 2023.

Average interest-bearing liabilities of ~~$2.83~~$4.31 billion in the ~~first nine~~six months ~~of 2017~~ended June 30, 2023 were ~~$288.5~~$389.8 million, or ~~11%~~9.9%, higher than the ~~first nine~~six months ~~of 2016.~~ended June 30, 2022. The increase was driven by increases in both total borrowings and interest-bearing deposits. Total average borrowings increased to $340.0 million, up $206.3 million from the six months ended June 30, 2022. On average, interest-bearing deposits grew ~~$193.1~~$183.5 million from $3.79 billion for the six months ended June 30, 2022 to $3.97 billion for the current period, while noninterest-bearing demand deposits ~~were up $39.2 million.~~(a principal component of net free funds) decreased $43.7 million to $1.05 billion for the six months ended June 30, 2023. The increase in average deposits was primarily due to growth in brokered, non-public and reciprocal deposits, partially offset by a decrease in public deposits. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities – Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate ~~and volume~~ changes resulted in ~~$1.6~~a $38.3 million ~~of higher~~increase in interest expense during the ~~first nine~~six months ~~of 2017. Average borrowings increased $95.4 million compared~~ended June 30, 2023, primarily due to the ~~first nine months~~rising interest rate environment.

Table of ~~2016. Overall, short and long-term borrowing rate and volume changes resulted in $1.6 million of higher interest expense during the first nine months of 2017.~~Contents

~~- 42 -~~

~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

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


	Three months ended June 30,
	2023								2022
	Average Balance			Interest		Average Rate (3)			Average Balance			Interest		Average Rate (3)
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	92,954		$	1,186		5.12	%	$	60,429		$	110		0.72	%
Investment securities (1):
Taxable		1,190,177			5,451		1.83			1,307,507			5,746		1.76
Tax-exempt (2)		79,004			539		2.73			108,558			695		2.56
Total investment securities		1,269,181			5,990		1.89			1,416,065			6,441		1.82
Loans:
Commercial business		710,145			12,701		7.17			626,574			6,568		4.20
Commercial mortgage		1,911,729			30,827		6.47			1,429,910			15,019		4.21
Residential real estate loans		598,638			5,447		3.64			576,990			4,820		3.34
Residential real estate lines		76,191			1,371		7.22			76,730			671		3.51
Consumer indirect		1,011,338			13,272		5.26			1,045,720			11,422		4.38
Other consumer		21,686			434		8.02			14,183			372		10.49
Total loans (4)		4,329,727			64,052		5.93			3,770,107			38,872		4.13
Total interest-earning assets		5,691,862			71,228		5.02			5,246,601			45,423		3.47
Less: Allowance for credit losses		(49,183	)							(42,292	)
Other noninterest-earning assets		410,579								393,908
Total assets	$	6,053,258							$	5,598,217
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	848,552		$	1,636		0.77	%	$	938,995		$	292		0.12	%
Savings and money market		1,660,148			8,283		2.00			1,882,998			1,098		0.23
Time deposits		1,506,592			14,135		3.76			954,862			976		0.41
Total interest-bearing deposits		4,015,292			24,054		2.40			3,776,855			2,366		0.25
Short-term borrowings		294,923			3,159		4.30			94,242			252		1.07
Long-term borrowings		124,329			1,565		5.04			74,019			1,061		5.73
Total borrowings		419,252			4,724		4.52			168,261			1,313		3.13
Total interest-bearing liabilities		4,434,544			28,778		2.60			3,945,116			3,679		0.37
Noninterest-bearing demand deposits		1,029,681								1,098,084
Other noninterest-bearing liabilities		159,781								119,093
Shareholders’ equity		429,252								435,924
Total liabilities and shareholders’ equity	$	6,053,258							$	5,598,217
Net interest income (tax-equivalent)				$	42,450							$	41,744
Interest rate spread							2.42	%							3.10	%
Net earning assets	$	1,257,318							$	1,301,485
Net interest margin (tax-equivalent)							2.99	%							3.19	%
Ratio of average interest-earning assets to average interest-bearing liabilities							128.35	%							132.99	%

(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).:

   Three months ended September 30,
   2017 2016
   Average    Average Average    Average
   Balance Interest    Rate Balance Interest    Rate
Interest-earning assets:

Federal funds sold and interest-earning deposits
   $ —   $ —      —   % $ 1 $ —      —   %
Investment securities⁽¹⁾:

Taxable
   803,814 4,501    2.24 773,037 4,276    2.21
Tax-exempt⁽²⁾
   292,560 2,216    3.03 295,829 2,254    3.05






Total investment securities
   1,096,374 6,717    2.45 1,068,866 6,530    2.44
Loans:

Commercial business
   405,308 4,586    4.49 352,696 3,691    4.16
Commercial mortgage
   752,634 8,876    4.68 625,003 7,261    4.62
Residential real estate loans
   438,436 4,080    3.72 417,854 3,987    3.82
Residential real estate lines
   117,597 1,241    4.19 123,312 1,165    3.76
Consumer indirect
   841,081 8,145    3.84 711,948 6,987    3.90
Other consumer
   17,184 527    12.17 17,548 528    11.97






Total loans
   2,572,240 27,455    4.24 2,248,361 23,619    4.18






Total interest-earning assets
   3,668,614 34,172    3.71 3,317,228 30,149    3.62






Allowance for loan losses
   (33,740 )    (29,314 )
Other noninterest-earning assets
   316,128    305,758





Total assets
   $ 3,951,002    $ 3,593,672





Interest-bearing liabilities:

Deposits:

Interest-bearing demand
   $ 612,401 $ 224    0.14 % $ 547,545 $ 206    0.15 %
Savings and money market
   998,769 386    0.15 981,207 335    0.14
Time deposits
   855,371 2,479    1.15 722,098 1,651    0.91






Total interest-bearing deposits
   2,466,541 3,089    0.50 2,250,850 2,192    0.39
Short-term borrowings
   385,512 1,251    1.29 315,122 500    0.63
Long-term borrowings
   39,103 618    6.32 39,032 618    6.33






Total borrowings
   424,615 1,869    1.75 354,154 1,118    1.26






Total interest-bearing liabilities
   2,891,156 4,958    0.68 2,605,004 3,310    0.51






Noninterest-bearing demand deposits
   679,303    638,417
Other noninterest-bearing liabilities
   22,226    24,387
Shareholders’ equity
   358,317    325,864





Total liabilities and shareholders’ equity
   $ 3,951,002    $ 3,593,672





Net interest income(tax-equivalent)
   $ 29,214    $ 26,839





Net interest spread
      3.03 %    3.11 %




Net earning assets
   $ 777,458    $ 712,224





Net interest margin(tax-equivalent)
      3.17 %    3.23 %




Ratio of average interest-earning assets to average interest-bearing liabilities
      126.89 %    127.34 %

⁽¹⁾	~~Investment securities are shown at amortized cost.~~

⁽²⁾	~~The interest ontax-exempt~~ ~~securities is calculated on a tax equivalent basis assuming a Federal tax rate of 35%.~~

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~~- 43 -~~

~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

   Nine months ended September 30,
   2017 2016
   Average    Average Average    Average
   Balance Interest    Rate Balance Interest    Rate
Interest-earning assets:

Federal funds sold and interest-earning deposits
   $ 8,869 $ 67    1.02 % $ 129 $ 1    0.61 %
Investment securities⁽¹⁾:

Taxable
   790,407 13,287    2.24 763,796 12,800    2.23
Tax-exempt⁽²⁾
   300,318 6,844    3.04 293,476 6,763    3.07






Total investment securities
   1,090,725 20,131    2.46 1,057,272 19,563    2.47
Loans:

Commercial business
   385,025 12,522    4.35 332,985 10,396    4.17
Commercial mortgage
   710,690 24,761    4.66 604,577 20,846    4.61
Residential real estate loans
   432,838 12,157    3.74 397,327 11,669    3.92
Residential real estate lines
   119,493 3,611    4.04 125,273 3,555    3.79
Consumer indirect
   804,051 22,962    3.82 691,343 20,009    3.87
Other consumer
   16,941 1,527    12.05 17,678 1,569    11.85






Total loans
   2,469,038 77,540    4.20 2,169,183 68,044    4.19






Total interest-earning assets
   3,568,632 97,738    3.66 3,226,584 87,608    3.62






Allowance for loan losses
   (32,325 )    (28,423 )
Other noninterest-earning assets
   315,283    304,467





Total assets
   $ 3,851,590    $ 3,502,628





Interest-bearing liabilities:

Deposits:

Interest-bearing demand
   $ 632,596 $ 667    0.14 % $ 566,419 $ 617    0.15 %
Savings and money market
   1,027,927 1,073    0.14 988,224 989    0.13
Time deposits
   780,374 6,080    1.04 693,153 4,631    0.89






Total interest-bearing deposits
   2,440,897 7,820    0.43 2,247,796 6,237    0.37
Short-term borrowings
   345,637 2,815    1.09 250,329 1,183    0.63
Long-term borrowings
   39,085 1,853    6.32 39,015 1,853    6.33






Total borrowings
   384,722 4,668    1.62 289,344 3,036    1.40






Total interest-bearing liabilities
   2,825,619 12,488    0.59 2,537,140 9,273    0.49






Noninterest-bearing demand deposits
   665,221    626,018
Other noninterest-bearing liabilities
   20,954    22,032
Shareholders’ equity
   339,796    317,438





Total liabilities and shareholders’ equity
   $ 3,851,590    $ 3,502,628





Net interest income(tax-equivalent)
   $ 85,250    $ 78,335





Net interest spread
      3.07 %    3.13 %




Net earning assets
   $ 743,013    $ 689,444





Net interest margin(tax-equivalent)
      3.19 %    3.24 %




Ratio of average interest-earning assets to average interest-bearing liabilities
      126.30 %    127.17 %


	Three months ended June 30,
	2023			2022
Commercial business	$	(3	)	$	737
Commercial mortgage		598			607
Residential real estate loans		(397	)		(459	)
Residential real estate lines		(102	)		(81	)
Consumer indirect		(1,067	)		(591	)
Other consumer		5			4
Total	$	(966	)	$	217

⁽¹⁾	~~Investment securities are shown at amortized cost.~~

⁽²⁾	~~The interest ontax-exempt~~ ~~securities is calculated on a tax equivalent basis assuming a Federal tax rate of 35%.~~


	Six months ended June 30,
	2023								2022
	Average Balance			Interest		Average Rate (3)			Average Balance			Interest		Average Rate (3)
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	78,214		$	1,802		4.65	%	$	52,538		$	127		0.49	%
Investment securities (1):
Taxable		1,202,822			11,052		1.84			1,308,310			11,233		1.72
Tax-exempt (2)		82,432			1,116		2.71			109,686			1,390		2.53
Total investment securities		1,285,254			12,168		1.89			1,417,996			12,623		1.78
Loans:
Commercial business		690,360			23,933		6.99			627,241			12,572		4.04
Commercial mortgage		1,828,807			57,227		6.31			1,430,916			28,557		4.02
Residential real estate loans		594,217			10,693		3.60			578,994			9,641		3.33
Residential real estate lines		76,408			2,674		7.06			77,167			1,350		3.53
Consumer indirect		1,017,814			25,796		5.11			1,007,791			22,297		4.46
Other consumer		18,439			827		9.04			14,356			753		10.57
Total loans (4)		4,226,045			121,150		5.78			3,736,465			75,170		4.05
Total interest-earning assets		5,589,513			135,120		4.87			5,206,999			87,920		3.40
Less: Allowance for credit losses		(47,933	)							(41,548	)
Other noninterest-earning assets		407,521								413,920
Total assets		5,949,101							$	5,579,371
Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	864,235		$	3,035		0.71	%	$	931,253		$	575		0.12	%
Savings and money market		1,662,598			14,839		1.80			1,915,344			1,884		0.20
Time deposits		1,444,705			25,474		3.56			941,448			1,612		0.35
Total interest-bearing deposits		3,971,538			43,348		2.20			3,788,045			4,071		0.22
Short-term borrowings		220,641			4,361		3.99			59,649			280		0.95
Long-term borrowings		119,318			3,025		5.07			73,980			2,121		5.73
Total borrowings		339,959			7,386		4.38			133,629			2,401		3.62
Total interest-bearing liabilities		4,311,497			50,734		2.37			3,921,674			6,472		0.33
Noninterest-bearing demand deposits		1,047,121								1,090,835
Other noninterest-bearing liabilities		166,858								103,128
Shareholders’ equity		423,625								463,734
Total liabilities and shareholders’ equity	$	5,949,101							$	5,579,371
Net interest income (tax-equivalent)				$	84,386							$	81,448
Interest rate spread							2.50	%							3.07	%
Net earning assets	$	1,278,016							$	1,285,325
Net interest margin (tax-equivalent)							3.04	%							3.15	%
Ratio of average interest-earning assets to average interest-bearing liabilities							129.64	%							132.77	%

~~- 44 -~~52

Table of Contents

~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

(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):


	Six months ended June 30,
	2023			2022
Commercial business	$	(4	)	$	1,706
Commercial mortgage		1,146			983
Residential real estate loans		(801	)		(963	)
Residential real estate lines		(176	)		(154	)
Consumer indirect		(2,161	)		(1,016	)
Other consumer		5			9
Total	$	(1,991	)	$	565

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table presents, on a ~~tax equivalent~~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									Nine months ended
	September 30, 2017 vs. 2016									September 30, 2017 vs. 2016									Three months ended June 30, 2023 vs. 2022									Six months ended June 30, 2023 vs. 2022
Increase (decrease) in:	Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total			Volume			Rate			Total
Interest income:
Federal funds sold and interest-earning deposits	$	—		$	—		$	—		$	66		$	—		$	66		$	88		$	988		$	1,076		$	91		$	1,584		$	1,675
Investment securities:
Taxable		172			53			225			447			40			487			(530	)		235			(295	)		(940	)		759			(181	)
Tax-exempt		(25	)		(13	)		(38	)		157			(76	)		81			(199	)		43			(156	)		(364	)		90			(274	)

Total investment securities		147			40			187			604			(36	)		568			(729	)		278			(451	)		(1,304	)		849			(455	)
Loans:
Commercial business		579			316			895			1,678			448			2,126			974			5,159			6,133			1,377			9,984			11,361
Commercial mortgage		1,503			112			1,615			3,695			220			3,915			6,107			9,701			15,808			9,423			19,247			28,670
Residential real estate loans		193			(100	)		93			1,012			(524	)		488			186			441			627			258			794			1,052
Residential real estate lines		(56	)		132			76			(169	)		225			56			(5	)		705			700			(13	)		1,337			1,324
Consumer indirect		1,252			(94	)		1,158			3,222			(269	)		2,953			(387	)		2,237			1,850			224			3,275			3,499
Other consumer		(11	)		10			(1	)		(66	)		24			(42	)		165			(103	)		62			193			(119	)		74

Total loans		3,460			376			3,836			9,372			124			9,496			7,040			18,140			25,180			11,462			34,518			45,980

Total interest income		3,607			416			4,023			10,042			88			10,130			6,399			19,406			25,805			10,249			36,951			47,200

Interest expense:
Deposits:
Interest-bearing demand		24			(6	)		18			70			(20	)		50			(31	)		1,375			1,344			(44	)		2,504			2,460
Savings and money market		6			45			51			40			44			84			(145	)		7,330			7,185			(281	)		13,236			12,955
Time deposits		338			490			828			625			824			1,449			868			12,291			13,159			1,298			22,564			23,862

Total interest-bearing deposits		368			529			897			735			848			1,583			692			20,996			21,688			973			38,304			39,277
Short-term borrowings		132			619			751			562			1,070			1,632			1,367			1,540			2,907			1,864			2,217			4,081
Long-term borrowings		1			(1	)		—			3			(3	)		—			646			(142	)		504			1,173			(269	)		904

Total borrowings		133			618			751			565			1,067			1,632			2,013			1,398			3,411			3,037			1,948			4,985

Total interest expense		501			1,147			1,648			1,300			1,915			3,215			2,705			22,394			25,099			4,010			40,252			44,262

Net interest income	$	3,106		$	(731	)	$	2,375		$	8,742		$	(1,827	)	$	6,915		$	3,694		$	(2,988	)	$	706		$	6,239		$	(3,301	)	$	2,938

Provision for ~~Loan~~Credit Losses

The provision for ~~loan losses is based upon~~ credit ~~loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the current loan portfolio. The provision for loan~~ losses for the three and ~~nine month periods~~six months ended ~~September~~June 30, ~~2017 were $2.8~~2023 was $3.2 million and ~~$9.4~~$7.4 million, respectively, compared to ~~$2.0 million~~$563 thousand and ~~$6.3~~$2.9 million for the corresponding periods in ~~2016.~~2022. The increase into the loan loss provision ~~is primarily attributable to growth in the total loan portfolio combined with the impact of the downgrade of one commercial credit relationship~~ in the second quarter of ~~2017. The downgrade necessitated~~2023 and the six months ended June 30, 2023 reflects the impact of strong loan growth and a ~~provision and~~modest increase in ~~allowance for~~the national unemployment forecast, partially offset by low levels of net charge-offs and a reduction in overall specific reserve levels. Included in the second quarter of 2022 and the six months ended June 30, 2022 was a $2.0 million recovery in connection with the pay-off of a commercial loan ~~losses~~that was downgraded to non-performing status with a partial charge-off in the second quarter of ~~approximately $925 thousand.~~2021.

See the “Allowance for ~~Loan Losses”~~Credit Losses – Loans” and~~“Non-Performing~~ “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion.

Table of Contents

~~- 45 -~~

~~MANAGEMENT’S~~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					Nine months ended
	September 30,					September 30,				Three months ended June 30,						Six months ended June 30,
	2017			2016		2017		2016		2023			2022			2023		2022
Service charges on deposits	$	1,901		$	1,913	$	5,486	$	5,392	$	1,223		$	1,437		$	2,250	$	2,806
Insurance income		1,488			1,407		4,052		4,262		1,328			1,234			3,415		3,331
ATM and debit card		1,445			1,441		4,230		4,187
Card interchange income											2,107			2,103			4,046		4,055
Investment advisory		1,497			1,326		4,357		3,934		2,819			2,906			5,742		5,947
Company owned life insurance		449			486		1,367		2,340		953			869			1,947		1,702
Investments in limited partnerships		(14	)		161		91		253		469			242			720		1,037
Loan servicing		105			104		348		332		114			135			260		244
Income from derivative instruments, net											703			645			1,199		1,164
Net gain on sale of loans held for sale		150			46		270		202		122			828			234		737
Net gain on investment securities		184			426		600		2,426
Net gain on other assets		21			199		25		285
Contingent consideration liability adjustment		—			—		1,200		—
Net loss on investment securities											—			(15	)		—		(15	)
Net (loss) gain on other assets											(7	)		7			32		7
Net gain (loss) on tax credit investments											489			(92	)		288		(319	)
Other		1,348			1,030		3,717		3,059		1,146			1,061			2,257		1,986

Total noninterest income	$	8,574		$	8,539	$	25,743	$	26,672	$	11,466		$	11,360		$	22,390	$	22,682

~~Insurance income~~

Service charges on deposits decreased ~~$210~~$214 thousand, or 5%15%, to ~~$4.1~~$1.2 million for the second quarter of 2023 compared to $1.4 million for the second quarter of 2022. For the first six months of 2023, service charges on deposits decreased $556 thousand, or 20%, to $2.3 million compared to $2.8 million for the first ~~nine~~six months of ~~2017~~2022. The decrease for both periods was primarily driven by a reduction in nonsufficient funds fees as a result of January 2023 changes in the Bank’s consumer overdraft program that align with trends in community banking.

Investments in limited partnerships income increased $227 thousand to $469 thousand for the second quarter of 2023 compared to ~~$4.3~~$242 thousand for the second quarter of 2022. For the first six months of 2023, investments in limited partnerships income decreased $317 thousand to $720 thousand from $1.0 million for the first ~~nine~~six months of ~~2016.~~2022. The ~~decrease was primarily the result ofnon-renewal~~ by a few large commercial accounts during 2016 due to: one customer being acquired, one customer going out of business and one customer selecting another agency during a competitive bidding process. These~~non-renewals~~ ~~have been partially replaced with~~Company has made several ~~new, but smaller, commercial and personal accounts.~~

Investment advisory income increased to $4.4 million in the first nine months of 2017 compared to $3.9 million in the first nine months of 2016, reflecting higher assets under management driven by the acquisition of assets of Robshaw & Julian and favorable market conditions and successful business development efforts.

Income from company owned life insurance decreased to $1.4 million in the first nine months of 2017 compared to $2.3 million in the same period in 2016, as the first quarter of 2016 included $911 thousand of death benefit proceeds.

~~We have~~ investments in limited partnerships, primarily small business investment companies, and ~~account~~accounts for these investments under the equity method. ~~The income~~Income from these ~~equity method~~ investments fluctuates based on the maturity and performance of the underlying investments.

~~During the first nine months of 2017, we recognized net gains~~Net gain on ~~investment securities totaling $600 thousand from the~~ sale of ~~eleven agency securities and six mortgage backed securities. The $2.4 million in gains realized during the first nine months of 2016 resulted from the~~loans held for sale of 24 agency securities and nine mortgage backed securities. The amount and timing of our sale of investment securities is dependent on a number of factors, including our prudent efforts to realize gains while managing duration, premium and credit risk.

Inwas $122 thousand for the second quarter of ~~2017, we recognized~~2023 compared to $828 thousand for the second quarter of 2022. For the first six months of 2023, net gain on sale of loans held for sale was $234 thousand compared to $737 thousand for the first six months of 2022. Included in the prior year periods was a ~~$1.2 millionnon-cash~~ ~~fair value adjustment~~gain of ~~the contingent liability~~$586 thousand related to the ~~SDN acquisition. We also recognized $1.6~~sale of a $31.2 million portfolio of ~~goodwill impairment related~~indirect loans in the second quarter of 2022.

Net gain (loss) on tax credit investments was a net gain of $489 thousand for the second quarter of 2023, compared to a $92 thousand net loss for the ~~same acquisition.~~second quarter of 2022. For the first six months of 2023, net gain (loss) on tax credit investments was a net gain of $288 thousand compared to a net loss of $319 thousand for the first six months of 2022. The net gains include New York investment tax credits that are refundable, partially offset by amortization of these tax credits.

~~- 46 -~~

~~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				Nine months ended
	September 30,				September 30,				Three months ended June 30,					Six months ended June 30,
	2017		2016		2017		2016		2023			2022		2023			2022
Salaries and employee benefits	$	12,348	$	11,325	$	35,703	$	33,757	$	17,754		$	16,966	$	35,887		$	33,582
Occupancy and equipment		4,087		3,617		12,235		10,906		3,538			4,015		7,268			7,771
Professional services		1,313		956		3,741		5,236		1,273			1,269		2,768			2,925
Computer and data processing		1,208		1,089		3,691		3,335		4,750			4,573		9,441			8,552
Supplies and postage		492		490		1,496		1,548		473			469		963			1,010
FDIC assessments		440		406		1,366		1,283		1,239			621		2,354			1,134
Advertising and promotions		188		302		939		1,259		498			406		812			786
Amortization of intangibles		288		309		876		946		230			249		464			503
Goodwill impairment		—		—		1,575		—
Restructuring charges										(19	)		1,269		(19	)		1,269
Other		2,103		2,124		5,728		5,686		4,046			3,050		7,505			5,490

Total noninterest expense	$	22,467	$	20,618	$	67,350	$	63,956	$	33,782		$	32,887	$	67,443		$	63,022

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

Salaries and employee benefits expense increased ~~by $1.9~~$788 thousand, or 5%, to $17.8 million for the second quarter of 2023 compared to $17.0 million for the second quarter of 2022. For the first six months of 2023, salaries and employee benefits expense increased $2.3 million, or 6%7%, to $35.9 million compared to $33.6 million for the first six months of 2022. The increase in salaries and employee benefits expense in the second quarter of 2023 was primarily due to annual merit increases. The increase in the first ~~nine~~six months of ~~2017 compared to~~2023 was primarily the ~~same period~~result of investments in ~~2016, primarily~~personnel and wage pressures driven by the current labor market, along with an increase in health insurance benefit expense due to ~~additional personnel to support our organic growth initiatives.~~higher medical claims.

Occupancy and equipment expense ~~increased $1.3~~decreased $477 thousand, or 12%, to $3.5 million infor the second quarter of 2023 compared to $4.0 million for the second quarter of 2022. For the first ~~nine~~six months of ~~2017~~2023, occupancy and equipment expense decreased $503 thousand, or 6%, to $7.3 million compared to $7.8 million for the ~~same period~~first six months of 2022. The decrease in ~~2016,~~occupancy and equipment expense for both periods in 2023 was primarily due to ~~organic growth initiatives.~~the purchase of laptop computers in the second quarter of 2022 to support our flexible work model, as well as timing of maintenance and repairs.

Professional services decreased $1.5 million when comparing the first nine months of 2017 to the same period in 2016. The prior year includes approximately $2.1 million of professional services associated with responding to the demands of an activist shareholder.

Computer and data processing expense increased ~~$356~~$177 thousand, or ~~11%~~4%, ~~when comparing~~to $4.8 million for the second quarter of 2023 compared to $4.6 million for the second quarter of 2022. For the first ~~nine~~six months of ~~2017~~2023, computer and data processing expense increased $889 thousand, or 10%, to $9.4 million compared to $8.6 million for the first ~~nine~~six months of ~~2016 primarily due to information~~2022. The increase for the 2023 periods was a result of our strategic investment in technology, ~~projects to maintain~~including digital banking initiatives, a customer relationship management solution across all lines of business, and ~~improve our infrastructure.~~BaaS initiatives.

WeRestructuring charges of $1.3 million were recognized ~~$1.6 million of goodwill impairment~~ in the second quarter of ~~2017~~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 $996 thousand, or 33%, to $4.0 million for the second quarter of 2023 compared to $3.1 million for the second quarter of 2022. For the first six months of 2023, other expense increased $2.0 million, or 37%, to $7.5 million compared to $5.5 million for the first six months of 2022. The increase for the 2023 periods was due to a combination of factors, including interest charges related to collateral held for derivative transactions, the ~~SDN acquisition. For additional discussion related to~~timing of deposit account-related fraud charge-offs, higher insurance costs and the ~~goodwill impairment see Note 6, Goodwill and Other Intangible Assets,~~impact of ~~the notes to consolidated financial statements.~~inflationary pressures.

Our efficiency ratio for the ~~nine~~second quarter of 2023 and the first six months ~~ended September 30, 2017~~of 2023 was ~~61.01%~~62.66% and 63.17%, respectively, compared with ~~62.35%~~61.91% and 60.51% for the second quarter of 2022 and first ~~nine~~six months of ~~2016.~~2022, respectively. The ~~lower~~higher efficiency ratio ~~is a~~for both periods in 2023 was primarily the result of ~~the higher net interest income associated with our organic growth initiatives.~~an increase in noninterest expense in 2023 as described above. The efficiency ratio is calculated by dividing total noninterest expense by net revenue, defined as the sum oftax-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.

Income Taxes

For the ~~nine~~three and six months ended ~~September~~June 30, ~~2017 and 2016,~~2023, we recorded income tax expense of ~~$9.4~~$2.4 million and ~~$9.2~~$5.2 million, respectively, versus $3.9 million and $7.3 million for the same periods in the prior year. In the second quarter of 2023, we recognized federal and state tax benefits related to tax credit investments placed in service and/or amortized during the period resulting in a reduction in income tax expense of $761 thousand, versus $426 thousand for the same period in the prior year. The six months ended June 30, 2023 and 2022 also included related benefits of $1.3 million and $1.0 million, respectively. ~~The~~

Our effective tax rates for the~~year-to-date~~ three and six months ended June 30, 2023 were 14.4% and 16.4%, respectively, versus 19.8% and 19.2%, respectively, for the same periods in ~~2017 and 2016 were 29.4% and 28.3%, respectively. The increase in income tax expense and effective tax rate was primarily due to thenon-taxable~~ ~~death benefits proceeds on company owned life insurance received in~~ the ~~first quarter of 2016. In addition, the higher effective tax rate in 2017 was a result of the $1.6 millionnon-cash~~ ~~goodwill impairment charge related to the SDN acquisition, partially offset by the $1.2 millionnon-cash~~ ~~fair value adjustment of the contingent consideration liability related to the SDN acquisition, both of which werenon-taxable~~ ~~adjustments.~~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 fromtax-exempt securities, ~~and~~ earnings on company owned life ~~insurance.~~insurance and the impact of tax credit investments. In addition, our effective tax rate for ~~2017~~2023 and ~~2016~~2022 reflects the New York State tax ~~savings~~benefit generated by our real estate investment trust.

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~~- 47 -~~

~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

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, 2017				December 31, 2016				June 30, 2023					December 31, 2022
	Amortized		Fair		Amortized		Fair		Amortized			Fair		Amortized			Fair
	Cost		Value		Cost		Value		Cost			Value		Cost			Value
Securities available for sale (“AFS”):
U.S. Government agencies and government-sponsored enterprise securities	$	163,366	$	163,695	$	187,325	$	186,268
Securities available for sale:
U.S. Government agency and government-sponsored enterprise securities									$	24,535		$	21,261	$	24,535		$	21,115
Mortgage-backed securities:
Agency mortgage-backed securities		388,045		386,599		356,667		352,643		1,057,639			890,529		1,102,522			932,919
Non-Agency mortgage-backed securities		—		950		—		824		—			332		—			337
Asset-backed securities		—		247		—		191

Total AFS securities		551,411		551,491		543,992		539,926
Securities held to maturity (“HTM”):
Total available for sale securities										1,082,174			912,122		1,127,057			954,371
Securities held to maturity:
U.S. Government agency and government-sponsored enterprise securities										16,438			15,614		16,363			15,515
State and political subdivisions		293,026		297,177		305,248		305,759		76,066			69,695		97,583			90,435
Mortgage-backed securities		245,306		242,299		238,090		234,232		67,393			60,717		75,034			68,238

Total HTM securities		538,332		539,476		543,338		539,991

Total held to maturity securities										159,897			146,026		188,980			174,188
Allowance for credit losses – securities										(4	)				(5	)
Total held to maturity securities, net										159,893					188,975
Total investment securities	$	1,089,743	$	1,090,967	$	1,087,330	$	1,079,917	$	1,242,067		$	1,058,148	$	1,316,032		$	1,128,559

~~The AFS~~

Our available for sale (“AFS”) investment securities portfolio ~~increased $11.6~~decreased $44.9 million from ~~$539.9~~December 31, 2022 to June 30, 2023. The AFS portfolio had a net unrealized loss of $170.1 million at June 30, 2023 and $172.7 million at December 31, ~~2016 to $551.5 million at September 30, 2017. The AFS portfolio had net unrealized gains (losses) totaling $80 thousand and $(4.1) million at September 30, 2017 and December 31, 2016,~~2022, respectively. The ~~unrealized gains (losses)~~decline in the ~~AFS~~ portfolio ~~were predominantly caused by changes in market interest rates. The fair value of most~~balance was primarily the result of the ~~investment securities in the AFS~~use of portfolio ~~fluctuates as market interest rates change.~~cash flow to fund loan originations.

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~~June 30, ~~2017.~~2023. 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. Notax-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	$	—		—	%	$	15,210		1.87	%	$	144,055		2.32	%	$	4,101		2.08	%	$	163,366		2.27	%	$	—		0.00	%	$	15,000		1.69	%	$	9,535		1.90	%	$	—		—		$	24,535		1.77	%
Mortgage-backed securities		—		—			107,058		1.92			170,357		2.52			110,630		2.29			388,045		2.29			2,767		2.25			77,004		2.25			125,407		2.04			852,461		1.70			1,057,639		1.78
																											2,767		2.25			92,004		2.16			134,942		2.03			852,461		1.70			1,082,174		1.78
		—		—			122,268		1.92			314,412		2.43			114,731		2.28			551,411		2.29
Held to maturity debt securities:
U.S. Government agencies and government-sponsored enterprises																										$	—		0.00	%	$	10,000		0.00	%	$	6,438		3.53	%	$	—		0.00	%	$	16,438		3.21	%
State and political subdivisions		59,880		1.83			162,385		2.16			70,761		1.85			—		—			293,026		2.02			25,668		2.17			23,807		1.94			5,004		1.62			21,587		2.45			76,066		2.14
Mortgage-backed securities		—		—			—		—			11,110		1.61			234,196		2.17			245,306		2.15			—		—			5,539		2.44			19,351		2.28			42,503		2.81			67,393		2.63
																											25,668		2.17			39,346		2.03			30,793		2.43			64,090		2.69			159,897		2.45
		59,880		1.83			162,385		2.16			81,871		1.82			234,196		2.17			538,332		2.08

Total investment securities	$	59,880		1.83	%	$	284,653		2.06	%	$	396,283		2.30	%	$	348,927		2.21	%	$	1,089,743		2.18	%	$	28,435		2.18	%	$	131,350		2.20	%	$	165,735		2.11	%	$	916,551		1.77	%	$	1,242,071		1.87	%

~~- 48 -~~57

Table of Contents

~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

Impairment Assessment

~~We review investment~~For AFS securities onin an ongoing basis for the presence of other than temporary impairment (“OTTI”) with formal reviews performed quarterly. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses or the security is intended to be sold or will be required to be sold. The amount of the impairment related to~~non-credit~~ ~~related factors is recognized in other comprehensive income. Evaluating~~unrealized loss position, we first assess whether ~~the impairment of a debt security is other than temporary involves assessing i.) the intent~~(i) we intend to sell, ~~the debt security~~ or ~~ii.) the likelihood of being~~(ii) it is more likely than not that we will be required to sell the security before ~~the~~ recovery of its amortized cost basis. ~~In determining~~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 ~~OTTI includes a~~decline in fair value has resulted from credit ~~loss, we use our best estimate of the present value of cash flows expected to be collected from the debt security considering factors such as: a.) the length of time and~~losses or other factors. In making this assessment, management considers the extent to which ~~the~~ fair value ~~has been~~is less than ~~the~~ amortized cost, basis, b.) adverse conditions specifically related to the security, an industry, or a geographic area, c.) the historical and implied volatility of the fair value of the security, d.) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future, e.) failure of the issuer of the security to make scheduled interest or principal payments, f.) any changes to the rating of the security by a rating agency and ~~g.) recoveries or additional declines in~~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 ~~subsequent~~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 ~~balance sheet date. The assessment~~allowance are reported in our income statement as a component of ~~whether OTTI exists involves a high degree~~credit loss expense. AFS securities are charged-off against the allowance or, in the absence of ~~subjectivity~~any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. For the three and ~~judgment~~six months ended June 30, 2023 and ~~is based~~2022 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the ~~information available~~securities are impaired due to ~~management at a point in time. There were no securities deemed to be other-than-temporarily impaired during the nine month periods ended September 30, 2017 and 2016.~~reasons of credit quality.

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, 2017					December 31, 2016					June 30, 2023					December 31, 2022
	Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total
Commercial business	$	419,415		16.0	%	$	349,547		14.9	%	$	720,372		16.4	%	$	664,249		16.4	%
Commercial mortgage		757,987		29.0			670,058		28.6			1,961,220		44.6			1,679,840		41.5

Total commercial		1,177,402		45.0			1,019,605		43.5			2,681,592		61.0			2,344,089		57.9
Residential real estate loans		446,044		17.0			427,937		18.3			611,199		13.9			589,960		14.5
Residential real estate lines		117,621		4.5			122,555		5.2			75,971		1.7			77,670		1.9
Consumer indirect		857,528		32.8			752,421		32.2			1,000,982		22.8			1,023,620		25.3
Other consumer		17,640		0.7			17,643		0.8			28,065		0.6			15,110		0.4

Total consumer		1,438,833		55.0			1,320,556		56.5			1,716,217		39.0			1,706,360		42.1

Total loans		2,616,235		100.0	%		2,340,161		100.0	%		4,397,809		100.0	%		4,050,449		100.0	%

Less: Allowance for loan losses		34,347					30,934

Less: Allowance for credit losses – loans												49,836					45,413
Total loans, net	$	2,581,888				$	2,309,227				$	4,347,973				$	4,005,036

Total loans increased ~~$276.1~~$347.4 million to ~~$2.62~~$4.40 billion at ~~September~~June 30, ~~2017~~2023 from ~~$2.34~~$4.05 billion at December 31, ~~2016.~~2022. The increase in loans was primarily attributable to our organic growth initiatives.

~~Commercial~~Total commercial loans increased ~~$157.8~~$337.5 million during the six months ended June 30, 2023 and represented ~~45.0%~~61.0% of total loans as of ~~September~~June 30, ~~2017,~~2023. The increase was primarily a result of our continued commercial business development efforts.

~~The~~Total consumer ~~indirect portfolio totaled $857.5~~loans increased $9.9 million to $1.72 billion and represented ~~32.8%~~39.0% of total loans as of ~~September~~June 30, ~~2017.~~2023. During the first ~~nine~~six months of ~~2017,~~2023, we originated ~~$334.9~~$169.0 million in indirect ~~auto~~automobile loans with a mix of approximately ~~42%~~26% new ~~auto~~automobile and ~~58%~~74% used ~~auto.~~automobile loans. During the first ~~nine~~six months of ~~2016,~~2022, we originated ~~$265.2~~$304.6 million in indirect ~~auto~~automobile loans with a mix of approximately ~~43%~~27% new ~~auto~~automobile and ~~57%~~73% used ~~auto. Our origination~~automobile loans. Origination volumes and mix of new and used vehicles financed fluctuate depending on general market conditions.

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 ~~$2.4 million~~$805 thousand and ~~$1.1 million~~$550 thousand as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, 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 ~~$164.6~~$270.9 million and ~~$173.7~~$275.3 million as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively.

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~~- 49 -~~

~~MANAGEMENT’S~~MANAGEMENT'S DISCUSSION AND ANALYSIS

Allowance for ~~Loan~~Credit Losses – Loans

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


	Loan Loss Analysis												Credit Loss – Loans Analysis
	Three months ended September 30,						Nine months ended September 30,						Three months ended June 30,						Six months ended June 30,
	2017			2016			2017			2016			2023			2022			2023			2022
Balance as of beginning of period	$	33,159		$	28,525		$	30,934		$	27,085
Charge-offs:
Allowance for credit losses – loans, beginning of period													$	47,528		$	40,966		$	45,413		$	39,676
Net charge-offs (recoveries):
Commercial business		130			44			1,908			688			33			90			(91	)		53
Commercial mortgage		—			156			10			168			16			(2,018	)		14			(2,019	)
Residential real estate loans		198			78			298			258			13			46			71			41
Residential real estate lines		21			8			64			59			25			(12	)		41			(17	)
Consumer indirect		2,330			2,056			7,343			6,452			300			647			2,138			1,197
Other consumer		230			158			620			434			249			207			552			492
Total net charge-offs (recoveries)														636			(1,040	)		2,725			(253	)
Provision for credit losses – loans														2,944			446			7,148			2,523
Allowance for credit losses – loans, end of period													$	49,836		$	42,452		$	49,836		$	42,452

Total charge-offs		2,909			2,500			10,243			8,059
Recoveries:
Net loan charge-offs (recoveries) to average loans:
Commercial business		86			75			332			244			0.02	%		0.06	%		(0.03	)%		0.02	%
Commercial mortgage		5			29			257			40			0.00	%		(0.57	)%		0.00	%		(0.28	)%
Residential real estate loans		37			17			85			142			0.01	%		0.03	%		0.02	%		0.01	%
Residential real estate lines		2			4			58			11			0.13	%		(0.06	)%		0.11	%		(0.04	)%
Consumer indirect		1,086			1,160			3,259			3,324			0.12	%		0.25	%		0.42	%		0.24	%
Other consumer		79			79			250			282			4.62	%		5.86	%		6.04	%		6.91	%
Total loans														0.06	%		(0.11	)%		0.13	%		(0.01	)%

Total recoveries		1,295			1,364			4,241			4,043

Net charge-offs		1,614			1,136			6,002			4,016
Provision for loan losses		2,802			1,961			9,415			6,281

Balance at end of period	$	34,347		$	29,350		$	34,347		$	29,350

Net loan charge-offs to average loans (annualized)		0.25	%		0.20	%		0.33	%		0.25	%
Allowance for loan losses to total loans		1.31	%		1.29	%		1.31	%		1.29	%
Allowance for loan losses tonon-performing loans		273	%		481	%		273	%		481	%
Allowance for credit losses – loans to total loans														1.13	%		1.13	%		1.13	%		1.13	%
Allowance for credit losses – loans to nonaccrual loans														503	%		648	%		503	%		648	%
Allowance for credit losses – loans to non-performing loans														503	%		648	%		503	%		648	%

Loans 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 estimate. The allowance for ~~loan losses represents the estimated amount of probable~~ credit losses ~~inherent in our loan portfolio. We perform~~for pooled loans estimate is based upon periodic ~~systematic reviews~~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 ~~to estimate probable losses~~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 ~~respective loan portfolios. In addition, we regularly evaluate prevailing economic~~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 ~~business conditions, industry concentrations, changes in the size~~include nonaccrual loans, and ~~characteristics~~other loans deemed appropriate by management, collectively referred to as collateral dependent loans. See Note 5. Loans of the ~~portfolio and other pertinent factors. The process we use~~notes to ~~determine~~ the ~~overall allowance~~consolidated financial statements for ~~loan losses is based~~further details on ~~this analysis. Based on this analysis, we believe the allowance for loan losses is adequate as of September 30, 2017.~~collateral dependent loans.

Assessing the adequacy of the allowance for ~~loan~~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~~risk profile of our loan products and customers.

The adequacy of the allowance for ~~loan~~credit losses – loans is subject to ongoing management review. While management evaluates currently available information in establishing the allowance for ~~loan~~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 examination process, periodically review a financial institution’s allowance for ~~loan losses.~~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.

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

Net charge-offs of ~~$1.6 million~~$636 thousand in the ~~third~~second quarter of ~~2017~~2023 represented ~~0.25%~~0.06% of average loans on an annualized basis compared to ~~$1.1~~net recoveries of $1.0 million, or ~~0.20% in~~0.11% of average loans for the ~~third~~second quarter of ~~2016.~~2022. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, net charge-offs of ~~$6.0~~$2.7 million represented ~~0.33%~~0.13% of average loans, ~~on an annualized basis,~~ compared to ~~$4.0 million~~net recoveries of $253 thousand, or ~~0.25%~~0.01% of average loans for the same period in ~~2016.~~2022. Net charge-offs for the second quarter of 2022 included 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 fourth quarter of 2021. The allowance for ~~loan~~credit losses – loans was ~~$34.3~~$49.8 million at ~~September~~June 30, ~~2017,~~2023, compared with ~~$30.9~~$42.5 million at ~~December 31, 2016.~~June 30, 2022. The ratio of the allowance for ~~loan~~credit losses – loans to total loans was ~~1.31%~~1.13% at ~~September~~both June 30, ~~2017, compared with 1.32% at December 31, 2016.~~2023 and June 30, 2022. The ratio of allowance for ~~loan~~credit losses – loans tonon-performing loans was ~~273%~~503% at ~~September~~June 30, ~~2017,~~2023, compared with ~~489%~~648% at ~~December 31, 2016.~~June 30, 2022.

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
	June 30, 2023					December 31, 2022
			Percentage					Percentage
	Credit		of loans by			Credit		of loans by
	Loss		category to			Loss		category to
	Allowance		total loans			Allowance		total loans
Commercial business	$	13,418		16.4	%	$	12,585		16.4	%
Commercial mortgage		16,826		44.6			14,412		41.5
Residential real estate loans		4,646		13.9			3,301		14.5
Residential real estate lines		710		1.7			608		1.9
Consumer indirect		13,306		22.8			14,238		25.3
Other consumer		930		0.6			269		0.4
Total	$	49,836		100.0	%	$	45,413		100.0	%

~~- 50 -~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Non-Performing Assets and Potential Problem Loans

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


	Non-Performing Assets
	September 30,			December 31,			Non-Performing Assets
	2017			2016			June 30, 2023			December 31, 2022
Nonaccrual loans:
Commercial business	$	7,182		$	2,151		$	415		$	340
Commercial mortgage		2,539			1,025			2,477			2,564
Residential real estate loans		1,263			1,236			3,820			4,071
Residential real estate lines		325			372			208			142
Consumer indirect		1,250			1,526			2,982			3,079
Other consumer		15			7			—			1

Total nonaccrual loans		12,574			6,317			9,902			10,197
Accruing loans or consumer overdrafts 90 days or more delinquent		11			9

Accruing loans 90 days or more delinquent								5			1
Totalnon-performing loans		12,585			6,326			9,907			10,198
Foreclosed assets		281			107			163			19

Totalnon-performing assets	$	12,866		$	6,433		$	10,070		$	10,217

Nonaccrual loans to total loans								0.23	%		0.25	%
Non-performing loans to total loans		0.48	%		0.27	%		0.23	%		0.25	%
Non-performing assets to total assets		0.32	%		0.17	%		0.16	%		0.18	%

~~Changes in the level of nonaccrual loans typically represent increases for loans that reach a specified past due status, offset by reductions for loans that arecharged-off,~~ paid down, sold, transferred to foreclosed real estate, or are no longer classified as nonaccrual because they have returned to accrual status. Activity in nonaccrual loans for the three and nine months ended September 30, 2017 was as follows (in thousands):

   Three months    Nine months
   ended    ended
   September 30,
2017    September 30,
2017
Nonaccrual loans, beginning of period
   $ 12,619    $ 6,317
Additions
   4,608    21,910
Payments
   (1,364 )    (3,927 )
Charge-offs
   (2,747 )    (9,871 )
Returned to accruing status
   (317 )    (1,476 )
Transferred to other real estate or repossessed assets
   (225 )    (379 )




Nonaccrual loans, end of period
   $ 12,574    $ 12,574

Non-performing assets includenon-performing loans and foreclosed assets.Non-performing assets at ~~September~~June 30, ~~2017~~2023 were ~~$12.9~~$10.1 million, ~~an increase~~a decrease of ~~$6.4~~$147 thousand from the $10.2 million ~~from~~balance at December 31, ~~2016.~~2022. The primary component ofnon-performing assets isnon-performing loans, which were ~~$12.6~~$9.9 million or ~~0.48%~~0.23% of total loans at ~~September~~June 30, ~~2017, compared with $6.3~~2023, down from $10.2 million or ~~0.27%~~0.25% of total loans at December 31, ~~2016. The increase was~~2022 primarily due to pay-downs or payments received and applied to principal for the ~~result of the second quarter internal downgrade of two commercial credit relationships with unpaid principal balances totaling $5.6 million.~~non-performing loans.

Approximately ~~$823 thousand,~~$2.4 million, or 7%24%, of the ~~$12.6~~$9.9 million innon-performing loans as of ~~September~~June 30, ~~2017~~2023 were current with respect to payment of principal and interest but were classified asnon-accruing because repayment in full of principal and/or interest was uncertain. ~~Included in nonaccrual loans are troubled debt restructurings (“TDRs”)~~

Table of $164 thousand and $1.4 million at September 30, 2017 and December 31, 2016, respectively. We had one TDR of $650 thousand that was accruing interest as of September 30, 2017, and we had no TDRs that were accruing interest as of December 31, 2016.Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

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. ~~Foreclosed~~We had $163 thousand and $19 thousand of properties representing foreclosed asset holdings ~~represented five properties totaling $281 thousand~~ at ~~September~~June 30, ~~2017~~2023 and ~~four properties totaling $107 thousand at~~ December 31, ~~2016.~~2022, respectively.

~~- 51 -~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

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 ~~$14.0~~$21.7 million and ~~$15.6~~$22.7 million in loans that continued to accrue interest which were classified as substandard as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively.

Contractual Loan Maturity Schedule

The following table summarizes the contractual maturities of our loan portfolio at June 30, 2023. 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	$	180,332	$	285,288	$	9,877	$	244,875	$	720,372
Commercial mortgage		578,544		1,038,945		342,043		1,688		1,961,220
Residential real estate loans		76,587		227,684		283,210		23,718		611,199
Residential real estate lines		1,492		6,693		27,262		40,524		75,971
Consumer indirect (1)		425,594		575,388		—		—		1,000,982
Other consumer		9,111		14,549		4,325		80		28,065
Total loans	$	1,271,660	$	2,148,547	$	666,717	$	310,885	$	4,397,809

Loans maturing after one year:
With a predetermined interest rate
Commercial business			$	93,824	$	4,090	$	15,004	$	112,918
Commercial mortgage				496,503		174,129		451		671,083
Residential real estate loans				186,879		253,503		21,901		462,283
Residential real estate lines				11		36		—		47
Consumer indirect (1)				575,388		—		—		575,388
Other consumer				14,549		4,325		80		18,954
With a floating or adjustable rate
Commercial business				191,464		5,787		229,871		427,122
Commercial mortgage				542,442		167,914		1,237		711,593
Residential real estate loans				40,805		29,707		1,817		72,329
Residential real estate lines				6,682		27,226		40,524		74,432
Consumer indirect (1)				—		—		—		—
Other consumer				—		—		—		—
Total loans maturing after one year			$	2,148,547	$	666,717	$	310,885	$	3,126,149

_________

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

Table of Contents

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, 2017					December 31, 2016					June 30, 2023					December 31, 2022
	Amount		% of Total			Amount		% of Total			Amount		% of Total			Amount		% of Total
Noninterest-bearing demand	$	710,865		21.7	%	$	677,076		22.6	%	$	1,022,788		20.3	%	$	1,139,214		23.1	%
Interest-bearing demand		656,703		20.0			581,436		19.4			823,983		16.4	%		863,822		17.5	%
Savings and money market		1,050,487		32.0			1,034,194		34.5			1,641,014		32.6	%		1,643,516		33.4	%
Time deposits < $250,000		706,373		21.5			602,715		20.2
Time deposits of $250,000 or more		157,080		4.8			99,801		3.3

Time deposits												1,547,076		30.7	%		1,282,872		26.0	%
Total deposits	$	3,281,508		100.0	%	$	2,995,222		100.0	%	$	5,034,861		100.0	%	$	4,929,424		100.0	%

As of June 30, 2023 and December 31, 2022, the aggregate amount of uninsured deposits (deposits in amounts greater than $250 thousand, which is the maximum amount for federal deposit insurance) was $1.64 billion and $1.76 billion, respectively. The portion of our time deposits by account that were in excess of the FDIC insurance limit was $254.0 million and $258.7 million at June 30, 2023 and December 31, 2022, respectively. The maturities of our uninsured time deposits at June 30, 2023 were as follows: $128.1 million in three months or less; $64.7 million between three months and six months; $57.3 million between six months and one year; and $4.0 million over one year. Approximately $926.1 million and $1.05 billion of uninsured deposits were collateralized by government-backed securities as of June 30, 2023 and December 31, 2022, respectively.

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~~June 30, ~~2017,~~2023, total deposits were ~~$3.28~~$5.03 billion, representing an increase of ~~$286.3~~$105.4 million ~~for the year.~~from December 31, 2022. The increase was due to growth in reciprocal, brokered, and non-public deposits, partially offset by seasonally lower public deposits. Time deposits were approximately 31% and 26% of total deposits at ~~September~~June 30, ~~2017~~2023 and ~~24% at~~ December 31, ~~2016.~~2022, respectively.

~~Nonpublic~~Non-public deposits, the largest component of our funding sources, totaled ~~$2.36~~$2.80 billion and ~~$2.19~~$2.77 billion at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively, and represented ~~72% and 73%~~56% of total deposits as of ~~the end of~~ each ~~period, respectively.~~date. 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 cost~~high-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~~liquidity to accommodate the seasonality associated with public deposits. Total public deposits were ~~$926.0~~$992.7 million and ~~$803.6 million~~$1.12 billion at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016,~~2022, respectively, and represented ~~28%~~20% and ~~27%~~23% of total deposits as of ~~the end of~~ each ~~period,~~date, respectively. The ~~increase~~decrease in public deposits ~~during 2017~~as of June 30, 2023 in comparison to December 31, 2022 was due largely to ~~successful business development efforts.~~seasonality.

We ~~had no traditional brokered deposits at September 30, 2017 or December 31, 2016; however, we do~~also participate in ~~the CDARS and ICS~~reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount. ~~CDARS and ICS deposits are considered brokered deposits for regulatory reporting purposes.~~ Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. ~~Reciprocal CDARS~~Prior to the Economic Growth, Regulatory Relief and Consumer Protection Act (“EGRRCPA”) enacted on May 14, 2018, all reciprocal deposits ~~and ICS~~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 ~~$168.0~~$794.3 million ~~and $146.1 million, respectively,~~ at ~~September~~June 30, ~~2017,~~2023, compared to ~~$143.2~~$696.1 million ~~and $152.9, respectively,~~ at December 31, ~~2016.~~2022, as this product has been an attractive option for customers with more than $250 thousand on deposit desiring FDIC insurance. Reciprocal deposits represented 16% and 14% of total deposits as of each date, respectively.

~~Borrowings~~Brokered deposits totaled $445.0 million and $347.2 million at June 30, 2023 and December 31, 2022, respectively, and represented 9% and 7% of total deposits as of each date, respectively.

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

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,
   2017    2016
Short-term borrowings - Short-term FHLB borrowings
   $ 310,800    $ 331,500
Long-term borrowings - Subordinated notes
   39,114    39,061




Total borrowings
   $ 349,914    $ 370,561


	June 30,		December 31,
	2023		2022
Short-term borrowings – FHLB	$	359,000	$	205,000
Short-term borrowings – FRB		15,000		-
Total short-term borrowings		374,000		205,000

Long-term borrowings – FHLB		50,000		-
Long-term borrowings – Subordinated notes, net		74,377		74,222
Total long-term borrowings		124,377		74,222
Total borrowings	$	498,377	$	279,222

~~- 52 -~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

Short-term Borrowings

Short-term Federal Home Loan Bank (“FHLB”) borrowings have original maturities of less ~~then~~than one year and include overnight borrowings which we typically utilize to address short term funding needs as they arise. Short-term FHLB borrowings at ~~September~~June 30, ~~2017~~2023 and December 31, 2022 consisted of ~~$163.3~~$359.0 million ~~in overnight~~and $205.0 million, respectively. In the second quarter of 2023, we borrowed $15.0 million under the Federal Reserve Bank (“FRB”) Bank Term funding program at a rate of 4.8%, which matures on May 8, 2024. Short-term borrowings and ~~$147.5~~brokered deposits have historically been utilized to manage the seasonality of public deposits. As of June 30, 2023, $50.0 million of the short-term borrowings balance at June 30, 2023 is designated as a cash-flow hedge, which became effective in ~~short-term advances. The maximum amount~~April 2022, at a fixed rate of ~~short-term FHLB borrowings outstanding~~0.787%, $30.0 million is designated as a cash-flow hedge, which became effective in January 2023, at ~~anymonth-end~~ ~~during the nine months ended September 30, 2017 was $446.9 million. Short-term FHLB borrowings~~a fixed rate of 3.669%, and $25.0 million is designated as a cash-flow hedge, which became effective in May 2023, at ~~December 31, 2016 consisted~~a fixed rate of ~~$171.5 million in overnight borrowings and $160.0 million in short-term advances.~~3.4615%.

We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements. We had approximately ~~$204.8~~$212.3 million of immediate credit capacity with the FHLB as of ~~September~~June 30, ~~2017.~~2023. We had approximately ~~$606.4~~$592.3 million in secured borrowing capacity at the ~~Federal Reserve Bank (“FRB”)~~FRB discount window, none of which was outstanding at ~~September~~June 30, ~~2017.~~2023. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans. We had ~~approximately $140.0~~$145.0 million of credit available under unsecured federal funds purchased lines with various banks as of ~~September~~both June 30, ~~2017.~~2023 and December 31, 2022. Additionally, we had approximately ~~$227.7~~$258.5 million of unencumbered liquid securities available for ~~pledging.~~pledging at June 30, 2023.

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~~June 30, ~~2017,~~2023, no amounts have been drawn on the line of credit.

Long-term Borrowings

As of March 31, 2023 we had a long-term advance payable to FHLB of $50.0 million. The advance matures on January 20, 2026 and bears interest at a fixed rate of 4.05%. FHLB advances are collateralized by securities from our investment portfolio and certain qualifying loans.

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~~subordinated notes (the “2015 Notes”) in a registered public offering. The ~~Subordinated~~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~~then-current three-month London Interbank Offered Rate (“LIBOR”) plus 3.944%, payable quarterly. With the discontinuance of LIBOR as of June 30, 2023, the interest rate defaults to the fallback language until an alternate method as reasonably selected by the Company. The ~~Subordinated~~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 ~~Subordinated~~2015 Notes qualify as Tier 2 capital for regulatory purposes.

Table of Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

LIQUIDITY AND CAPITAL MANAGEMENT

Liquidity

We continue to actively monitor our liquidity profile and funding concentrations in accordance with our Board approved Liquidity Policy. Management is actively monitoring customer activity by way of commercial and consumer line of credit utilization, as well as deposit flows. As of June 30, 2023, 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 andlines-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, ~~core~~ 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 ~~the~~ other banking institutions, the FHLB, the FRB Discount Window and ~~the FRB.~~newly-established Bank Term Funding Program, and brokered deposit relationships. The primary source of ournon-deposit short-term borrowings is FHLB advances, of which we had ~~$310.8~~$359.0 million outstanding at ~~September~~June 30, ~~2017.~~2023. In addition to this amount, we have additional collateralized wholesale borrowing capacity of approximately ~~$951.2~~$949.6 million as of June 30, 2023 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.

The Parent’s funding requirements consist primarily of dividends to shareholders, debt service, income taxes, operating expenses, funding of ~~nonbank~~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~~June 30, ~~2017.~~2023. The line of credit has a ~~one year~~one-year term and matures in May ~~2018.~~2024. Funds drawn would be used for general corporate purposes and backup liquidity.

Cash and cash equivalents were ~~$97.8~~$180.2 million as of ~~September~~June 30, ~~2017,~~2023, up ~~$26.6~~$49.8 million from ~~$71.3~~$130.5 million as of December 31, ~~2016.~~2022. Net cash provided by operating activities totaled ~~$35.4~~$14.8 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 ~~$294.0~~$279.1 million, which primarily included outflows of ~~$282.5~~$350.1 million for net loan originations, ~~and $4.1~~partially offset by $72.2 million net cash provided from ~~net~~ investment ~~securities transactions.~~securities. Net cash provided by financing activities of ~~$285.2~~$314.1 million was primarily attributed to a ~~$286.3~~$169.0 million net increase in short-term borrowings, $105.4 million net increase in deposits, and ~~$29.7~~a $50.0 million ~~from the“at-the-market”~~ ~~common stock offering, partly~~net increase in long-term borrowings, partially offset by ~~a $20.7 million decrease in short-term borrowings and $10.3~~$9.8 million in dividend payments.

~~- 53 -~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

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 certainoff-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 ~~$366.0~~$425.9 million at ~~September~~June 30, ~~2017,~~2023, an increase of ~~$45.9~~$20.3 million from ~~$320.1~~$405.6 million at December 31, ~~2016.~~2022. Net income for the ~~year and stock issued from the“at-the-market”~~ ~~common stock offering~~six months ended June 30, 2023 increased shareholders’ equity by ~~$22.5~~$26.5 million, ~~and $29.7 million, respectively, which were partially~~ offset by common and preferred stock dividends declared of ~~$10.6~~$10.0 million. Accumulated other comprehensive loss included in shareholders’ equity decreased ~~$3.1~~$3.0 million during the ~~first nine~~six months ~~of 2017~~ended June 30, 2023 due primarily to ~~lower~~a decrease in net unrealized losses 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. ~~The final rules implementing~~As of June 30, 2023, 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 became effective for the Company on January 1, 2015, with full compliance with all~~banks.

Table of ~~the final requirements phased in over a multi-year schedule, to be fullyphased-in~~ ~~by January 1, 2019. As of September 30, 2017, the Company’s capital levels remained characterized as “well-capitalized” under these rules.~~Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

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


	September 30,			December 31,			June 30,			December 31,
	2017			2016			2023			2022
Common shareholders’ equity	$	348,668		$	302,714		$	412,850		$	394,716
Less: Goodwill and other intangible assets, net of deferred tax liabilities		69,324			68,759
Net unrealized (loss) gain on investment securities ⁽¹⁾		(1,129	)		(3,729	)
Net periodic pension & postretirement benefits plan adjustments		(9,709	)		(10,222	)
Less: Goodwill and other intangible assets								70,116			70,643
Net unrealized loss on investment securities (1)								(126,480	)		(128,440	)
Hedging derivative instruments								5,476			4,735
Net periodic pension and postretirement benefits plan adjustments								(13,300	)		(13,588	)
Other		—			—			(168	)		(194	)

Common equity Tier 1 (“CET1”) capital		290,182			247,906
Common Equity Tier 1 (“CET1”) Capital								477,206			461,560
Plus: Preferred stock		17,334			17,340			17,292			17,292
Less: Other		—			—			—			—

Tier 1 Capital		307,516			265,246			494,498			478,852
Plus: Qualifying allowance for loan losses		34,347			30,934
Plus: Qualifying allowance for credit losses								48,499			40,895
Subordinated Notes		39,114			39,061			74,377			74,222

Total regulatory capital	$	380,977		$	335,241		$	617,374		$	593,969

Adjusted average total assets (for leverage capital purposes)	$	3,889,673		$	3,602,377		$	6,119,665		$	5,748,203

Total risk-weighted assets	$	2,877,061		$	2,584,161		$	5,244,124		$	4,896,451

Regulatory Capital Ratios
Tier 1 leverage (Tier 1 capital to adjusted average assets)		7.91	%		7.36	%
CET1 capital (CET1 capital to total risk-weighted assets)		10.09			9.59
Tier 1 capital (Tier 1 capital to total risk-weighted assets)		10.69			10.26
Total risk-based capital (Total regulatory capital to total risk-weighted assets)		13.24			12.97
Tier 1 Leverage (Tier 1 capital to adjusted average assets)								8.08	%		8.33	%
CET1 Capital (CET1 capital to total risk-weighted assets)								9.10	%		9.42	%
Tier 1 Capital (Tier 1 capital to total risk-weighted assets)								9.43	%		9.78	%
Total Risk-Based Capital (Total regulatory capital to total risk-weighted assets)								11.77	%		12.13	%

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

~~- 54 -~~(1) Includes unrealized gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category.

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

We have elected to apply the 2020 Current Expected Credit Losses (“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 has begun to phase into regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, we were 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, also began to phase into regulatory capital at 25% per year commencing January 1, 2022.

~~BCBS~~Basel III Capital Rules

~~The BCBS~~Under the Basel III Capital Rules, ~~include a new common equity~~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 minimum ratio of 4.5%, increase the minimum~~assets; and

•

10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets ratio from 4.0% to 6.0%, require a minimum total capital to risk-weighted assets ratio of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer is also established above the regulatory minimum capital requirements, effectively increasing the minimum required risk-weighted asset ratios. This capital conservation buffer is being~~phased-in~~ ~~as of January 1, 2016 at 0.625% of risk-weighted assets and increases each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019.~~ 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 ~~BCBS~~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 ~~final rules. The final rules also revised the definition and calculation~~Basel III Capital Rules.

Table of ~~Tier 1 capital, total capital, and risk-weighted assets.~~Contents

MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table presents actual and required capital ratios as of ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016~~2022 for the Company and the Bank under the ~~BCBS~~Basel III Capital Rules. ~~The minimum required capital amounts presented include the minimum required capital levels as of those dates based on thephase-in~~ ~~provisions of the BCBS Capital Rules and the minimum required capital levels as of January 1, 2019 when the BCBS Capital Rules have been fullyphased-in.~~ Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, ~~as amended to reflect the changes~~ under the ~~BCBS~~Basel III Capital Rules ~~(in~~(dollars in thousands):


						Minimum Capital					Minimum Capital					Required to be															Required to be
						Required – Basel III					Required – Basel III					Considered Well										Minimum Capital					Considered Well
	Actual					Phase-in Schedule					FullyPhased-in					Capitalized					Actual					Required – Basel III					Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2017
June 30, 2023
Tier 1 leverage:
Company	$	307,516		7.91	%	$	155,587		4.00	%	$	155,587		4.00	%	$	194,484		5.00	%	$	494,498		8.08	%	$	244,787		4.00	%	$	305,983		5.00	%
Bank		330,442		8.51			155,258		4.00			155,258		4.00			194,072		5.00			537,402		8.80			244,304		4.00			305,380		5.00
CET1 capital:
Company		290,182		10.09			165,431		5.75			201,394		7.00			187,009		6.50			477,206		9.10			367,089		7.00			340,868		6.50
Bank		330,442		11.52			164,867		5.75			200,707		7.00			186,371		6.50			537,402		10.27			366,144		7.00			339,991		6.50
Tier 1 capital:
Company		307,516		10.69			208,587		7.25			244,550		8.50			230,165		8.00			494,498		9.43			445,751		8.50			419,350		8.00
Bank		330,442		11.52			207,876		7.25			243,716		8.50			229,380		8.00			537,402		10.27			444,604		8.50			418,451		8.00
Total capital:
Company		380,977		13.24			266,128		9.25			302,092		10.50			287,706		10.00			617,374		11.77			550,633		10.50			524,412		10.00
Bank		364,789		12.72			265,221		9.25			301,061		10.50			286,725		10.00			585,901		11.20			549,217		10.50			523,063		10.00
December 31, 2016
December 31, 2022
Tier 1 leverage:
Company	$	265,246		7.36	%	$	144,095		4.00	%	$	144,095		4.00	%	$	180,119		5.00	%	$	478,852		8.33	%	$	229,928		4.00	%	$	287,410		5.00	%
Bank		284,765		7.92			143,862		4.00			143,862		4.00			179,828		5.00			525,997		9.17			229,434		4.00			286,793		5.00
CET1 capital:
Company		247,906		9.59			132,438		5.13			180,891		7.00			167,970		6.50			461,560		9.42			342,852		7.00			318,363		6.50
Bank		284,765		11.06			132,014		5.13			180,312		7.00			167,432		6.50			525,997		10.77			341,944		7.00			317,520		6.50
Tier 1 capital:
Company		265,246		10.26			171,201		6.63			219,654		8.50			206,733		8.00			478,852		9.78			416,321		8.50			391,831		8.00
Bank		284,765		11.06			170,652		6.63			218,950		8.50			206,070		8.00			525,997		10.77			415,218		8.50			390,794		8.00
Total capital:
Company		335,241		12.97			222,884		8.63			271,337		10.50			258,416		10.00			593,969		12.13			514,278		10.50			489,789		10.00
Bank		315,699		12.26			222,170		8.63			270,467		10.50			257,588		10.00			566,891		11.60			512,917		10.50			488,492		10.00

~~- 55 -~~

~~MANAGEMENT’S DISCUSSION AND ANALYSIS~~

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.

~~Off-Balance~~ ~~Sheet Arrangements~~66

Table of Contents

~~See Note 12, Commitments and Contingencies, in the notes to the accompanying consolidated financial statements for applicable information.~~

~~- 56 -~~

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, ~~2016~~2022 in Item 7A of the Company’s Annual Report on Form10-K for the year ended December 31, ~~2016,~~2022, as filed with the Securities and Exchange Commission on March ~~7, 2017.~~9, 2023. 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, ~~2016~~2022 to ~~September~~June 30, ~~2017.~~2023. 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. ~~At September 30, 2017, the Company was slightly asset sensitive, meaning that net interest income increases in rising rate conditions.~~

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 the12-month period ending ~~September~~June 30, ~~2018~~2024 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
Change in net interest income	$	(3,105	)	$	(21	)	$	(284	)	$	(1,596	)
Estimated change in net interest income													$	(135	)	$	(1,551	)	$	(3,098	)	$	(4,648	)
% Change		(2.59	)%		(0.02	)%		(0.24	)%		(1.33	)%		-0.09	%		-0.99	%		-1.97	%		-2.96	%

In the rising rate scenarios, the static model results indicate that net interest income is modeled to decrease compared to the flat rate scenario over a one-year timeframe. This is a combination of the increasing of the funding curve in shorter maturities driving up the funding costs for wholesale, and reciprocal deposits, as well as an increase in wholesale borrowings which were used to fund seasonal municipal deposit outflow and continued loan growth on a quarter-over-quarter basis. 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 should improve over longer-term timeframes. Model results in the declining rate scenario have both scenarios moving closer to neutral 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 ofnon-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.

Table of Contents

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 fornon-maturity deposits are projected based on historical data (back-testing).

~~- 57 -~~

The analysis that follows presents the estimated EVE resulting from market interest rates prevailing at a given~~quarter-end(“~~ 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~~June 30, ~~2017~~2023 and December 31, ~~2016.~~2022 (dollars in thousands). The analysis additionally presents a measurement of the interest rate sensitivity at ~~September~~June 30, ~~2017~~2023 and December 31, ~~2016.~~2022. EVE amounts are computed under each respective~~Pre-~~ ~~Shock~~ 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, 2017								December 31, 2016								June 30, 2023								December 31, 2022
Rate Shock Scenario:	EVE		Change			Percentage Change			EVE		Change			Percentage Change			EVE		Change			Percentage Change			EVE		Change			Percentage Change
Pre-Shock Scenario	$	565,051							$	532,744							$	765,889							$	848,308
- 100 Basis Points		581,216	$	16,165			2.86	%		543,506	$	10,762			2.02	%		762,452	$	(3,437	)		-0.45	%		851,921	$	3,613			0.43	%
+ 100 Basis Points		536,779		(28,272	)		(5.00	)		507,924		(24,820	)		(4.66	)
+100 Basis Points																		758,664		(7,225	)		-0.94			838,462		(9,846	)		-1.16
+ 200 Basis Points		505,400		(59,651	)		(10.56	)		481,692		(51,052	)		(9.58	)		754,887		(11,002	)		-1.44			832,558		(15,750	)		-1.86
+ 300 Basis Points		468,577		(96,474	)		(17.07	)		445,207		(87,537	)		(16.43	)		750,729		(15,160	)		-1.98			825,826		(22,482	)		-2.65

~~ThePre-Shock~~ ~~Scenario EVE was $565.1 million at September 30, 2017, compared to $532.7 million at December 31, 2016.~~

The increase in thePre-Shock Scenario EVE at ~~September~~June 30, ~~2017 resulted primarily from~~2023 compared to December 31, 2022 is the result of a ~~more favorable~~significant loan growth, as well as an increase in the valuation of~~non-maturity~~ ~~deposits and certain fixed rates assets that reflected alternative funding rate changes used for discounting future cash flows.~~

the deposit book, slightly offset by higher borrowing costs. The ~~+200 basis~~sensitivity in the -100-basis point Rate Shock Scenario to EVE ~~increased from $481.7 million~~decreased at ~~December 31, 2016 to $505.4 million at September~~June 30, ~~2017, reflecting the more favorable valuation ofnon-maturity~~ ~~deposits and certain fixed rate assets. The percentage change in the EVE amount from thePre-Shock~~ Scenario to the +200 basis point Rate Shock Scenario increased from (9.58)% at December 31, 2016 to (10.56)% at September 30, 2017. The increase in sensitivity resulted from a decreased benefit in the valuation of~~non-maturity~~ ~~deposits and certain fixed rate assets in the +200 basis point Rate Shock Scenario EVE as of September 30, 2017,~~2023 compared to December 31, ~~2016.~~2022. This is a result of significantly higher wholesale borrowings to fund municipal deposit outflow, which doesn’t realize the same economic value benefit as core deposits in higher rate environments.

ITEM 4. Controls and Procedures

Evaluation of ~~disclosure controls~~Disclosure Controls and ~~procedures~~Procedures

As of ~~September~~June 30, ~~2017,~~2023, 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 Rule13a-15(b), as adopted by the ~~Securities and Exchange Commission (“SEC”)~~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~~Internal Control over ~~financial reporting~~Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended ~~September~~June 30, ~~2017~~2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

~~- 58 -~~

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

~~The Company has experienced no material developments~~From time to time we are a party to or otherwise involved in ~~its~~ legal proceedings ~~from~~arising out of the ~~disclosure included~~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 ~~Company’s~~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 26, 2022, the lower Court denied the plaintiffs’ motion for partial summary judgment for most of the relief they seek and 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. The Court also denied our motion for partial summary judgment seeking an offset in the form of recoupment reducing any liability that may be imposed against us by the amounts that the borrowers owe for failing to repay their motor vehicle loans, determining that the Court could not enter a judgment on recoupment – which is a set off from liability – without first determining whether there was liability. Also pending with the lower Court is our motion to compel discovery.

On October 7, 2022, the Superior Court of Pennsylvania granted our December 20, 2021 Request for an Interlocutory Appeal of the denial of our motion to dismiss the claims brought by New York borrowers for lack of subject matter jurisdiction and lack of standing. The case is stayed until the appeal is decided by the Superior Court.

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 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 insurer. We can provide no assurances that our insurer will cover the full legal costs, settlements or judgments we incur. If we are unsuccessful in defending ourselves from these claims or if our insurer does not cover the full amount of legal costs we incur, the result may materially adversely affect our business, results of operations and financial condition.

Table of Contents

ITEM 1A. Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form10-K for the fiscal year ended December 31, ~~2016, dated~~2022 and Quarterly Report on Form 10-Q for the quarter ended March ~~7, 2017,~~31, 2023. The risk factors set forth below also identify important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

Regulatory scrutiny of bank provision of BaaS solutions and related technology considerations has recently increased.

We provide BaaS products and services to third parties. The third parties that use these BaaS solutions, and with which we may partner in marketing efforts, are typically considered FinTech companies but may also include other financial intermediaries. Recently, federal bank regulators have increasingly focused on the risks related to bank and FinTech company partnerships, raising concerns regarding risk management, oversight, internal controls, information security, change management, and information technology operational resilience. There have been regulatory enforcement actions against other banks that have not adequately addressed these concerns while growing their BaaS offerings. Accordingly, we could be subject to additional regulatory scrutiny with respect to that portion of our business.

We have implemented a program to provide financial products and services to customers that do business in the cannabis industry and the strict enforcement of federal laws and regulations regarding cannabis could result in our inability to continue to provide financial products and services to these customers and we could have legal action taken against us by the federal government and exposure to additional liabilities and regulatory compliance costs.

Offering financial products and services to the cannabis industry presents a unique set of regulatory risks due to the conflict between state and federal laws. While the possession and sale of recreational marijuana is legal for adults aged 21 and older in New York State, cannabis remains classified as ~~filed~~a Schedule I controlled substance under the federal Controlled Substances Act. In January 2018, the U.S. Department of Justice (the “DOJ”) rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion. The impact of the DOJ’s rescission of the Cole Memo and related memoranda is unclear, but in the future may result in increased enforcement actions against the regulated cannabis industry generally. More recently, the United States Attorney General has indicated that the DOJ under his leadership does not intend to pursue cases against parties who comply with the ~~SEC.~~laws in states which have legalized and are effectively regulating marijuana. However, enforcement policies and practices may be highly variable between political administrations. In addition, federal prosecutors have significant discretion and there can be no assurance that the federal prosecutor for any district in which we or our customers operate will not choose to strictly enforce the federal laws governing cannabis.

Any enforcement action against a cannabis-related business customer of ours could affect our results of operation and financial condition. Additionally, as the possession and use of cannabis remains illegal under the Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services that we provide to such customers and could have legal action taken against us by the federal government, including imprisonment and fines. The Financial Crimes Enforcement Network (“FinCEN”) published guidelines in 2014 for financial institutions servicing state-legal cannabis businesses. These guidelines were issued for the explicit purpose so “that financial institutions can provide services to marijuana-related businesses in a manner consistent with their obligations to know their customers and to report possible criminal activity.” The Bank has and will continue to follow this and other FinCEN guidance in the areas of cannabis banking. However, there can be no assurance that compliance with the FinCEN guidelines will protect us from federal prosecution or other regulatory sanctions. Any change in position or potential action taken against us could result in significant financial damage to us and our stockholders.

Additionally, while we believe our Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) policies and practices for our cannabis banking program are sufficient, the recreational cannabis business is considered high-risk, and our BSA/AML program will be subject to increased regulatory scrutiny. Any real or perceived shortcomings in our BSA/AML program may result in regulatory action against us and may prevent us from undertaking mergers and acquisitions or other expansion activities.

Loss of key employees may disrupt relationships with certain customers.

Our customer relationships are critical to the success of our business, and loss of key employees with significant customer relationships may lead to the loss of business if the customers were to follow that employee to a competitor. While we believe our relationships with key personnel are strong, we cannot guarantee that all of our key personnel will remain with the organization, which could result in the loss of some of our customers and could have a negative impact on our business, financial condition, and results of operations.

Table of Contents
ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
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 second quarter of 2023 were as follows:
Issuer Purchases of Equity Securities

Period

Total Number of Shares Purchased(1)

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

April 1, 2023 - April 30, 2023

105

$
18.15

—

766,447

May 1, 2023 - May 31, 2023

—

—

—

766,447

June 1, 2023 - June 30, 2023

—

—

—

766,447

Total

105

$
18.15

—

766,447

(1)
This column reflects the deemed surrender to us of 105 shares of common stock to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units.
ITEM 5. Other Information
During the second quarter of 2023, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as that term is used in SEC regulations.
71
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:

~~(a)~~

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


Exhibit Number	Description	Location
3.1	Amended and Restated Certificate of Incorporation of the Company	Incorporated by reference to Exhibits 3.1, 3.2 and 3.3 of the Form 10-K for the year ended December 31, 2008, dated March 12, 2009
~~31.1~~ 3.2	Amended and Restated Bylaws of Financial Institutions, Inc.	Incorporated by reference to Exhibit 3.1 of the Form 8-K, dated June 25, 2019
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -– Principal Executive Officer	Filed Herewith
31.2
~~31.2~~	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 -– Principal Financial Officer	Filed Herewith
32
32	Certification pursuant ~~to18~~to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed Herewith
101.INS
~~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
~~101.SCH~~	Inline XBRL Taxonomy Extension Schema Document
101.CAL
~~101.CAL~~	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
~~101.LAB~~	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
~~101.PRE~~	Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
~~101.DEF~~	Inline XBRL Taxonomy Extension Definition Linkbase Document
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

~~- 59 -~~

Table of Contents~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the ~~registrant~~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		, August 7, 2023
Martin K. Birmingham
President and Chief Executive Officer
(Principal Executive Officer)


	/s/ Sonia M. Dumbleton	*~~/s/ Martin K. Birmingham~~*	, ~~November 3, 2017~~	August 7, 2023
Sonia M. Dumbleton		~~Martin K. Birmingham~~
		~~President and Chief Executive Officer~~
		~~(Principal Executive Officer)~~

		*~~/s/ Kevin B. Klotzbach~~*	~~, November 3, 2017~~
		~~Kevin B. Klotzbach~~
		~~Executive Vice President, Chief Financial Officer and Treasurer~~
		~~(Principal Financial Officer)~~

		*~~/s/ Michael D. Grover~~*	~~, November 3, 2017~~
		~~Michael D. Grover~~
		Senior Vice President and ~~Chief Accounting Officer~~Controller
		(Principal Accounting Officer)

~~- 60 -~~


	Nine months ended September 30,
*(Dollars in thousands)*	2017			2016
Cash flows from operating activities:
Net income	$	22,468		$	23,238
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,613			4,480
Net amortization of premiums on securities		2,473			2,325
Provision for loan losses		9,415			6,281
Share-based compensation		885			597
Deferred income tax expense (benefit)		(527	)		(523	)
Proceeds from sale of loans held for sale		9,439			9,246
Originations of loans held for sale		(10,526	)		(8,458	)
Income from company owned life insurance		(1,367	)		(2,340	)
Net gain on sale of loans held for sale		(270	)		(202	)
Net gain on investment securities		(600	)		(2,426	)
Goodwill impairment		1,575			—
Net gain on other assets		(25	)		(285	)
(Increase) decrease in other assets		(874	)		3,548
(Decrease) increase in other liabilities		(1,266	)		1,943

Net cash provided by operating activities		35,413			37,424

Cash flows from investing activities:
Purchases of available for sale securities		(86,434	)		(192,140	)
Purchases of held to maturity securities		(70,610	)		(90,602	)
Proceeds from principal payments, maturities and calls on available for sale securities		29,291			107,418
Proceeds from principal payments, maturities and calls on held to maturity securities		74,205			48,424
Proceeds from sales of securities available for sale		49,424			85,772
Net loan originations		(282,455	)		(204,691	)
Proceeds from company owned life insurance, net of purchases		(7	)		2,443
Proceeds from sales of other assets		189			602
Purchases of premises and equipment		(6,966	)		(4,242	)
Cash consideration paid for acquisition, net of cash acquired		(676	)		(868	)

Net cash used in investing activities		(294,039	)		(247,884	)

Cash flows from financing activities:
Net increase in deposits		286,286			332,826
Net decrease in short-term borrowings		(20,700	)		(62,900	)
Proceeds from issuance of common stock		29,664			—
Repurchase of preferred stock		(6	)		—
Purchase of common stock for treasury		(148	)		—
Proceeds from stock options exercised		413			814
Excess tax benefit on share-based compensation, net		—			10
Cash dividends paid to common and preferred shareholders		(10,322	)		(9,690	)

Net cash provided by financing activities		285,187			261,060

Net increase in cash and cash equivalents		26,561			50,600
Cash and cash equivalents, beginning of period		71,277			60,121

Cash and cash equivalents, end of period	$	97,838		$	110,721

Supplemental information:
Cash paid for interest	$	10,189		$	8,144
Cash paid for income taxes, net of refunds received		8,677			4,708
Noncash investing and financing activities:
Real estate and other assets acquired in settlement of loans		379			443
Accrued and declared unpaid dividends		3,637			3,257
Increase in net unsettled security purchases		75			2,290
Common stock issued for acquisition		—			8,100
Assets acquired and liabilities assumed in business combinations:
Fair value of assets acquired		812			4,848
Fair value of liabilities assumed		44			1,845


Cash	$	50
Identified intangible assets		3,928
Premises and equipment, accounts receivable and other assets		870
Deferred tax liability		(1,797	)
Other liabilities		(48	)

Net assets acquired	$	3,003


	Amount allocated		Useful life (in years)
Goodwill	$	6,015		n/a
Other intangible assets - customer relationships		3,900		20
Other intangible assets - other		28		5

	$	9,943


Stock options	—	—	—	—
Restricted stock awards	—	—	2	3

Total	—	—	2	3


	Recorded Investment⁽¹⁾		Unpaid Principal Balance⁽¹⁾		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2017
With no related allowance recorded:
Commercial business	$	991	$	1,467	$	—	$	690	$	—
Commercial mortgage		604		604		—		629		—

		1,595		2,071		—		1,319		—
With an allowance recorded:
Commercial business		6,339		6,339		2,678		4,342		—
Commercial mortgage		2,438		2,438		174		1,200		—

		8,777		8,777		2,852		5,542		—

	$	10,372	$	10,848	$	2,852	$	6,861	$	—

December 31, 2016
With no related allowance recorded:
Commercial business	$	645	$	1,044	$	—	$	1,338	$	—
Commercial mortgage		673		882		—		902		—

		1,318		1,926		—		2,240		—
With an allowance recorded:
Commercial business		1,506		1,506		694		1,467		—
Commercial mortgage		352		352		124		461		—

		1,858		1,858		818		1,928		—

	$	3,176	$	3,784	$	818	$	4,168	$	—


(in thousands)	Banking		Non-Banking			Total
Balance, December 31, 2016	$	48,536	$	17,881		$	66,417
Impairment		—		(1,575	)		(1,575	)
Acquisition		—		998			998

Balance, September 30, 2017	$	48,536	$	17,304		$	65,840


2017 (remainder of year)	$	294
2018		1,112
2019		1,011
2020		909
2021		803
2022		725


			Weighted
			Average
	Number of		Per Share
	Underlying		Grant Date
	Shares		Fair Value
RSUs		25,331	$	32.22
PSUs		12,531		33.07


				Weighted
				Average
				Market
	Number of			Price at
	Shares			Grant Date
Outstanding at beginning of year		114,565		$	19.90
Granted		49,739			31.40
Vested		(25,053	)		23.84
Forfeited		(11,359	)		12.81

Outstanding at end of period		127,892		$	24.23


	Banking			Non-Banking⁽²⁾			Holding Company and Other			Consolidated Totals
Three months ended September 30, 2016
Net interest income (expense)	$	26,667		$	—		$	(617	)	$	26,050
Provision for loan losses		(1,961	)		—			—			(1,961	)
Noninterest income		6,579			2,086			(126	)		8,539
Noninterest expense		(18,148	)		(1,759	)		(711	)		(20,618	)

Income (loss) before income taxes		13,137			327			(1,454	)		12,010
Income tax (expense) benefit		(3,987	)		(129	)		575			(3,541	)

Net income (loss)	$	9,150		$	198		$	(879	)	$	8,469

Nine months ended September 30, 2016
Net interest income (expense)	$	77,820		$	—		$	(1,852	)	$	75,968
Provision for loan losses		(6,281	)		—			—			(6,281	)
Noninterest income		20,386			6,620			(334	)		26,672
Noninterest expense		(54,547	)		(5,329	)		(4,080	)		(63,956	)

Income (loss) before income taxes		37,378			1,291			(6,266	)		32,403
Income tax (expense) benefit		(10,977	)		(505	)		2,317			(9,165	)

Net income (loss)	$	26,401		$	786		$	(3,949	)	$	23,238


	Three months ended September 30,
	2017								2016
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	—		$	—		—	%	$	1		$	—		—	%
Investment securities⁽¹⁾:
Taxable		803,814			4,501		2.24			773,037			4,276		2.21
Tax-exempt⁽²⁾		292,560			2,216		3.03			295,829			2,254		3.05

Total investment securities		1,096,374			6,717		2.45			1,068,866			6,530		2.44
Loans:
Commercial business		405,308			4,586		4.49			352,696			3,691		4.16
Commercial mortgage		752,634			8,876		4.68			625,003			7,261		4.62
Residential real estate loans		438,436			4,080		3.72			417,854			3,987		3.82
Residential real estate lines		117,597			1,241		4.19			123,312			1,165		3.76
Consumer indirect		841,081			8,145		3.84			711,948			6,987		3.90
Other consumer		17,184			527		12.17			17,548			528		11.97

Total loans		2,572,240			27,455		4.24			2,248,361			23,619		4.18

Total interest-earning assets		3,668,614			34,172		3.71			3,317,228			30,149		3.62

Allowance for loan losses		(33,740	)							(29,314	)
Other noninterest-earning assets		316,128								305,758

Total assets	$	3,951,002							$	3,593,672

Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	612,401		$	224		0.14	%	$	547,545		$	206		0.15	%
Savings and money market		998,769			386		0.15			981,207			335		0.14
Time deposits		855,371			2,479		1.15			722,098			1,651		0.91

Total interest-bearing deposits		2,466,541			3,089		0.50			2,250,850			2,192		0.39
Short-term borrowings		385,512			1,251		1.29			315,122			500		0.63
Long-term borrowings		39,103			618		6.32			39,032			618		6.33

Total borrowings		424,615			1,869		1.75			354,154			1,118		1.26

Total interest-bearing liabilities		2,891,156			4,958		0.68			2,605,004			3,310		0.51

Noninterest-bearing demand deposits		679,303								638,417
Other noninterest-bearing liabilities		22,226								24,387
Shareholders’ equity		358,317								325,864

Total liabilities and shareholders’ equity	$	3,951,002							$	3,593,672

Net interest income(tax-equivalent)				$	29,214							$	26,839

Net interest spread							3.03	%							3.11	%

Net earning assets	$	777,458							$	712,224

Net interest margin(tax-equivalent)							3.17	%							3.23	%

Ratio of average interest-earning assets to average interest-bearing liabilities							126.89	%							127.34	%


	Nine months ended September 30,
	2017								2016
	Average					Average			Average					Average
	Balance			Interest		Rate			Balance			Interest		Rate
Interest-earning assets:
Federal funds sold and interest-earning deposits	$	8,869		$	67		1.02	%	$	129		$	1		0.61	%
Investment securities⁽¹⁾:
Taxable		790,407			13,287		2.24			763,796			12,800		2.23
Tax-exempt⁽²⁾		300,318			6,844		3.04			293,476			6,763		3.07

Total investment securities		1,090,725			20,131		2.46			1,057,272			19,563		2.47
Loans:
Commercial business		385,025			12,522		4.35			332,985			10,396		4.17
Commercial mortgage		710,690			24,761		4.66			604,577			20,846		4.61
Residential real estate loans		432,838			12,157		3.74			397,327			11,669		3.92
Residential real estate lines		119,493			3,611		4.04			125,273			3,555		3.79
Consumer indirect		804,051			22,962		3.82			691,343			20,009		3.87
Other consumer		16,941			1,527		12.05			17,678			1,569		11.85

Total loans		2,469,038			77,540		4.20			2,169,183			68,044		4.19

Total interest-earning assets		3,568,632			97,738		3.66			3,226,584			87,608		3.62

Allowance for loan losses		(32,325	)							(28,423	)
Other noninterest-earning assets		315,283								304,467

Total assets	$	3,851,590							$	3,502,628

Interest-bearing liabilities:
Deposits:
Interest-bearing demand	$	632,596		$	667		0.14	%	$	566,419		$	617		0.15	%
Savings and money market		1,027,927			1,073		0.14			988,224			989		0.13
Time deposits		780,374			6,080		1.04			693,153			4,631		0.89

Total interest-bearing deposits		2,440,897			7,820		0.43			2,247,796			6,237		0.37
Short-term borrowings		345,637			2,815		1.09			250,329			1,183		0.63
Long-term borrowings		39,085			1,853		6.32			39,015			1,853		6.33

Total borrowings		384,722			4,668		1.62			289,344			3,036		1.40

Total interest-bearing liabilities		2,825,619			12,488		0.59			2,537,140			9,273		0.49

Noninterest-bearing demand deposits		665,221								626,018
Other noninterest-bearing liabilities		20,954								22,032
Shareholders’ equity		339,796								317,438

Total liabilities and shareholders’ equity	$	3,851,590							$	3,502,628

Net interest income(tax-equivalent)				$	85,250							$	78,335

Net interest spread							3.07	%							3.13	%

Net earning assets	$	743,013							$	689,444

Net interest margin(tax-equivalent)							3.19	%							3.24	%

Ratio of average interest-earning assets to average interest-bearing liabilities							126.30	%							127.17	%


	Three months			Nine months
	ended			ended
	September 30, 2017			September 30, 2017
Nonaccrual loans, beginning of period	$	12,619		$	6,317
Additions		4,608			21,910
Payments		(1,364	)		(3,927	)
Charge-offs		(2,747	)		(9,871	)
Returned to accruing status		(317	)		(1,476	)
Transferred to other real estate or repossessed assets		(225	)		(379	)

Nonaccrual loans, end of period	$	12,574		$	12,574


Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased(1)		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
April 1, 2023 - April 30, 2023		105	$	18.15		—		766,447
May 1, 2023 - May 31, 2023		—		—		—		766,447
June 1, 2023 - June 30, 2023		—		—		—		766,447
Total		105	$	18.15		—		766,447

/s/ W. Jack Plants II

~~FINANCIAL INSTITUTIONS, INC.~~

, August 7, 2023

W. Jack Plants II

Executive Vice President and Chief Financial Officer and Treasurer

(Principal Financial Officer)