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FISI Financial Institutions

Filed: 10 May 21, 4:16pm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

For the quarterly period ended              March 31, 2021            

or

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

For the transition period from ________ to ________

Commission File Number:     000-26481     

 

 

Financial Institutions, Inc.

(Exact name of registrant as specified in its charter)

 

 

New York

  

16-0816610

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

 

220 LIBERTY STREET, WARSAW, New York

  

14569

(Address of principal executive offices)

  

(Zip Code)

 

(585) 786-1100

(Registrant’s telephone number, including area code)

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, par value $0.01 per share

FISI

Nasdaq Global Select Market

 

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

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

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

    

Smaller reporting company

 

 

 

 

 

 

Emerging growth company

 

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

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

The registrant had 15,828,899 shares of Common Stock, $0.01 par value, outstanding as of May 1, 2021.

 

 

 


Table of Contents

 

 

FINANCIAL INSTITUTIONS, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2021

TABLE OF CONTENTS

 

 

 

PAGE

PART I.

 

FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition (Unaudited) - at March 31, 2021 and December 31, 2020

 

3

 

 

 

 

 

 

 

Consolidated Statements of Income (Unaudited) - Three months ended March 31, 2021 and 2020

 

4

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited) - Three months ended March 31, 2021 and 2020

 

5

 

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three months ended March 31, 2021 and 2020

 

6

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 2021 and 2020

 

8

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

9

 

 

 

 

 

ITEM 2.

 

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

 

40

 

 

 

 

 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

58

 

 

 

 

 

ITEM 4.

 

Controls and Procedures

 

59

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

 

Legal Proceedings

 

60

 

 

 

 

 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

 

 

 

 

 

ITEM 6.

 

Exhibits

 

61

 

 

 

 

 

 

 

Signatures

 

62

 

 

 

- 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)

 

March 31,

2021

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

344,790

 

 

$

93,878

 

Securities available for sale, at fair value

 

 

753,489

 

 

 

628,059

 

Securities held to maturity, at amortized cost (net of allowance for credit losses of $7 and $7, respectively) (fair value of $264,329 and $282,035, respectively)

 

 

256,127

 

 

 

271,966

 

Loans held for sale

 

 

5,685

 

 

 

4,305

 

Loans (net of allowance for credit losses of $49,828 and $52,420, respectively)

 

 

3,604,558

 

 

 

3,542,718

 

Company owned life insurance

 

 

101,564

 

 

 

100,895

 

Premises and equipment, net

 

 

39,820

 

 

 

40,610

 

Goodwill and other intangible assets, net

 

 

74,528

 

 

 

73,789

 

Other assets

 

 

148,495

 

 

 

156,086

 

Total assets

 

$

5,329,056

 

 

$

4,912,306

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

1,099,608

 

 

$

1,018,549

 

Interest-bearing demand

 

 

873,390

 

 

 

731,885

 

Savings and money market

 

 

1,826,621

 

 

 

1,642,340

 

Time deposits

 

 

916,395

 

 

 

885,593

 

Total deposits

 

 

4,716,014

 

 

 

4,278,367

 

Short-term borrowings

 

 

 

 

 

5,300

 

Long-term borrowings, net of issuance costs of $1,321 and $1,377, respectively

 

 

73,679

 

 

 

73,623

 

Other liabilities

 

 

73,079

 

 

 

86,653

 

Total liabilities

 

 

4,862,772

 

 

 

4,443,943

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

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;

171,786 and  171,847 shares issued, respectively

 

 

17,179

 

 

 

17,185

 

Total preferred equity

 

 

17,322

 

 

 

17,328

 

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

 

 

161

 

 

 

161

 

Additional paid-in capital

 

 

124,891

 

 

 

125,118

 

Retained earnings

 

 

340,923

 

 

 

324,850

 

Accumulated other comprehensive (loss) income

 

 

(10,572

)

 

 

2,128

 

Treasury stock, at cost – 270,657 and 57,630 shares, respectively

 

 

(6,441

)

 

 

(1,222

)

Total shareholders’ equity

 

 

466,284

 

 

 

468,363

 

Total liabilities and shareholders’ equity

 

$

5,329,056

 

 

$

4,912,306

 

 

See accompanying notes to the consolidated financial statements.

 

- 3 -


Table of Contents

 

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

 

(In thousands, except per share amounts)

 

Three months ended

March 31,

 

 

 

2021

 

 

2020

 

Interest income:

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

37,059

 

 

$

36,860

 

Interest and dividends on investment securities

 

 

4,187

 

 

 

4,582

 

Other interest income

 

 

27

 

 

 

211

 

Total interest income

 

 

41,273

 

 

 

41,653

 

Interest expense:

 

 

 

 

 

 

 

 

Deposits

 

 

2,235

 

 

 

7,019

 

Short-term borrowings

 

 

119

 

 

 

892

 

Long-term borrowings

 

 

1,062

 

 

 

618

 

Total interest expense

 

 

3,416

 

 

 

8,529

 

Net interest income

 

 

37,857

 

 

 

33,124

 

Provision (benefit) for credit losses

 

 

(1,981

)

 

 

13,915

 

Net interest income after provision for credit losses

 

 

39,838

 

 

 

19,209

 

Noninterest income:

 

 

 

 

 

 

 

 

Service charges on deposits

 

 

1,292

 

 

 

1,587

 

Insurance income

 

 

1,396

 

 

 

1,349

 

Card interchange income

 

 

1,958

 

 

 

1,602

 

Investment advisory

 

 

2,772

 

 

 

2,246

 

Company owned life insurance

 

 

657

 

 

 

465

 

Investments in limited partnerships

 

 

855

 

 

 

213

 

Loan servicing

 

 

97

 

 

 

7

 

Income from derivative instruments, net

 

 

1,875

 

 

 

746

 

Net gain on sale of loans held for sale

 

 

1,078

 

 

 

252

 

Net gain on investment securities

 

 

74

 

 

 

221

 

Net (loss) gain on other assets

 

 

(5

)

 

 

64

 

Loss on tax credit investments

 

 

(85

)

 

 

(40

)

Other

 

 

995

 

 

 

1,198

 

Total noninterest income

 

 

12,959

 

 

 

9,910

 

Noninterest expense:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

14,465

 

 

 

15,014

 

Occupancy and equipment

 

 

3,382

 

 

 

3,756

 

Professional services

 

 

1,895

 

 

 

2,152

 

Computer and data processing

 

 

3,121

 

 

 

2,673

 

Supplies and postage

 

 

484

 

 

 

553

 

FDIC assessments

 

 

765

 

 

 

372

 

Advertising and promotions

 

 

324

 

 

 

555

 

Amortization of intangibles

 

 

271

 

 

 

294

 

Other

 

 

2,033

 

 

 

2,301

 

Total noninterest expense

 

 

26,740

 

 

 

27,670

 

Income before income taxes

 

 

26,057

 

 

 

1,449

 

Income tax expense

 

 

5,347

 

 

 

322

 

Net income

 

$

20,710

 

 

$

1,127

 

Preferred stock dividends

 

 

365

 

 

 

365

 

Net income available to common shareholders

 

$

20,345

 

 

$

762

 

Earnings per common share (Note 3):

 

 

 

 

 

 

 

 

Basic

 

$

1.28

 

 

$

0.05

 

Diluted

 

$

1.27

 

 

$

0.05

 

Cash dividends declared per common share

 

$

0.27

 

 

$

0.26

 

 

See accompanying notes to the consolidated financial statements.

- 4 -


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

 

(Dollars in thousands)

 

Three months ended

March 31,

 

 

 

2021

 

 

2020

 

Net income

 

$

20,710

 

 

$

1,127

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities

 

 

(14,402

)

 

 

12,106

 

Hedging derivative instruments

 

 

1,564

 

 

 

91

 

Pension and post-retirement obligations

 

 

138

 

 

 

234

 

Total other comprehensive (loss) income, net of tax

 

 

(12,700

)

 

 

12,431

 

Comprehensive income

 

$

8,010

 

 

$

13,558

 

 

See accompanying notes to the consolidated financial statements.

- 5 -


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

Three months ended March 31, 2021 and 2020

 

(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, 2020

 

$

17,328

 

 

$

161

 

 

$

125,118

 

 

$

324,850

 

 

$

2,128

 

 

$

(1,222

)

 

$

468,363

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

20,710

 

 

 

 

 

 

 

 

 

20,710

 

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,700

)

 

 

 

 

 

(12,700

)

Common stock issued

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

298

 

 

 

301

 

Purchases of common stock for treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,963

)

 

 

(5,963

)

Purchases of 8.48% preferred stock

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

216

 

 

 

 

 

 

 

 

 

 

 

 

216

 

Restricted stock units released

 

 

 

 

 

 

 

 

(446

)

 

 

 

 

 

 

 

 

446

 

 

 

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per

   share

 

 

 

 

 

 

 

 

 

 

 

(364

)

 

 

 

 

 

 

 

 

(364

)

Common-$0.27 per share

 

 

 

 

 

 

 

 

 

 

 

(4,272

)

 

 

 

 

 

 

 

 

(4,272

)

Balance at March 31, 2021

 

$

17,322

 

 

$

161

 

 

$

124,891

 

 

$

340,923

 

 

$

(10,572

)

 

$

(6,441

)

 

$

466,284

 

 

Continued on next page

 

See accompanying notes to the consolidated financial statements.

- 6 -


Table of Contents

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

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

Three months ended March 31, 2021 and 2020

 

(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, 2019

 

$

17,328

 

 

$

161

 

 

$

124,582

 

 

$

313,364

 

 

$

(14,513

)

 

$

(1,975

)

 

$

438,947

 

Cumulative-effect adjustment

 

 

 

 

 

 

 

 

 

 

 

(8,719

)

 

 

 

 

 

 

 

 

(8,719

)

Balance at January 1, 2020

 

$

17,328

 

 

$

161

 

 

$

124,582

 

 

$

304,645

 

 

$

(14,513

)

 

$

(1,975

)

 

$

430,228

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

1,127

 

 

 

 

 

 

 

 

 

1,127

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,431

 

 

 

 

 

 

12,431

 

Purchases of common stock for treasury

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(196

)

 

 

(196

)

Share-based compensation plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

332

 

 

 

 

 

 

 

 

 

 

 

 

332

 

Restricted stock units released

 

 

 

 

 

 

 

 

(469

)

 

 

 

 

 

 

 

 

469

 

 

 

 

Cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Series A 3% Preferred-$0.75 per share

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Series B-1 8.48% Preferred-$2.12 per

   share

 

 

 

 

 

 

 

 

 

 

 

(364

)

 

 

 

 

 

 

 

 

(364

)

Common-$0.26 per share

 

 

 

 

 

 

 

 

 

 

 

(4,164

)

 

 

 

 

 

 

 

 

(4,164

)

Balance at March 31, 2020

 

$

17,328

 

 

$

161

 

 

$

124,445

 

 

$

301,243

 

 

$

(2,082

)

 

$

(1,702

)

 

$

439,393

 

 

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)

 

Three months ended

March 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

20,710

 

 

$

1,127

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,950

 

 

 

1,973

 

Net amortization of premiums on securities

 

 

1,206

 

 

 

562

 

(Benefit) provision for credit losses

 

 

(1,981

)

 

 

13,915

 

Share-based compensation

 

 

216

 

 

 

332

 

Deferred income tax expense (benefit)

 

 

1,658

 

 

 

(276

)

Proceeds from sale of loans held for sale

 

 

21,314

 

 

 

9,934

 

Originations of loans held for sale

 

 

(21,616

)

 

 

(9,280

)

Income on company owned life insurance

 

 

(657

)

 

 

(465

)

Net gain on sale of loans held for sale

 

 

(1,078

)

 

 

(252

)

Net gain on investment securities

 

 

(74

)

 

 

(221

)

Net loss (gain) on other assets

 

 

5

 

 

 

(64

)

Noncash restructuring charges against assets

 

 

6

 

 

 

 

Decrease (increase) in other assets

 

 

12,818

 

 

 

(31,708

)

(Decrease) increase in other liabilities

 

 

(14,172

)

 

 

18,745

 

Net cash provided by operating activities

 

 

20,305

 

 

 

4,322

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of available for sale securities

 

 

(204,695

)

 

 

(44,812

)

Purchases of held to maturity securities

 

 

(1,265

)

 

 

(1,364

)

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

 

 

32,416

 

 

 

30,947

 

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

 

 

16,783

 

 

 

13,827

 

Proceeds from sales of securities available for sale

 

 

26,675

 

 

 

3,157

 

Net loan originations

 

 

(60,135

)

 

 

(27,029

)

Purchases of company owned life insurance, net of proceeds received

 

 

(12

)

 

 

(7

)

Proceeds from sales of other assets

 

 

 

 

 

427

 

Purchases of premises and equipment

 

 

(290

)

 

 

(1,196

)

Cash consideration paid for acquisition, net of cash acquired

 

 

(713

)

 

 

 

Net cash used in investing activities

 

 

(191,236

)

 

 

(26,050

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

437,647

 

 

 

231,510

 

Net decrease in short-term borrowings

 

 

(5,300

)

 

 

(166,000

)

Repurchase of preferred stock

 

 

(6

)

 

 

 

Purchases of common stock for treasury

 

 

(5,963

)

 

 

(196

)

Cash dividends paid to common and preferred shareholders

 

 

(4,535

)

 

 

(4,365

)

Net cash provided by financing activities

 

 

421,843

 

 

 

60,949

 

Net increase in cash and cash equivalents

 

 

250,912

 

 

 

39,221

 

Cash and cash equivalents, beginning of period

 

 

93,878

 

 

 

112,947

 

Cash and cash equivalents, end of period

 

$

344,790

 

 

$

152,168

 

 

See accompanying notes to the consolidated financial statements.

 

- 8 -


Table of Contents

 

 

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1.)

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Financial Institutions, Inc. (the “Company”) is a financial holding company organized in 1931 under the laws of New York State (“New York”). The Company provides diversified financial services through its subsidiaries, Five Star Bank, SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York chartered banking subsidiary, Five Star Bank (the “Bank”). The Bank also has indirect lending network relationships with franchised automobile dealers in the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies conform to U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in conformity with GAAP have been condensed or omitted pursuant to such rules and regulations. However, in the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal and recurring nature necessary for a fair presentation of the consolidated statements of financial condition, income, comprehensive income, changes in shareholders’ equity and cash flows for the periods indicated and contain adequate disclosure to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the Company’s 2020 Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year.

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

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

 

Accounting for Loan Modifications - The CARES Act provided that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

 

Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. On December 27, 2020, the Consolidated Appropriations Act, 2021 provided approximately $284 billion for PPP loans in an additional round of funding under the program and extended the PPP through March 31, 2021. This additional round of PPP loan funding is authorized for first-time borrowers and for second draws by certain borrowers who have previously received PPP loans.  On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extends the program to May 31, 2021.

 

Mortgage Forbearance - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance. This relief has been extended by executive order through at least June 30, 2021.

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

 

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(1.)

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

 

Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

 

Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

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

As part of the first round of PPP loans we have helped more than 1,700 customers obtain more than $270 million in loans as of December 31, 2020. Of those loans, we have helped customers complete the forgiveness process for approximately $87 million of loans in the first three months of 2021. Also, during the first three months of 2021, we have helped customers obtain approximately $96 million of new PPP loans under the second round of the PPP. Additionally, approximately 4% of our commercial loan and mortgage customers, 1% of our residential real estate loans and lines customers and less than 1% of our indirect loans customers have active payment deferrals, in accordance with the previously noted loan modifications under the CARES Act or agencies guidelines.

 

Reclassifications

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

Use of Estimates

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

Cash Flow Reporting

Supplemental cash flow information is summarized as follows for the three months ended March 31 (in thousands):

 

 

 

2021

 

 

2020

 

Supplemental information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,173

 

 

$

8,418

 

Cash paid for income taxes

 

 

1,500

 

 

 

1,000

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Real estate and other assets acquired in settlement of loans

 

 

 

 

 

646

 

Accrued and declared unpaid dividends

 

 

4,637

 

 

 

4,259

 

Common stock issued for acquisition

 

 

301

 

 

 

 

Assets acquired and liabilities assumed in business combinations:

 

 

 

 

 

 

 

 

Fair value of assets acquired

 

 

449

 

 

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(1.)

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

Recent Accounting Pronouncements

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

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

In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. ASU 2021-01 was effective upon issuance and applies through December 31, 2022. The Company is in the process of determining which optional expedients to elect, if any, as well as the timing and application of those elections. At this time, the Company does not expect any elections to have a significant impact on its financial statements.

 

(2.)

BUSINESS COMBINATIONS

2021 Activity – Landmark Group Acquisition

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

2020 Activity – No Activity

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(3.)

RESTRUCTURING CHARGES

On July 17, 2020, the Bank announced management’s decision to adapt to a full-service branch model to streamline retail branches to better align with shifting customer needs and preferences. The transformation resulted in 6 branch closures and a reduction in staffing. The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conducted in partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping service areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and facilitate the long-term sustainability of current and future branches. The announced consolidations represented about 10 percent of the branch network and impacted approximately 6 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 1 additional branch that closed in January 2021. This location was not included in the branch consolidations announced in July, as alternative options were being considered and consolidation was not possible given its significant distance from other Bank branches.

The Company incurred total pre-tax expense related to the branch closures of approximately $1.7 million, including approximately $0.2 million in employee severance, $0.5 million in lease termination costs and $1.0 million in valuation adjustments on branch facilities. The Company recognized all of these expenses during 2020. The Company expects $0.9 million of total costs will result in future cash expenditures. The Company anticipates annual expense savings of approximately $2.7 million as a result of these branch closures.

The Company incurred 0 restructuring charges during the three months ended March 31, 2021 and 2020.

 

 

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

 

 

 

Three months ended

March 31,

 

 

 

2021

 

 

2020

 

Balance at beginning of period

 

$

1,245

 

 

$

 

Restructuring charges

 

 

 

 

 

 

Cash payments

 

 

(77

)

 

 

 

Charges against assets

 

 

(6

)

 

 

 

Balance at end of period

 

$

1,162

 

 

$

 

 

In contemplation of the transactions noted above, certain long-lived assets have met the held for sale criteria as of March 31, 2021. The Company reclassified $867 thousand from premises and equipment, net to other assets on the consolidated statement of financial condition as of March 31, 2021. NaN long-lived assets were reclassified as held for sale as of December 31, 2020.

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4.)

EARNINGS PER COMMON SHARE (“EPS”)

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

 

 

 

Three months ended

March 31,

 

 

 

2021

 

 

2020

 

Net income available to common shareholders

 

$

20,345

 

 

$

762

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

Total shares issued

 

 

16,100

 

 

 

16,100

 

Unvested restricted stock awards

 

 

(6

)

 

 

(4

)

Treasury shares

 

 

(205

)

 

 

(90

)

Total basic weighted average common shares outstanding

 

 

15,889

 

 

 

16,006

 

Incremental shares from assumed:

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

 

 

 

 

Vesting of restricted stock awards

 

 

83

 

 

 

63

 

Total diluted weighted average common shares outstanding

 

 

15,972

 

 

 

16,069

 

Basic earnings per common share

 

$

1.28

 

 

$

0.05

 

Diluted earnings per common share

 

$

1.27

 

 

$

0.05

 

 

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

 

Stock options

 

 

 

 

 

 

Restricted stock awards

 

 

11

 

 

 

2

 

Total

 

 

11

 

 

 

2

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(5.)

INVESTMENT SECURITIES

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

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

16,244

 

 

$

348

 

 

$

59

 

 

$

16,533

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

435,287

 

 

 

8,798

 

 

 

4,432

 

 

 

439,653

 

Federal Home Loan Mortgage Corporation

 

 

250,091

 

 

 

1,239

 

 

 

5,760

 

 

 

245,570

 

Government National Mortgage Association

 

 

21,605

 

 

 

495

 

 

 

126

 

 

 

21,974

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

22,361

 

 

 

89

 

 

 

43

 

 

 

22,407

 

Federal Home Loan Mortgage Corporation

 

 

6,943

 

 

 

 

 

 

22

 

 

 

6,921

 

Privately issued

 

 

 

 

 

431

 

 

 

 

 

 

431

 

Total mortgage-backed securities

 

 

736,287

 

 

 

11,052

 

 

 

10,383

 

 

 

736,956

 

Total available for sale securities

 

$

752,531

 

 

$

11,400

 

 

$

10,442

 

 

$

753,489

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

$

139,264

 

 

$

3,767

 

 

$

 

 

$

143,031

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

10,147

 

 

 

522

 

 

 

 

 

 

10,669

 

Federal Home Loan Mortgage Corporation

 

 

5,521

 

 

 

193

 

 

 

 

 

 

5,714

 

Government National Mortgage Association

 

 

34,568

 

 

 

1,313

 

 

 

 

 

 

35,881

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

27,230

 

 

 

920

 

 

 

 

 

 

28,150

 

Federal Home Loan Mortgage Corporation

 

 

32,206

 

 

 

1,242

 

 

 

 

 

 

33,448

 

Government National Mortgage Association

 

 

7,198

 

 

 

238

 

 

 

 

 

 

7,436

 

Total mortgage-backed securities

 

 

116,870

 

 

 

4,428

 

 

 

 

 

 

121,298

 

Total held to maturity securities

 

 

256,134

 

 

$

8,195

 

 

$

 

 

$

264,329

 

Allowance for credit losses - securities

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity securities, net

 

$

256,127

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

6,239

 

 

$

396

 

 

$

 

 

$

6,635

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

350,627

 

 

 

15,549

 

 

 

44

 

 

 

366,132

 

Federal Home Loan Mortgage Corporation

 

 

225,645

 

 

 

3,155

 

 

 

24

 

 

 

228,776

 

Government National Mortgage Association

 

 

22,107

 

 

 

830

 

 

 

 

 

 

22,937

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

3,047

 

 

 

97

 

 

 

 

 

 

3,144

 

Federal Home Loan Mortgage Corporation

 

 

 

 

 

 

 

 

 

 

 

-

 

Privately issued

 

 

 

 

 

435

 

 

 

 

 

 

435

 

Total mortgage-backed securities

 

 

601,426

 

 

 

20,066

 

 

 

68

 

 

 

621,424

 

Total available for sale securities

 

$

607,665

 

 

$

20,462

 

 

$

68

 

 

$

628,059

 

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(5.)

INVESTMENT SECURITIES (Continued)

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

December 31, 2020 (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

$

144,506

 

 

$

4,478

 

 

$

 

 

$

148,984

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

10,776

 

 

 

703

 

 

 

 

 

 

11,479

 

Federal Home Loan Mortgage Corporation

 

 

5,858

 

 

 

382

 

 

 

 

 

 

6,240

 

Government National Mortgage Association

 

 

37,084

 

 

 

1,578

 

 

 

 

 

 

38,662

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

29,988

 

 

 

1,075

 

 

 

 

 

 

31,063

 

Federal Home Loan Mortgage Corporation

 

 

35,897

 

 

 

1,581

 

 

 

 

 

 

37,478

 

Government National Mortgage Association

 

 

7,864

 

 

 

265

 

 

 

 

 

 

8,129

 

Total mortgage-backed securities

 

 

127,467

 

 

 

5,584

 

 

 

 

 

 

133,051

 

Total held to maturity securities

 

 

271,973

 

 

$

10,062

 

 

$

 

 

$

282,035

 

Allowance for credit losses - securities

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

Total held to maturity securities, net

 

$

271,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote. For AFS debt securities, AIR totaled $1.4 million and $1.2 million as of March 31, 2021 and December 31, 2020. For HTM debt securities, AIR totaled $1.3 million and $905 thousand as of March 31, 2021 and December 31, 2020, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.

For each of the three months ended March 31, 2021 and 2020, credit loss expense (credit) for HTM investment securities was less than $(1) thousand.

Investment securities with a total fair value of $660.1 million and $567.4 million at March 31, 2021 and December 31, 2020, respectively, were pledged as collateral to secure public deposits and for other purposes required or permitted by law.

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

 

 

 

Three months ended

March 31,

 

 

 

2021

 

 

2020

 

Proceeds from sales

 

$

26,675

 

 

$

3,157

 

Gross realized gains

 

 

89

 

 

 

 

Gross realized losses

 

 

15

 

 

 

9

 

 

The scheduled maturities of securities available for sale and securities held to maturity at March 31, 2021 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

 

 

 

Cost

 

 

Value

 

Debt securities available for sale:

 

 

 

 

 

 

 

 

Due in one year or less

 

$

4,887

 

 

$

4,946

 

Due from one to five years

 

 

57,462

 

 

 

60,632

 

Due after five years through ten years

 

 

148,739

 

 

 

153,492

 

Due after ten years

 

 

541,443

 

 

 

534,419

 

Total available for sale securities

 

$

752,531

 

 

$

753,489

 

Debt securities held to maturity:

 

 

 

 

 

 

 

 

Due in one year or less

 

$

46,389

 

 

$

46,684

 

Due from one to five years

 

 

92,903

 

 

 

96,303

 

Due after five years through ten years

 

 

20,252

 

 

 

21,018

 

Due after ten years

 

 

96,590

 

 

 

100,324

 

Total held to maturity securities

 

$

256,134

 

 

$

264,329

 

 

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(5.)

INVESTMENT SECURITIES (Continued)

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

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

Fair

 

 

Unrealized

 

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

 

Value

 

 

Losses

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored

   enterprises

 

$

9,941

 

 

$

59

 

 

$

 

 

$

 

 

$

9,941

 

 

$

59

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

224,499

 

 

 

4,432

 

 

 

13

 

 

 

 

 

 

224,512

 

 

 

4,432

 

Federal Home Loan Mortgage Corporation

 

 

209,482

 

 

 

5,760

 

 

 

 

 

 

 

 

 

209,482

 

 

 

5,760

 

Government National Mortgage Association

 

 

5,165

 

 

 

126

 

 

 

 

 

 

 

 

 

5,165

 

 

 

126

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

9,665

 

 

 

43

 

 

 

 

 

 

 

 

 

9,665

 

 

 

43

 

Federal Home Loan Mortgage Corporation

 

 

6,921

 

 

 

22

 

 

 

 

 

 

 

 

 

6,921

 

 

 

22

 

Total mortgage-backed securities

 

 

455,732

 

 

 

10,383

 

 

 

13

 

 

 

 

 

 

455,745

 

 

 

10,383

 

Total available for sale securities

 

 

465,673

 

 

 

10,442

 

 

 

13

 

 

 

 

 

 

465,686

 

 

 

10,442

 

Total temporarily impaired securities

 

$

465,673

 

 

$

10,442

 

 

$

13

 

 

$

 

 

$

465,686

 

 

$

10,442

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and government sponsored

   enterprises

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

18,155

 

 

 

44

 

 

 

 

 

 

 

 

 

18,155

 

 

 

44

 

Federal Home Loan Mortgage Corporation

 

 

10,932

 

 

 

24

 

 

 

 

 

 

 

 

 

10,932

 

 

 

24

 

Government National Mortgage Association

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal National Mortgage Association

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

8

 

 

 

 

Federal Home Loan Mortgage Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total mortgage-backed securities

 

 

29,087

 

 

 

68

 

 

 

8

 

 

 

 

 

 

29,095

 

 

 

68

 

Total available for sale securities

 

 

29,087

 

 

 

68

 

 

 

8

 

 

 

 

 

 

29,095

 

 

 

68

 

Total temporarily impaired securities

 

$

29,087

 

 

$

68

 

 

$

8

 

 

$

 

 

$

29,095

 

 

$

68

 

 


- 16 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(5.)

INVESTMENT SECURITIES (Continued)

 

 

The total number of securities positions in the investment portfolio in an unrealized loss position at March 31, 2021 was 62 compared to 8 at December 31, 2020. At March 31, 2021, the Company had a position in 1 investment security with a fair value of $13 thousand and a total unrealized loss of less than 1 thousand dollars that has been in a continuous unrealized loss position for more than 12 months. At March 31, 2021, there were a total of 61 securities positions in the Company’s investment portfolio with a fair value of $465.7 million and a total unrealized loss of $10.4 million that had been in a continuous unrealized loss position for less than 12 months. At December 31, 2020, the Company had a position in 1 investment security with a fair value of 8 thousand dollars and a total unrealized loss of less than 1 thousand dollars that had been in a continuous unrealized loss position for more than 12 months. At December 31, 2020, there were a total of 7 securities positions in the Company’s investment portfolio with a fair value of $29.1 million and a total unrealized loss of $68 thousand that had been in a continuous unrealized loss position for less than 12 months. The unrealized loss on investment securities was predominantly caused by changes in market interest rates subsequent to purchase. The fair value of most of the investment securities in the Company’s portfolio fluctuates as market interest rates change.

Securities Available for Sale

As of March 31, 2021 and December 31, 2020, 0 allowance for credit losses has been recognized on available for sale securities in an unrealized loss position as management does not believe any of the securities were impaired due to reasons of credit quality. This is based upon our analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

Securities Held to Maturity

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

The Company monitors the credit quality of our municipal bonds through the use of a credit rating agency or by ratings that are derived by an internal scoring model. The scoring methodology for the internally derived ratings is based on a series of financial ratios for the municipality being reviewed as compared to typical industry figures. This information is used to determine the financial strengths and weaknesses of the municipality, which is indicated with a numeric rating. This number is then converted into a letter rating to better match the system used by the credit rating agencies. As of March 31, 2021, $131.4 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $7.6 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating. Additionally, one municipal bond was rated below investment grade, with a BB+ Standard & Poor’s equivalent rating. The below investment grade bond represented exposure of $280 thousand, or 0.20% of the municipal bond portfolio and has been closely monitored for repayment. As of December 31, 2020, $135.7 million of our municipal bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $8.5 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA rating. Additionally, one municipal bond was rated below investment grade, with a BB+ Standard & Poor’s equivalent rating. The below investment grade bond represented exposure of $279 thousand, or 0.19% of the municipal bond portfolio and has been closely monitored for repayment.

As of March 31, 2021 and December 31, 2020, the Company had 0 past due or nonaccrual held to maturity investment securities.

 

- 17 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(6.)

LOANS

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

 

 

 

Principal

Amount

Outstanding

 

 

Net Deferred

Loan (Fees)

Costs

 

 

Loans,

Net

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

822,499

 

 

$

(5,563

)

 

$

816,936

 

Commercial mortgage

 

 

1,279,317

 

 

 

(2,476

)

 

 

1,276,841

 

Residential real estate loans

 

 

588,002

 

 

 

13,607

 

 

 

601,609

 

Residential real estate lines

 

 

82,319

 

 

 

3,043

 

 

 

85,362

 

Consumer indirect

 

 

829,362

 

 

 

28,442

 

 

 

857,804

 

Other consumer

 

 

15,695

 

 

 

139

 

 

 

15,834

 

Total

 

$

3,617,194

 

 

$

37,192

 

 

 

3,654,386

 

Allowance for credit losses - loans

 

 

 

 

 

 

 

 

 

 

(49,828

)

Total loans, net

 

 

 

 

 

 

 

 

 

$

3,604,558

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

798,409

 

 

$

(4,261

)

 

$

794,148

 

Commercial mortgage

 

 

1,256,525

 

 

 

(2,624

)

 

 

1,253,901

 

Residential real estate loans

 

 

586,537

 

 

 

13,263

 

 

 

599,800

 

Residential real estate lines

 

 

86,708

 

 

 

3,097

 

 

 

89,805

 

Consumer indirect

 

 

812,816

 

 

 

27,605

 

 

 

840,421

 

Other consumer

 

 

16,913

 

 

 

150

 

 

 

17,063

 

Total

 

$

3,557,908

 

 

$

37,230

 

 

 

3,595,138

 

Allowance for credit losses - loans

 

 

 

 

 

 

 

 

 

 

(52,420

)

Total loans, net

 

 

 

 

 

 

 

 

 

$

3,542,718

 

 

Loans held for sale (not included above) were comprised entirely of residential real estate mortgages and totaled $5.7 million and $4.3 million as of March 31, 2021 and December 31, 2020, respectively.

The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act established the PPP, an expansion of the SBA’s 7(a) loan program and the EIDL, administered directly by the SBA. The Company had $262.1 million and $253.1 million of PPP loans (included in Commercial business above) as of March 31, 2021 and December 31, 2020, respectively. In addition, the CARES Act provides that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Accordingly, the Company had $532.4 million of loans with modifications related to COVID-19 during 2020, with $89.1 million and $113.0 million still on deferral as of March 31, 2021 and December 31, 2020, respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of March 31, 2021 and December 31, 2020, AIR for loans totaled $13.7 million and $13.6 million, respectively, and is included in other assets on the Company’s consolidated statements of financial condition.

- 18 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(6.)

LOANS (Continued)

Past Due Loans Aging

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

 

 

 

30-59

Days

Past

Due

 

 

60-89

Days

Past

Due

 

 

Greater

Than

90 Days

 

 

Total

Past

Due

 

 

Nonaccrual

 

 

Current

 

 

Total

Loans

 

 

Nonaccrual

with no

allowance

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

75

 

 

$

 

 

$

 

 

$

75

 

 

$

1,742

 

 

$

820,682

 

 

$

822,499

 

 

$

1,238

 

Commercial mortgage

 

 

24

 

 

 

 

 

 

 

 

 

24

 

 

 

3,402

 

 

 

1,275,891

 

 

 

1,279,317

 

 

 

2,867

 

Residential real estate loans

 

 

168

 

 

 

20

 

 

 

 

 

 

188

 

 

 

2,519

 

 

 

585,295

 

 

 

588,002

 

 

 

2,519

 

Residential real estate lines

 

 

27

 

 

 

25

 

 

 

 

 

 

52

 

 

 

256

 

 

 

82,011

 

 

 

82,319

 

 

 

256

 

Consumer indirect

 

 

1,427

 

 

 

253

 

 

 

 

 

 

1,680

 

 

 

1,482

 

 

 

826,200

 

 

 

829,362

 

 

 

1,482

 

Other consumer

 

 

98

 

 

 

53

 

 

 

284

 

 

 

435

 

 

 

3

 

 

 

15,257

 

 

 

15,695

 

 

 

3

 

Total loans, gross

 

$

1,819

 

 

$

351

 

 

$

284

 

 

$

2,454

 

 

$

9,404

 

 

$

3,605,336

 

 

$

3,617,194

 

 

$

8,365

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

264

 

 

$

87

 

 

$

 

 

$

351

 

 

$

1,975

 

 

$

796,083

 

 

$

798,409

 

 

$

1,502

 

Commercial mortgage

 

 

822

 

 

 

26

 

 

 

 

 

 

848

 

 

 

2,906

 

 

 

1,252,771

 

 

 

1,256,525

 

 

 

2,709

 

Residential real estate loans

 

 

984

 

 

 

60

 

 

 

 

 

 

1,044

 

 

 

2,587

 

 

 

582,906

 

 

 

586,537

 

 

 

2,587

 

Residential real estate lines

 

 

40

 

 

 

15

 

 

 

 

 

 

55

 

 

 

323

 

 

 

86,330

 

 

 

86,708

 

 

 

323

 

Consumer indirect

 

 

3,966

 

 

 

1,348

 

 

 

 

 

 

5,314

 

 

 

1,495

 

 

 

806,007

 

 

 

812,816

 

 

 

1,495

 

Other consumer

 

 

133

 

 

 

18

 

 

 

231

 

 

 

382

 

 

 

 

 

 

16,531

 

 

 

16,913

 

 

 

 

Total loans, gross

 

$

6,209

 

 

$

1,554

 

 

$

231

 

 

$

7,994

 

 

$

9,286

 

 

$

3,540,628

 

 

$

3,557,908

 

 

$

8,616

 

 

There were 0 loans past due greater than 90 days and still accruing interest as of March 31, 2021 and December 31, 2020. There were $284 thousand and $231 thousand in consumer overdrafts which were past due greater than 90 days as of March 31, 2021 and December 31, 2020, respectively. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue interest.

The Company recognized 0 interest income on nonaccrual loans during the three months ended March 31, 2021 and 2020.

 

Troubled Debt Restructurings

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

There were 0 loans modified as a TDR during the three months ended March 31, 2021 and 2020. There were 0 loans modified as a TDR within the previous 12 months that defaulted during the three months ended March 31, 2021 and 2020. For purposes of this disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due.


- 19 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(6.)

LOANS (Continued)

Collateral Dependent Loans

Management has determined that specific commercial loans on nonaccrual status, all loans that have had their terms restructured in a troubled debt restructuring and other loans deemed appropriate by management where repayment is expected to be provided substantially through the operation or sale of the collateral to be collateral dependent loans. Collateral dependent loans at March 31, 2021 and December 31, 2020 included certain criticized COVID-19 bridge loans not otherwise classified as nonaccrual. The following table presents the amortized cost basis of collateral dependent loans by collateral type as of March 31, 2021 and December 31, 2020 (in thousands):

 

 

 

Collateral type

 

 

 

 

 

 

 

 

 

 

 

Business assets

 

 

Real property

 

 

Total

 

 

Specific Reserve

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

804

 

 

$

1,148

 

 

$

1,952

 

 

$

1,346

 

Commercial mortgage

 

 

 

 

 

60,156

 

 

 

60,156

 

 

 

12,157

 

Total

 

$

804

 

 

$

61,304

 

 

$

62,108

 

 

$

13,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

$

2,379

 

 

$

 

 

$

2,379

 

 

$

1,383

 

Commercial mortgage

 

 

 

 

 

36,625

 

 

 

36,625

 

 

 

8,187

 

Total

 

$

2,379

 

 

$

36,625

 

 

$

39,004

 

 

$

9,570

 

 

Credit Quality Indicators

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

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

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

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

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

 

 

- 20 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(6.)

LOANS (Continued)

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

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving

Loans

Amortized

Cost Basis

 

 

Revolving

Loans

Converted

to Term

 

 

Total

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

34,725

 

 

$

282,996

 

 

$

106,625

 

 

$

65,350

 

 

$

23,823

 

 

$

24,702

 

 

$

268,143

 

 

$

0

 

 

$

806,364

 

Special mention

 

 

0

 

 

 

0

 

 

 

1

 

 

 

42

 

 

 

566

 

 

 

1,002

 

 

 

2,795

 

 

 

0

 

 

 

4,406

 

Substandard

 

 

0

 

 

 

247

 

 

 

225

 

 

 

1,119

 

 

 

153

 

 

 

234

 

 

 

4,188

 

 

 

0

 

 

 

6,166

 

Doubtful

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total

 

$

34,725

 

 

$

283,243

 

 

$

106,851

 

 

$

66,511

 

 

$

24,542

 

 

$

25,938

 

 

$

275,126

 

 

$

0

 

 

$

816,936

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

47,489

 

 

$

332,420

 

 

$

220,441

 

 

$

146,250

 

 

$

159,788

 

 

$

208,781

 

 

$

895

 

 

$

0

 

 

$

1,116,064

 

Special mention

 

 

500

 

 

 

14,067

 

 

 

39,480

 

 

 

19,511

 

 

 

27,305

 

 

 

40,518

 

 

 

0

 

 

 

0

 

 

 

141,381

 

Substandard

 

 

0

 

 

 

331

 

 

 

5,350

 

 

 

1,881

 

 

 

1,761

 

 

 

9,875

 

 

 

198

 

 

 

0

 

 

 

19,396

 

Doubtful

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total

 

$

47,989

 

 

$

346,818

 

 

$

265,271

 

 

$

167,642

 

 

$

188,854

 

 

$

259,174

 

 

$

1,093

 

 

$

0

 

 

$

1,276,841

 

 

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Revolving

Loans

Amortized

Cost Basis

 

 

Revolving

Loans

Converted

to Term

 

 

Total

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

350,992

 

 

$

112,469

 

 

$

82,029

 

 

$

31,990

 

 

$

8,195

 

 

$

16,600

 

 

$

179,770

 

 

$

0

 

 

$

782,045

 

Special mention

 

 

0

 

 

 

360

 

 

 

21

 

 

 

709

 

 

 

41

 

 

 

1,025

 

 

 

2,995

 

 

 

0

 

 

 

5,151

 

Substandard

 

 

193

 

 

 

211

 

 

 

1,183

 

 

 

464

 

 

 

202

 

 

 

309

 

 

 

4,390

 

 

 

0

 

 

 

6,952

 

Doubtful

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total

 

$

351,185

 

 

$

113,040

 

 

$

83,233

 

 

$

33,163

 

 

$

8,438

 

 

$

17,934

 

 

$

187,155

 

 

$

0

 

 

$

794,148

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Uncriticized

 

$

310,364

 

 

$

227,406

 

 

$

163,839

 

 

$

161,771

 

 

$

74,915

 

 

$

154,399

 

 

$

731

 

 

$

0

 

 

$

1,093,425

 

Special mention

 

 

14,299

 

 

 

42,305

 

 

 

19,505

 

 

 

27,530

 

 

 

12,256

 

 

 

28,744

 

 

 

43

 

 

 

0

 

 

 

144,682

 

Substandard

 

 

189

 

 

 

2,521

 

 

 

1,890

 

 

 

1,648

 

 

 

3

 

 

 

9,344

 

 

 

199

 

 

 

0

 

 

 

15,794

 

Doubtful

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total

 

$

324,852

 

 

$

272,232

 

 

$

185,234

 

 

$

190,949

 

 

$

87,174

 

 

$

192,487

 

 

$

973

 

 

$

0

 

 

$

1,253,901

 

 

 

- 21 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(6.)

LOANS (Continued)

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

 

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving

Loans

Amortized

Cost Basis

 

 

Revolving

Loans

Converted

to Term

 

 

Total

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

32,920

 

 

$

136,773

 

 

$

97,640

 

 

$

80,962

 

 

$

62,906

 

 

$

187,889

 

 

$

0

 

 

$

0

 

 

$

599,090

 

Nonperforming

 

 

0

 

 

 

0

 

 

 

198

 

 

 

661

 

 

 

754

 

 

 

906

 

 

 

0

 

 

 

0

 

 

 

2,519

 

Total

 

$

32,920

 

 

$

136,773

 

 

$

97,838

 

 

$

81,623

 

 

$

63,660

 

 

$

188,795

 

 

$

0

 

 

$

0

 

 

$

601,609

 

Residential Real Estate Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

75,606

 

 

$

9,500

 

 

$

85,106

 

Nonperforming

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

64

 

 

 

192

 

 

 

256

 

Total

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

75,670

 

 

$

9,692

 

 

$

85,362

 

Consumer Indirect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

105,985

 

 

$

278,315

 

 

$

182,163

 

 

$

146,363

 

 

$

94,067

 

 

$

49,429

 

 

$

0

 

 

$

0

 

 

$

856,322

 

Nonperforming

 

 

0

 

 

 

394

 

 

 

421

 

 

 

387

 

 

 

195

 

 

 

85

 

 

 

0

 

 

 

0

 

 

 

1,482

 

Total

 

$

105,985

 

 

$

278,709

 

 

$

182,584

 

 

$

146,750

 

 

$

94,262

 

 

$

49,514

 

 

$

0

 

 

$

0

 

 

$

857,804

 

Other Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

1,311

 

 

$

5,419

 

 

$

2,782

 

 

$

1,439

 

 

$

688

 

 

$

962

 

 

$

3,230

 

 

$

0

 

 

$

15,831

 

Nonperforming

 

 

0

 

 

 

0

 

 

 

3

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

3

 

Total

 

$

1,311

 

 

$

5,419

 

 

$

2,785

 

 

$

1,439

 

 

$

688

 

 

$

962

 

 

$

3,230

 

 

$

0

 

 

$

15,834

 

 

 

 

 

Term Loans Amortized Cost Basis by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Revolving

Loans

Amortized

Cost Basis

 

 

Revolving

Loans

Converted

to Term

 

 

Total

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Real Estate Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

137,926

 

 

$

103,923

 

 

$

87,153

 

 

$

66,446

 

 

$

67,473

 

 

$

134,292

 

 

$

0

 

 

$

0

 

 

$

597,213

 

Nonperforming

 

 

0

 

 

 

199

 

 

 

765

 

 

 

665

 

 

 

233

 

 

 

725

 

 

 

0

 

 

 

0

 

 

 

2,587

 

Total

 

$

137,926

 

 

$

104,122

 

 

$

87,918

 

 

$

67,111

 

 

$

67,706

 

 

$

135,017

 

 

$

0

 

 

$

0

 

 

$

599,800

 

Residential Real Estate Lines

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

79,257

 

 

$

10,225

 

 

$

89,482

 

Nonperforming

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

65

 

 

 

258

 

 

 

323

 

Total

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

79,322

 

 

$

10,483

 

 

$

89,805

 

Consumer Indirect

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

295,216

 

 

$

202,187

 

 

$

166,773

 

 

$

111,008

 

 

$

47,793

 

 

$

15,949

 

 

$

0

 

 

$

0

 

 

$

838,926

 

Nonperforming

 

 

70

 

 

 

652

 

 

 

319

 

 

 

287

 

 

 

132

 

 

 

35

 

 

 

0

 

 

 

0

 

 

 

1,495

 

Total

 

$

295,286

 

 

$

202,839

 

 

$

167,092

 

 

$

111,295

 

 

$

47,925

 

 

$

15,984

 

 

$

0

 

 

$

0

 

 

$

840,421

 

Other Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performing

 

$

6,774

 

 

$

3,177

 

 

$

1,765

 

 

$

907

 

 

$

369

 

 

$

508

 

 

$

3,563

 

 

$

0

 

 

$

17,063

 

Nonperforming

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Total

 

$

6,774

 

 

$

3,177

 

 

$

1,765

 

 

$

907

 

 

$

369

 

 

$

508

 

 

$

3,563

 

 

$

0

 

 

$

17,063

 


- 22 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(6.)LOANS (Continued)

Allowance for Credit Losses - Loans

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

The following table sets forth the changes in the allowance for credit losses - loans for the three-month periods ended as of the dates indicated (in thousands):

 

 

 

Commercial

Business

 

 

Commercial

Mortgage

 

 

Residential

Real

Estate

Loans

 

 

Residential

Real

Estate

Lines

 

 

Consumer

Indirect

 

 

Other

Consumer

 

 

Total

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses - loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

13,580

 

 

$

21,763

 

 

$

3,924

 

 

$

674

 

 

$

12,165

 

 

$

314

 

 

$

52,420

 

Charge-offs

 

 

(86

)

 

 

(203

)

 

 

(11

)

 

 

(70

)

 

 

(2,413

)

 

 

(81

)

 

 

(2,864

)

Recoveries

 

 

238

 

 

 

0

 

 

 

5

 

 

 

0

 

 

 

1,670

 

 

 

64

 

 

 

1,977

 

Provision (benefit)

 

 

(1,062

)

 

 

1,112

 

 

 

(809

)

 

 

(122

)

 

 

(865

)

 

 

41

 

 

 

(1,705

)

Ending balance

 

$

12,670

 

 

$

22,672

 

 

$

3,109

 

 

$

482

 

 

$

10,557

 

 

$

338

 

 

$

49,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses - loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance, prior to adoption of ASC 326

 

$

11,358

 

 

$

5,681

 

 

$

1,059

 

 

$

118

 

 

$

11,852

 

 

$

414

 

 

$

30,482

 

Impact of adopting ASC 326

 

 

(246

)

 

 

7,310

 

 

 

3,290

 

 

 

607

 

 

 

(1,234

)

 

 

(133

)

 

 

9,594

 

Beginning balance, after adoption of ASC 326

 

 

11,112

 

 

 

12,991

 

 

 

4,349

 

 

 

725

 

 

 

10,618

 

 

 

281

 

 

 

40,076

 

Charge-offs

 

 

(8,241

)

 

 

0

 

 

 

(98

)

 

 

0

 

 

 

(3,424

)

 

 

(269

)

 

 

(12,032

)

Recoveries

 

 

58

 

 

 

0

 

 

 

10

 

 

 

3

 

 

 

1,668

 

 

 

150

 

 

 

1,889

 

Provision

 

 

7,294

 

 

 

2,163

 

 

 

1,909

 

 

 

171

 

 

 

1,783

 

 

 

103

 

 

 

13,423

 

Ending balance

 

$

10,223

 

 

$

15,154

 

 

$

6,170

 

 

$

899

 

 

$

10,645

 

 

$

265

 

 

$

43,356

 

 

 

 

 

 

 

 

- 23 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(6.)

LOANS (Continued)

Risk Characteristics

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

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

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

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

 

 


- 24 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(7.)

LEASES

ASC 842, Leases (“ASC 842”), establishes a right of use model that requires a lessee to record a right of use asset and a lease liability for all leases with terms longer than 12 months. The Company is obligated under a number of non-cancellable operating lease agreements for land, buildings and equipment with terms, including renewal options reasonably certain to be exercised, extending through 2047. NaN building lease is subleased for terms extending through 2021.

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

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

Balance Sheet Location

 

2021

 

 

2020

 

Operating Lease Right of Use Assets:

 

 

 

 

 

 

 

 

 

 

Gross carrying amount

 

Other assets

 

$

24,557

 

 

$

23,697

 

Accumulated amortization

 

Other assets

 

 

(4,241

)

 

 

(3,741

)

Net book value

 

 

 

$

20,316

 

 

$

19,956

 

 

 

 

 

 

 

 

 

 

 

 

Operating Lease Liabilities:

 

 

 

 

 

 

 

 

 

 

Right of use lease obligations

 

Other liabilities

 

$

21,908

 

 

$

21,507

 

 

The weighted average remaining lease term for operating leases was 21.1 years at March 31, 2021 and the weighted-average discount rate used in the measurement of operating lease liabilities was 3.78%. The Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term for the discount rate.

The following table represents lease costs and other lease information:

 

 

 

Three months ended

March 31,

 

 

 

2021

 

 

2020

 

Lease costs:

 

 

 

 

 

 

 

 

Operating lease costs

 

$

680

 

 

$

677

 

Variable lease costs (1)

 

 

98

 

 

 

101

 

Sublease income

 

 

(11

)

 

 

(11

)

Net lease costs

 

$

767

 

 

$

767

 

 

 

 

 

 

 

 

 

 

Other information:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

661

 

 

$

648

 

Right of use assets obtained in exchange for new operating

   lease liabilities

 

$

864

 

 

$

334

 

 

(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 March 31, 2021 (in thousands):

 

Twelve months ended March 31,

 

 

 

2022

$

2,372

 

2023

 

1,979

 

2024

 

1,514

 

2025

 

1,308

 

2026

 

1,233

 

Thereafter

 

24,858

 

Total future minimum operating lease payments

 

33,264

 

Amounts representing interest

 

(11,356

)

Present value of net future minimum operating lease payments

$

21,908

 

 

 

- 25 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(8.)

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The carrying amount of goodwill totaled $66.7 million and $66.1 million as of both March 31, 2021 and December 31, 2020. The Company performs a goodwill impairment test on an annual basis as of October 1st or more frequently if events and circumstances warrant.

 

 

 

Banking

 

 

All Other (1)

 

 

Total

 

Balance, December 31, 2020

 

$

48,536

 

 

$

17,526

 

 

$

66,062

 

Acquisition

 

 

 

 

 

611

 

 

 

611

 

Balance, March 31, 2021

 

$

48,536

 

 

$

18,137

 

 

$

66,673

 

 

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

 

Goodwill and other intangible assets added during the period relates to the acquisition of assets of Landmark Group, which was completed on February 1, 2021. See Note 2 – Business Combinations for additional information.

 

Other Intangible Assets

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Other intangibles assets:

 

 

 

 

 

 

 

 

Gross carrying amount

 

$

16,324

 

 

$

15,925

 

Accumulated amortization

 

 

(8,469

)

 

 

(8,198

)

Net book value

 

$

7,855

 

 

$

7,727

 

 

Amortization expense for total other intangible assets was $271 thousand and $294 thousand for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the estimated amortization expense of other intangible assets for the remainder of 2021 and each of the next five years is as follows (in thousands):

 

2021 (remainder of year)

$

779

 

2022

 

960

 

2023

 

887

 

2024

 

816

 

2025

 

745

 

2026

 

675

 

 

(9.)

OTHER ASSETS

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Operating lease right of use assets

 

$

20,316

 

 

$

19,956

 

Tax credit investments

 

 

38,632

 

 

 

34,370

 

Derivative instruments

 

 

18,391

 

 

 

20,120

 

Collateral on derivative instruments

 

 

4,270

 

 

 

19,630

 

Other

 

 

66,886

 

 

 

62,010

 

Total other assets

 

$

148,495

 

 

$

156,086

 

 

- 26 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(10.)

DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate caps and interest rate swaps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During the first three months of 2021 and in 2020, such derivatives were used to hedge the variable cash flows associated with short-term borrowings. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a period of approximately 60 months. As of March 31, 2021, the Company had 1 outstanding forward starting interest rate derivative with a notional value of $50.0 million that was designated as a cash flow hedge of interest rate risk. The derivative becomes effective in April 2022.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s borrowings. During the next twelve months, the Company estimates that $0 will be reclassified into interest expense.

Interest Rate Swaps

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

Credit-risk-related Contingent Features

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

- 27 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(10.)

DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES (Continued)

Mortgage Banking Derivatives

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

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the notional amounts, respective fair values of the Company’s derivative financial instruments, as well as their classification on the balance sheet as of March 31, 2021 and December 31, 2020 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Asset derivatives

 

 

Liability derivatives

 

 

 

Gross notional

amount

 

 

Balance

 

Fair value

 

 

Balance

 

Fair value

 

 

 

Mar. 31,

2021

 

 

Dec. 31,

2020

 

 

sheet

line item

 

Mar. 31,

2021

 

 

Dec. 31,

2020

 

 

sheet

line item

 

Mar. 31,

2021

 

 

Dec. 31,

2020

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

50,000

 

 

$

50,000

 

 

Other assets

 

$

1,677

 

 

$

 

 

Other liabilities

 

$

 

 

$

311

 

Total derivatives

 

$

50,000

 

 

$

50,000

 

 

 

 

$

1,677

 

 

$

 

 

 

 

$

 

 

$

311

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

 

 

$

100,000

 

 

Other assets

 

$

 

 

$

 

 

Other liabilities

 

$

 

 

$

 

Interest rate swaps (1)

 

 

706,115

 

 

 

631,907

 

 

Other assets

 

 

16,176

 

 

 

19,626

 

 

Other liabilities

 

 

15,580

 

 

 

19,837

 

Credit contracts

 

 

115,833

 

 

 

113,434

 

 

Other assets

 

 

12

 

 

 

23

 

 

Other liabilities

 

 

39

 

 

 

86

 

Mortgage banking

 

 

28,025

 

 

 

28,225

 

 

Other assets

 

 

526

 

 

 

471

 

 

Other liabilities

 

 

 

 

 

1

 

Total derivatives

 

$

849,973

 

 

$

873,566

 

 

 

 

$

16,714

 

 

$

20,120

 

 

 

 

$

15,619

 

 

$

19,924

 

 

(1)

The Company secured its obligations under these contracts with $4.3 million and $19.6 million in cash at March 31, 2021 and December 31, 2020, 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 months ended March 31, 2021 and 2020 (in thousands):

 

 

 

 

 

Gain (loss) recognized in income

 

 

 

Line item of gain (loss)

 

Three months ended

March 31,

 

Undesignated derivatives

 

recognized in income

 

2021

 

 

2020

 

Cash flow hedges

 

Income from derivative instruments, net

 

$

 

 

$

 

Interest rate swaps

 

Income from derivative instruments, net

 

 

1,772

 

 

 

724

 

Credit contracts

 

Income from derivative instruments, net

 

 

48

 

 

 

(5

)

Mortgage banking

 

Income from derivative instruments, net

 

 

55

 

 

 

27

 

Total undesignated

 

 

 

$

1,875

 

 

$

746

 

 

- 28 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(11.)

SHAREHOLDERS’ EQUITY

Common Stock

The changes in shares of common stock were as follows for the three months ended March 31, 2021 and 2020:

 

 

 

Outstanding

 

 

Treasury

 

 

Issued

 

2021

 

 

 

 

 

 

 

 

 

 

 

 

Shares at December 31, 2020

 

 

16,041,926

 

 

 

57,630

 

 

 

16,099,556

 

Shares issued for Landmark Group acquisition

 

 

12,831

 

 

 

(12,831

)

 

 

 

Restricted stock units released

 

 

18,819

 

 

 

(18,819

)

 

 

 

Treasury stock purchases

 

 

(244,677

)

 

 

244,677

 

 

 

 

Shares at March 31, 2021

 

 

15,828,899

 

 

 

270,657

 

 

 

16,099,556

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

Shares at December 31, 2019

 

 

16,002,899

 

 

 

96,657

 

 

 

16,099,556

 

Restricted stock units released

 

 

22,921

 

 

 

(22,921

)

 

 

 

Treasury stock purchases

 

 

(6,436

)

 

 

6,436

 

 

 

 

Shares at March 31, 2020

 

 

16,019,384

 

 

 

80,172

 

 

 

16,099,556

 

 

Share Repurchase Program

In November 2020, the Company’s Board of Directors authorized a share repurchase program for up to 801,879 shares of common stock. Repurchased shares are recorded in treasury stock, at cost, which includes any applicable transaction costs. 238,439 shares were repurchased at an average price of $24.30 during the three months ended March 31, 2021. NaN shares were repurchased under this program during the year ended December 31, 2020. As of March 31, 2021, the remaining amount of shares authorized for repurchase under the repurchase program was 563,440.

 

- 29 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(12.)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of other comprehensive income (loss) for the three months ended March 31, 2021 and 2020 (in thousands):

 

 

 

Pre-tax

Amount

 

 

Tax

Effect

 

 

Net-of-tax

Amount

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

$

(19,362

)

 

$

(4,961

)

 

$

(14,401

)

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

 

 

(1

)

 

 

 

 

 

(1

)

Total securities available for sale and transferred securities

 

 

(19,363

)

 

 

(4,961

)

 

 

(14,402

)

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

 

2,103

 

 

 

539

 

 

 

1,564

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

 

(1

)

 

 

 

 

 

(1

)

Amortization of net actuarial loss included in income

 

 

186

 

 

 

47

 

 

 

139

 

Total pension and post-retirement obligations

 

 

185

 

 

 

47

 

 

 

138

 

Other comprehensive loss

 

$

(17,075

)

 

$

(4,375

)

 

$

(12,700

)

 

(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.

 

 

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale and transferred securities:

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

$

16,451

 

 

$

4,215

 

 

$

12,236

 

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

 

 

(175

)

 

 

(45

)

 

 

(130

)

Total securities available for sale and transferred securities

 

 

16,276

 

 

 

4,170

 

 

 

12,106

 

Hedging derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gain/loss during the period

 

 

123

 

 

 

32

 

 

 

91

 

Pension and post-retirement obligations:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior service credit included in income

 

 

(9

)

 

 

(2

)

 

 

(7

)

Amortization of net actuarial loss included in income

 

 

323

 

 

 

82

 

 

 

241

 

Total pension and post-retirement obligations

 

 

314

 

 

 

80

 

 

 

234

 

Other comprehensive income

 

$

16,713

 

 

$

4,282

 

 

$

12,431

 

 

(1)

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

 

- 30 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

(12.)

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)

Activity in accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2021 and 2020 was as follows (in thousands):

 

 

 

Hedging

Derivative

Instruments

 

 

Securities

Available

for Sale and

Transferred

Securities

 

 

Pension and

Post-

retirement

Obligations

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(316

)

 

$

14,743

 

 

$

(12,299

)

 

$

2,128

 

Other comprehensive income before reclassifications

 

 

1,564

 

 

 

(14,401

)

 

 

 

 

 

(12,837

)

Amounts reclassified from accumulated other comprehensive

   income (loss)

 

 

 

 

 

(1

)

 

 

138

 

 

 

137

 

Net current period other comprehensive income (loss)

 

 

1,564

 

 

 

(14,402

)

 

 

138

 

 

 

(12,700

)

Balance at end of period

 

$

1,248

 

 

$

341

 

 

$

(12,161

)

 

$

(10,572

)

March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

(518

)

 

$

873

 

 

$

(14,868

)

 

$

(14,513

)

Other comprehensive income before reclassifications

 

 

91

 

 

 

12,236

 

 

 

 

 

 

12,327

 

Amounts reclassified from accumulated other comprehensive

   income (loss)

 

 

 

 

 

(130

)

 

 

234

 

 

 

104

 

Net current period other comprehensive income (loss)

 

 

91

 

 

 

12,106

 

 

 

234

 

 

 

12,431

 

Balance at end of period

 

$

(427

)

 

$

12,979

 

 

$

(14,634

)

 

$

(2,082

)

 

The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three months ended March 31, 2021 and 2020 (in thousands):

 

Details About Accumulated Other

Comprehensive Income (Loss) Components

 

Amount Reclassified from

Accumulated Other

Comprehensive

Income (Loss)

 

 

Affected Line Item in the

Consolidated Statement of Income

 

 

Three months ended

 

 

 

 

 

March 31,

 

 

 

 

 

2021

 

 

2020

 

 

 

Realized gain on sale of investment securities

 

$

74

 

 

$

221

 

 

Net gain on investment securities

Amortization of unrealized holding losses

   on investment securities transferred from

   available for sale to held to maturity

 

 

(73

)

 

 

(46

)

 

Interest income

 

 

 

1

 

 

 

175

 

 

Total before tax

 

 

 

 

 

 

(45

)

 

Income tax expense

 

 

 

1

 

 

 

130

 

 

Net of tax

Amortization of pension and post-retirement items:

 

 

 

 

 

 

 

 

 

 

Prior service credit (1)

 

 

1

 

 

 

9

 

 

Salaries and employee benefits

Net actuarial losses (1)

 

 

(186

)

 

 

(323

)

 

Salaries and employee benefits

 

 

 

(185

)

 

 

(314

)

 

Total before tax

 

 

 

47

 

 

 

80

 

 

Income tax benefit

 

 

 

(138

)

 

 

(234

)

 

Net of tax

Total reclassified for the period

 

$

(137

)

 

$

(104

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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

 

- 31 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(13.)

SHARE-BASED COMPENSATION PLANS

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

The MD&C Committee approved the grant of restricted stock units (“RSUs”) and performance share units (“PSUs”) shown in the table below to certain members of management during the three months ended March 31, 2021.

 

 

 

Number of

Underlying

Shares

 

 

Weighted

Average

Per Share

Grant Date

Fair Value

 

RSUs

 

 

58,924

 

 

$

27.46

 

PSUs

 

 

22,178

 

 

 

27.58

 

 

The grant-date fair value for the RSUs granted during the three months ended March 31, 2021 is equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.

NaN percent of the PSUs that ultimately vest is contingent on achieving specified return on average equity (“ROAE”) targets relative to the SNL Small Cap Bank & Thrift Index, a market index the MD&C Committee has selected as a peer group for this purpose. These shares will be earned based on the Company’s achievement of a relative ROAE performance requirement, on a percentile basis, compared to the SNL Small Cap Bank & Thrift Index over a three-year performance period ended December 31, 2023. The shares earned based on the achievement of the ROAE performance requirement, if any, will vest on the third anniversary of the grant date assuming the recipient’s continuous service to the Company.  The remaining 50 percent of the PSUs that ultimately vest is contingent upon achievement of an average return on average assets (“ROAA”) performance requirement over a three-year performance period ended December 31, 2023. The shares earned based on the achievement of the ROAA performance requirement, if any, will vest on the third anniversary of the grant date assuming the recipient’s continuous service to the Company.  

The grant-date fair values for both the ROAE and the ROAA portions of PSUs granted during the three months ended March 31, 2021 are equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be paid on the underlying shares.

The Company previously granted restricted stock awards to certain members of management and non-employee directors. There were 0 restricted stock awards granted during the three months ended March 31, 2021. The following is a summary of restricted stock awards and restricted stock units activity for the three months ended March 31, 2021:

 

 

 

Number of

Shares

 

 

Weighted

Average

Market

Price at

Grant Date

 

Outstanding at beginning of year

 

 

168,513

 

 

$

25.65

 

Granted

 

 

81,102

 

 

 

27.50

 

Vested

 

 

(18,819

)

 

 

28.38

 

Forfeited

 

 

(18,487

)

 

 

26.67

 

Outstanding at end of period

 

 

212,309

 

 

$

26.03

 

 

At March 31, 2021, there was $3.8 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 2.40 years.

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(13.)

SHARE-BASED COMPENSATION PLANS (Continued)

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

 

 

 

Three months ended

March 31,

 

 

 

2021

 

 

2020

 

Salaries and employee benefits

 

$

188

 

 

$

304

 

Other noninterest expense

 

 

28

 

 

 

28

 

Total share-based compensation expense

 

$

216

 

 

$

332

 

 

(14.)

EMPLOYEE BENEFIT PLANS

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

 

 

 

Three months ended

March 31,

 

 

 

2021

 

 

2020

 

Service cost

 

$

1,049

 

 

$

923

 

Interest cost on projected benefit obligation

 

 

551

 

 

 

635

 

Expected return on plan assets

 

 

(1,306

)

 

 

(1,284

)

Amortization of unrecognized prior service credit

 

 

(1

)

 

 

(9

)

Amortization of unrecognized net actuarial loss

 

 

186

 

 

 

323

 

Net periodic benefit expense

 

$

479

 

 

$

588

 

 

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 0 minimum required contribution for the 2021 fiscal year.

(15.)

COMMITMENTS AND CONTINGENCIES

Financial Instruments with Off-Balance Sheet Risk

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

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

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

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Commitments to extend credit

 

$

993,324

 

 

$

1,012,810

 

Standby letters of credit

 

 

22,970

 

 

 

22,393

 

 

- 33 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(15.)

COMMITMENTS AND CONTINGENCIES (Continued)

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

Unfunded Commitments

At March 31, 2021 and December 31, 2020, the allowance for credit losses for unfunded commitments totaled $2.9 million and $3.1 million, respectively, and was included in other liabilities on the Company's consolidated statements of financial condition. For the three months ended March 31, 2021 and 2020, credit loss (credit) expense for unfunded commitments was $(276) thousand and $1.0 million, respectively.

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, 2020 as filed with the SEC on March 15, 2021 and as disclosed in Part II, Item 1 of this Quarterly Report on Form 10-Q, we are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania.  Plaintiffs seek class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs seek 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.

In February 2020, we agreed to engage in mediation with the plaintiffs and mediation is expected to commence during May 2021.  On October 19, 2020, the Court granted plaintiffs’ motion for judgment on the pleadings dismissing our affirmative defense against one named New York plaintiff that his claim was time-barred under New York law, applying a six-year statute of limitations rather than the three years limitation period we had argued. The issue of class certification has been briefed and the class certification hearing date has been scheduled for June 14, 2021.

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

(16.)

FAIR VALUE MEASUREMENTS

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

Valuation Hierarchy

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

 

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

- 34 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(16.)

FAIR VALUE MEASUREMENTS (Continued)

 

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.

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

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

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

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

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

Long-lived assets held for sale: The fair value of the long-lived assets held for sale was based on estimated market prices from independently prepared current appraisals and are classified as Level 2 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 market participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs, ancillary income, impound account balances, and discount rates. The significant unobservable inputs used in the fair value measurement of the Company’s loan servicing rights are the constant prepayment rates and weighted average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in opposite directions. Loan servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

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

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

- 35 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(16.)

FAIR VALUE MEASUREMENTS (Continued)

Assets Measured at Fair Value

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

 

 

 

Quoted

Prices

in Active

Markets for

Identical

Assets or

Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

 

 

$

16,533

 

 

$

 

 

$

16,533

 

Mortgage-backed securities

 

 

 

 

 

736,956

 

 

 

 

 

 

736,956

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging derivative instruments

 

 

 

 

 

1,677

 

 

 

 

 

 

1,677

 

Fair value adjusted through comprehensive income

 

$

 

 

$

755,166

 

 

$

 

 

$

755,166

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - interest rate swaps

 

 

 

 

 

16,176

 

 

 

 

 

 

16,176

 

Derivative instruments - credit contracts

 

 

 

 

 

12

 

 

 

 

 

 

12

 

Derivative instruments - mortgage banking

 

 

 

 

 

526

 

 

 

 

 

 

526

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - interest rate swaps

 

 

 

 

 

(15,580

)

 

 

 

 

 

(15,580

)

Derivative instruments - credit contracts

 

 

 

 

 

(39

)

 

 

 

 

 

(39

)

Derivative instruments - mortgage banking

 

 

 

 

 

-

 

 

 

 

 

 

-

 

Fair value adjusted through net income

 

$

 

 

$

1,095

 

 

$

 

 

$

1,095

 

Measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

 

 

$

5,685

 

 

$

 

 

$

5,685

 

Collateral dependent loans

 

 

 

 

 

 

 

 

48,605

 

 

 

48,605

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-lived assets held for sale

 

 

 

 

 

867

 

 

 

 

 

 

867

 

Loan servicing rights

 

 

 

 

 

 

 

 

1,392

 

 

 

1,392

 

Other real estate owned

 

 

 

 

 

 

 

 

2,966

 

 

 

2,966

 

Total

 

$

 

 

$

6,552

 

 

$

52,963

 

 

$

59,515

 

 

There were 0 transfers between Levels 1 and 2 during the three months ended March 31, 2021. There were 0 liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2021.

 

- 36 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(16.)

FAIR VALUE MEASUREMENTS (Continued)

 

 

 

Quoted

Prices

in Active

Markets for

Identical

Assets or

Liabilities

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Measured on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government sponsored enterprises

 

$

 

 

$

6,635

 

 

$

 

 

$

6,635

 

Mortgage-backed securities

 

 

 

 

 

621,424

 

 

 

 

 

 

621,424

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging derivative instruments

 

 

 

 

 

(311

)

 

 

 

 

 

(311

)

Fair value adjusted through comprehensive income

 

$

 

 

$

627,748

 

 

$

 

 

$

627,748

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - cash flow hedges

 

$

 

 

$

 

 

$

 

 

$

-

 

Derivative instruments - interest rate swaps

 

 

 

 

 

19,626

 

 

 

 

 

 

19,626

 

Derivative instruments - credit contracts

 

 

 

 

 

23

 

 

 

 

 

 

23

 

Derivative instruments - mortgage banking

 

 

 

 

 

471

 

 

 

 

 

 

471

 

Other liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments - interest rate swaps

 

 

 

 

 

(19,837

)

 

 

 

 

 

(19,837

)

Derivative instruments - credit contracts

 

 

 

 

 

(86

)

 

 

 

 

 

(86

)

Derivative instruments - mortgage banking

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Fair value adjusted through net income

 

$

 

 

$

196

 

 

$

 

 

$

196

 

Measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

 

 

$

4,305

 

 

$

 

 

$

4,305

 

Collateral dependent loans

 

 

 

 

 

 

 

 

29,434

 

 

 

29,434

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan servicing rights

 

 

 

 

 

 

 

 

1,320

 

 

 

1,320

 

Other real estate owned

 

 

 

 

 

 

 

 

2,966

 

 

 

2,966

 

Total

 

$

 

 

$

4,305

 

 

$

33,720

 

 

$

38,025

 

 

There were 0 transfers between Levels 1 and 2 during the three months ended March 31, 2020. There were 0 liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2020.

The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis for which the Company has utilized Level 3 inputs to determine fair value as of March 31, 2021 (dollars in thousands).

 

Asset

 

Fair

Value

 

 

Valuation Technique

 

Unobservable Input

 

Unobservable Input

Value or Range

Collateral dependent loans

 

$

48,605

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

28.6% (3) / 0 - 35%

Loan servicing rights

 

 

1,392

 

 

Discounted cash flow

 

Discount rate

 

10.3% (3)

 

 

 

 

 

 

 

 

Constant prepayment rate

 

16.7% (3)

Other real estate owned

 

 

2,966

 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

27.7% (3) / 20 - 46%

 

(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.

- 37 -


Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(16.)

FAIR VALUE MEASUREMENTS (Continued)

Changes in Level 3 Fair Value Measurements

There were 0 assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the three months ended March 31, 2021 and 2020.

Disclosures about Fair Value of Financial Instruments

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

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

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

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

 

 

 

Level in

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Fair Value

 

 

 

 

 

Estimated

 

 

 

 

 

 

Estimated

 

 

 

Measurement

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

 

Hierarchy

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

 

$

344,790

 

 

$

344,790

 

 

$

93,878

 

 

$

93,878

 

Securities available for sale

 

Level 2

 

 

753,489

 

 

 

753,489

 

 

 

628,059

 

 

 

628,059

 

Securities held to maturity, net

 

Level 2

 

 

256,127

 

 

 

264,329

 

 

 

271,973

 

 

 

282,035

 

Loans held for sale

 

Level 2

 

 

5,685

 

 

 

5,685

 

 

 

4,305

 

 

 

4,305

 

Loans

 

Level 2

 

 

3,555,953

 

 

 

3,609,735

 

 

 

3,513,284

 

 

 

3,549,770

 

Loans (1)

 

Level 3

 

 

48,605

 

 

 

48,605

 

 

 

29,434

 

 

 

29,434

 

Long-lived assets held for sale

 

Level 2

 

 

867

 

 

 

867

 

 

 

 

 

 

 

Accrued interest receivable

 

Level 1

 

 

16,422

 

 

 

16,422

 

 

 

15,635

 

 

 

15,635

 

Derivative instruments – cash flow hedges

 

Level 2

 

 

1,677

 

 

 

1,677

 

 

 

 

 

 

 

Derivative instruments – interest rate products

 

Level 2

 

 

16,176

 

 

 

16,176

 

 

 

19,626

 

 

 

19,626

 

Derivative instruments – credit contracts

 

Level 2

 

 

12

 

 

 

12

 

 

 

23

 

 

 

23

 

Derivative instruments – mortgage banking

 

Level 2

 

 

526

 

 

 

526

 

 

 

471

 

 

 

471

 

FHLB and FRB stock

 

Level 2

 

 

8,729

 

 

 

8,729

 

 

 

8,619

 

 

 

8,619

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-maturity deposits

 

Level 1

 

 

3,799,619

 

 

 

3,799,619

 

 

 

3,392,774

 

 

 

3,392,774

 

Time deposits

 

Level 2

 

 

916,395

 

 

 

916,809

 

 

 

885,593

 

 

 

887,113

 

Short-term borrowings

 

Level 1

 

 

 

 

 

 

 

 

5,300

 

 

 

5,300

 

Long-term borrowings

 

Level 2

 

 

73,679

 

 

 

79,299

 

 

 

73,623

 

 

 

83,953

 

Accrued interest payable

 

Level 1

 

 

4,624

 

 

 

4,624

 

 

 

4,381

 

 

 

4,381

 

Derivative instruments – cash flow hedges

 

Level 2

 

 

 

 

 

 

 

 

311

 

 

 

311

 

Derivative instruments – interest rate products

 

Level 2

 

 

15,580

 

 

 

15,580

 

 

 

19,837

 

 

 

19,837

 

Derivative instruments – credit contracts

 

Level 2

 

 

39

 

 

 

39

 

 

 

86

 

 

 

86

 

Derivative instruments – mortgage banking

 

Level 2

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

(1)

Comprised of collateral dependent loans.

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Table of Contents

FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

 

(17.)

SEGMENT REPORTING

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

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

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

 

 

 

Banking

 

 

All Other

 

 

Consolidated

Totals

 

March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

48,536

 

 

$

18,137

 

 

$

66,673

 

Other intangible assets, net

 

 

18

 

 

 

7,837

 

 

 

7,855

 

Total assets

 

 

5,291,625

 

 

 

37,431

 

 

 

5,329,056

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

48,536

 

 

$

17,526

 

 

$

66,062

 

Other intangible assets, net

 

 

28

 

 

 

7,699

 

 

 

7,727

 

Total assets

 

 

4,875,673

 

 

 

36,633

 

 

 

4,912,306

 

 

 

 

 

Banking

 

 

All Other (1)

 

 

Consolidated

Totals

 

Three months ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

38,918

 

 

$

(1,061

)

 

$

37,857

 

(Provision) benefit for credit losses

 

 

1,981

 

 

 

 

 

 

1,981

 

Noninterest income

 

 

9,275

 

 

 

3,684

 

 

 

12,959

 

Noninterest expense

 

 

(22,633

)

 

 

(4,107

)

 

 

(26,740

)

Income (loss) before income taxes

 

 

27,541

 

 

 

(1,484

)

 

 

26,057

 

Income tax (expense) benefit

 

 

(6,035

)

 

 

688

 

 

 

(5,347

)

Net income (loss)

 

$

21,506

 

 

$

(796

)

 

$

20,710

 

 

(1)

Reflects activity from the acquisition of assets of Landmark Group since February 1, 2021 (the date of acquisition).

 

 

 

Banking

 

 

All Other

 

 

Consolidated

Totals

 

Three months ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

33,742

 

 

$

(618

)

 

$

33,124

 

Provision for credit losses

 

 

(13,915

)

 

 

 

 

 

(13,915

)

Noninterest income

 

 

6,815

 

 

 

3,095

 

 

 

9,910

 

Noninterest expense

 

 

(23,726

)

 

 

(3,944

)

 

 

(27,670

)

Income (loss) before income taxes

 

 

2,916

 

 

 

(1,467

)

 

 

1,449

 

Income tax (expense) benefit

 

 

141

 

 

 

(463

)

 

 

(322

)

Net income (loss)

 

$

3,057

 

 

$

(1,930

)

 

$

1,127

 

 

 

 

 

 

 

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Table of Contents

 

 

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

This Quarterly Report on Form 10-Q should be read in conjunction with the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2020. In addition, please read this section in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements contained herein.

FORWARD LOOKING INFORMATION

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

 

statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial condition, results of operations and performance of Financial Institutions, Inc. (the “Parent” or “FII”) and its subsidiaries (collectively, the “Company,” “we,” “our” or “us”); and

 

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

These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results may differ materially from those presented, either expressed or implied, in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (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:

 

The COVID-19 pandemic, and governmental and individual efforts to contain the pandemic, have had a significant negative impact on the U.S. and global economy which has and will continue to adversely affect our business, financial condition and results of operations;

 

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

 

Geographic concentration may unfavorably impact our operations;

 

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

 

Our indirect and consumer lending involves risk elements in addition to normal credit risk;

 

Lack of seasoning in portions of our loan portfolio could increase risk of credit defaults in the future;

 

We accept deposits that do not have a fixed term, and which may be withdrawn by the customer at any time for any reason;

 

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

 

We operate in a highly competitive industry and market area;

 

Changes to and replacement of the LIBOR Benchmark Interest Rate may adversely affect our business, financial condition, and results of operations;

 

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

 

Any future FDIC insurance premium increases may adversely affect our earnings;

 

We are highly regulated, and any adverse regulatory action may result in additional costs, loss of business opportunities, and reputational damage;

 

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

 

Our insurance brokerage subsidiary is subject to risk related to the insurance industry;

 

Our investment advisory and wealth management operations are subject to risk related to the regulation of the financial services industry and market volatility;

 

We make certain assumptions and estimates in preparing our financial statements that may prove to be incorrect, which could significantly impact our results of operations, cash flows and financial condition, and we are subject to new or changing accounting rules and interpretations, and the failure by us to correctly interpret or apply these evolving rules and interpretations could have a material adverse effect;

 

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

 

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

 

Acquisitions may disrupt our business and dilute shareholder value;

 

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

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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;

 

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

 

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

 

A breach in security of our or third-party information systems, including the occurrence of a cyber incident or a deficiency in cybersecurity, or a failure by us to comply with New York State cybersecurity regulations, may subject us to liability, result in a loss of customer business or damage our brand image;

 

We are subject to interest rate risk, and a rising rate environment may reduce our income and result in higher defaults on our loans, whereas a falling rate environment may result in earlier loan prepayments than we expect, which may reduce our income;

 

The soundness of other financial institutions could adversely affect us;

 

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

 

We may not pay or may reduce the dividends on our common stock;

 

We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could dilute our current shareholders or negatively affect the value of our common stock;

 

Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect;

 

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

 

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

 

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

 

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

 

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

 

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

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

GENERAL

The Parent is a financial holding company headquartered in New York State, providing diversified financial services through its subsidiaries, Five Star Bank (the “Bank”), SDN Insurance Agency, LLC (“SDN”), Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”). The Company offers a broad array of deposit, lending and other financial services to individuals, municipalities and businesses in Western and Central New York through its wholly-owned New York-chartered banking subsidiary, the Bank. Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, the Capital District of New York and Northern and Central Pennsylvania. SDN provides a broad range of insurance services to personal and business clients. Courier Capital and HNP Capital provide customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.

Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and other funding sources) and noninterest income, particularly fees and other revenue from insurance, investment advisory and financial services provided to customers or ancillary services tied to loans and deposits. Business volumes and pricing drive revenue potential, and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth, and competitive conditions within the marketplace. We are not able to predict market interest rate fluctuations with certainty and our asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on our results of operations and financial condition.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

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 are staffed by certified personal bankers who are trained to meet a broad array of customer needs. In recent years, we have opened four financial solution centers in the Rochester and Buffalo markets. We believe that the foregoing factors all help to grow our core deposits, which supports a central element of our business strategy - the growth of a diversified and high-quality loan portfolio.

EXECUTIVE OVERVIEW

Summary of 2021 First Quarter Results

Net income increased $19.6 million to $20.7 million for the first quarter of 2021 compared to $1.1 million for the first quarter of 2020. Net income available to common shareholders for the first quarter of 2021 was $20.3 million, or $1.27 per diluted share, compared with $762 thousand, or $0.05 per diluted share, for the first quarter of last year. Return on average common equity was 18.28% and return on average assets was 1.66% for the first quarter of 2021 compared to 0.72% and 0.10%, respectively, for the first quarter of 2020.

Net income for both periods was significantly impacted by the provision for credit losses. In the first quarter of 2020, the provision of $13.9 million was driven by the adoption of the current expected credit loss standard (“CECL”) and the impact of the COVID-19 pandemic on the economic environment. The designated loss driver for our CECL model is the national unemployment forecast, which spiked in early 2020 at the onset of the pandemic. In the first quarter of 2021, the provision was a benefit of $2.0 million due to continued improvement in national unemployment and positive trends in qualitative factors, resulting in a release of some of our credit loss reserves.

Net interest income totaled $37.9 million in the first quarter of 2021, up from $33.1 million in the first quarter of 2020. The increase was primarily the result of an increase in interest-earning assets and the positive impact of PPP loan forgiveness in the first quarter of 2021. Average loans and average investment securities were up $417.8 million and $134.7 million, respectively, in the first quarter of 2021 compared to the same quarter in 2020. 

The provision for credit losses - loans was a $1.7 million benefit in the first quarter of 2021 compared to a provision of $13.4 million in the first quarter of 2020. Net charge-offs during the recent quarter were $887 thousand, down from $10.1 million in the first quarter of 2020. Net charge-offs expressed as an annualized percentage of average loans outstanding were 0.10% during the first quarter of 2021 compared with 1.27% in the first quarter of 2020. See the “Allowance for Credit Losses - Loans” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion regarding the change in the provision (benefit) for credit losses - loans and the decrease in net charge-offs.

Noninterest income totaled $13.0 million in the first quarter of 2021, compared to $9.9 million in the first quarter of 2020. The increase in noninterest income for the first quarter was primarily due to increases in income from derivative instruments, net, net gain on sale of loans held for sale, income from investments in limited partnerships and investment advisory income, partially offset by a decrease in service charges on deposits. Income from derivative instruments, net of $1.9 million was recognized in the first quarter of 2021 as compared to $746 thousand in the first quarter of 2020. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed combined with the impact of changes in the fair market value of borrower-facing trades, which were positively impacted by the recent increase in longer-term interest rates. Net gain on sale of loans held for sale of $1.1 million was recognized in the first quarter of 2021 due to higher loan volume combined with an increase in transaction margins. Investments in limited partnerships of $855 thousand was recognized in the first quarter of 2021 as compared to $213 thousand in the first quarter of 2020. Investment advisory income of $2.8 million was recognized in the first quarter of 2021 due to increases in assets under management driven by a combination of market gains, new customer accounts and contributions to existing accounts. The Company recognized $1.3 million in service charges on deposits in the first quarter of 2021 as compared to $1.6 million in the first quarter of 2020. Insufficient fund fees, captured in service charges on deposits, remained lower than historic levels after the first quarter of 2020, potentially due to the positive impact of stimulus programs on consumer account balances.

Noninterest expense totaled $26.7 million in the first quarter of 2021, compared to $27.7 million in the first quarter of 2020. The decrease in noninterest expense was primarily the result of decreases in salaries and employee benefits and occupancy and equipment, partially offset by increases in computer and data processing and FDIC assessments. The decrease in salaries and employee benefits reflects a streamlining of retail branches to better align with shifting customer needs and preferences, including the decision in 2020 to close a total of seven branches. Computer and data processing expense increased primarily due to costs related to the Bank’s online and mobile platform, Five Star Bank Digital Banking, launched in the second quarter of 2020. FDIC assessments increased primarily as the result of an increase in total assets combined with the impact of a $70 thousand credit from 2018 that was utilized in the first quarter of 2020.

The regulatory Common Equity Tier 1 Ratio and Total Risk-Based Capital Ratio were 10.26%, and 13.58%, respectively, at March 31, 2021. 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Stock Repurchase Program

On November 4, 2020, the Company announced a stock repurchase program for up to 801,879 shares of common stock, or approximately 5% of the Company’s outstanding common shares. Shares may be repurchased in open market transactions and pursuant to any trading plan adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The timing and number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. The repurchase program does not obligate the Company to purchase any shares and it may be extended, modified or discontinued at any time.

No shares were repurchased in 2020 under this program. Year-to-date, the Company has repurchased 238,439 shares for an average repurchase price of $24.30 per share, inclusive of transaction costs.

Insurance Subsidiary Acquisition

On February 1, 2021, the Company’s insurance subsidiary SDN completed the acquisition of assets of Landmark Group (“Landmark”). A staple of the Rochester community since 1984, Landmark was an independent insurance brokerage firm delivering insurance, surety and risk management solutions across many business sectors including construction, manufacturing, real estate and technology, as well as individual personal insurance. Landmark Founder and Chairman Kelly M. Shea and President Christopher K. Shea remain with SDN to lead Rochester operations and continue their long-term relationship with clients.

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

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

 

Accounting for Loan Modifications - The CARES Act provided that a financial institution may elect to suspend (1) the application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

 

Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. On December 27, 2020, the Consolidated Appropriations Act, 2021 provided approximately $284 billion for PPP loans in an additional round of funding under the program and extended the PPP through March 31, 2021. This additional round of PPP loan funding is authorized for first-time borrowers and for second draws be certain borrowers who have previously received PPP loans.  On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extends the program to May 31, 2021.

 

Mortgage Forbearance - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance. This relief has been extended by executive order through at least June 30, 2021.

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

 

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.

 

Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

 

Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.

Effective March 23, 2020 through July 9, 2020, for consumer customers, the Bank waived early CD penalty fees for withdrawals up to $20,000 (limited to one penalty-free withdrawal per CD account); eliminated all insufficient funds (overdrafts) and returned item fees; eliminated all

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Pay by Phone fees; waived all late fees; offered the opportunity for monthly mortgage, home equity loan or home equity line payment relief; offered the opportunity to defer unsecured consumer loans or lines of credit and secured consumer loans and lines of credit payments; and offered unsecured personal loans up to $5,000, up to 60 months at 2.95% APR subject to credit approval.  ATM access fees were reinitiated on September 19, 2020.

As part of the first round of PPP loans we have helped more than 1,700 customers obtain more than $270 million in loans as of December 31, 2020. Of those loans, we have helped customers complete the forgiveness process for approximately $87 million of loans in the first three months of 2021. Also, during the first three months of 2021, we have helped customers obtain approximately $96 million of new PPP loans under the second round of the PPP. Additionally, approximately 4% of our commercial loan and mortgage customers, 1% of our residential real estate loans and lines customers and less than 1% of our indirect loans customers have active payment deferrals in accordance with the previously noted loan modifications under the CARES Act or agencies guidelines.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

Net interest income is our primary source of revenue, comprising 74% of revenue during the three months ended March 31, 2021. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities and repricing frequencies.

 

We use interest rate spread and net interest margin to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and shareholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.

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

March 31,

 

 

 

2021

 

 

2020

 

Interest income per consolidated statements of income

 

$

41,273

 

 

$

41,653

 

Adjustment to fully taxable equivalent basis

 

 

184

 

 

 

246

 

Interest income adjusted to a fully taxable equivalent basis

 

 

41,457

 

 

 

41,899

 

Interest expense per consolidated statements of income

 

 

3,416

 

 

 

8,529

 

Net interest income on a taxable equivalent basis

 

$

38,041

 

 

$

33,370

 

 

Analysis of Net Interest Income for the Three Months Ended March 31, 2021 and 2020

Net interest income on a taxable equivalent basis for the three months ended March 31, 2021, was $38.0 million, an increase of approximately $4.7 million versus the comparable quarter last year of $33.4 million. The increase in net interest income was due to deferred fee amortization of $2.9 million on PPP loans, which included accelerated amortization of fees on PPP loans paid-off through the forgiveness process, and increases in average loans and average investment securities of $417.8 million, or 13%, and $134.7 million, or 17%, respectively, compared to the first quarter of 2020. Average loans in the first quarter of 2021 included PPP loans net of deferred fees of $248.5 million.

Our net interest margin for the first quarter of 2021 was 3.29%, two-basis points lower than 3.31% for the same period in 2020. This comparable period decrease was a function of a 16-basis point lower contribution from net free funds, partially offset by a 14-basis point increase in the interest rate spread. The higher interest rate spread was a result of a 55-basis point decrease in the yield on average interest-earning assets and a 69-basis point decrease in the cost of average interest-bearing liabilities.

For the first quarter of 2021, the yield on average interest earning assets of 3.60% was 55-basis points lower than the first quarter of 2020 of 4.15%. Loan yields decreased 47-basis points during the first quarter of 2021 to 4.14% from 4.61%. The yield on investment securities decreased 57-basis points during the first quarter of 2021 to 1.91% from 2.48%. Overall, the earning asset rate changes decreased interest income by $5.7 million during the first quarter of 2021 and a favorable volume variance increased interest income by $5.3 million, which collectively drove a $442 thousand decrease in interest income.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

 

Average interest-earning assets were $4.67 billion for the first quarter of 2021 compared to $4.05 billion for the first quarter of 2020, an increase of $616.3 million, or 15%, from the comparable quarter last year, with average loans up $417.8 million from $3.21 billion to $3.63 billion and average securities up approximately $134.7 million from $780.0 million to $914.6 million. The growth in average loans reflected increases in the commercial loans, residential real estate loans and other consumer loans categories. Commercial loans, in particular, were up $411.6 million from $1.67 billion to $2.08 billion, or 25%, from the first quarter of 2020. The average balance of PPP loans net of deferred fees was $248.5 million in the first quarter of 2021 and the PPP loans are included in Commercial loans. Residential real estate loans were up $24.5 million, partially offset by a decrease of $15.0 million in residential real estate lines. Consumer indirect loans decreased by $3.9 million and other consumer loans increased by $701 thousand. Loans comprised 77.8% of average interest-earning assets during the first quarter of 2021 compared to 79.3% during the first quarter of 2020. Loans generally have significantly higher yields compared to securities and federal funds sold and interest-bearing deposits and, as such, have a more positive effect on the net interest margin. The yield on average loans was 4.14% for the first quarter of 2021, a decrease of 47-basis points compared to 4.61% for the comparable quarter in 2020. An increase in the volume of average loans resulted in a $4.5 million increase in interest income, partially offset by a $4.3 million decrease due to the unfavorable rate variance. Securities represented 19.6% of average interest-earning assets during the first quarter of 2021 compared to 19.2% during the first quarter of 2020. The unfavorable rate variance resulted in a $1.1 million decrease in interest income from investment securities, partially offset by a $674 thousand increase due to an increase in the average volume.

The cost of average interest-bearing liabilities of 0.40% in the first quarter of 2021 compared to 1.09% in the first quarter of 2020, was 69-basis points lower and the cost of average interest-bearing deposits decreased 69-basis points from 0.96% to 0.27%. Average short-term borrowings decreased $168.6 thousand from $169.8 thousand to $1.2 thousand in the first quarter of 2021 compared to the same quarter of 2020. The decrease in average short-term borrowings was a result of the Company’s decision to utilize brokered deposits as a cost-effective alternative to Federal Home Loan Bank borrowings. The cost of long-term borrowings for the first quarter of 2021 decreased 44-basis points from 6.29% to 5.85% compared to the same quarter of 2020. Overall, interest-bearing liability rate and volume decreases resulted in $5.1 million of lower interest expense.

Average interest-bearing liabilities of $3.45 billion in the first quarter of 2021 were $317.3 million, or 10%, higher than the first quarter of 2020. On average, interest-bearing deposits grew $451.6 million from $2.93 billion to $3.38 billion, and noninterest-bearing demand deposits (a principal component of net free funds) were up $322.8 million from $722.0 million to $1,044.7 million. The increase in average deposits was due to growth in non-public demand and an increase in reciprocal deposit programs. For further discussion of the reciprocal deposit programs, refer to the “Funding Activities - Deposits” section of this Management’s Discussion and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in a $4.8 million decrease in interest expense during the first quarter of 2021. Average borrowings decreased $134.3 million from $209.1 million to $74.8 million compared to the first quarter of 2020. Overall, short and long-term borrowing rate and volume changes resulted in $329 thousand of lower interest expense during the first quarter of 2021.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

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

 

 

 

Three months ended March 31,

 

 

 

2021

 

 

2020

 

 

 

Average

Balance

 

 

Interest

 

 

Average

Rate

 

 

Average

Balance

 

 

Interest

 

 

Average

Rate

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-earning deposits

 

$

123,042

 

 

$

27

 

 

 

0.09

%

 

$

59,309

 

 

$

211

 

 

 

1.43

%

Investment securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

772,360

 

 

 

3,496

 

 

 

1.81

 

 

 

589,182

 

 

 

3,657

 

 

 

2.49

 

Tax-exempt (2)

 

 

142,209

 

 

 

875

 

 

 

2.46

 

 

 

190,712

 

 

 

1,171

 

 

 

2.45

 

Total investment securities

 

 

914,569

 

 

 

4,371

 

 

 

1.91

 

 

 

779,894

 

 

 

4,828

 

 

 

2.48

 

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

798,866

 

 

 

8,413

 

 

 

4.27

 

 

 

570,886

 

 

 

6,514

 

 

 

4.59

 

Commercial mortgage

 

 

1,284,290

 

 

 

12,245

 

 

 

3.87

 

 

 

1,100,660

 

 

 

13,314

 

 

 

4.87

 

Residential real estate loans

 

 

602,866

 

 

 

5,260

 

 

 

3.49

 

 

 

578,407

 

 

 

5,448

 

 

 

3.77

 

Residential real estate lines

 

 

87,681

 

 

 

745

 

 

 

3.45

 

 

 

102,680

 

 

 

1,183

 

 

 

4.64

 

Consumer indirect

 

 

842,873

 

 

 

9,988

 

 

 

4.81

 

 

 

846,800

 

 

 

9,919

 

 

 

4.71

 

Other consumer

 

 

16,167

 

 

 

408

 

 

 

10.23

 

 

 

15,466

 

 

 

482

 

 

 

12.53

 

Total loans

 

 

3,632,743

 

 

 

37,059

 

 

 

4.14

 

 

 

3,214,899

 

 

 

36,860

 

 

 

4.61

 

Total interest-earning assets

 

 

4,670,354

 

 

 

41,457

 

 

 

3.60

 

 

 

4,054,102

 

 

 

41,899

 

 

 

4.15

 

Less: Allowance for credit losses

 

 

(53,998

)

 

 

 

 

 

 

 

 

 

 

(40,615

)

 

 

 

 

 

 

 

 

Other noninterest-earning assets

 

 

428,824

 

 

 

 

 

 

 

 

 

 

 

362,638

 

 

 

 

 

 

 

 

 

Total assets

 

$

5,045,180

 

 

 

 

 

 

 

 

 

 

$

4,376,125

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

$

790,996

 

 

$

256

 

 

 

0.13

%

 

$

667,533

 

 

 

344

 

 

 

0.21

%

Savings and money market

 

 

1,724,577

 

 

 

890

 

 

 

0.21

 

 

 

1,143,628

 

 

 

1,581

 

 

 

0.56

 

Time deposits

 

 

863,924

 

 

 

1,089

 

 

 

0.51

 

 

 

1,116,736

 

 

 

5,094

 

 

 

1.83

 

Total interest-bearing deposits

 

 

3,379,497

 

 

 

2,235

 

 

 

0.27

 

 

 

2,927,897

 

 

 

7,019

 

 

 

0.96

 

Short-term borrowings

 

 

1,178

 

 

 

119

 

 

 

40.97

 

 

 

169,827

 

 

 

892

 

 

 

2.11

 

Long-term borrowings

 

 

73,636

 

 

 

1,062

 

 

 

5.85

 

 

 

39,279

 

 

 

618

 

 

 

6.29

 

Total borrowings

 

 

74,814

 

 

 

1,181

 

 

 

6.40

 

 

 

209,106

 

 

 

1,510

 

 

 

2.90

 

Total interest-bearing liabilities

 

 

3,454,311

 

 

 

3,416

 

 

 

0.40

 

 

 

3,137,003

 

 

 

8,529

 

 

 

1.09

 

Noninterest-bearing demand deposits

 

 

1,044,733

 

 

 

 

 

 

 

 

 

 

 

721,975

 

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

77,501

 

 

 

 

 

 

 

 

 

 

 

75,931

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

468,635

 

 

 

 

 

 

 

 

 

 

 

441,216

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

5,045,180

 

 

 

 

 

 

 

 

 

 

$

4,376,125

 

 

 

 

 

 

 

 

 

Net interest income (tax-equivalent)

 

 

 

 

 

$

38,041

 

 

 

 

 

 

 

 

 

 

$

33,370

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

3.20

%

 

 

 

 

 

 

 

 

 

 

3.06

%

Net earning assets

 

$

1,216,043

 

 

 

 

 

 

 

 

 

 

$

917,099

 

 

 

 

 

 

 

 

 

Net interest margin (tax-equivalent)

 

 

 

 

 

 

 

 

 

 

3.29

%

 

 

 

 

 

 

 

 

 

 

3.31

%

Ratio of average interest-earning assets to average

   interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

135.20

%

 

 

 

 

 

 

 

 

 

 

129.23

%

 

(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%.

 

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

 

The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes in net interest income for the periods indicated. The change in interest income not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands):

 

 

 

Three months ended

March 31, 2021 vs. 2020

 

Increase (decrease) in:

 

Volume

 

 

Rate

 

 

Total

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and interest-earning deposits

 

$

113

 

 

$

(297

)

 

$

(184

)

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

972

 

 

 

(1,133

)

 

 

(161

)

Tax-exempt

 

 

(298

)

 

 

2

 

 

 

(296

)

Total investment securities

 

 

674

 

 

 

(1,131

)

 

 

(457

)

Loans:

 

 

 

 

 

 

 

 

 

 

 

 

Commercial business

 

 

2,433

 

 

 

(534

)

 

 

1,899

 

Commercial mortgage

 

 

2,014

 

 

 

(3,083

)

 

 

(1,069

)

Residential real estate loans

 

 

224

 

 

 

(412

)

 

 

(188

)

Residential real estate lines

 

 

(157

)

 

 

(281

)

 

 

(438

)

Consumer indirect

 

 

(46

)

 

 

115

 

 

 

69

 

Other consumer

 

 

21

 

 

 

(95

)

 

 

(74

)

Total loans

 

 

4,489

 

 

 

(4,290

)

 

 

199

 

Total interest income

 

 

5,276

 

 

 

(5,718

)

 

 

(442

)

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing demand

 

 

56

 

 

 

(144

)

 

 

(88

)

Savings and money market

 

 

578

 

 

 

(1,269

)

 

 

(691

)

Time deposits

 

 

(954

)

 

 

(3,051

)

 

 

(4,005

)

Total interest-bearing deposits

 

 

(320

)

 

 

(4,464

)

 

 

(4,784

)

Short-term borrowings

 

 

(1,720

)

 

 

947

 

 

 

(773

)

Long-term borrowings

 

 

500

 

 

 

(56

)

 

 

444

 

Total borrowings

 

 

(1,220

)

 

 

891

 

 

 

(329

)

Total interest expense

 

 

(1,540

)

 

 

(3,573

)

 

 

(5,113

)

Net interest income

 

$

6,816

 

 

$

(2,145

)

 

$

4,671

 

 

Provision for Credit Losses

The provision for credit losses for the three months ended March 31, 2021 was a benefit of $2.0 million, compared to a provision of $13.9 million for the corresponding period in 2020. The benefit in the first quarter of 2021 was due to continued improvement in the national unemployment forecast, the designated loss driver for our CECL model, and positive trends in qualitative factors, resulting in a release of credit loss reserves. The provision in the first quarter of 2020 was driven by the adoption of CECL and the impact of the COVID-19 pandemic on the economic environment. The provision for credit losses - loans varies based primarily on forecasted unemployment rates, loan growth, net charge-offs, collateral values associated with collateral dependent loans and qualitative factors.

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

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Table of Contents

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

March 31,

 

 

 

2021

 

 

2020

 

Service charges on deposits

 

$

1,292

 

 

$

1,587

 

Insurance income

 

 

1,396

 

 

 

1,349

 

Card interchange income

 

 

1,958

 

 

 

1,602

 

Investment advisory

 

 

2,772

 

 

 

2,246

 

Company owned life insurance

 

 

657

 

 

 

465

 

Investments in limited partnerships

 

 

855

 

 

 

213

 

Loan servicing

 

 

97

 

 

 

7

 

Income from derivative instruments, net

 

 

1,875

 

 

 

746

 

Net gain on sale of loans held for sale

 

 

1,078

 

 

 

252

 

Net gain (loss) on investment securities

 

 

74

 

 

 

221

 

Net gain (loss) on other assets

 

 

(5

)

 

 

64

 

Net loss on tax credit investments

 

 

(85

)

 

 

(40

)

Other

 

 

995

 

 

 

1,198

 

Total noninterest income

 

$

12,959

 

 

$

9,910

 

 

Service charges on deposits decreased $295 thousand, or 19%, to $1.3 million for the first quarter of 2021, compared to $1.6 million for the first quarter of 2020. The decrease was primarily due to decreased insufficient fund fees in the first quarter of 2021, potentially due to the positive impact of stimulus programs on consumer account balances.

Card interchange income increased $356 thousand to $2.0 million for the first quarter of 2021, compared to $1.6 million for the first quarter of 2020. The increase was primarily due to the impact of the COVID-19 pandemic on customer behavior in the last half of March 2020.

Investment advisory income increased $526 thousand to $2.8 million for the first quarter of 2021, compared to $2.2 million for the first quarter of 2020. The increase was primarily the result of an increase in assets under management driven by a combination of market gains, new customer accounts and contributions to existing accounts in 2021.

Income from investments in limited partnerships increased $642 thousand, to $855 thousand for the first quarter of 2021, compared to $213 thousand for the first quarter of 2020. We have investments in limited partnerships, primarily small business investment companies, and account for these investments under the equity method. The income from these equity method investments fluctuates based on the maturity and performance of the underlying investments.

Income from derivative instruments, net increased $1.1 million to $1.9 million for the first quarter of 2021, compared to $746 thousand for the first quarter of 2020. Income from derivative instruments, net is based on the number and value of interest rate swap transactions executed during the quarter combined with the impact of changes in the fair market value of borrower-facing trades, which were positively impacted by the recent increase in longer-term interest rates.

Net gain on sale of loans held for sale was $1.1 million for the first quarter of 2021, compared to $252 thousand for the first quarter of 2020. The increase was primarily due to increased volume combined with an increase in transaction margins.

 

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Table of Contents

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

March 31,

 

 

 

2021

 

 

2020

 

Salaries and employee benefits

 

$

14,465

 

 

$

15,014

 

Occupancy and equipment

 

 

3,382

 

 

 

3,756

 

Professional services

 

 

1,895

 

 

 

2,152

 

Computer and data processing

 

 

3,121

 

 

 

2,673

 

Supplies and postage

 

 

484

 

 

 

553

 

FDIC assessments

 

 

765

 

 

 

372

 

Advertising and promotions

 

 

324

 

 

 

555

 

Amortization of intangibles

 

 

271

 

 

 

294

 

Other

 

 

2,033

 

 

 

2,301

 

Total noninterest expense

 

$

26,740

 

 

$

27,670

 

 

Salaries and employee benefits expense decreased by $549 thousand, or 4%, to $14.5 million for the first quarter of 2021, compared to $15.0 million for the first quarter of 2020. The decrease in the first three months of 2021 reflects a streamlining of retail branches to better align with shifting customer needs and preferences, including the closure of seven branches since the first quarter of 2020.

Professional services expense decreased $257 thousand, or 12%, to $1.9 million for the first quarter of 2021, compared to $2.2 million for the first quarter of 2020. The decrease was primarily due to the timing and level of audit fees and fees for consulting and advisory projects, including our improvement initiatives. Expenses related to improvement initiatives totaled $180 thousand for the first quarter of 2021 and $599 thousand for the first quarter of 2020.

Computer and data processing expense increased $448 thousand, or 17%, to $3.1 million for the first quarter of 2021, compared to $2.7 million for the first quarter of 2020. The increase in computer and data processing expense was primarily due to investments in technology and reflects costs related to the Bank’s new online and mobile platform, Five Star Bank Digital Banking, launched in the second quarter of 2020.

FDIC assessments increased $393 thousand to $765 thousand for the first quarter of 2021, compared to $372 thousand for the first quarter of 2020. The increase as compared to the first quarter of 2020 was the result of an increase in total assets combined with the impact of a $70 thousand credit from 2018 that was utilized in the first quarter of 2020.

Our efficiency ratio for the first quarter of 2021 was 52.51% compared with 64.26% for the first quarter of 2020. The lower efficiency ratio was primarily the result of an increase in net interest income, associated with an increase in average interest-earning assets, and an increase in noninterest income compared to the prior year quarter. The efficiency ratio is calculated by dividing total noninterest expense by net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains on investment securities. An increase in the efficiency ratio indicates that more resources are being utilized to generate the same volume of income, while a decrease indicates a more efficient allocation of resources. The efficiency ratio, a banking industry financial measure, is not required by GAAP. However, the efficiency ratio is used by management in its assessment of financial performance specifically as it relates to noninterest expense control. Management also believes such information is useful to investors in evaluating Company performance.

Income Taxes

For the three months ended March 31, 2021, we recorded income tax expense of $5.3 million, versus $322 thousand for the same period in the prior year. In the first quarter of 2021 and 2020, the Company recognized tax credit investments resulting in a reduction in income tax expense of $244 thousand and $197 thousand, respectively, and a net loss recorded in noninterest income of $85 thousand and $40 thousand, respectively.

Our effective tax rates for the first three months of 2021 and 2020 were 20.5% and 22.2%, respectively. Effective tax rates are typically impacted by items of income and expense that are not subject to federal or state taxation. Our effective tax rates reflect the impact of these items, which include, but are not limited to, interest income from tax-exempt securities, earnings on Company owned life insurance and the impact of tax credit investments. In addition, our effective tax rate for 2021 and 2020 reflects the New York State tax benefit generated by our real estate investment trust.

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Table of Contents

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

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

 

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agency and government-sponsored enterprise

   securities

 

$

16,244

 

 

$

16,533

 

 

$

6,239

 

 

$

6,635

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency mortgage-backed securities

 

 

736,287

 

 

 

736,525

 

 

 

601,426

 

 

 

620,989

 

Non-Agency mortgage-backed securities

 

 

 

 

 

431

 

 

 

 

 

 

435

 

Total available for sale securities

 

 

752,531

 

 

 

753,489

 

 

 

607,665

 

 

 

628,059

 

Securities held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

 

139,264

 

 

 

143,031

 

 

 

144,506

 

 

 

148,984

 

Mortgage-backed securities

 

 

116,870

 

 

 

121,298

 

 

 

127,467

 

 

 

133,051

 

Total held to maturity securities

 

 

256,134

 

 

 

264,329

 

 

 

271,973

 

 

 

282,035

 

Allowance for credit losses - securities

 

 

(7

)

 

 

 

 

 

 

(7

)

 

 

 

 

Total held to maturity securities, net

 

 

256,127

 

 

 

 

 

 

 

271,966

 

 

 

 

 

Total investment securities

 

$

1,008,658

 

 

$

1,017,818

 

 

$

879,631

 

 

$

910,094

 

 

The available for sale (“AFS”) investment securities portfolio increased $125.4 million from $628.1 million at December 31, 2020 to $753.5 million at March 31, 2021. The increase from year-end 2020 was primarily due to the deployment of excess liquidity into cash flowing agency backed securities. The AFS portfolio had net unrealized gains of $958 thousand and $20.4 million at March 31, 2021 and December 31, 2020, respectively. The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change.

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 March 31, 2021. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Actual maturities may differ from the contractual maturities presented because borrowers may have the right to call or prepay certain investments. No tax-equivalent adjustments were made to the weighted average yields (dollars in thousands).

 

 

 

Due in one

year or less

 

 

Due from one

to five years

 

 

Due after five

years through

ten years

 

 

Due after ten years

 

 

Total

 

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

Available for sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies and

   government-sponsored enterprises

 

$

 

 

 

%

 

$

6,244

 

 

 

2.42

%

 

$

 

 

 

%

 

$

10,000

 

 

 

%

 

$

16,244

 

 

 

2.42

%

Mortgage-backed securities

 

 

4,887

 

 

 

2.23

 

 

 

51,218

 

 

 

2.54

 

 

 

148,739

 

 

 

2.07

 

 

 

531,443

 

 

 

1.48

 

 

 

736,287

 

 

 

1.68

 

 

 

 

4,887

 

 

 

 

 

 

57,462

 

 

 

2.53

 

 

 

148,739

 

 

 

2.07

 

 

 

541,443

 

 

 

1.48

 

 

 

752,531

 

 

 

1.68

 

Held to maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

State and political subdivisions

 

 

46,389

 

 

 

2.22

 

 

 

90,591

 

 

 

1.91

 

 

 

2,284

 

 

 

1.99

 

 

 

 

 

 

 

 

 

139,264

 

 

 

2.01

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

2,312

 

 

 

2.29

 

 

 

17,968

 

 

 

2.11

 

 

 

96,590

 

 

 

2.36

 

 

 

116,870

 

 

 

2.32

 

 

 

 

46,389

 

 

 

2.22

 

 

 

92,903

 

 

 

1.92

 

 

 

20,252

 

 

 

2.09

 

 

 

96,590

 

 

 

2.36

 

 

 

256,134

 

 

 

2.16

 

Total investment securities

 

$

51,276

 

 

 

2.22

%

 

$

150,365

 

 

 

2.15

%

 

$

168,991

 

 

 

2.07

%

 

$

638,033

 

 

 

1.62

%

 

$

1,008,665

 

 

 

1.80

%

 

Impairment Assessment

For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met. For the three months ended March 31, 2021 and 2020 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.

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 thousands).

 

 

 

Loan Portfolio Composition

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Amount

 

 

% of

Total

 

 

Amount

 

 

% of

Total

 

Commercial business

 

$

816,936

 

 

 

22.4

%

 

$

794,148

 

 

 

22.1

%

Commercial mortgage

 

 

1,276,841

 

 

 

34.9

 

 

 

1,253,901

 

 

 

34.9

 

Total commercial

 

 

2,093,777

 

 

 

57.3

 

 

 

2,048,049

 

 

 

57.0

 

Residential real estate loans

 

 

601,609

 

 

 

16.5

 

 

 

599,800

 

 

 

16.7

 

Residential real estate lines

 

 

85,362

 

 

 

2.3

 

 

 

89,805

 

 

 

2.5

 

Consumer indirect

 

 

857,804

 

 

 

23.5

 

 

 

840,421

 

 

 

23.4

 

Other consumer