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FINANCIAL INSTITUTIONS INC

FINANCIAL INSTITUTIONS INCFISIEarnings & Financial Report

Nasdaq · Financials · National Commercial Banks

The Mizuho Financial Group, Inc. , known from 2000 to 2003 as Mizuho Holdings and abbreviated as MHFG or simply Mizuho, is a Japanese banking holding company headquartered in the Ōtemachi district of Chiyoda, Tokyo, Japan. The group was formed in 2000–2002 by merger of Dai-Ichi Kangyo Bank, Fuji Bank, and Industrial Bank of Japan. The name mizuho (瑞穂) literally means "abundant rice" in Japanese and "harvest" in the figurative sense.

What changed in FINANCIAL INSTITUTIONS INC's 10-K — 2022 vs 2023

Top changes in FINANCIAL INSTITUTIONS INC's 2023 10-K

490 paragraphs added · 463 removed · 356 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

127 edited+39 added−41 removed76 unchanged
Under the Basel III Rules, the current minimum capital ratios, including an additional capital conservation buffer applicable to the Company and the Bank, are: • 7.0% CET1 to risk-weighted assets; • 8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and • 10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.
Under the Basel III Rules, the current minimum capital ratios, including an additional capital conservation buffer (2.5%) applicable to the Company and the Bank, are: • 7.0% CET1 to risk-weighted assets; • 8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and • 10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.
We rely primarily on competitive pricing of our deposit products, customer service and long-standing relationships with customers to attract and retain these deposits and seek to make our services convenient to the community by offering a choice of several delivery systems and channels, including telephone, mail, online, automated teller machines (“ATMs”), debit cards, point-of-sale transactions, automated clearing house transactions (“ACH”), remote deposit, and mobile banking via telephone or wireless devices.
We rely primarily on competitive pricing of our deposit products, customer service and long-standing relationships with customers to attract and retain these deposits and seek to make our services convenient to the community by offering a choice of several delivery systems and channels, including telephone, mail, online, automated teller machines (“ATMs”), debit cards, point-of-sale transactions, automated clearing house transactions (“ACH”), ITM’s, remote deposit, and mobile banking via telephone or wireless devices.
In November 2021, the federal bank regulatory agencies issued a final rule requiring banking organizations to notify their primary federal regulator as soon as possible and no later than 36 hours of determining that a “computer-security incident” that rises to the level of a “notification incident,” as those terms are defined in the final rule, has occurred.
In November 2021, the federal bank regulatory agencies issued a final rule requiring banking organizations to notify their primary federal regulator as soon as possible and no later than 36 hours after determining that a “computer-security incident” that rises to the level of a “notification incident,” as those terms are defined in the final rule, has occurred.
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 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 and services typically found at larger banks, our highly experienced management team and our strategically located banking centers.
Federal banking regulators, as required under the Gramm-Leach-Bliley Act, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to non-affiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties.
Privacy and Cybersecurity Federal banking regulators, as required under the Gramm-Leach-Bliley Act, have adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to non-affiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to non-affiliated third parties.
Commercial Business and Commercial Mortgage Lending We primarily originate commercial business loans in our market areas and underwrite them based on the borrower’s ability to service the loan from operating income. We offer a broad range of commercial lending products, including term loans and lines of credit.
Commercial Lending We primarily originate commercial business loans in our market areas and underwrite them based on the borrower’s ability to service the loan from operating income. We offer a broad range of commercial lending products, including term loans and lines of credit.
The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of shareholders and creditors. Elements of the laws and regulations applicable to the Company and material to our operations are described below.
The regulatory framework is intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of shareholders and creditors. Elements of the laws and regulations applicable to the Company and the Bank and material to our operations are described below.
The key elements of our lending philosophy include the following: • To ensure consistent underwriting, employees must share a common view of the risks inherent in lending activities as well as the standards to be applied in underwriting and managing credit risk; • Pricing of credit products should be risk-based; • The loan portfolio must be diversified to limit the potential impact of negative events; and • Careful, timely exposure monitoring through dynamic use of our risk rating system is required to provide early warning and assure proactive management of potential problems.
The key elements of our lending philosophy include the following: • To ensure consistent underwriting, employees must share a common view of the risks inherent in lending activities as well as the standards to be applied in underwriting and managing credit risk; • Pricing of credit products are risk-based; • The loan portfolio must be diversified to limit the potential impact of negative events; and • Careful, timely exposure monitoring through dynamic use of our risk rating system is required to provide early warning and assure proactive management of potential problems.
Under the limited exception, qualified banks are able to exempt from treatment as “brokered” deposits up to $5 billion or 20 percent of the institution’s total liabilities in reciprocal deposits (which is defined as deposits received by a financial institution through a deposit placement network with the same maturity (if any) and in the same aggregate amount as deposits placed by the institution in other network member banks).
Under the limited exception, qualified banks are able to exempt from treatment as “brokered” deposits up to $5 billion or 20% of the institution’s total liabilities in reciprocal deposits (which are defined as deposits received by a financial institution through a deposit placement network with the same maturity (if any) and in the same aggregate amount as deposits placed by the institution in other network member banks).
Courier Capital and HNP Capital must update these forms at least once each year and more frequently under certain specified circumstances. This registration covers Courier Capital or HNP Capital and its employees as well as other persons under their control and supervision, such as independent contractors, provided that their activities are undertaken on behalf of Courier Capital or HNP Capital.
Courier Capital must update these forms at least once each year and more frequently under certain specified circumstances. This registration covers Courier Capital and its employees as well as other persons under their control and supervision, such as independent contractors, provided that their activities are undertaken on behalf of Courier Capital.
It is also authorized to terminate a depository bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the bank’s regulatory agency.
It is also authorized to terminate a depository bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable law, regulation, order or condition enacted or imposed by the bank’s regulatory agency.
Commercial mortgage loans are secured by first liens on the real estate and are typically amortized over a 10 to 20-year period. The underwriting analysis includes credit verification, appraisals and a review of the borrower’s financial condition and repayment capacity.
The majority of our commercial mortgage loans are secured by first liens on the real estate and are typically amortized over a 10- to 20-year period. The underwriting analysis includes credit verification, appraisals and a review of the borrower’s financial condition and repayment capacity.
If a bank is not a qualifying community banking organization, does not opt in to using the CBLR, or cannot maintain a CBLR of greater than 9.0%, the bank would have to comply with the Basel III Rules. We determined to comply with the Basel III Rules instead of using the CBLR framework. Leverage Requirements.
If a bank is not a qualifying community banking organization, does not opt in to using the CBLR, or cannot maintain a CBLR of greater than 9.0%, the bank would have to comply with the Basel III Rules. We determined to comply with the Basel III Rules instead of using the CBLR framework.
Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Interstate Branching.
Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
The BHC Act provides that a financial holding company must obtain FRB approval before: • Acquiring, directly or indirectly, ownership or control of any voting shares of another bank, financial holding company or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); • Acquiring all or substantially all the assets of another bank, financial holding company or bank holding company, or • Merging or consolidating with another financial holding company or bank holding company.
The BHC Act provides that an FHC must obtain FRB approval before: • Acquiring, directly or indirectly, ownership or control of any voting shares of another bank, financial holding company or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); • Acquiring all or substantially all the assets of another bank, financial holding company or bank holding company, or • Merging or consolidating with another financial holding company or bank holding company.
The FRB policy is that a financial holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition and that it is inappropriate for a financial holding company experiencing serious financial problems to borrow funds to pay dividends.
Dividends The FRB policy is that an FHC should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition and that it is inappropriate for an FHC experiencing serious financial problems to borrow funds to pay dividends.
Five Star REIT provides additional flexibility and planning opportunities for the business of the Bank. - 6 - Table of Contents Business Strategy Our business strategy has been to maintain a community bank philosophy, which consists of focusing on and understanding the individualized banking and other financial services needs of individuals, municipalities and businesses of the communities surrounding our primary service area.
Five Star REIT provides additional flexibility and planning opportunities for the business of the Bank. Business Strategy Our business strategy has been to maintain a community bank philosophy, which consists of focusing on and understanding the individualized banking and other financial services needs of individuals, municipalities and businesses of the communities surrounding our primary service area.
Our policy includes loan reviews, under the supervision of the Audit and Risk Oversight committees of our Board of Directors and directed by our Chief Risk Officer, in order to render an independent and objective evaluation of our asset quality and credit administration process. - 11 - Table of Contents We assign risk ratings to loans in the commercial business and commercial mortgage portfolios.
Our policy includes loan reviews, under the supervision of the Audit and Risk Oversight committees of our Board of Directors and directed by our Chief Risk Officer, in order to render an independent and objective evaluation of our asset quality and credit administration process. We assign risk ratings to loans in the commercial business and commercial mortgage portfolios.
Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics such as changes in: underwriting standards, delinquency level, regulatory environment, economic condition, Company management and the status of portfolio administration including the Company’s credit risk review function. - 12 - Table of Contents 3.
Adjustments to the quantitative evaluation may be made for differences in current or expected qualitative risk characteristics such as changes in underwriting standards, delinquency level, regulatory environment, economic condition, Company management and the status of portfolio administration including the Company’s credit risk review function. 3.
For further information regarding the capital ratios and leverage ratio of the Company and the Bank see the section titled “Sources and Uses of Capital Resources” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of - 15 - Table of Contents Operations,” included in this Annual Report on Form 10-K.
For further information regarding the capital ratios and leverage ratio of the Company and the Bank, see the section titled “Sources and Uses of Capital Resources” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this Annual Report on Form 10-K.
A notification incident is a “computer-security incident” that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the - 17 - Table of Contents banking organization, or impact the stability of the financial sector.
A notification incident is a “computer-security incident” that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector.
The Federal Reserve Act imposes limitations on a bank with respect to extensions of credit to, investments in, and certain other transactions with, its parent financial holding company and the holding company’s other subsidiaries. Furthermore, bank loans and extensions of credit to affiliates also are subject to various collateral requirements.
The Federal Reserve Act and Regulation W imposes limitations on a bank with respect to extensions of credit to, investments in, and certain other transactions with, its affiliates, including its parent financial holding company and the holding company’s other subsidiaries. Furthermore, bank loans and extensions of credit to affiliates also are subject to various collateral requirements.
These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason, the policies of the FRB could have a material effect on our earnings. - 20 - Table of Contents
These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. For that reason, the policies of the FRB could have a material effect on our earnings.
Through the loan approval process, loan administration and loan review program, management seeks to continuously monitor our credit risk profile and assess the overall quality of the loan portfolio and adequacy of the allowance for credit losses. We have several procedures in place to assist in maintaining the overall quality of our loan portfolio.
Through the loan approval process, loan administration and loan review program, management seeks to continuously monitor our credit risk profile and assess the overall quality of the loan portfolio and adequacy of the allowance for credit losses. - 10 - Table of Contents We have several procedures in place to assist in maintaining the overall quality of our loan portfolio.
However, the Gramm-Leach-Bliley Act amended portions of the BHC Act to authorize financial holding companies, such as us, to directly or through non-bank subsidiaries engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity.
However, the Gramm-Leach-Bliley Act amended portions of the BHC Act to authorize FHCs, such as us, to directly or through non-bank subsidiaries engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity.
The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA establishes five capital categories for FDIC-insured banks: well capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized.
Prompt Corrective Action The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA establishes five capital categories for FDIC-insured banks: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
These filings may be viewed by accessing the SEC Filings subsection of the Financials section of our website ( www.fiiwarsaw.com ). Information available on our website is not a part of, and is not incorporated into, this Annual Report on Form 10-K.
These filings may be viewed by accessing the SEC Filings subsection of the Financials section of our website ( www.FISI-investors.com ). Information available on our website is not a part of, and is not incorporated into, this Annual Report on Form 10-K.
Community Reinvestment Act. Pursuant to the Community Reinvestment Act (the “CRA”), under federal and New York State law, the Bank is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods.
Community Reinvestment Act Pursuant to the federal Community Reinvestment Act (the “CRA”), and its New York state analogue, the Bank is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods.
The Bank reviews and monitors its anti-money laundering compliance program to ensure it complies with the changes reflected in the AMLA and the regulations that implement it. - 18 - Table of Contents Office of Foreign Assets Control Regulation. The U.S.
The Bank reviews and monitors its anti-money laundering compliance program to ensure it complies with the changes reflected in the AMLA and the regulations that implement it. Office of Foreign Assets Control Regulation The U.S.
Furthermore, a bank that is classified under the prompt corrective action regulations as “under-capitalized” will be prohibited from paying any dividends. The primary source of cash for dividends we pay is the dividends we receive from the Bank.
Furthermore, a bank that is classified under the prompt corrective action regulations as “undercapitalized” will be prohibited from paying any dividends. The primary source of cash for dividends we pay is the dividends we receive from the Bank.
Section 23A of the Federal Reserve Act also generally requires that an insured depository institution’s loans to its nonbank affiliates be, at a minimum, 100% secured, and Section 23B of the Federal Reserve Act generally requires that an insured depository institution’s transactions with its nonbank affiliates be on terms and under circumstances that are substantially the same or at least as favorable as those prevailing for comparable transactions with non-affiliates.
Section 23A of the Federal Reserve Act and Regulation W also generally requires that an insured depository institution’s loans to its affiliates be, at a minimum, 100% secured, and Section 23B of the Federal Reserve Act and Regulation W generally requires that an insured depository institution’s transactions with its affiliates be on terms and under circumstances that are substantially the same or at least as favorable to the bank as those prevailing for comparable transactions with or involving non-affiliates.
In the final rules approved by the FDIC in September 2019, qualifying community banking organizations that opt in to using the CBLR are considered to be in compliance with the Basel III Rules as long as the bank maintains a CBLR of greater than 9.0%.
In the final rules approved by the FRB in November 2019, qualifying community banking organizations that opt in to using the CBLR are considered to be in compliance with the Basel III Rules as long as the bank maintains a CBLR of greater than 9.0%.
The rule was effective April 1, 2022, with compliance required by May 1, 2022. The NY DFS requires New York State-chartered or licensed banks regulated by the NY DFS, such as us, to adopt broad cybersecurity protections.
The rule was effective April 1, 2022, with compliance required by May 1, 2022. - 16 - Table of Contents The NY DFS requires New York State-chartered or licensed banks regulated by the NY DFS, such as us, to adopt broad cybersecurity protections.
We believe our capital position remains strong enough to support an active merger and acquisition strategy and the expansion of our core financial service businesses of banking, insurance and wealth management. Consequently, we continue to explore acquisition opportunities in these activities.
We believe our capital position remains strong enough to support an active merger and acquisition strategy and the expansion of our core financial service businesses. Consequently, we continue to explore acquisition opportunities in these activities.
While a FHC is generally excluded from regulation under the Advisers Act, the SEC has stated that this exclusion does not apply to investment adviser subsidiaries of FHCs, such as Courier Capital and HNP Capital.
While an FHC is generally excluded from regulation under the Advisers Act, the SEC has stated that this exclusion does not apply to investment adviser subsidiaries of FHCs, such as Courier Capital.
Pursuant to the Dodd-Frank Act, national and state-chartered banks may open an initial branch in a state other than its home state (e.g., a host state) by establishing a de novo branch at any location in such host state at which a bank chartered in such host state could establish a branch.
Interstate Branching Pursuant to the Dodd-Frank Act, national and state-chartered banks may open an initial branch in states other than their home state (e.g., host states) by establishing a de novo branch at any location in such host state at which a bank chartered in such host state could establish a branch.
To facilitate talent attraction and retention, we strive to make the Company an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, health and welfare programs. - 7 - Table of Contents Employee Profile As of December 31, 2022, we had 672 employees situated across the United States (the “U.S.”).
To facilitate talent attraction and retention, we strive to make the Company an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, health and welfare programs. Employee Profile As of December 31, 2023, we had 624 employees situated across the United States (the “U.S.”).
We typically follow the underwriting and appraisal guidelines of the secondary market, including the FHLMC and the Federal Housing Administration, and service the loans in a manner that satisfies the secondary market agreements. As of December 31, 2022, our residential mortgage servicing portfolio totaled $275.3 million, the majority of which has been sold to the FHLMC.
We typically follow the underwriting and appraisal guidelines of the secondary market, including the FHLMC and the Federal Housing Administration, and service the loans in a manner that satisfies the secondary market agreements. As of December 31, 2023, our residential mortgage servicing portfolio totaled $269.4 million, the majority of which has been sold to the FHLMC.
In June 2021, the Financial Crimes Enforcement Network (“FinCEN”) issued the priorities for anti-money laundering and countering the financing of terrorism policy required under AMLA. The national priorities include: (i) corruption, (ii) cybercrime, (iii) terrorist financing, (iv) fraud, (v) transnational crime, (vi) drug trafficking, (vii) human trafficking and (viii) proliferation financing.
In June 2021, the FinCEN issued the priorities for anti-money laundering and countering the financing of terrorism policy required under AMLA. The national priorities include: (i) corruption, (ii) cybercrime, (iii) terrorist financing, (iv) fraud, (v) transnational crime, (vi) drug trafficking, (vii) human trafficking and (viii) proliferation financing.
BHCs and banks are also required to comply with minimum leverage ratio requirements. These requirements provide for a minimum ratio of Tier 1 capital to total consolidated quarterly average assets (as defined for regulatory purposes), net of the loan loss reserve, goodwill and certain other intangible assets (the “leverage ratio”), of 4.0%. Prompt Corrective Action.
Leverage Requirements Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. These requirements provide for a minimum ratio of Tier 1 capital to total consolidated quarterly average assets (as defined for regulatory purposes), net of the loan loss reserve, goodwill and certain other intangible assets (the “leverage ratio”), of 4.0%.
Department of the Treasury to promulgate priorities for anti-money laundering and countering the financing of terrorism policy; requires the development of standards for testing technology and internal processes for BSA compliance; expands enforcement and investigation-related authority, including increasing available sanctions for certain BSA violations; and expands BSA whistleblower incentives and protections.
Department of the Treasury to promulgate priorities for anti-money laundering and countering the financing of terrorism policy; required the development of standards for testing technology and internal processes for BSA compliance; expanded enforcement and investigation-related authority, including the increase of available sanctions for certain BSA violations; and expanded BSA whistleblower incentives and protections.
Because Courier Capital and HNP Capital each have over $100 million in assets under management, each is individually considered a “large adviser,” which requires registration with the SEC by filing Form ADV, including Part 3 to Form ADV, or Form CRS, which discloses the material terms of the advisor’s relationship with retail customers.
Because Courier Capital has over $100 million in assets under management, it is considered a “large adviser,” which requires registration with the SEC by filing Form ADV, including Part 3 to Form ADV, or Form CRS, which discloses the material terms of the advisor’s relationship with retail customers.
Regulatory authorities routinely examine financial institutions for compliance with these obligations, and for the failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
The failure of a financial institution to maintain and implement an adequate program to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Applications to establish such branches must still be filed with the appropriate primary federal regulator. Transactions with Affiliates. FII, FSB, Five Star REIT, SDN, Courier Capital, HNP Capital and CHIL are affiliates within the meaning of the Federal Reserve Act.
Applications to establish such branches must still be filed with the appropriate primary federal regulator. Transactions with Affiliates FII, FSB, Five Star REIT, SDN, and Courier Capital are affiliates within the meaning of the Federal Reserve Act and its implementing regulation, Regulation W.
Commencing in October 2013, prior to the Parent’s acquisition of Courier Capital and HNP Capital, the Bank entered into a partnership with LPL Financial, one of the nation’s largest independent financial services companies (“LPL”), to provide investment advisory and broker-dealer services to the Bank’s customers through LPL.
Commencing in October 2013, prior to the Parent’s acquisition of Courier Capital and former HNP Capital, the Bank entered into a partnership with LPL Financial (“LPL”) to provide investment advisory and broker-dealer services to the Bank’s customers through LPL.
Our current policy generally limits security purchases to the following: • U.S. treasury securities; • U.S. government agency securities, which are securities issued by official Federal government bodies (e.g., the Government National Mortgage Association (“GNMA”) and the Small Business Administration (“SBA”)), and U.S. government-sponsored enterprise securities, which are securities issued by independent organizations that are in part sponsored by the federal - 9 - Table of Contents government (e.g., the Federal Home Loan Bank (“FHLB”) system, the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Farm Credit Bureau); • Mortgage-backed securities (“MBS”), which include mortgage-backed pass-through securities, collateralized mortgage obligations and multi-family MBS issued by GNMA, FNMA and FHLMC; • Investment grade municipal securities, including revenue, tax and bond anticipation notes, statutory installment notes and general obligation bonds; • Certain creditworthy unrated securities issued by municipalities; • Certificates of deposit; • Equity securities at the holding company level; • Derivative instruments; and • Limited partnership investments.
Our current policy generally limits security purchases to the following: • U.S. treasury securities; • U.S. government agency securities, which are securities issued by official Federal government bodies (e.g., the Government National Mortgage Association (“GNMA”) and the Small Business Administration (“SBA”)), and U.S. government-sponsored enterprise securities, which are securities issued by independent organizations that are in part sponsored by the federal government (e.g., the Federal Home Loan Bank (“FHLB”) system, the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”) and the Federal Farm Credit Bureau); • Mortgage-backed securities (“MBS”), which include mortgage-backed pass-through securities, collateralized mortgage obligations and multi-family MBS issued by GNMA, FNMA and FHLMC; • Investment grade municipal securities, including revenue, tax and bond anticipation notes, statutory installment notes and general obligation bonds; • Certain creditworthy unrated securities issued by municipalities; • Certificates of deposit; • Equity securities at the holding company level; • Derivative instruments; and • Limited partnership investments. - 8 - Table of Contents LENDING ACTIVITIES General We offer a broad range of loans including commercial business and revolving lines of credit, commercial mortgages, equipment loans, residential mortgage loans and home equity loans and lines of credit, home improvement loans, automobile loans and personal loans.
All information in the table was obtained from S&P Global Market Intelligence, which compiles deposit data published by the FDIC as of June 30, 2022 and updates the information for any bank mergers and acquisitions completed subsequent to the reporting date.
The table also indicates the ranking by deposit size in each market. All information in the table was obtained from S&P Global Market Intelligence, which compiles deposit data published by the FDIC as of June 30, 2023 and updates the information for any bank mergers and acquisitions completed subsequent to the reporting date.
Treasury Department’s Office of Foreign Assets Control, or “OFAC”, administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries.
Treasury Department’s Office of Foreign Assets Control, or “OFAC”, administers and enforces economic and trade sanctions against targeted foreign countries and regimes, nationals, and others, under authority of various laws, regulations, and executive orders. OFAC publishes lists of specially designated nationals and sanctioned countries.
“Covered transactions” are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the FRB) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
“Covered transactions” are defined by law and regulation to include a loan or extension of credit to an affiliate, as well as a purchase of securities issued by an affiliate, a purchase of assets from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.
For example, Section 23A of the Federal Reserve Act limits the aggregate outstanding amount of any insured depository institution’s loans and other “covered transactions” with any particular nonbank affiliate to no more than 10% of the institution’s total capital and limits the aggregate outstanding amount of any insured depository institution’s covered transactions with all of its nonbank affiliates to no more than 20% of its total capital.
Section 23A of the Federal Reserve Act and Regulation W limit the aggregate outstanding amount of any insured depository institution’s loans and other “covered transactions” with any particular affiliate to no more than 10% of the institution’s total capital and limits the aggregate outstanding amount of any insured depository institution’s covered transactions with all of its non-bank affiliates to no more than 20% of its total capital.
With $1.90 billion in assets under management as of December 31, 2022, Courier Capital offers customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses and institutions. For the year ended December 31, 2022, Courier Capital had total revenue of $5.7 million.
With $2.88 billion in assets under management as of December 31, 2023, Courier Capital offers customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses and institutions. For the year ended December 31, 2023, Courier Capital had total revenue of $10.1 million.
The Company is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.
The Company is responsible for, among other things, blocking accounts of, and transactions with, such sanctioned parties or jurisdictions, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence.
In most jurisdictions, licensing laws and regulations generally grant broad discretion to supervisory authorities to adopt and amend regulations and to supervise regulated activities. Investment Advisory Regulation. Courier Capital and HNP Capital are providers of investment consulting and financial planning services and, as such, are each considered an “investment adviser” under the U.S.
In most jurisdictions, licensing laws and regulations generally grant broad discretion to supervisory authorities to adopt and amend regulations and to supervise regulated activities. - 18 - Table of Contents Investment Advisory Regulation Courier Capital is a provider of investment consulting and financial planning services and, as such, is considered an “investment adviser” under the U.S.
Our industry frequently experiences merger activity, which affects competition by eliminating some institutions while potentially strengthening the franchises of others. The following table presents the Bank’s market share percentage for total deposits as of June 30, 2022, in each county where we have operations. The table also indicates the ranking by deposit size in each market.
Our industry frequently experiences merger activity, which affects competition by eliminating some institutions while potentially strengthening the franchises of others. - 7 - Table of Contents The following table presents the Bank’s market share percentage for total deposits as of June 30, 2023, in each county where we have operations in New York.
This approach has yielded loyalty and commitment among our employees which in turn grows our business, our products, and our customers, while also adding new talent, skill sets and ideas to support a continuous improvement mindset and our goals of a diverse and inclusive workforce.
This approach has yielded loyalty and commitment among our employees which in turn grows our business, our products, and our customers, while also adding new talent, skill sets and ideas to support a continuous improvement mindset and our goals of a diverse and inclusive workforce. We conduct intentional, strategic hiring to supplement the organization with new skill sets and perspectives.
The Company had made the election with the adoption of ASU 2016-13 of not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner, as described above. 5.
The Company had made the election with the adoption of Accounting Standards Update (“ASU 2016-13”) of not measuring an allowance for credit losses for accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner, as described above. - 11 - Table of Contents 5.
Regulatory authorities have increased their regulatory scrutiny of the Bank Secrecy Act (“BSA”) and anti-money laundering programs maintained by financial institutions and imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations. The Bank has adopted policies and procedures which are in compliance with these requirements.
Regulatory authorities have increased their regulatory scrutiny of the Bank Secrecy Act (“BSA”) and anti-money laundering programs maintained by financial institutions and have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
In addition, our consumer indirect lending presence includes the Capital District of New York and Northern and - 8 - Table of Contents Central Pennsylvania, and we have commercial loan production offices in Baltimore, Maryland and Syracuse, New York, serving the Mid-Atlantic and Central New York regions.
During 2023, our consumer indirect lending presence included the Capital District of New York and Northern and Central Pennsylvania, and we have commercial loan production offices in Baltimore, Maryland and Syracuse, New York, serving the Mid-Atlantic and Central New York regions, respectively.
We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families.
We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families. - 6 - Table of Contents Talent A core tenet of our talent system is to both develop talent from within and supplement with external hires.
Additionally, approval of the New York State Department of Financial Services (the “NY DFS”) is required prior to paying a dividend if the dividend declared by the Bank exceeds the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years.
Additionally, approval of the NY DFS is required prior to paying a dividend if the dividend declared by the Bank exceeds the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years.
Such legislation could change banking statutes and/or our operating environment in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.
If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.
This relief includes an exemption from the Volcker Rule (i.e., a provision of the Dodd-Frank Act which prohibits banks and their affiliates from engaging in proprietary trading and from investing and sponsoring hedge funds and private equity funds.) - 14 - Table of Contents Depository Institution Regulation. The Bank is subject to regulation by the FDIC.
This relief includes an exemption from the Volcker Rule (i.e., a provision of the Dodd-Frank Act which prohibits banks and their affiliates from engaging in proprietary trading and from investing and sponsoring hedge funds and private equity funds.) Depository Institution Regulation The Bank is organized under the laws of the state of New York.
These financial solution centers 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.
We focus on technology to provide solutions that fit our customer preferences for transacting business with us. Branches are staffed by certified personal bankers who are trained to meet a broad array of customer needs.
The Basel III Rules, among other things, (i) introduce a new capital measure called CET1, which consists primarily of retained earnings and common stock, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, such as preferred stock and certain convertible securities, meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to historical regulations.
The current risk-based capital standards applicable to the Company and the Bank are based on the final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision. - 13 - Table of Contents The Basel III Rules, among other things, (i) introduce a capital measure called CET1, which consists primarily of retained earnings and common stock, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, such as preferred stock and certain convertible securities, meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to historical regulations.
We are registered with the Federal Reserve as a financial holding company (“FHC”). We must file reports with the FRB and submit such additional information as the FRB may require, and our holding company and non-banking affiliates are subject to examination by the FRB.
We are registered with the Federal Reserve as a financial holding company (“FHC”). We must file reports with the FRB and submit such additional information as the FRB may require, and our holding company and non-banking affiliates are subject to examination by the FRB. Under FRB policy, an FHC must serve as a source of strength for its subsidiary banks.
Short and medium-term commercial loans, primarily collateralized, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion and improvements) and the purchase of equipment. We offer commercial business loans to customers in the agricultural industry for short-term crop production, farm equipment and livestock financing.
Short- and medium-term commercial loans, primarily collateralized, are made available to businesses for working capital (including inventory and receivables), business expansion (including acquisition of real estate, expansion and improvements) and the purchase of equipment.
At January 1, 2023, the Bank could declare dividends of $89.3 million from retained net profits of the preceding two years. The Bank declared dividends of $28.0 million and $24.0 million in 2022 and 2021, respectively. Federal Deposit Insurance Assessments.
At January 1, 2024, the Bank could declare dividends of $70.3 million from retained net profits of the preceding two years. The Bank declared dividends of $14.0 million and $28.0 million in 2023 and 2022, respectively.
For institutions of the Bank’s asset size, the FDIC operates a risk-based premium system that determines assessment rates from financial modeling designed to estimate the probability of the bank’s failure over a three-year period. Assessment rates for institutions of the Bank’s size ranged from 1.5 to 30-basis points effective through December 31, 2022.
For institutions of the Bank’s asset size, the FDIC operates a risk-based premium system that determines assessment rates from financial modeling designed to estimate the probability of the bank’s failure over a three-year period. Assessment rates for institutions of the Bank’s size ranged from 2.5- to 32-basis points effective January 1, 2023. The FDIC may also issue special assessments.
The Parent’s five direct wholly-owned subsidiaries are: (1) the Bank, which provides a full range of banking services to consumer, commercial and municipal customers in Western and Central New York; (2) SDN, which sells various premium-based insurance policies on a commission basis to commercial and consumer customers; (3) Courier Capital and (4) HNP Capital, which both provide customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans; and (5) CHIL, which oversees the Company’s Banking-as-a-Service (“BaaS”) and financial technology (“FinTech”) relationships.
The Parent’s three direct wholly-owned subsidiaries are: (1) the Bank, which provides a full range of banking services to consumer, commercial and municipal customers in Western and Central New York, commercial loans in the Mid-Atlantic and Central New York regions, and Banking-as-a-Service (“BaaS”) capabilities to non-bank service providers and other financial technology firms (“FinTechs”); (2) SDN, which sells various premium-based insurance policies on a commission basis to commercial and consumer customers; and (3) Courier Capital, which provides customized investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and retirement plans.
As of December 31, 2022, $178.3 million, or 27%, of our aggregate commercial business loan portfolio were at fixed rates, while $485.9 million, or 73%, were at variable rates. We also offer commercial mortgage loans to finance the purchase of real property, which generally consists of real estate with completed structures.
As of December 31, 2023, $171.7 million, or 23%, of our aggregate commercial business loan portfolio were at fixed interest rates, while $564.0 million, or 77%, were at variable interest rates. We also offer commercial mortgage loans to finance the purchase of real property, which generally consists of real estate with completed structures.
The policy also sets limits on individual lending authority and various forms of joint lending authority, while designating which loans are required to be approved at the committee level.
The policy establishes requirements for extending credit based on the size, risk rating and type of credit involved. The policy also sets limits on individual lending authority and various forms of joint lending authority, while designating which loans are required to be approved at the committee level.
Other sources of funds include scheduled amortization and prepayments of principal from loans and mortgage-backed securities, maturities and calls of investment securities and funds provided by operations. - 13 - Table of Contents OTHER INFORMATION We also make available, free of charge through our website, all reports filed with or furnished to the Securities and Exchange Commission (“SEC”), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable after those documents are filed with or furnished to the SEC.
OTHER INFORMATION We also make available, free of charge through our website, all reports filed with or furnished to the Securities and Exchange Commission (“SEC”), including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments to those reports, as soon as reasonably practicable after those documents are filed with or furnished to the SEC.
Under FRB policy, a financial holding company must serve as a source of strength for its subsidiary banks. Under this policy, the FRB may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank.
Under this policy, the FRB may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank.
As a general practice, where possible, a first position collateral lien is placed on any available real estate, equipment or other assets owned by the borrower and a personal guarantee of the owner is obtained.
As a general practice, where possible, a first position collateral lien is placed on any available real estate, equipment or other assets owned by the borrower and a personal guarantee of the owner is obtained. As of December 31, 2023, our commercial business loan portfolio totaled $735.7 million, or 16% of our total loan portfolio.
We are subject to comprehensive regulation by the Board of Governors of the Federal Reserve System, frequently referred to as the Federal Reserve Board (“FRB” or “Federal Reserve”), under the Bank Holding Company Act (the “BHC Act”), as amended by, among other laws, the Gramm-Leach-Bliley Act of 1999 (the “Gramm-Leach-Bliley Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
A change in statutes, regulations or regulatory policies applicable to the Company or the Bank could have a material effect on the business, financial condition and results of operations of the Company. - 12 - Table of Contents Holding Company Regulation We are subject to comprehensive regulation by the Board of Governors of the Federal Reserve System, frequently referred to as the Federal Reserve Board (“FRB” or “Federal Reserve”), under the Bank Holding Company Act (the “BHC Act”), as amended by, among other laws, the Gramm-Leach-Bliley Act of 1999 (the “Gramm-Leach-Bliley Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
The current level of deposit insurance is $250,000. The coverage limit is per depositor, per insured depository institution for each account ownership category. Under the Dodd-Frank Act, the FDIC defined the deposit insurance assessment base for an insured depository institution as an amount equal to the institution’s average consolidated total assets during the assessment period minus average tangible equity.
Under the Dodd-Frank Act, the FDIC defined the deposit insurance assessment base for an insured depository institution as an amount equal to the institution’s average consolidated total assets during the assessment period minus average tangible equity.
Five Star Bank The Bank is a New York-chartered bank that has its headquarters at 55 North Main Street, Warsaw, NY, a total of 48 full-service banking offices in the New York State counties of Allegany, Cattaraugus, Cayuga, Chemung, Erie, Genesee, Livingston, Monroe, Ontario, Orleans, Seneca, Steuben, Wyoming and Yates, and commercial loan production offices in Baltimore, Maryland and Syracuse, New York serving the Mid-Atlantic and Central New York regions.
Five Star Bank The Bank is a New York-chartered bank that has its headquarters at 55 North Main Street, Warsaw, NY, a total of 48 full-service banking offices in the New York State counties of Allegany, Cattaraugus, Cayuga, Chemung, Erie, Genesee, Livingston, Monroe, Ontario, Orleans, Seneca, Steuben, Wyoming and Yates, and commercial loan production offices in Baltimore, Maryland and Syracuse, New York serving the Mid-Atlantic and Central New York regions, respectively. - 4 - Table of Contents At December 31, 2023, the Bank had total assets of $6.12 billion, investment securities of $1.04 billion, net loans of $4.41 billion, deposits of $5.23 billion and shareholders’ equity of $485.0 million.
This represents an increase of 47 employees or 8% from December 31, 2021. As of December 31, 2022, approximately 62% of our current workforce is female, 38% male, and our average tenure is 5.74 years, a decrease of 13% from an average tenure of 6.56 years as of December 31, 2021.
This represents a decrease of 48 employees, or 7%, from December 31, 2022. As of December 31, 2023, approximately 64% of our current workforce is female, 36% male, and our average tenure is 6.83 years, an increase of 19% from an average tenure of 5.74 years as of December 31, 2022.
Except as the context otherwise requires, the Parent and its direct and indirect subsidiaries are collectively referred to in this report as the “Company.” Five Star Bank is referred to as “FSB” or “the Bank,” SDN Insurance Agency, LLC is referred to as “SDN,” Courier Capital, LLC is referred to as “Courier Capital,” HNP Capital, LLC is referred to as “HNP Capital” and Corn Hill Innovation Labs, LLC is referred to as “CHIL.” The consolidated financial statements include the accounts of the Parent, the Bank, SDN, Courier Capital, HNP Capital and CHIL.
Except as the context otherwise requires, the Parent and its direct and indirect subsidiaries are collectively referred to in this report as the “Company.” The Parent’s common stock is traded on the Nasdaq Global Select Market under the ticker symbol “FISI.” Five Star Bank is referred to as “FSB” or “the Bank,” SDN Insurance Agency, LLC is referred to as “SDN,” and Courier Capital, LLC is referred to as “Courier Capital.” The consolidated financial statements include the accounts of the Parent, the Bank, SDN and Courier Capital.
At December 31, 2022, the Bank represented 99.3%, SDN represented 0.3%, Courier Capital and HNP Capital combined represented 0.3% and CHIL represented less than 0.1% of the consolidated assets of the Company.
At December 31, 2023, the Bank represented 99.3%, SDN represented 0.3%, and Courier Capital represented 0.3%, respectively, of the consolidated assets of the Company.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Because indirect automobile loan applications are originated by automobile dealerships, we assume the risk of unsatisfactory origination programs, including any noncompliance with federal, state, and local laws. If we were unable to comply with the regulations applicable to our consumer lending activities, our financial condition and results of operations may be adversely affected.
Because indirect automobile loan applications are originated by automobile dealerships, we assume the risk of unsatisfactory origination programs, including any noncompliance with federal, state, and local laws. If we are unable to comply with the regulations applicable to our consumer lending activities, our financial condition and results of operations may be adversely affected.
If we settle these claims or the litigation 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 cover the full legal costs, settlements or judgements we incur.
If we settle these claims or the litigation 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 cover the full legal costs, settlements or judgments we incur.
Any failure on our part to comply with current laws, regulations, other regulatory requirements or safe and sound banking, insurance, or investment advisory practices or concerns about our financial condition, or any related regulatory sanctions or adverse actions against us, could increase our costs or restrict our ability to expand our business and result in damage to our reputation.
Any failure on our part to comply with current laws, regulations, other regulatory requirements or safe and sound banking, insurance, or investment advisory practices or concerns about our financial condition, or any related regulatory sanctions or enforcement actions against us, could increase our costs or restrict our ability to expand our business and result in damage to our reputation.
The various regulatory authorities with jurisdiction over us have significant latitude in addressing our compliance with applicable laws and regulations including, but not limited to, those governing consumer credit, fair lending, anti-money laundering, anti-terrorism, capital adequacy, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors affecting us.
The various regulatory authorities with jurisdiction over us have significant latitude in addressing our compliance with applicable laws and regulations including, but not limited to, those governing consumer credit, fair lending, anti-money laundering, anti-terrorist financing, capital adequacy, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors affecting us.
An inability to raise additional capital on acceptable terms when needed could have a material adverse impact on our business, financial condition, results of operations or liquidity. - 29 - Table of Contents Technology and Cybersecurity Risks We face competition in staying current with technological changes and banking alternatives to compete and meet customer demands.
An inability to raise additional capital on acceptable terms when needed could have a material adverse impact on our business, financial condition, results of operations or liquidity. Technology and Cybersecurity Risks We face competition in staying current with technological changes and banking alternatives to compete and meet customer demands.
Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business.
Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, geopolitical conflicts, and other adverse external events could have a significant impact on our ability to conduct business.
If we were to conclude that a future write-down of our goodwill is necessary, we would record the appropriate charge, which could have a material adverse effect on our results of operations. - 26 - Table of Contents Identifiable intangible assets other than goodwill consist of core deposit intangibles and other intangible assets (primarily customer relationships).
If we were to conclude that a future write-down of our goodwill is necessary, we would record the appropriate charge, which could have a material adverse effect on our results of operations. Identifiable intangible assets other than goodwill consist of core deposit intangibles and other intangible assets (primarily customer relationships).
Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet. The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships.
Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet. - 28 - Table of Contents The soundness of other financial institutions could adversely affect us. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships.
Additionally, shareholder activism and potential regulatory reform may lead to substantial new regulations and - 32 - Table of Contents disclosure obligations, including with respect to ESG matters, which may lead to additional compliance costs and impact the manner in which we operate our business in ways that may materially adversely impact our results of operations and financial condition.
Additionally, shareholder activism and potential regulatory reform may lead to substantial new regulations and disclosure obligations, including with respect to ESG matters, which may lead to additional compliance costs and impact the manner in which we operate our business in ways that may materially adversely impact our results of operations and financial condition.
We could also face potential negative publicity in traditional media or social media if investors determine that we have not adequately considered or addressed ESG matters, which may result in adverse effects on the trading price of our common stock. ITEM 1B. UNRESOLV ED STAFF COMMENTS None.
We could also face potential negative publicity in traditional media or social media if investors determine that we have not adequately considered or addressed ESG matters, which may result in adverse effects on the trading price of our common stock. ITEM 1B . UNRESOLVED STAFF COMMENTS None.
See the section captioned “Supervision and Regulation” included in Part I, Item 1 “Business” for more information about FDIC insurance premiums. - 24 - Table of Contents We are highly regulated, and any adverse regulatory action may result in additional costs, loss of business opportunities, and reputational damage.
See the section captioned “Supervision and Regulation” included in Part I, Item 1 “Business” for more information about FDIC insurance premiums. We are highly regulated, and any adverse regulatory action may result in additional costs, loss of business opportunities, and reputational damage.
Technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.
Technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.
This could adversely affect the market price of 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.
This could adversely affect the market price of our common stock. - 30 - Table of Contents 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.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. We operate in a highly competitive industry and market area.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. - 22 - Table of Contents We operate in a highly competitive industry and market area.
Acquiring other banks, businesses, or branches involves potential adverse impact to our financial results and various other risks commonly associated with acquisitions, including, among other things: • difficulty in estimating the value of the target company; • payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term; • potential exposure to unknown or contingent liabilities of the target company; • exposure to potential asset quality issues of the target company; • volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts; • challenge and expense of integrating the operations and personnel of the target company; • inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and other projected benefits; • potential disruption to our business; • potential diversion of our management’s time and attention; • the possible loss of key employees and customers of the target company; • potential changes in banking or tax laws or regulations that may affect the target company; and • additional regulatory burdens associated with new lines of business. - 27 - Table of Contents Our tax strategies and the value of our deferred tax assets and liabilities could adversely affect our operating results and regulatory capital ratios.
Acquiring other banks, businesses, or branches involves potential adverse impact to our financial results and various other risks commonly associated with acquisitions, including, among other things: • difficulty in estimating the value of the target company; • payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short and long term; • potential exposure to unknown or contingent liabilities of the target company; • exposure to potential asset quality issues of the target company; • volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts; • challenge and expense of integrating the operations and personnel of the target company; • inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and other projected benefits; • potential disruption to our business; • potential diversion of our management’s time and attention; • the possible loss of key employees and customers of the target company; • potential changes in banking or tax laws or regulations that may affect the target company; and • additional regulatory burdens associated with new lines of business.
Our success depends, in large part, on our ability to attract and retain skilled people. Competition for highly talented people can be intense, and we may not be able to hire sufficiently skilled people or retain them.
General Risk Factors We may not be able to attract and retain skilled people. Our success depends, in large part, on our ability to attract and retain skilled people. Competition for highly talented people can be intense, and we may not be able to hire sufficiently skilled people or retain them.
Our stock price can fluctuate significantly in response to a variety of factors including, among other things: • volatility of stock market prices and volumes in general; • changes in market valuations of similar companies; • changes in conditions in credit markets; • changes in accounting policies or procedures as required by the FASB or other regulatory agencies; • legislative and regulatory actions subjecting us to additional or different regulatory oversight which may result in increased compliance costs and/or require us to change our business model; • government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; • political instability and uncertainty, both within the U.S. and internationally; • additions or departures of key members of management; • negative publicity regarding our business; • fluctuations in our quarterly or annual operating results; and • changes in analysts’ estimates of our financial performance. - 31 - Table of Contents General Risk Factors We may not be able to attract and retain skilled people.
Our stock price can fluctuate significantly in response to a variety of factors including, among other things: • volatility of stock market prices and volumes in general; • changes in market valuations of similar companies; • changes in conditions in credit markets; • changes in accounting policies or procedures as required by the FASB or other regulatory agencies; • legislative and regulatory actions subjecting us to additional or different regulatory oversight which may result in increased compliance costs and/or require us to change our business model; • government intervention in the U.S. financial system and the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board; • political instability and uncertainty, both within the U.S. and internationally; • additions or departures of key members of management; • negative publicity regarding our business; • fluctuations in our quarterly or annual operating results; and • changes in analysts’ estimates of our financial performance.
The occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. Negative public opinion could damage our reputation and impact business operations and revenues.
The occurrence of any such event or a combination of the foregoing factors could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. Negative public opinion could damage our reputation and impact business operations and revenues.
We serve customers that cover a range of creditworthiness, and the required terms and rates are reflective of those risk profiles. While these loans have higher yields than many of our other loans, such loans involve risk elements in addition to normal credit risk.
These loans are for the purchase of new or used automobiles. We serve customers that cover a range of creditworthiness, and the required terms and rates are reflective of those risk profiles. While these loans have higher yields than many of our other loans, such loans involve risk elements in addition to normal credit risk.
At December 31, 2022, we had $3.65 billion of deposit liabilities that have no maturity and, therefore, may be withdrawn by the depositor at any time. These deposit liabilities include our checking, savings, and money market deposit accounts. Market conditions may impact the competitive landscape for deposits in the banking industry.
At December 31, 2023, we had $3.81 billion of deposit liabilities, or 73% of our total deposits, that have no maturity and, therefore, may be withdrawn by the depositor at any time. These deposit liabilities include our checking, savings, and money market deposit accounts. Market conditions may impact the competitive landscape for deposits in the banking industry.
Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking.
Banks, securities firms and insurance companies can merge under the umbrella of an FHC, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking.
Any problems caused by these third parties, including as a result of them not providing us their services for any reason or them performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third-party vendors could also entail significant delay and expense.
Any problems caused by these third parties, including as a result of them not providing us their services for any reason or them performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively.
If we were to conclude that a significant portion of our deferred tax assets were not more likely than not to be realized, the required valuation allowance could adversely affect our financial position, results of operations and regulatory capital ratios. In addition, the value of our deferred tax assets could be adversely affected by a change in statutory rates.
If we were to conclude that a significant portion of our deferred tax assets were not more likely than not to be realized, the required valuation allowance could adversely affect our financial position, results of operations and regulatory capital ratios.
Our non-owner occupied commercial real estate level equaled 263% of total risk-based capital at December 31, 2022.
Our non-owner occupied commercial real estate level equaled 285% of total risk-based capital at December 31, 2023.
The rising rate environment and future actions the Federal Reserve may take may impact pricing and demand for deposits in the banking industry.
The interest rate environment and future actions of the Federal Reserve may impact pricing and demand for deposits in the banking industry.
We may have to increase the allowance in the future in response to the request of one of our primary banking regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of our loan portfolio. The actual amount of future provisions for credit losses may vary from the amount of past provisions.
We may have to increase the allowance in the future in response to the request of one of our primary banking regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of our loan portfolio.
Negative public opinion could affect our ability to attract and/or retain clients, could expose us to litigation and regulatory action, and could have a material adverse effect on our stock price or result in heightened volatility. Negative public opinion could also affect our ability to borrow funds in the unsecured wholesale debt markets.
Negative public opinion could affect our ability to attract and/or retain clients, could expose us to litigation and regulatory action, and could have a material adverse effect on our stock price or result in heightened volatility.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. There is a risk that hazardous or toxic substances could be found on properties we have foreclosed upon.
During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. There is a risk that hazardous or toxic substances could be found on properties we have foreclosed upon.
These include the depositor insurance fund’s reserve ratio, the Bank’s assessment base, which is equal to average consolidated total assets minus average tangible equity, and various inputs into the FDIC’s assessment rate calculation. If there are financial institution failures, we may be required to pay higher FDIC premiums. Such increases of FDIC insurance premiums may adversely impact our earnings.
These include the depositor insurance fund’s reserve ratio, the Bank’s assessment base, which is equal to average consolidated total assets minus average tangible equity, and various inputs into the FDIC’s assessment rate calculation. - 23 - Table of Contents If there are financial institution failures, we may be required to pay higher FDIC premiums or special assessments.
Our commercial business and mortgage loans increase our exposure to credit risks. At December 31, 2022, our portfolio of commercial business and mortgage loans totaled $2.34 billion, or 58% of total loans.
Our commercial business and commercial mortgage loans increase our exposure to credit risks. At December 31, 2023, our portfolio of commercial business and commercial mortgage loans totaled $2.74 billion, or 61% of total loans.
In addition, the broker-dealer services provided by Courier Capital and HNP Capital are subject to Regulation Best Interest, which requires a broker-dealer to act in the best interest of a retail customer when making a recommendation to that customer of any securities transaction or investment strategy involving securities.
Our investment advisory services are also subject to state laws including anti-fraud laws and regulations. In addition, the broker-dealer services provided by Courier Capital are subject to Regulation Best Interest, which requires a broker-dealer to act in the best interest of a retail customer when making a recommendation to that customer of any securities transaction or investment strategy involving securities.
The value of our goodwill and other intangible assets may decline in the future. As of December 31, 2022, we had $67.1 million of goodwill and $6.3 million of other intangible assets.
The value of our goodwill and other intangible assets may decline in the future. As of December 31, 2023, we had $67.1 million of goodwill and $5.4 million of other intangible assets.
Geographic concentration may unfavorably impact our operations. Substantially all of our operations are concentrated in the Western and Central New York region. As a result of this geographic concentration, our results depend largely on economic conditions in these and surrounding areas.
The majority of our operations are concentrated in the Western and Central New York regions. As a result of this geographic concentration, our results depend largely on economic conditions in these and surrounding areas.
Our earnings and cash flows depend largely upon our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of governmental and regulatory agencies, particularly the Federal Reserve.
Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of governmental and regulatory agencies, particularly the Federal Reserve.
Third parties perform significant operational services on our behalf. These third-party vendors are subject to similar risks as us relating to cybersecurity, breakdowns or failures of their own systems or employees.
Replacing these third-party vendors could also entail significant delay and expense. - 29 - Table of Contents Third parties perform significant operational services on our behalf. These third-party vendors are subject to similar risks as us relating to cybersecurity, breakdowns or failures of their own systems or employees.
The replacement of deposit funding with wholesale funding could cause our overall cost of funding to increase, which would reduce our net interest income. A loss of interest-earning assets could also reduce our net interest income. - 22 - Table of Contents We are subject to environmental liability risk associated with our lending activities.
The replacement of deposit funding with wholesale funding could cause our overall cost of funding to increase, which would reduce our net interest income. A loss of interest-earning assets could also reduce our net interest income. We are subject to environmental liability risk associated with our lending activities. A significant portion of our loan portfolio is secured by real property.
The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our markets, years of industry experience, and the difficulty of promptly finding qualified replacement personnel. We use financial models for business planning purposes that may not adequately predict future results.
The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of our markets, years of industry experience, and the difficulty of promptly finding qualified replacement personnel. Loss of key employees may disrupt relationships with certain customers.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations. Changes to and replacement of the LIBOR Benchmark Interest Rate may adversely affect our business, financial condition, and results of operations.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations. Legal and Regulatory Risks Legal and regulatory proceedings and related matters could adversely affect us and the banking industry in general.
If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected.
During 2022 and 2023, in response to accelerated inflation, the Federal Reserve implemented monetary tightening policies, resulting in significantly increased interest rates. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected.
Our tax strategies are dependent upon our ability to generate taxable income in future periods. Our tax strategies will be less effective in the event we fail to generate taxable income. Our deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized for financial statement purposes.
Our deferred tax assets are subject to an evaluation of whether it is more likely than not that they will be realized for financial statement purposes.
Any one or a combination of the foregoing factors could negatively impact our business, financial condition, results of operations and prospects. Market Risks We are subject to interest rate risk, and fluctuations in market interest rates may affect our interest margins and income, demand for our products, defaults on loans, loan prepayments and the fair value of our financial instruments.
Market Risks We are subject to interest rate risk, and fluctuations in market interest rates may affect our interest margins and income, demand for our products, defaults on loans, loan prepayments and the fair value of our financial instruments. Our earnings and cash flows depend largely upon our net interest income.
As a result of a public health emergency, including the COVID-19 pandemic, and the related adverse local and national consequences, and as a result of governmental, consumer and business responses to any outbreak, we may be subject to the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, or results of operations: demand for our products and services may decline; if consumer and business activities are restricted, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could increase loan losses; our allowance for credit losses may have to be increased if borrowers experience financial difficulties; a material decrease in net income or a net loss over several quarters could affect our ability to pay cash dividends; cyber security risks may be increased as the result of an increase in the number of employees working remotely; critical services provided by third-party vendors may become unavailable; government actions and vaccine mandates in response to the pandemic may affect our workforce, - 28 - Table of Contents human capital resources and infrastructure; and the Company may experience staffing shortages and unanticipated unavailability or loss of key employees, harming our ability to execute our business strategy.
Additionally, demand for our products and services may decline; loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans may decline in value, which could increase loan losses; our allowance for credit losses may have to be increased if borrowers experience financial difficulties; a material decrease in net income could affect our ability to pay cash dividends; cybersecurity risks may be increased as the result of employees working remotely; critical services provided by third-party vendors may become unavailable; government actions and mandates may affect our workforce and infrastructure; and the Company may experience staffing shortages and unanticipated unavailability or loss of key employees.
Adverse events or circumstances could impact the recoverability of these intangible assets including loss of core deposits, significant losses of customer accounts and/or balances, increased competition or adverse changes in the economy. To the extent these intangible assets are deemed unrecoverable, a non-cash impairment charge would be recorded which could have a material adverse effect on our results of operations.
Adverse events or circumstances could impact the recoverability of these intangible assets including loss of core deposits, significant losses of customer accounts and/or balances, increased competition or adverse changes in the economy.
Changes in those policies are beyond our control and are difficult to predict. Federal Reserve policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower’s products and services.
Those policies determine, to a significant extent, our cost of funds for lending and investing and impact our net interest income, our primary source of revenue. Changes in those policies are beyond our control and are difficult to predict. Federal Reserve policies can also affect our borrowers, potentially increasing the risk that they may fail to repay their loans.
Environmental, social and governance matters, and any related reporting obligations may impact our business. U.S. and international regulators, investors and other stakeholders are increasingly focused on environmental, social, and governance (“ESG”) matters.
Negative public opinion could also affect our ability to borrow funds in the unsecured wholesale debt markets. - 32 - Table of Contents Environmental, social and governance matters, and any related reporting obligations may impact our business. U.S. and international regulators, investors and other stakeholders are increasingly focused on environmental, social, and governance (“ESG”) matters.
Any failure by us to comply with these regulations could also result in regulatory sanctions, public disclosure and reputational damage even if we do not experience a significant cybersecurity breach. - 30 - Table of Contents Furthermore, as the threat of cyber-attacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our systems, or to investigate and remediate vulnerabilities in our systems.
Any failure by us to comply with these regulations could also result in regulatory sanctions, public disclosure and reputational damage even if we do not experience a significant cybersecurity breach.
A portion of our current lending involves the purchase of consumer automobile installment sales contracts from automobile dealers located in Western, Central and the Capital District of New York, and Northern and Central Pennsylvania. These loans are for the purchase of new or used automobiles.
A portion of our lending involves the purchase of consumer automobile installment sales contracts from automobile dealers located in Western, Central and the Capital District of New York, and Northern and Central Pennsylvania. Effective January 1, 2024, we exited the Pennsylvania automobile market in order to align our focus more fully around our core Upstate New York market.
This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations. Risks Related to Non-Banking Activities Our insurance brokerage subsidiary is subject to risk related to the insurance industry.
For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower’s products and services. This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a material adverse effect on our financial condition and results of operations.
Reduced liquidity may arise due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects third parties or us. Our efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated reductions in our liquidity.
Our liquidity could be impaired by an inability to access the capital markets or unforeseen outflows of cash. Reduced liquidity may arise due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects third parties or us.
We may be unable to successfully implement our growth strategies, including the integration and successful management of newly-acquired businesses. Our current growth strategy is multi-faceted.
To the extent these intangible assets are deemed unrecoverable, a non-cash impairment charge would be recorded which could have a material adverse effect on our results of operations. - 26 - Table of Contents We may be unable to successfully implement our growth strategies, including the integration and successful management of newly-acquired businesses. Our current growth strategy is multi-faceted.
Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold. Those policies determine, to a significant extent, our cost of funds for lending and investing and impact our net interest income, our primary source of revenue.
The Federal Reserve regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments we hold.
Liquidity is essential to our businesses. Liquidity is essential to our business as we must be able to meet the cash needs of borrowers and depositors. Our liquidity could be impaired by an inability to access the capital markets or unforeseen outflows of cash.
In addition, the value of our deferred tax assets could be adversely affected by a change in statutory rates. - 27 - Table of Contents Liquidity is essential to our businesses. Liquidity is essential to our business as we must be able to meet the cash needs of borrowers and depositors.
If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected. Public health emergencies, like the COVID-19 outbreak, may have an adverse impact on our business and results of operations. The COVID-19 pandemic caused significant economic dislocation in the United States.
If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.
Removed
We have material contracts that are indexed to the London Interbank Offered Rate (“LIBOR”). In 2017, the United Kingdom’s Financial Conduct Authority, a regulator of financial services firms and financial markets in the United Kingdom, announced that the publication of LIBOR would not be guaranteed after 2021.
Added
The actual amount of future provisions for credit losses may vary from the amount of past provisions. - 20 - Table of Contents We are subject to risks and losses resulting from fraudulent activities that could adversely impact our financial performance and results of operations.
Removed
LIBOR will be discontinued after June 2023 and will impact loans that have not yet matured or been refinanced by that date. This announcement, and, more generally, financial benchmark reforms and changes in the interbank lending markets, have resulted in uncertainty about the interest rate benchmarks that will be used in the future.
Added
As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation.
Removed
In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates have been ongoing, and the Alternative Reference Rate Committee formally recommended the use of a Secured Overnight Funding Rate (“SOFR”).
Added
We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, checking transactions, and debit cards that we have issued to our customers and through our online banking portals.
Removed
The March 2022 enactment of the Adjustable Interest Rate (LIBOR) Act and the Federal Reserve’s proposed implementing regulations are intended to address the discontinuation of LIBOR and establish a replacement benchmark, based on SOFR, that will automatically apply to agreements that rely on LIBOR and do not have an alternative contractual fallback benchmark.
Added
Subsequent to year end, the Bank discovered fraudulent activity associated with deposit transactions conducted over the course of several business days ending in early March 2024 by an in-market business customer of the Bank.
Removed
SOFR-based replacement benchmarks may also apply to contracts with fallback provisions that authorize a particular person to determine the replacement benchmark.
Added
The Bank continues to investigate this matter to determine the potential exposure to the Company, which the Company currently estimates could be up to $18.9 million, or $14.1 million net of taxes. The ultimate financial impact could be lower and will depend, in part, on the Bank’s success in recovering the funds.
Removed
We have generally selected to use the Federal Reserve-recommended SOFR-linked replacement rate as an alternative to LIBOR. - 23 - Table of Contents While the LIBOR Act and implementing regulations will help to transition legacy LIBOR contracts to a new benchmark rate, the substitution of SOFR for LIBOR may have potentially significant economic impacts on parties to affected contracts.
Added
The Bank plans to pursue all available sources of recovery to mitigate the potential loss. See Note 24, Subsequent Events, of the notes to consolidated financial statements, included in this Annual Report on Form 10-K, for additional details.
Removed
SOFR is different from LIBOR in that it is a retrospective-looking secured rate rather than a forward-looking unsecured rate. These differences could lead to a greater disconnect between our and the Bank’s costs to raise funds for SOFR as compared to LIBOR.
Added
While the Company believes this recent incident is an isolated occurrence, there can be no assurance that such fraudulent actions will not occur again or that such acts will be detected in a timely manner. We maintain a system of internal controls and insurance coverage to mitigate against such risks, including data processing system failures and errors, and customer fraud.
Removed
In addition to the discontinuance of LIBOR, there may be future changes in the rules or methodologies used to calculate SOFR or other benchmarks, which may have a material adverse effect on the value of or return on our financial assets and liabilities that are based on or are linked to LIBOR and other benchmarks.
Added
If our internal controls fail to prevent or detect any such occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations. Geographic concentration may unfavorably impact our operations.
Removed
Once LIBOR rates are no longer available, and we are required to implement replacement reference rates for the calculation of interest rates under our loan agreements with borrowers, we may incur significant expense in effecting the transition and we may be subject to disputes or litigation with our borrowers over the appropriateness or comparability to LIBOR of the replacement reference rates.
Added
For example, in 2023, the FDIC issued a special assessment applicable for banks with total uninsured deposits in excess of $5 billion in order to recover losses sustained by the DIF as a result of the March 2023 failures of Silicon Valley Bank and Signature Bank. Such increases of FDIC insurance premiums may adversely impact our earnings.
Removed
Once LIBOR rates are no longer available, and we are required to implement replacement reference rates for the calculation of interest rates under our loan agreements with borrowers, we may incur significant expense in effecting the transition and we may be subject to disputes or litigation with our borrowers over the appropriateness or comparability to LIBOR of the replacement reference rates.
Added
We are subject to the CRA and fair lending laws, and failure to comply with these laws could lead to material penalties. The Community Reinvestment Act (the “CRA”), the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions.
Removed
The uncertainty related to these changes may have an unpredictable impact on the financial markets and could adversely impact our financial condition or results of operations. Legal and Regulatory Risks Legal and regulatory proceedings and related matters could adversely affect us and the banking industry in general.
Added
With respect to the Bank, the NY DFS, FRB, the United States Department of Justice and other federal and state agencies are responsible for enforcing these laws and regulations.
Removed
The policies of the Federal Reserve have a significant impact on our earnings. The policies of the Federal Reserve impact us significantly. The Federal Reserve regulates the supply of money and credit in the United States.
Added
A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion.
Removed
Our investment advisory services are also subject to state laws including anti-fraud laws and regulations.
Added
Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations. The policies of the Federal Reserve have a significant impact on our earnings. The policies of the Federal Reserve impact us significantly.
Removed
In particular, effective January 1, 2020, we implemented FASB’s Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments , which requires us to recognize an allowance for credit losses based on historical experience, current conditions and reasonable and supportable forecasts, as opposed to recognizing an allowance when it is probable that a loss has been incurred.

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Item 2. Properties

Properties — owned and leased real estate

4 edited+0 added−0 removed2 unchanged
For additional information, see Note 7, Premises and Equipment, Net, and Note 14, Commitments and Contingencies, in the accompanying financial statements included in Part II, Item 8, of this Annual Report on Form 10-K. - 33 - Table of Contents
For additional information, see Note 7, Premises and Equipment, Net, and Note 14, Commitments and Contingencies, in the accompanying financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.
Courier Capital operates from an owned 11,000 square foot office, located in Buffalo, New York. Courier Capital also has operations at an owned facility in Jamestown, New York. We believe that our properties have been adequately maintained, are in good operating condition and are suitable for our business as presently conducted, including meeting the prescribed security requirements.
We believe that our properties have been adequately maintained, are in good operating condition and are suitable for our business as presently conducted, including meeting the prescribed security requirements.
The operating leases for our branch offices expire at various dates through the year 2061 and generally include options to renew. The Bank also entered into a new lease agreement in 2022 for a 28,500 square foot facility in Amherst, New York, which serves as a regional administrative facility, as well as operations facility for SDN.
The operating leases for our branch offices expire at various dates through the year 2061 and generally include options to renew. Courier Capital operates from an owned 11,000 square foot office, located in Buffalo, New York. Courier Capital also has operations at an owned facility in Jamestown, New York.
This lease expires in December 2032, with two additional five-year extensions. This facility replaced our former leased location in Amherst, New York and an SDN leased facility in Williamsville, New York, which leases expired in September 2021. SDN also has operations at a leased facility in Rochester, New York.
We also lease a 28,500 square foot facility in Amherst, New York, which serves as a regional administrative facility, as well as an operations facility for SDN. This lease expires in December 2032, with two additional five-year extensions.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

3 edited+4 added−0 removed7 unchanged
The case is stayed until the appeal is briefed and decided by the Superior Court. We have not accrued a contingent liability for this matter at this time because, given our defenses, we are unable to conclude whether a liability is probable to occur nor are we able to currently reasonably estimate the amount of potential loss.
We have not accrued a contingent liability for this matter at this time because, given our defenses, we are unable to conclude whether a liability is probable to occur nor are we able to currently reasonably estimate the amount of potential loss.
If we are unsuccessful in defending ourselves from these claims or if our insurer does not cover the full amount of legal costs we incur, the result may materially adversely affect our business, results of operations and financial condition. ITEM 4. MINE SAF ETY DISCLOSURES Not applicable. - 34 - Table of Contents PART II
If we are unsuccessful in defending ourselves from these claims or if our insurer does not cover the full amount of legal costs we incur, the result may materially adversely affect our business, results of operations and financial condition.
Also pending with the lower Court is our motion to compel discovery. On October 7, 2022, the Superior Court of Pennsylvania granted our December 20, 2021 Request for an Interlocutory Appeal of the denial of our motion to dismiss the claims brought by New York borrowers for lack of subject matter jurisdiction and lack of standing.
On October 7, 2022, the Superior Court of Pennsylvania granted our December 20, 2021 Request for an Interlocutory Appeal of the denial of our motion to dismiss the claims brought by New York borrowers for lack of subject matter jurisdiction and lack of standing. - 34 - Table of Contents In a Memorandum filed on February 13, 2024, the Superior Court affirmed the decision of the lower court, holding that trial court has subject matter jurisdiction over the New York part of this action and that the New York plaintiffs have standing to pursue relief against us.
Added
The Superior Court also remanded the case to the lower court for further proceedings, which will include the completion of any remaining discovery and an adjudication of the open claims and defenses that have been asserted in the case.
Added
Once the lower court has issued a final adjudication, the parties will have an opportunity to appeal adverse rulings in the case.
Added
Other than as described above, at December 31, 2023, the Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business, which involve amounts in the aggregate believed by management to be immaterial to the financial condition and operating results of the Company. ITEM 4.
Added
MINE SAF ETY DISCLOSURES Not applicable. - 35 - Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

5 edited+1 added−2 removed2 unchanged
In June 2022, the Company’s Board of Directors (the "Board.”) authorized a share repurchase program for up to 766,447 shares of common stock (the “2022 Repurchase Program.”). The program will expire at the earlier of the completion of all share repurchases or a Board vote to retire the program.
In June 2022, the Company’s Board of Directors (the “Board.”) authorized a share repurchase program for up to 766,447 shares of common stock (the “2022 Repurchase Program.”). The program will expire at the earlier of the completion of all share repurchases or a Board vote to retire the program.
See the discussions in the section captioned “Supervision and Regulation” included in Part I, Item 1, “Business,” in the section captioned “Liquidity and Capital Management” included in Part II, Item 7, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 15, Regulatory Matters, in the accompanying financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” all of which are included elsewhere in this report and incorporated herein by reference thereto.
See the discussions in the section captioned “Supervision and Regulation” included in Part I, Item 1, “Business,” in the section captioned “Liquidity and Capital Management” included in Part II, Item 7, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 14, Regulatory Matters, in the accompanying financial statements included in Part II, Item 8, “Financial Statements and Supplementary Data,” all of which are included elsewhere in this report and incorporated herein by reference thereto.
The Company’s repurchases of its common stock during the fourth quarter of 2022 were as follows: Issuer Purchases of Equity Securities Period Total Number of Shares Purchased (1) Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs October 1 - 31, 2022 — $ — — 766,447 November 1 - 30, 2022 — — — 766,447 December 1 -31, 2022 540 24.01 — 766,447 Total 540 $ 24.01 — (1) This column reflects the deemed surrender to us of common stock to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units. - 35 - Table of Contents Stock Performance Graph The stock performance graph below compares (a) the cumulative total return on our common stock for the period beginning December 31, 2017 as reported by the Nasdaq Global Select Market, through December 31, 2022, (b) the cumulative total return on stocks included in the NASDAQ Composite Index over the same period, and (c) the cumulative total return of the Standard and Poor's ("S&P") U.S.
The Company’s repurchases of its common shares during the fourth quarter of 2023 were as follows: Issuer Purchases of Equity Securities Period Total Number of Shares Purchased (1) Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs October 1 - 31, 2023 — $ — — 766,447 November 1 - 30, 2023 — — — 766,447 December 1 -31, 2023 540 15.55 — 766,447 Total 540 $ 15.55 — (1) This column reflects the deemed surrendered to us of common stock to satisfy tax withholding obligations in connection with the vesting of employee restricted stock units. - 36 - Table of Contents Stock Performance Graph The stock performance graph below compares (a) the cumulative total return on our common stock for the period beginning December 31, 2018 as reported by the Nasdaq Global Select Market, through December 31, 2023, (b) the cumulative total return on stocks included in the NASDAQ Composite Index over the same period, and (c) the cumulative total return of the Standard and Poor’s (“S&P”) U.S.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED ST OCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the Nasdaq Global Select Market under the ticker symbol “FISI.” At February 28, 2023, 15,375,479 shares of our common stock were outstanding and there were 268 registered shareholders of record.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED ST OCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is traded on the Nasdaq Global Select Market under the ticker symbol “FISI.” At February 28, 2024, 15,408,580 shares of our common stock were outstanding and there were 255 registered shareholders of record.
The graph was prepared by S&P Global Market Intelligence and is expressed in dollars based on an assumed investment of $100. Period Ending Index 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 Financial Institutions, Inc. 100.00 85.23 110.11 81.47 119.25 95.41 NASDAQ Composite Index 100.00 97.16 132.81 192.47 235.15 158.65 S&P U.S.
The graph was prepared by S&P Global Market Intelligence and is expressed in dollars based on an assumed investment of $100. Period Ending Index 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Financial Institutions, Inc. 100.00 129.19 95.59 139.92 111.94 104.38 NASDAQ Composite Index 100.00 136.69 198.10 242.03 163.28 236.17 S&P U.S. SmallCap Banks Index 100.00 125.46 113.94 158.62 139.85 140.55
Removed
In November 2020, the Board authorized a share repurchase program for up to 801,879 shares of common stock (the “2020 Repurchase Program”). The 2020 Repurchase Program was completed in March 2022.
Added
During the quarter ended December 31, 2023, there were no shares repurchased pursuant to the 2022 Repurchase Program.
Removed
SmallCap Banks Index 100.00 83.44 104.69 95.08 132.36 116.69 ITEM 6. [ RESERVED] - 36 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

151 edited+51 added−41 removed74 unchanged
Basel III Capital Rules Under the Basel III Rules, the current minimum capital ratios, including an additional capital conservation buffer applicable to the Company and the Bank, are: • 7.0% CET1 to risk-weighted assets; • 8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and • 10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.
Basel III Capital Rules Under the Basel III Rules, the current minimum capital ratios, including an additional capital conservation buffer (2.5%) applicable to the Company and the Bank, are: • 7.0% CET1 to risk-weighted assets; • 8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and • 10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.
With the exception of obligations in connection with our irrevocable loan commitments, limited partnership investments and tax credit investments as of December 31, 2022, we had no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
With the exception of obligations in connection with our irrevocable loan commitments, limited partnership investments and tax credit investments as of December 31, 2023, we had no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
MANAGEMENT’S DISCUSSION AND ANALYSIS O F FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of our financial position and results of operations and should be read in conjunction with the information set forth under Part I, Item 1A, “Risk Factors,” and our consolidated financial statements and notes thereto appearing under Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion and analysis of our financial position and results of operations and should be read in conjunction with the information set forth under Part I, Item 1A, “Risk Factors,” and our consolidated financial statements and notes thereto appearing under Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
However, these fixed-rate securities were purchased with the expectation that they will continue to prepay principal and the proceeds will be invested at current market rates. Given the high credit quality inherent in Agency MBS, we do not consider any of the unrealized losses as of December 31, 2022 on such Agency MBS to be credit related.
However, these fixed-rate securities were purchased with the expectation that they will continue to prepay principal and the proceeds will be invested at current market rates. Given the high credit quality inherent in Agency MBS, we do not consider any of the unrealized losses as of December 31, 2023 on such Agency MBS to be credit related.
Management believes the unrealized losses are temporary in nature, as the losses are associated with the increase in interest rates. The securities portfolio continues to generate cash flow and given the high quality of our agency mortgage-backed securities portfolio, management expects the bonds to ultimately mature at a terminal value equivalent to par.
Management believes the unrealized losses are temporary in nature, as the losses are associated with the increase in interest rates. The securities portfolio continues to generate cash flow and given the high quality of our agency mortgaged-backed securities portfolio, management expects the bonds to ultimately mature at a terminal value equivalent to par.
We do not believe any of the securities in a loss position are impaired due to reasons of credit quality. Accordingly, as of December 31, 2022, we concluded that unrealized losses on our AFS securities are not impaired due to reasons of credit quality and no allowance for credit losses has been recognized on AFS securities.
We do not believe any of the securities in a loss position are impaired due to reasons of credit quality. Accordingly, as of December 31, 2023, we concluded that unrealized losses on our AFS securities are not impaired due to reasons of credit quality and no allowance for credit losses has been recognized on AFS securities.
For the year ended December 31, 2022 and 2021 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.
For the year ended December 31, 2023 and 2022 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.
The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks were fully phased-in on January 1, 2019. As of December 31, 2022, the Company’s capital levels remained characterized as “well-capitalized” under the BCBS rules.
The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks were fully phased-in on January 1, 2019. As of December 31, 2023, the Company’s capital levels remained characterized as “well-capitalized” under the BCBS rules.
This is referred to as the "pooled loan" component of the allowance for credit losses estimate. The allowance for credit losses for pooled loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information.
This is referred to as the “pooled loan” component of the allowance for credit losses estimate. The allowance for credit losses for pooled loans estimate is based upon periodic review of the collectability of the loans quantitatively correlating historical loan experience with reasonable and supportable forecasts using forward looking information.
Long-term Borrowings On October 7, 2020, we completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2030 to qualified institutional buyers and accredited institutional investors that were subsequently exchanged for subordinated notes with substantially the same terms (the “2020 Notes”) registered under the Securities Act of 1933, as amended.
On October 7, 2020, we completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2030 to qualified institutional buyers and accredited institutional investors that were subsequently exchanged for subordinated notes with substantially the same terms (the “2020 Notes”) registered under the Securities Act of 1933, as amended.
These loans are generally considered to be collateral dependent and, therefore, an analysis of the collateral position versus the pooled loan discounted cash flow approach better reflects the potential loss. Individually evaluated accounts include: loans over 90 days past due, loans marked as TDR, loans placed on non-accrual status and classified assets with exposure greater than $2.0 million.
These loans are generally considered to be collateral dependent and, therefore, an analysis of the collateral position versus the pooled loan discounted cash flow approach better reflects the potential loss. Individually evaluated accounts include: loans over 90 days past due, loans placed on non-accrual status and classified assets with exposure greater than $2.0 million.
In addition, our effective tax rate for 2022 and 2021 reflects the New York State tax benefit generated by our real estate investment trust. - 46 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2021 AND DECEMBER 31, 2020 A discussion regarding our financial condition and results of operations for the year ended December 31, 2021 and year-to-year comparisons between 2021 and 2020, which are not included in this Form 10-K, can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and are incorporated by reference herein.
In addition, our effective tax rate for 2023 and 2022 reflects the New York State tax benefit generated by our real estate investment trust. - 47 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 A discussion regarding our financial condition and results of operations at and for the year ended December 31, 2022 and year-to-year comparisons between 2022 and 2021, which are not included in this Form 10-K, can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and are incorporated by reference herein.
We typically originate business loans of up to $15.0 million for small to mid-sized businesses in our market area for working capital, equipment financing, inventory financing, accounts receivable financing, or other general business purposes. Loans of this type are in a diverse range of industries.
We typically originate commercial business loans of up to $25.0 million for small- to mid-sized businesses in our market area for working capital, equipment financing, inventory financing, accounts receivable financing, or other general business purposes. Loans of this type are in a diverse range of industries.
As of December 31, 2022, the Company’s capital levels remained characterized as “well-capitalized” under the Basel III rules, including the additional capital conservation buffer. - 58 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements are prepared in accordance with GAAP and are consistent with predominant practices in the financial services industry.
As of December 31, 2023, the Company’s capital levels remained characterized as “well-capitalized” under the Basel III rules, including the additional capital conservation buffer. - 59 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements are prepared in accordance with GAAP and are consistent with predominant practices in the financial services industry.
RECENT ACCOUNTING PRONOUNCEMENTS See Note 1, Summary of Significant Accounting Policies - Recent Accounting Pronouncements, in the notes to consolidated financial statements for a discussion of recent accounting pronouncements. - 59 - Table of Contents
RECENT ACCOUNTING PRONOUNCEMENTS See Note 1, Summary of Significant Accounting Policies – Recent Accounting Pronouncements, in the notes to consolidated financial statements for a discussion of recent accounting pronouncements. - 60 - Table of Contents
For additional information on off-balance sheet arrangements, see Note 1, Summary of Significant Accounting Policies and Note 14, Commitments and Contingencies, in the notes to the accompanying consolidated financial statements. - 56 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Security Yields and Maturities Schedule The following table sets forth certain information regarding the amortized cost (“Cost”), cost-weighted average yields (“Yield”), which is defined as the book yield weighted against the ending book value, and contractual maturities of our debt securities portfolio as of December 31, 2022 (dollars in thousands).
For additional information on off-balance sheet arrangements, see Note 1, Summary of Significant Accounting Policies and Note 13, Commitments and Contingencies, in the notes to the accompanying consolidated financial statements. - 57 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Security Yields and Maturities Schedule The following table sets forth certain information regarding the amortized cost (“Cost”), cost-weighted average yields (“Yield”), which is defined as the book yield weighted against the ending book value, and contractual maturities of our debt securities portfolio as of December 31, 2023 (dollars in thousands).
See Note 15, Regulatory Matters of the notes to consolidated financial statements and the “Basel III Capital Rules” section below for further discussion.
See Note 14, Regulatory Matters of the notes to consolidated financial statements and the “Basel III Capital Rules” section below for further discussion.
Therefore, these non-GAAP financial measures should not be considered in isolation, or as a substitute for comparable measures prepared in accordance with GAAP. - 40 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS FOR THE YEARS ENDED December 31, 2022 AND December 31, 2021 Net Interest Income and Net Interest Margin Net interest income is our primary source of revenue, comprising 78% of revenue during the year ended December 31, 2022.
Therefore, these non-GAAP financial measures should not be considered in isolation, or as a substitute for comparable measures prepared in accordance with GAAP. - 41 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS FOR THE YEARS ENDED December 31, 2023 AND December 31, 2022 Net Interest Income and Net Interest Margin Net interest income is our primary source of revenue, comprising 77% of revenue during the year ended December 31, 2023.
The unrealized loss of these securities is driven by the timing of the purchases of fixed-rate securities during the extended low interest rate environments experienced over the past two years, which has been compounded with subsequent increases in benchmark interest rates.
The unrealized loss of these securities is driven by the timing of the purchases of fixed-rate securities during the extended low interest rate environments experienced in prior years, which has been compounded with subsequent increases in benchmark interest rates.
For detailed information on shareholders’ equity, see Note 16, Shareholders’ Equity, of the notes to consolidated financial statements. FII and the Bank are subject to various regulatory capital requirements. At December 31, 2022, both FII and the Bank exceeded all regulatory requirements.
For detailed information on shareholders’ equity, see Note 15, Shareholders’ Equity, of the notes to consolidated financial statements. FII and the Bank are subject to various regulatory capital requirements. At December 31, 2023, both FII and the Bank exceeded all regulatory requirements.
Foreclosed assets consist of real property formerly pledged as collateral for loans, which we have acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. We had $19 thousand of properties representing foreclosed asset holdings at December 31, 2022 and no properties representing foreclosed asset holdings at December 31, 2021.
Foreclosed assets consist of real property formerly pledged as collateral for loans, which we have acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. We had $142 thousand and $19 thousand of properties representing foreclosed asset holdings at December 31, 2023 and 2022, respectively.
For additional information on the Company’s long-term contractual obligations above, see Note 11, Deposits, Note 21, Employee Benefit Plans, Note 12, Borrowings, and Note 9, Leases, in the accompanying consolidated financial statements. We have financial instruments with off-balance sheet risk established in the normal course of business to meet the financing needs of customers.
For additional information on the Company’s long-term contractual obligations above, see Note 10, Deposits, Note 20, Employee Benefit Plans, Note 11, Borrowings, and Note 8, Leases, in the accompanying consolidated financial statements. We have financial instruments with off-balance sheet risk established in the normal course of business to meet the financing needs of customers.
ANALYSIS OF FINANCIAL CONDITION OVERVIEW At December 31, 2022, we had total assets of $5.80 billion, an increase of 5% from $5.52 billion as of December 31, 2021, largely attributable to organic loan growth, partially offset by a decrease in our investment securities portfolio.
ANALYSIS OF FINANCIAL CONDITION OVERVIEW At December 31, 2023, we had total assets of $6.16 billion, an increase of 6% from $5.80 billion as of December 31, 2022, largely attributable to organic loan growth, partially offset by a decrease in our investment securities portfolio.
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 We recorded income tax expense of $14.4 million for 2022, compared to $19.5 million for 2021.
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 We recorded income tax expense of $12.8 million for 2023, compared to $14.4 million for 2022.
Residential real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $275.3 million and $272.7 million as of December 31, 2022 and 2021, respectively. Allowance for Credit Losses The following table summarizes the activity in the allowance for credit losses - loans (in thousands) for the periods indicated.
Residential real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $269.4 million and $275.3 million as of December 31, 2023 and 2022, respectively. Allowance for Credit Losses The following table summarizes the activity in the allowance for credit losses - loans (in thousands) for the periods indicated.
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. EXECUTIVE OVERVIEW 2022 Financial Performance Review Net income decreased $21.1 million to $56.6 million for 2022, compared to $77.7 million for 2021.
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. EXECUTIVE OVERVIEW 2023 Financial Performance Review Net income decreased $6.3 million to $50.3 million for 2023, compared to $56.6 million for 2022.
Total public deposits were $1.12 billion and $1.10 billion at December 31, 2022 and December 31, 2021, respectively, and represented 23% of total deposits as of the end of each period. We participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount.
Total public deposits were $1.02 billion and $1.12 billion at December 31, 2023 and December 31, 2022, respectively, and represented 20% and 23% of total deposits as of the end of each year, respectively. We participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise exceeding the maximum insurable amount.
Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Reciprocal deposits totaled $696.1 million at December 31, 2022, compared to $771.4 million at December 31, 2022, and represented 14% and 16% of total deposits as of the end of each period, respectively.
Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Reciprocal deposits totaled $817.6 million at December 31, 2023, compared to $696.1 million at December 31, 2022, and represented 16% and 14% of total deposits as of the end of each year, respectively.
We have committed to investments in limited partnerships, primarily related to small business investment companies, tax credit investments and FinTech and ESG-related investment funds. As of December 31, 2022, the off-balance sheet commitments related to these investments totaled $57.1 million.
We have committed to investments in limited partnerships, primarily related to small business investment companies, tax credit investments and FinTech and ESG-related investment funds. As of December 31, 2023, the off-balance sheet commitments related to these investments totaled $27.6 million.
Restructuring charges related to the 2020 closing of five branches and totaled $1.6 million in 2022 and $111 thousand in 2021, representing charges related to the write-down of real estate assets to fair market value based upon current market conditions.
Restructuring charges related to the 2020 closing of five branches totaled $114 thousand in 2023 and $1.6 million in 2022, representing selling costs and charges related to the write-down of real estate assets to fair market value based upon current market conditions.
We had approximately $145.0 million of credit available under unsecured federal funds purchased lines with various banks as of December 31, 2022, with no amounts outstanding at December 31, 2022. Additionally, we had approximately $271.4 million of unencumbered liquid securities available for pledging.
We had approximately $165.0 million of credit available under unsecured federal funds purchased lines with various banks as of December 31, 2023, with no amounts outstanding at December 31, 2023. Additionally, we had approximately $175.4 million of unencumbered liquid securities available for pledging.
(2) The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%. - 43 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS (3) Loans include net unearned income, net deferred loan fees and costs and non-accruing loans.
(2) The interest on tax-exempt securities is calculated on a tax-equivalent basis assuming a Federal income tax rate of 21%. (3) Loans include net unearned income, net deferred loan fees and costs and non-accruing loans.
Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled $550 thousand and $6.2 million as of December 31, 2022 and 2021, respectively. We sell certain qualifying newly originated or refinanced residential real estate loans on the secondary market.
Loans Held for Sale and Loan Servicing Rights Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled $1.4 million and $550 thousand as of December 31, 2023 and 2022, respectively. We sell certain qualifying newly originated or refinanced residential real estate loans on the secondary market.
The average FICO score for new home equity production was 769 and 768 during the years ended December 31, 2022 and 2021, respectively.
The average FICO score for new home equity production was 750 and 769 during the years ended December 31, 2023 and 2022, respectively.
The ratio of the allowance for credit losses - loans to total loans was 1.12% and 1.08% at December 31, 2022 and 2021, respectively.
The ratio of the allowance for credit losses–loans to total loans was 1.14% and 1.12% at December 31, 2023 and 2022, respectively.
The 2015 Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to the April 15, 2030 maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then current three-month London Interbank Offered Rate (“LIBOR”) plus 3.944%, payable quarterly.
The 2015 Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to the April 15, 2030 maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then current three-month CME Term SOFR plus 0.26161% plus a spread of 3.944%.
We have elected to apply the 2020 CECL transition provision related to the impact of the CECL accounting standard on regulatory capital, as provided by the US banking agencies’ March 2020 interim final rule.
We have elected to apply the 2020 Current Expected Credit Losses methodology (“CECL”) transition provision related to the impact of the CECL accounting standard on regulatory capital, as provided by the US banking agencies’ March 2020 interim final rule.
These financial instruments include commitments to extend credit for $1.44 billion and standby letters of credit for $17.2 million as of December 31, 2022. We do not expect all of the commitments to extend credit and standby letters of credit to be funded. Thus, the total commitment amounts do not necessarily represent our future cash requirements.
These financial instruments include commitments to extend credit for $1.20 billion and standby letters of credit for $13.5 million as of December 31, 2023. We do not expect all of the commitments to extend credit and standby letters of credit to be funded. Thus, the total commitment amounts do not necessarily represent our future cash requirements.
This increase was a function of a 9-basis points higher contribution from net free funds, partially offset by a 3-basis points decrease in the interest rate spread.
This decrease was a function of a 70-basis points decrease in the interest rate spread, partially offset by a 44-basis points higher contribution from net free funds.
Overall, interest-bearing deposit rate and volume changes resulted in $14.9 million of higher interest expense during 2022. - 42 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS The following table presents, for the years indicated, information regarding: (i) average balances, which were derived from daily balances; (ii) the amount of interest income from interest-earning assets and the resulting annualized yields (tax-exempt yields have been adjusted to a tax-equivalent basis using the applicable Federal tax rate in each year); (iii) the amount of interest expense on interest-bearing liabilities and the resulting annualized rates; (iv) net interest income; (v) net interest rate spread; (vi) net interest income as a percentage of average interest-earning assets (“net interest margin”); and (vii) the ratio of average interest-earning assets to average interest-bearing liabilities.
Overall, interest-bearing deposit interest rate changes and volume changes resulted in an increase in interest expense of $77.8 million and $6.6 million, respectively, as compared to 2022, and total borrowings volume and interest rate changes contributed $7.3 million of higher interest expense during 2023. - 43 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS The following table presents, for the years indicated, information regarding: (i) average balances, which were derived from daily balances; (ii) the amount of interest income from interest-earning assets and the resulting annualized yields (tax-exempt yields have been adjusted to a tax-equivalent basis using the applicable Federal tax rate in each year); (iii) the amount of interest expense on interest-bearing liabilities and the resulting annualized rates; (iv) net interest income; (v) net interest rate spread; (vi) net interest income as a percentage of average interest-earning assets (“net interest margin”); and (vii) the ratio of average interest-earning assets to average interest-bearing liabilities.
At December 31, 2022, our ownership of FHLB and FRB stock totaled $13.0 million and $6.4 million, respectively, and is included in other assets and recorded at cost, which approximates fair value. LENDING ACTIVITIES Total loans were $4.05 billion at December 31, 2022, an increase of $371.0 million, or 10%, from December 31, 2021.
At December 31, 2023, our ownership of FHLB and FRB stock totaled $11.0 million and $6.4 million, respectively, and is included in other assets and recorded at cost, which approximates fair value. LENDING ACTIVITIES Total loans were $4.46 billion at December 31, 2023, an increase of $411.7 million, or 10%, from December 31, 2022.
Approximately $1.8 million, or 18%, of the $10.2 million of nonaccrual loans, a component of non-performing loans, as of December 31, 2022 were current with respect to payment of principal and interest but were classified as non-accruing because repayment in full of principal and/or interest was uncertain.
Approximately $2.3 million, or 8%, of the $26.6 million of nonaccrual loans, a component of non-performing loans, as of December 31, 2023 were current with respect to payment of principal and interest but were classified as non-accruing because repayment in full of principal and/or interest was uncertain.
Currently, the maximum standard for LTV is 85%, with lower limits established for certain higher risk types, such as raw land which has a 65% LTV maximum. Consumer loans totaled $1.71 billion at December 31, 2022, up $78.0 million compared to 2021, and represented 42.1% of the 2022 year-end loan portfolio versus 44.3% at year-end 2021.
Currently, the maximum standard for LTV is 85%, with lower limits established for certain higher risk types, such as raw land which has a 65% LTV maximum. Consumer loans totaled $1.72 billion at December 31, 2023, up $14.8 million compared to 2022, and represented 39% of the 2023 year-end loan portfolio versus 42% at year-end 2022.
The portion of our time deposits by account that were in excess of the FDIC insurance limit was $258.7 million and $182.3 million at December 31, 2022 and 2021, respectively.
The portion of our time deposits by account that were in excess of the FDIC insurance limit was $302.6 million and $258.7 million at December 31, 2023 and 2022, respectively.
We have also recorded a $4.8 million liability primarily related to committed contributions for tax credit investments in property placed in service on or before December 31, 2022.
We have also recorded a $14.0 million liability primarily related to committed contributions for tax credit investments in property placed in service on or before December 31, 2023.
For detailed information on regulatory capital requirements, see Note 15, Regulatory Matters, of the notes to consolidated financial statements. - 55 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL MANAGEMENT The objective of maintaining adequate liquidity is to assure that we meet our financial obligations.
For detailed information on regulatory capital requirements, see Note 14, Regulatory Matters, of the notes to consolidated financial statements. LIQUIDITY AND CAPITAL MANAGEMENT The objective of maintaining adequate liquidity is to assure that we meet our financial obligations.
Refer to the “GAAP to Non-GAAP Reconciliation” section of this Item 7 for further information. - 38 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Additional financial highlights of the Company are as follows: At or for the year ended December 31, 2022 2021 2020 Performance ratios: Net income, returns on: Average assets 1.01 % 1.46 % 0.82 % Average equity 12.81 % 16.01 % 8.49 % Net income available to common shareholders, returns on: Average common equity 12.99 % 16.29 % 8.50 % Average tangible common equity (1) 15.72 % 19.37 % 10.25 % Average tangible assets (1) 1.00 % 1.45 % 0.80 % Common dividend payout ratio 32.40 % 22.45 % 45.22 % Net interest margin (fully tax-equivalent) 3.20 % 3.14 % 3.22 % Effective tax rate 20.3 % 20.1 % 16.2 % Efficiency ratio (2) 60.39 % 55.76 % 60.22 % Capital ratios: Leverage ratio 8.33 % 8.23 % 8.25 % Common equity Tier 1 capital ratio 9.42 % 10.28 % 10.14 % Tier 1 capital ratio 9.78 % 10.68 % 10.59 % Total risk-based capital ratio 12.13 % 13.12 % 13.56 % Average equity to average assets 7.88 % 9.10 % 9.61 % Common equity to assets 6.70 % 8.84 % 9.18 % Tangible common equity to tangible assets (1) 5.50 % 7.59 % 7.80 % (1) This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition.
Additional financial highlights of the Company are as follows: At or for the year ended December 31, 2023 2022 2021 Performance ratios: Net income, returns on: Average assets 0.83 % 1.01 % 1.46 % Average equity 11.86 % 12.81 % 16.01 % Net income available to common shareholders, returns on: Average common equity 12.01 % 12.99 % 16.29 % Average tangible common equity (1) 14.64 % 15.72 % 19.37 % Average tangible assets (1) 0.82 % 1.00 % 1.45 % Common dividend payout ratio 37.85 % 32.40 % 22.45 % Net interest margin (fully tax-equivalent) 2.94 % 3.20 % 3.14 % Effective tax rate 20.3 % 20.3 % 20.1 % Efficiency ratio (2) 62.96 % 60.39 % 55.76 % Capital ratios: Leverage ratio 8.18 % 8.33 % 8.23 % Common equity Tier 1 capital ratio 9.43 % 9.42 % 10.28 % Tier 1 capital ratio 9.76 % 9.78 % 10.68 % Total risk-based capital ratio 12.13 % 12.13 % 13.12 % Average equity to average assets 7.03 % 7.88 % 9.10 % Common equity to assets 7.10 % 6.70 % 8.84 % Tangible common equity to tangible assets (1) 6.00 % 5.50 % 7.59 % (1) This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition.
Our loan portfolio is significantly affected by changes in the prime interest rate and changes in the prime interest rate generally follow changes in the federal funds rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, was 7.50%, at year-end 2022 compared to 3.25% at year-end 2021.
Our loan portfolio is significantly affected by changes in the prime interest rate and changes in the prime interest rate generally follow changes in the federal funds rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, was 8.50% at December 31, 2023, compared to 7.50% at December 31, 2022.
The increase in average deposits was due to growth in non-public deposits, public deposits, and brokered deposits, partially offset by a decrease in reciprocal deposits. Average short-term borrowings increased $85.6 million from $538 thousand in 2021 to $86.1 million in 2022 as short-term borrowings were utilized, in addition to deposits, to fund interest-earning asset growth.
The increase in average deposits was due to growth in non-public deposits, brokered deposits, and reciprocal deposits, partially offset by a decrease in public deposits. Average short-term borrowings increased $100.8 million from $86.1 million in 2022 to $186.9 million in 2023 as short-term borrowings were utilized, in addition to deposits, to fund interest-earning asset growth.
The Parent has a revolving line of credit with a commercial bank allowing borrowings up to $20.0 million in total as an additional source of working capital. At December 31, 2022, no amounts have been drawn on the line of credit.
The Parent has a revolving line of credit with a commercial bank allowing borrowings up to $20.0 million in total as an additional source of working capital. At December 31, 2023, no amounts have been drawn on the line of credit. Long-term Borrowings As of December 31, 2023 we had a long-term advance payable to FHLB of $50.0 million.
Brokered deposits totaled $347.2 million and $254.7 million at December 31, 2022 and 2021, respectively, and represented 7% and 5% of total deposits as of the end of each period, respectively. Borrowings The Company classifies borrowings as short-term or long-term in accordance with the original terms of the agreement.
Brokered deposits totaled $256.8 million, or 5% of total deposits, and $347.2 million, or 7% of total deposits, at December 31, 2023 and 2022, respectively. Borrowings The Company classifies borrowings as short-term or long-term in accordance with the original terms of the agreement.
Our Chief Financial Officer and Treasurer, guided by ALCO, is responsible for investment portfolio decisions within the established policies. - 47 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Our available for sale (“AFS”) investment securities portfolio decreased $224.1 million from $1.18 billion at December 31, 2021 to $954.4 million at December 31, 2022.
Our Chief Financial Officer and Treasurer, guided by ALCO, is responsible for investment portfolio decisions within the established policies. - 48 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Our available for sale (“AFS”) investment securities portfolio decreased $66.6 million from $954.4 million at December 31, 2022 to $887.7 million at December 31, 2023.
In 2022 and 2021, we recognized tax credit investments resulting in a $2.6 million reduction in income tax expense, in each year, and an $815 thousand and $431 thousand net loss recorded in noninterest income, respectively. Our effective tax rate was 20.3% for 2022 compared to 20.1% for 2021.
In 2023 and 2022, we recognized tax credit investments resulting in a $3.0 million and $2.6 million, respectively, reduction in income tax expense, in each year, and a $252 thousand and $815 thousand net loss recorded in noninterest income, respectively. Our effective tax rate was 20.3% for both 2023 and 2022.
We had approximately $573.8 million in secured borrowing capacity at the FRB discount window, none of which was outstanding at December 31, 2022. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans.
We had approximately $291.1 million of immediate credit capacity with the FHLB as of December 31, 2023. We had approximately $808.5 million in secured borrowing capacity at the FRB discount window, none of which was outstanding at December 31, 2023. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans.
Computer and data processing expense increased $3.5 million, or 25%, to $17.6 million in 2022, compared to $14.1 million in 2021. The increase was primarily a result of our strategic investments in technology, primarily driven by a new customer relationship management system implemented in the latter part of 2021 and other initiatives.
Computer and data processing expense increased $2.5 million, or 14%, to $20.1 million in 2023, compared to $17.6 million in 2022. The increase was primarily a result of our strategic investments in data efficiency and marketing technology primarily driven by a new customer relationship management system implemented in late 2021.
Commercial mortgage loans include both owner occupied, and non-owner occupied commercial real estate loans. Approximately 19% and 23% of our commercial mortgage portfolio at December 31, 2022 and 2021, respectively, was owner occupied commercial real estate.
Commercial loans include both owner-occupied and non-owner occupied commercial real estate loans. Approximately 16% and 19% of our total commercial loan portfolio at December 31, 2023 and December 31, 2022, respectively, was owner occupied real estate.
Planned Uses of Capital Resources The Company has various long-term contractual obligations as of December 31, 2022, which include: • Time deposits for $1.28 billion; • Supplemental executive retirement plans for $697 thousand; • Subordinated notes for $75.0 million; and • Operating leases for $53.2 million.
Planned Uses of Capital Resources The Company has various long-term contractual obligations as of December 31, 2023, which include: • Time deposits for $1.40 billion; • Supplemental executive retirement plans for $374 thousand; • Subordinated notes for $75.0 million • FHLB long-term advances for $50.0 million; and • Operating leases for $50.7 million.
The ratio of allowance for credit losses - loans to non-performing loans was 445% at December 31, 2022, compared with 326% at December 31, 2021. - 51 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS The following table sets forth the allocation of the allowance for credit losses - loans by loan category as of the dates indicated.
The ratio of allowance for credit losses–loans to non-performing loans was 192% at December 31, 2023, compared with 445% at December 31, 2022, reflective of the large commercial loan relationship noted above. - 52 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS The following table sets forth the allocation of the allowance for credit losses–loans by loan category as of the dates indicated.
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.
The higher efficiency ratio was primarily the result of the increase in noninterest expense in 2023 as described above. The efficiency ratio is calculated by dividing total noninterest expense by net revenue, defined as the sum of tax-equivalent net interest income and noninterest income before net gains on investment securities.
Such agencies may require us to increase the allowance based on their judgments about information available to them at the time of their examination. - 52 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Non-performing Assets and Potential Problem Loans The following table summarizes our non-performing assets (in thousands) as of the dates indicated: Non-performing Assets At December 31, 2022 2021 Nonaccrual loans: Commercial business $ 340 $ 602 Commercial mortgage 2,564 6,414 Residential real estate loans 4,071 2,373 Residential real estate lines 142 200 Consumer indirect 3,079 1,780 Other consumer 1 - Total nonaccrual loans 10,197 11,369 Accruing loans 90 days or more delinquent 1 797 Total non-performing loans 10,198 12,166 Foreclosed assets 19 - Total non-performing assets $ 10,217 $ 12,166 Nonaccrual loans to total loans 0.25 % 0.31 % Non-performing loans to total loans 0.25 % 0.33 % Non-performing assets to total assets 0.18 % 0.22 % Non-performing assets include non-performing loans and foreclosed assets.
Such agencies may require us to increase the allowance based on their judgments about information available to them at the time of their examination. - 53 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Non-performing Assets and Potential Problem Loans The following table summarizes our non-performing assets (in thousands) as of the dates indicated: Non-performing Assets At December 31, 2023 2022 Nonaccrual loans: Commercial business $ 5,664 $ 340 Commercial mortgage 10,563 2,564 Residential real estate loans 6,364 4,071 Residential real estate lines 221 142 Consumer indirect 3,814 3,079 Other consumer 13 1 Total nonaccrual loans 26,639 10,197 Accruing loans 90 days or more delinquent 21 1 Total non-performing loans 26,660 10,198 Foreclosed assets 142 19 Total non-performing assets $ 26,802 $ 10,217 Nonaccrual loans to total loans 0.60 % 0.25 % Non-performing loans to total loans 0.60 % 0.25 % Non-performing assets to total assets 0.44 % 0.18 % Non-performing assets include non-performing loans and foreclosed assets.
Based on this analysis, we believe the allowance for credit losses is adequate as of December 31, 2022.
The process we use to determine the overall allowance for credit losses is based on this analysis. Based on this analysis, we believe the allowance for credit losses is adequate as of December 31, 2023.
During the year ended December 31, 2022, we originated $489.0 million in indirect loans with a mix of approximately 29% new vehicles and 71% used vehicles. This compares with $504.3 million in indirect loans with a mix of approximately 25% new vehicles and 75% used vehicles for the same period in 2021.
During the year ended December 31, 2023, we originated $292.1 million in indirect loans with a mix of approximately 27% new vehicles and 73% used vehicles. This compares with $489.0 million in indirect loans with a mix of approximately 29% new vehicles and 71% used vehicles for 2022.
Credit Loss - Loans Analysis Year Ended December 31, 2022 2021 2020 Allowance for credit losses - loans, beginning of period, prior to adoption of ASC 326 $ 39,676 $ 52,420 $ 30,482 Impact of adopting ASC 326 - - 9,594 Allowance for credit losses - loans, beginning of period, after adoption of ASC 326 39,676 52,420 40,076 Net charge-offs (recoveries): Commercial business (64 ) (212 ) 7,384 Commercial mortgage (853 ) 3,814 1,755 Residential real estate loans 279 56 72 Residential real estate lines (1 ) 141 (3 ) Consumer indirect 4,538 1,256 4,278 Other consumer 1,339 705 329 Total net charge-offs 5,238 5,760 13,815 Provision (benefit) for credit losses – loans 10,975 (6,984 ) 26,159 Allowance for credit losses – loans, end of year $ 45,413 $ 39,676 $ 52,420 Net loan charge-offs (recoveries) to average loans: Commercial business -0.01 % -0.03 % 1.00 % Commercial mortgage -0.06 % 0.29 % 0.15 % Residential real estate loans 0.05 % 0.01 % 0.01 % Residential real estate lines 0.00 % 0.17 % 0.00 % Consumer indirect 0.45 % 0.14 % 0.51 % Other consumer 9.15 % 4.61 % 2.06 % Total loans 0.14 % 0.16 % 0.40 % Allowance for credit losses – loans to total loans 1.12 % 1.08 % 1.46 % Allowance for credit losses – loans to nonaccrual loans 445 % 349 % 564 % Allowance for credit losses – loans to non-performing loans 445 % 326 % 551 % Net charge-offs of $5.2 million in 2022 represented 0.14% of average loans compared to $5.8 million, or 0.16%, in 2021.
Credit Loss - Loans Analysis Year Ended December 31, 2023 2022 2021 Allowance for credit losses - loans, beginning of period $ 45,413 $ 39,676 $ 52,420 Net charge-offs (recoveries): Commercial business (109 ) (64 ) (212 ) Commercial mortgage 35 (853 ) 3,814 Residential real estate loans 89 279 56 Residential real estate lines 41 (1 ) 141 Consumer indirect 7,595 4,538 1,256 Other consumer 893 1,339 705 Total net charge-offs 8,544 5,238 5,760 Provision (benefit) for credit losses – loans 14,213 10,975 (6,984 ) Allowance for credit losses – loans, end of year $ 51,082 $ 45,413 $ 39,676 Net loan charge-offs (recoveries) to average loans: Commercial business -0.02 % -0.01 % -0.03 % Commercial mortgage 0.00 % -0.06 % 0.29 % Residential real estate loans 0.01 % 0.05 % 0.01 % Residential real estate lines 0.05 % 0.00 % 0.17 % Consumer indirect 0.76 % 0.45 % 0.14 % Other consumer 3.11 % 9.15 % 4.61 % Total loans 0.20 % 0.14 % 0.16 % Allowance for credit losses – loans to total loans 1.14 % 1.12 % 1.08 % Allowance for credit losses – loans to nonaccrual loans 192 % 445 % 349 % Allowance for credit losses – loans to non-performing loans 192 % 445 % 326 % Net charge-offs of $8.5 million in 2023 represented 0.20% of average loans compared to $5.2 million, or 0.14%, in 2022.
Management also believes such information is useful to investors in evaluating Company performance. - 39 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS GAAP to Non-GAAP Reconciliation (In thousands, except per share data) At or for the year ended December 31, 2022 2021 2020 Computation of ending tangible common equity: Common shareholders’ equity $ 388,313 $ 487,850 $ 451,035 Less: goodwill and other intangible assets, net 73,414 74,400 73,789 Tangible common equity $ 314,899 $ 413,450 $ 377,246 Computation of ending tangible assets: Total assets $ 5,797,272 $ 5,520,779 $ 4,912,306 Less: goodwill and other intangible assets, net 73,414 74,400 73,789 Tangible assets $ 5,723,858 $ 5,446,379 $ 4,838,517 Tangible common equity to tangible assets (1) 5.50 % 7.59 % 7.80 % Common shares outstanding 15,340 15,745 16,042 Tangible common book value per share (2) $ 20.53 $ 26.26 $ 23.52 Computation of average tangible common equity: Average common equity $ 424,421 $ 468,085 $ 433,908 Average goodwill and other intangible assets, net 73,913 74,411 74,364 Average tangible common equity $ 350,508 $ 393,674 $ 359,544 Computation of average tangible assets: Average assets $ 5,606,733 $ 5,335,808 $ 4,693,225 Average goodwill and other intangible assets, net 73,913 74,411 74,364 Average tangible assets $ 5,532,820 $ 5,261,397 $ 4,618,861 Net income available to common shareholders $ 55,114 $ 76,237 $ 36,871 Return on average tangible common equity (3) 15.72 % 19.37 % 10.25 % Return on average tangible assets (4) 1.00 % 1.45 % 0.80 % (1) Tangible common equity divided by tangible assets.
Management also believes such information is useful to investors in evaluating Company performance. - 40 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS GAAP to Non-GAAP Reconciliation (In thousands, except per share data) At or for the year ended December 31, 2023 2022 2021 Computation of ending tangible common equity: Common shareholders’ equity $ 437,504 $ 388,313 $ 487,850 Less: goodwill and other intangible assets, net 72,504 73,414 74,400 Tangible common equity $ 365,000 $ 314,899 $ 413,450 Computation of ending tangible assets: Total assets $ 6,160,881 $ 5,797,272 $ 5,520,779 Less: goodwill and other intangible assets, net 72,504 73,414 74,400 Tangible assets $ 6,088,377 $ 5,723,858 $ 5,446,379 Tangible common equity to tangible assets (1) 6.00 % 5.50 % 7.59 % Common shares outstanding 15,407 15,340 15,745 Tangible common book value per share (2) $ 23.69 $ 20.53 $ 26.26 Computation of average tangible common equity: Average common equity $ 406,394 $ 424,421 $ 468,085 Average goodwill and other intangible assets, net 73,055 73,913 74,411 Average tangible common equity $ 333,339 $ 350,508 $ 393,674 Computation of average tangible assets: Average assets $ 6,025,383 $ 5,606,733 $ 5,335,808 Average goodwill and other intangible assets, net 73,055 73,913 74,411 Average tangible assets $ 5,952,328 $ 5,532,820 $ 5,261,397 Net income available to common shareholders $ 48,805 $ 55,114 $ 76,237 Return on average tangible common equity (3) 14.64 % 15.72 % 19.37 % Return on average tangible assets (4) 0.82 % 1.00 % 1.45 % (1) Tangible common equity divided by tangible assets.
Allowance for Credit Losses - Loans by Loan Category At December 31, 2022 2021 Percentage Percentage Credit of loans by Credit of loans by Loss category to Loss category to Allowance total loans Allowance total loans Commercial business $ 12,585 16.4 % $ 11,099 17.3 % Commercial mortgage 14,412 41.5 14,777 38.4 Residential real estate loans 3,301 14.5 1,604 15.7 Residential real estate lines 608 1.9 379 2.2 Consumer indirect 14,238 25.3 11,611 26.0 Other consumer 269 0.4 206 0.4 Total $ 45,413 100.0 % $ 39,676 100.0 % Loans not analyzed for a specific reserve are segmented into "pools" of loans based upon similar risk characteristics.
Allowance for Credit Losses - Loans by Loan Category At December 31, 2023 2022 Percentage Percentage Credit of loans by Credit of loans by Loss category to Loss category to Allowance total loans Allowance total loans Commercial business $ 13,102 16.5 % $ 12,585 16.4 % Commercial mortgage 15,858 44.9 14,412 41.5 Residential real estate loans 5,286 14.6 3,301 14.5 Residential real estate lines 764 1.7 608 1.9 Consumer indirect 14,099 21.3 14,238 25.3 Other consumer 1,973 1.0 269 0.4 Total $ 51,082 100.0 % $ 45,413 100.0 % Loans not analyzed for a specific reserve are segmented into “pools” of loans based upon similar risk characteristics.
Other consumer loans totaled $15.1 million at December 31, 2022, up $633 thousand, or 4%, compared to 2021, and represented less than one percent of the 2022 and 2021 year-end loan portfolio. Other consumer loans consist of personal loans (collateralized and uncollateralized) and deposit account collateralized loans.
Other consumer loans totaled $45.1 million at December 31, 2023, up $30.0 million, compared to 2022, and represented 1% of the 2023 and less than 1% of the 2022 year-end loan portfolio. Other consumer loans consist of BaaS loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans.
The following table reflects the Company’s ratios and their components as of December 31 (in thousands): 2022 2021 Common shareholders’ equity $ 394,716 $ 496,387 Less: Goodwill and other intangible assets 70,643 71,748 Net unrealized loss on investment securities (1) (128,440 ) (4,971 ) Hedging derivative instruments 4,735 1,160 Net periodic pension and postretirement benefits plan adjustments (13,588 ) (9,396 ) Other (194 ) - Common Equity Tier 1 (“CET1”) capital 461,560 437,846 Plus: Preferred stock 17,292 17,292 Less: Other - - Tier 1 Capital 478,852 455,138 Plus: Qualifying allowance for credit losses 40,895 29,938 Subordinated Notes 74,222 73,911 Total regulatory capital $ 593,969 $ 558,987 Adjusted average total assets (for leverage capital purposes) $ 5,748,203 $ 5,532,987 Total risk-weighted assets $ 4,896,451 $ 4,260,101 Regulatory Capital Ratios Tier 1 Leverage (Tier 1 capital to adjusted average assets) 8.33 % 8.23 % CET1 Capital (CET1 capital to total risk-weighted assets) 9.42 10.28 Tier 1 Capital (Tier 1 capital to total risk-weighted assets) 9.78 10.68 Total Risk-Based Capital (Total regulatory capital to total risk-weighted assets) 12.13 13.12 (1) Includes unrealized gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category.
The following table reflects the Company’s ratios and their components as of December 31 (in thousands): 2023 2022 Common shareholders’ equity $ 441,773 $ 394,716 Less: Goodwill and other intangible assets 69,594 70,643 Net unrealized loss on investment securities (1) (111,761 ) (128,440 ) Hedging derivative instruments 3,911 4,735 Net periodic pension and postretirement benefits plan adjustments (11,946 ) (13,588 ) Other (145 ) (194 ) Common Equity Tier 1 (“CET1”) capital 492,120 461,560 Plus: Preferred stock 17,292 17,292 Tier 1 Capital 509,412 478,852 Plus: Qualifying allowance for credit losses 48,916 40,895 Subordinated Notes 74,532 74,222 Total regulatory capital $ 632,860 $ 593,969 Adjusted average total assets (for leverage capital purposes) $ 6,224,339 $ 5,748,203 Total risk-weighted assets $ 5,218,724 $ 4,896,451 Regulatory Capital Ratios Tier 1 Leverage (Tier 1 capital to adjusted average assets) 8.18 % 8.33 % CET1 Capital (CET1 capital to total risk-weighted assets) 9.43 9.42 Tier 1 Capital (Tier 1 capital to total risk-weighted assets) 9.76 9.78 Total Risk-Based Capital (Total regulatory capital to total risk-weighted assets) 12.13 12.13 (1) Includes unrealized gains and losses related to the Company’s reclassification of available for sale investment securities to the held to maturity category.
Net charge-offs for 2022 included a $2.0 million recovery in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the fourth quarter of 2021. The allowance for credit losses - loans was $45.4 million at December 31, 2022, compared with $39.7 million at December 31, 2021.
The lower level of net charge-offs for 2022 included a $2.0 million recovery in connection with the pay-off of a commercial loan that was downgraded to non-performing status with a partial charge-off in the fourth quarter of 2021.
The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis for the years ended December 31 (in thousands): 2022 2021 2020 Interest income per consolidated statements of income $ 196,107 $ 167,205 $ 161,299 Adjustment to fully taxable equivalent basis 544 626 871 Interest income adjusted to a fully taxable equivalent basis 196,651 167,831 162,170 Interest expense per consolidated statements of income 28,735 12,475 22,314 Net interest income on a taxable equivalent basis $ 167,916 $ 155,356 $ 139,856 Analysis of Net Interest Income and Net Interest Margin Net interest income on a taxable equivalent basis for 2022 was $167.9 million, an increase of $12.6 million compared to $155.4 million for 2021.
The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable equivalent basis for the years ended December 31 (in thousands): 2023 2022 2021 Interest income per consolidated statements of income $ 286,133 $ 196,107 $ 167,205 Adjustment to fully taxable equivalent basis 418 544 626 Interest income adjusted to a fully taxable equivalent basis 286,551 196,651 167,831 Interest expense per consolidated statements of income 120,418 28,735 12,475 Net interest income on a taxable equivalent basis $ 166,133 $ 167,916 $ 155,356 Analysis of Net Interest Income and Net Interest Margin Net interest income on a taxable equivalent basis for 2023 was $166.1 million, a decrease of $1.8 million compared to $167.9 million for 2022.
Other expense of $12.4 million in 2022 increased $2.8 million compared to $9.6 million in 2021, primarily due to interest charges related to collateral held for derivative transactions, higher travel and entertainment expense, higher insurance costs and the impact of inflationary pressures. The efficiency ratio for the year ended December 31, 2022 was 60.39% compared with 55.76% for 2021.
Other expense of $15.4 million in 2023 increased $3.0 million, or 25%, compared to $12.4 million in 2022, primarily due to interest charges related to collateral held for derivative transactions, higher insurance costs and the impact of general inflationary pressures. The efficiency ratio for the year ended December 31, 2023 was 62.96% compared with 60.39% for 2022.
The residential real estate line portfolio amounted to $77.7 million at December 31, 2022 down $861 thousand, or 1%, compared to 2021 and represented 1.9% of the 2022 year-end loan portfolio versus 2.2% at year-end 2021. The residential real estate loans and lines portfolios had a weighted average LTV at origination of approximately 70% at December 31, 2022 and 2021.
The residential real estate line portfolio amounted to $77.4 million at December 31, 2023 down $303 thousand, compared to 2022 and represented 2% of total loans at both December 31, 2023 and December 31, 2022. The residential real estate loans and lines portfolios had a weighted average LTV at origination of approximately 70% at December 31, 2023 and 2022.
We identified $22.7 million in loans that continued to accrue interest which were classified as substandard as of December 31, 2022 and 2021. - 53 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS FUNDING ACTIVITIES Deposits The following table summarizes the composition of our deposits (dollars in thousands) as of the dates indicated.
We identified $29.9 million and $25.5 million in loans that continued to accrue interest which were classified as substandard as of December 31, 2023 and 2022, respectively. FUNDING ACTIVITIES Deposits The following table summarizes the composition of our deposits (in thousands) as of the dates indicated.
Because current economic conditions and borrower strength can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the appropriateness of the allowance for credit losses, could change significantly. Management will periodically assess what adjustments are necessary to qualitatively adjust the ACL based on their assessment of current expected credit losses.
Because current economic conditions and borrower strength can change, and future events are inherently difficult to predict, the anticipated amount of estimated loan losses, and therefore the appropriateness of the allowance for credit losses, could change significantly.
We offer insurance services through our wholly-owned subsidiary, SDN Insurance Agency, LLC (“SDN”), a full-service insurance agency. We offer customized investment advice, wealth management, investment consulting and retirement plan services through our wholly-owned subsidiaries Courier Capital, LLC (“Courier Capital”) and HNP Capital, LLC (“HNP Capital”), SEC-registered investment advisory and wealth management firms.
We offer customized investment advice, wealth management, investment consulting and retirement plan services through our wholly-owned subsidiary Courier Capital, LLC (“Courier Capital”) an SEC-registered investment advisory and wealth management firm.
After the discontinuance of LIBOR, the alternate method selected by the Company is three-month SOFR. The 2015 Notes are redeemable by us at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. Proceeds, net of debt issuance costs of $1.1 million, were $38.9 million.
The 2015 Notes are redeemable by us at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. Proceeds, net of debt issuance costs of $1.1 million, were $38.9 million. The 2020 and 2015 Notes qualify as Tier 2 capital for regulatory purposes.
We achieve liquidity by maintaining a strong base of both core customer funds and maturing short-term assets; we also rely on our ability to sell or pledge securities and lines-of-credit and our overall ability to access to the financial and capital markets.
We achieve liquidity by maintaining a strong base of both core customer funds and maturing short-term assets; we also rely on our ability to sell or pledge securities and lines-of-credit and our overall ability to access to the financial and capital markets. - 56 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Liquidity for the Bank is managed through the monitoring of anticipated changes in loans, the investment portfolio, core deposits and wholesale funds.
The Company’s leverage ratio was 8.33% at December 31, 2022 compared to 8.23% at December 31, 2021. The Bank’s leverage ratio and total risk-based capital ratio were 9.17% and 11.60%, respectively, at December 31, 2022, compared to 8.98% and 12.38%, respectively, at December 31, 2021.
The Bank’s leverage ratio and total risk-based capital ratio were 9.06% and 11.76%, respectively, at December 31, 2023, compared to 9.17% and 11.60%, respectively, at December 31, 2022.
The maturities of our uninsured time deposits at December 31, 2022 were as follows: $55.6 million in three months or less; $80.6 million between three months and six months; $111.4 million between six months and one year; and $11.1 million over one year.
The maturities of our uninsured time deposits at December 31, 2023 were as follows: $107.7 million in three months or less; $84.3 million between three months and six months; $51.0 million between six months and one year; and $59.6 million over one year.
This resulted in a 1.01% return on average assets and a 12.81% return on average equity. Net income available to common shareholders was $55.1 million or $3.56 per diluted share for 2022, compared to $76.2 million or $4.78 per diluted share for 2021.
This resulted in a 0.83% return on average assets and an 11.86% return on average equity. Net income available to common shareholders was $48.8 million or $3.15 per diluted share for 2023, compared to $55.1 million or $3.56 per diluted share for 2022.
Salaries and benefits expense increased $8.7 million year-over-year, primarily due to higher investments in personnel and wage pressures driven by the current competitive labor market. Computer and data processing expense increased $3.5 million year-over-year, as a result of strategic investments in technology, primarily driven by a new customer relationship management system implemented in late 2021.
Computer and data processing expense increased $2.5 million year-over-year, as a result of strategic investments in technology, primarily driven by a new customer relationship management system implemented in late 2021.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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While this simulation is a useful measure as to net interest income at risk due to a change in interest rates, it is not a forecast of the future results, does not measure the effect of changing interest rates on noninterest income and is based on many assumptions that, if changed, could cause a different outcome. - 60 - Table of Contents Economic Value of Equity At Risk The economic (or “fair”) value of financial instruments on our balance sheet will also vary under the interest rate scenarios previously discussed.
While this simulation is a useful measure as to net interest income at risk due to a change in interest rates, it is not a forecast of the future results, does not measure the effect of changing interest rates on noninterest income and is based on many assumptions that, if changed, could cause a different outcome. - 61 - Table of Contents Economic Value of Equity At Risk The economic (or “fair”) value of financial instruments on our balance sheet will also vary under the interest rate scenarios previously discussed.
The analysis that follows presents the estimated EVE resulting from market interest rates prevailing at a given quarter-end (“Pre-Shock Scenario”), and under other interest rate scenarios (each a “Rate Shock Scenario”) represented by immediate, permanent, parallel shifts in interest rates from those observed at December 31, 2022 and 2021.
The analysis that follows presents the estimated EVE resulting from market interest rates prevailing at a given quarter-end (“Pre-Shock Scenario”), and under other interest rate scenarios (each a “Rate Shock Scenario”) represented by immediate, permanent, parallel shifts in interest rates from those observed at December 31, 2023 and 2022.
We consider the net interest income at risk simulation modeling to be more informative in forecasting future income at risk. - 62 - Table of Contents
We consider the net interest income at risk simulation modeling to be more informative in forecasting future income at risk. - 63 - Table of Contents
Our consumer indirect loan portfolio comprised 18% of assets and is primarily fixed rate loans with relatively short durations. Our commercial loan portfolio totaled 40% of assets and is a combination of fixed and variable rate loans, lines and mortgages. The MBS portfolio, including collateralized mortgages obligations, totaled 20% of assets with durations averaging three to five years.
Our consumer indirect loan portfolio comprised 15% of total assets and is primarily fixed rate loans. Our commercial loan portfolio totaled 44% of total assets and is a combination of fixed and variable rate loans, lines and mortgages. The MBS portfolio, including collateralized mortgages obligations, totaled 17% of total assets with durations averaging three to five years.
The Bank also has a significant amount of public deposits, which represented 23% of total deposits as of December 31, 2022. Net Interest Income at Risk A primary tool used to manage interest rate risk is “rate shock” simulation to measure the rate sensitivity.
In addition, fixed interest rate nonpublic certificate of deposit products comprised 12% of total deposits. The Bank also has a significant amount of public deposits, which represented 20% of total deposits as of December 31, 2023. Net Interest Income at Risk A primary tool used to manage interest rate risk is “rate shock” simulation to measure the rate sensitivity.
Our liabilities are comprised primarily of deposits, which account for 91% of total liabilities. Of these deposits, the majority, or 56%, is in nonpublic variable rate and noninterest bearing products including demand (both noninterest- and interest- bearing), savings and money market accounts. In addition, fixed rate nonpublic certificate of deposit products comprise 9% of total deposits.
Our liabilities are comprised primarily of deposits, which accounted for 91% of total liabilities as of December 31, 2023. Of these deposits, the majority, or 59%, is in nonpublic variable interest rate and noninterest bearing products including demand (both noninterest- and interest- bearing), savings and money market accounts.
The following table sets forth the estimated changes to net interest income over the 12-month period ending December 31, 2022 assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands): Changes in Interest Rate -100 bp +100 bp +200 bp +300 bp Estimated change in net interest income $ (1,731 ) $ 273 $ 571 $ 859 % Change (1.06 )% 0.17 % 0.35 % 0.53 % In the rising rate scenarios, the model results indicate that net interest income is modeled to increase compared to the flat rate scenario over a one-year timeframe.
The following table sets forth the estimated changes to net interest income over the 12-month period ending December 31, 2024 assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands): Changes in Interest Rate -100 bp +100 bp +200 bp +300 bp Estimated change in net interest income $ (3,663 ) $ 2,184 $ 4,364 $ 6,549 % Change (2.14 )% 1.28 % 2.55 % 3.83 % In the rising rate scenarios, the model results indicate that net interest income is modeled to increase compared to the flat rate scenario over a one-year timeframe.
It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case.
Further, it assumes that delinquency rates would not change as a result of changes in interest rates, although there can be no assurance that this will be the case.
The analysis additionally presents a measurement of the interest rate sensitivity at December 31, 2022 and 2021. EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock Scenario. An increase in the EVE amount is considered favorable, while a decline is considered unfavorable.
The analysis additionally presents a measurement of the interest rate sensitivity at December 31, 2023 and 2022. EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock Scenario.
These scenarios vary depending on the economic and interest rate environment. The simulation referenced above is based on our assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve.
The simulation referenced above is based on our assumption as to the effect of interest rate changes on assets and liabilities and assumes a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to changes in interest rates.
December 31, 2022 December 31, 2021 Rate Shock Scenario: EVE Change Percentage Change EVE Change Percentage Change Pre-Shock Scenario $ 848,308 $ 775,697 - 100 Basis Points 851,921 $ 3,613 0.43 % 746,770 $ (28,927 ) -3.73 % + 100 Basis Points 838,462 (9,846 ) -1.16 782,438 6,741 0.87 + 200 Basis Points 832,558 (15,750 ) -1.86 786,362 10,665 1.37 + 300 Basis Points 825,826 (22,482 ) -2.65 784,923 9,226 1.19 The Pre-Shock Scenario EVE was $848.3 million at December 31, 2022, compared to $775.7 million at December 31, 2021.
An increase in the EVE amount is considered favorable, while a decline is considered unfavorable (dollars in thousands): December 31, 2023 December 31, 2022 Rate Shock Scenario: EVE Change Percentage Change EVE Change Percentage Change Pre-Shock Scenario $ 627,519 $ 848,308 - 100 Basis Points 616,940 $ (10,579 ) -1.69 % 851,921 $ 3,613 0.43 % + 100 Basis Points 626,463 (1,056 ) -0.17 838,462 (9,846 ) -1.16 + 200 Basis Points 628,434 915 0.15 832,558 (15,750 ) -1.86 + 300 Basis Points 628,230 711 0.11 825,826 (22,482 ) -2.65 The Pre-Shock Scenario EVE was $627.5 million at December 31, 2023, compared to $848.3 million at December 31, 2022.
Model results in the declining rate scenario indicate decreases in net interest income due to assets having the ability to reprice downward, while deposit and borrowing liabilities reach modeled floors. In addition to the changes in interest rate scenarios listed above, other scenarios are typically modeled to measure interest rate risk.
In addition to the changes in interest rate scenarios listed above, other scenarios are typically modeled to measure interest rate risk. These scenarios vary depending on the economic and interest rate environment.
A shift to negative sensitivity during the +100-basis point Rate Shock Scenario to EVE is a result of rates rising on a linked year basis, primarily driving a diminishing positive deposit valuation coupled with an increase in wholesale borrowings. - 61 - Table of Contents Interest Rate Sensitivity Gap The following table presents an analysis of our interest rate sensitivity gap position at December 31, 2022.
The sensitivity in the -100-basis point Rate Shock Scenario to EVE shifted negative at December 31, 2023 compared to December 31, 2022. This is a result of a concerted effort to grow the deposit portfolio and to decrease wholesale borrowings.
Removed
This is a result of assumed commercial loan products and investment security cash flow repricing at a higher frequency than underlying borrowing and deposit costs. As intermediate and longer-term assets continue to mature and are replaced at higher yields, net interest income improves over longer-term timeframes.
Added
This is a combination of an increase across the entire deposit portfolio, which has decreased wholesale borrowings and the higher costs associated with borrowings.
Removed
The increase in the Pre-Shock Scenario EVE at December 31, 2022 compared to December 31, 2021 resulted primarily from growth in our loan portfolio and deposit valuation offset by wholesale funding sources.
Added
Model results in the declining rate scenario indicate decreases in net interest income due to a combination of increases in the yield curve, as well as increases in higher yielding public and nonpublic deposits, that will reprice downward slower, due to market deposit competition.
Removed
At December 31, 2022 Three Months or Less Over Three Months Through One Year Over One Year Through Five Years Over Five Years Total INTEREST-EARNING ASSETS: Federal funds sold and other interest-earning deposits $ 61,251 $ - $ 245 $ - $ 61,496 Investment securities 213,247 117,186 521,551 464,054 1,316,038 Loans 1,544,200 589,324 1,434,622 482,853 4,050,999 Total interest-earning assets $ 1,818,698 $ 706,510 $ 1,956,418 $ 946,907 5,428,533 Cash and due from banks 68,970 Other assets (1) 299,769 Total assets $ 5,797,272 INTEREST-BEARING LIABILITIES: Interest-bearing demand, savings and money market $ 2,507,338 $ - $ - $ - $ 2,507,338 Time deposits 484,750 753,543 44,579 - 1,282,872 Borrowings 205,000 - 74,222 - 279,222 Total interest-bearing liabilities $ 3,197,088 $ 753,543 $ 118,801 $ - 4,069,432 Noninterest-bearing deposits 1,139,214 Other liabilities 183,021 Total liabilities 5,391,667 Shareholders’ equity 405,605 Total liabilities and shareholders’ equity $ 5,797,272 Interest sensitivity gap $ (1,378,390 ) $ (47,033 ) $ 1,837,617 $ 946,907 $ 1,359,101 Cumulative gap $ (1,378,390 ) $ (1,425,423 ) $ 412,194 $ 1,359,101 Cumulative gap ratio (2) 56.9 % 63.9 % 110.1 % 133.4 % Cumulative gap as a percentage of total assets (23.8 )% (24.6 )% 7.1 % 23.4 % (1) Includes net unrealized loss on securities available for sale and allowance for credit losses.
Added
The decrease in the Pre-Shock Scenario EVE at December 31, 2023 compared to December 31, 2022 is the result of a deposit mix shift from non-maturity deposits to time deposits and non-interest bearing deposits to interest bearing deposits, while rising rates have muted asset valuation, specifically on fixed assets.
Added
As a result, the shift in mix of deposits previously noted have become less valuable when rates shock downward, most notably from money market accounts and time deposits in comparison to December 31, 2022. - 62 - Table of Contents Interest Rate Sensitivity Gap The following table presents an analysis of our interest rate sensitivity gap position at December 31, 2023.
Added
At December 31, 2023 Three Months or Less Over Three Months Through One Year Over One Year Through Five Years Over Five Years Total INTEREST-EARNING ASSETS: Federal funds sold and other interest-earning deposits $ 53,245 $ - $ - $ - $ 53,245 Investment securities 183,290 110,031 423,982 468,847 1,186,150 Loans 1,845,570 490,029 1,465,169 662,741 4,463,509 Total interest-earning assets $ 2,082,105 $ 600,060 $ 1,889,151 $ 1,131,588 5,702,904 Cash and due from banks 71,197 Other assets (1) 386,780 Total assets $ 6,160,881 INTEREST-BEARING LIABILITIES: Interest-bearing demand, savings and money market $ 2,797,602 $ - $ - $ - $ 2,797,602 Time deposits 472,355 839,329 93,012 - 1,404,696 Borrowings 107,000 78,000 50,000 74,532 309,532 Total interest-bearing liabilities $ 3,376,957 $ 917,329 $ 143,012 $ 74,532 4,511,830 Noninterest-bearing deposits 1,010,614 Other liabilities 183,641 Total liabilities 5,706,085 Shareholders’ equity 454,796 Total liabilities and shareholders’ equity $ 6,160,881 Interest sensitivity gap $ (1,294,852 ) $ (317,269 ) $ 1,746,139 $ 1,057,056 $ 1,191,074 Cumulative gap $ (1,294,852 ) $ (1,612,121 ) $ 134,018 $ 1,191,074 Cumulative gap ratio (2) 61.7 % 62.5 % 103.0 % 126.4 % Cumulative gap as a percentage of total assets (21.0 )% (26.2 )% 2.2 % 19.3 % (1) Includes net unrealized loss on securities available for sale and allowance for credit losses.

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