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What changed in FINANCIAL INSTITUTIONS INC's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of FINANCIAL INSTITUTIONS INC's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+529 added−494 removedSource: 10-K (2025-03-12) vs 10-K (2024-03-13)

Top changes in FINANCIAL INSTITUTIONS INC's 2024 10-K

529 paragraphs added · 494 removed · 387 edited across 9 sections

Item 1. Business

Business — how the company describes what it does

118 edited+37 added−24 removed100 unchanged
Biggest changeOur 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.
Biggest changeOur 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; • Government Guaranteed Loans (“GGLs”) or loans to business enterprises guaranteed by the Small Business Administration (“SBA”) or U.S.
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.
Commercial Lending We primarily originate commercial business loans and lines of credit 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 Bank is subject to extensive regulation, supervision and examination by, and the enforcement authority of, the New York State Department of Financial Services (the “NY DFS”) and FRB, and to a lesser extent by the FDIC, as its deposit insurer.
The Bank is subject to extensive regulation, supervision and examination by, and the enforcement authority of, the New York State Department of Financial Services (the “NY DFS”) and the FRB, and to a lesser extent by the FDIC, as its deposit insurer.
A depository institution is deemed to be “well-capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET 1 ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, and a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific level for any capital measure.
A depository institution is deemed to be “well-capitalized” if the institution has a total risk-based capital ratio of 10.0% or greater, a CET 1 ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater, and the institution is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific level for any capital measure.
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.
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, the institution has engaged in unsafe or unsound practices, or it has violated any applicable law, regulation, order or condition enacted or imposed by the bank’s regulatory agency.
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.
In June 2021, 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.
For example, the Dodd-Frank Act applies the 10% of capital limit on covered transactions to financial subsidiaries and amended the definition of “covered transaction” to include (i) securities borrowing or lending transactions with an affiliate, and (ii) all derivatives transactions with an affiliate, to the extent that either causes a bank or its affiliate to have credit exposure to the securities borrowing/lending or derivative counterparty.
For example, the Dodd-Frank Act applies the 10% of capital and surplus limit on covered transactions to financial subsidiaries and amended the definition of “covered transaction” to include (i) securities borrowing or lending transactions with an affiliate, and (ii) all derivatives transactions with an affiliate, to the extent that either causes a bank or its affiliate to have credit exposure to the securities borrowing/lending or derivative counterparty.
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.
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, and wealth management products and services typically found at larger banks, our highly experienced management team and our strategically located banking centers.
In 2023, the FDIC issued a special assessment applicable for banks with 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. The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions.
In 2023, the FDIC issued a special assessment, applicable to banks with 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. The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions.
Our core customers are primarily small- to medium-sized businesses, individuals and community organizations who prefer to build banking, insurance and wealth management relationships with a community bank that offers high-quality, competitively-priced products and services with personalized service.
Our core customers are primarily small- to medium-sized businesses, individuals and community organizations who prefer to build banking and wealth management relationships with a community bank that offers high-quality, competitively-priced products and services with personalized service.
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.
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”), ITMs, remote deposit, and mobile banking via telephone or wireless devices.
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 and regulations 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.
The allowance reflects management’s estimate of the amount of probable credit losses in the portfolio, based on factors including, but not limited to: • Specific allocations for individually evaluated credits; • Segmentation of credit exposures by similar credit characteristics; • Historical net charge-off experience by segment; • Correlation of segmented historical losses to a loss driver; • Evaluation of historical loss emergence by segment; • Evaluation and establishment of look-back periods by segment; • Evaluation of prepayment and curtailment experience by segment; • Evaluation of average life for each segment; • Levels and trends in delinquent and non-accruing loans; • Trends in volume and terms of loans; • Effects of changes in lending policy; • National and local economic trends and conditions excluding the loss driver; • Regulatory environment; • Portfolio administration; • Potential funding of unfunded commitments; • Evaluation of held to maturity investments; and • Evaluation of deferred interest receivable.
The allowance reflects management’s estimate of the amount of probable credit losses in the portfolio, based on factors including, but not limited to: • Specific allocations for individually evaluated credits; • Segmentation of credit exposures by similar credit characteristics; • Historical net charge-off experience by segment; • Correlation of segmented historical losses to a loss driver; • Evaluation of historical loss emergence by segment; • Evaluation and establishment of look-back periods by segment; • Evaluation of prepayment and curtailment experience by segment; • Evaluation of average life for each segment; • Levels and trends in delinquent and non-accruing loans; • Trends in volume and terms of loans; • Effects of changes in lending policy; • National and local economic trends and conditions excluding the loss driver, which is national unemployment; • Regulatory environment; • Portfolio administration; • Potential funding of unfunded commitments; • Evaluation of held to maturity investments; and • Evaluation of deferred interest receivable.
The unfunded reserve is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized as a provision for credit loss expense in the consolidated statements of income. The unfunded reserve is determined by estimating expected future funding, under each segment, and applying the expected loss rates.
The unfunded reserve is recognized as a liability (other liabilities in the consolidated statements of financial condition), with adjustments to the reserve recognized as a provision for credit loss expense in the consolidated statements of operations. The unfunded reserve is determined by estimating expected future funding, under each segment, and applying the expected loss rates.
Because of our identity and origin as a locally operated bank, we believe that our level of personal service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local communities. A key aspect of our current business strategy is to foster a community–oriented culture where our customers and employees establish long-standing and mutually beneficial relationships.
Because of our identity and origin as a locally operated bank, we believe that our level of personal service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local communities. - 5 - Table of Contents A key aspect of our current business strategy is to foster a community-oriented culture where our customers and employees establish long-standing and mutually beneficial relationships.
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.
During 2024, 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.
Such initiatives may include proposals to expand or contract the powers of FHCs and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and/or our operating environment in substantial and unpredictable ways.
Such initiatives may include proposals to expand or contract the powers of FHCs and depository institutions or proposals to substantially change the financial institution regulatory system. Such proposals could change banking statutes and regulations and/or our operating environment in substantial and unpredictable ways.
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.
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.) - 13 - Table of Contents Depository Institution Regulation The Bank is organized under the laws of the state of New York.
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.
The Bank 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.
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.
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. - 11 - Table of Contents 3.
The Bank has adopted policies and procedures which are in compliance with these requirements. - 17 - Table of Contents The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the BSA, was enacted in January 2021. The AMLA is intended to comprehensively reform and modernize U.S. anti-money laundering and anti-terrorist financing laws.
The Bank has adopted policies and procedures which are in compliance with these requirements. The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the BSA, was enacted in January 2021. The AMLA is intended to comprehensively reform and modernize U.S. anti-money laundering and anti-terrorist financing laws.
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.
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.
There can be no assurance that the bank regulatory agencies will not adopt new regulations that will materially affect the Bank’s Internet operations or restrict any such further operations.
There can be no assurance that federal or state bank regulatory agencies will not adopt new regulations that will materially affect the Bank’s Internet operations or restrict any such further operations.
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.
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
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.
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.
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.
Applications to establish such branches must still be filed with the appropriate primary federal regulator. Transactions with Affiliates FII, FSB, Five Star REIT, Courier Capital, and Five Star Advisors LLC, are affiliates within the meaning of the Federal Reserve Act and its implementing regulation, Regulation W.
While the list set forth herein is not exhaustive, these laws and regulations include, among others, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices.
While the list set forth herein is not exhaustive, these laws include, among others, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service members Civil Relief Act, and these laws’ respective state-law counterparts, as well as state usury laws and federal and state laws regarding unfair, deceptive and abusive acts and practices, and each of these laws’ implementing regulations.
These and other federal and state laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Company’s ability to raise interest rates and subject the Company to substantial regulatory oversight.
These and other federal and state laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Banks’s ability to raise interest rates and subject the Bank to substantial regulatory oversight.
Our credit objectives are to: • Compete effectively and service the legitimate credit needs of our target market; • Enhance our reputation for superior quality and timely delivery of products and services; • Provide pricing that reflects the entire relationship and is commensurate with the risk profiles of our borrowers; • Retain, develop and acquire profitable, multi-product, value added relationships with high-quality borrowers; • Focus on government guaranteed lending to meet the needs of the small businesses in our communities; • Develop efforts to serve minority and other traditionally underserved communities; and • Comply with all relevant laws and regulations.
Our credit objectives are to: • Compete effectively and service the legitimate credit needs of the communities within our market; • Enhance our reputation for superior quality and timely delivery of products and services; • Provide pricing that reflects the entire relationship and is commensurate with the risk profiles of our borrowers; • Retain, develop and acquire profitable, multi-product, value-added relationships with high-quality borrowers; • Focus on government guaranteed lending to meet the needs of the small businesses in our communities; • Develop efforts to serve majority, minority, low and moderate income and other traditionally underserved communities; and • Comply with all relevant laws and regulations.
We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to us or our subsidiaries could have a material effect on our business.
We cannot predict whether any such legislation or regulations will be enacted or issued, and, if enacted or issued, the effect that they would have on our financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to us or our subsidiaries could have a material effect on our business.
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.”).
To facilitate talent attraction and retention, we strive to make the Company an inclusive, safe and healthy workplace, with opportunities for all of our employees to grow and develop in their careers, supported by strong compensation, benefits, health and welfare programs. Employee Profile As of December 31, 2024, we had 598 employees situated across the United States (the “U.S.”).
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. Our market area is economically diversified in that we serve both rural markets and the larger markets in and around Rochester and Buffalo, New York.
Effective January 1, 2024, we exited the Pennsylvania automobile market in order to align our focus more fully around our core Upstate New York market. - 7 - Table of Contents Our market area is economically diversified in that we serve both rural markets and the larger markets in and around Rochester and Buffalo, New York.
See also the section titled “Allowance for Credit Losses” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. SOURCES OF FUNDS Our primary sources of funds are deposits and borrowed funds.
See also the section titled “Allowance for Credit Losses” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report on Form 10-K. SOURCES OF FUNDS Our primary sources of funds are deposits and borrowed funds.
Many of these laws are implemented through regulations issued by the Consumer Financial Protection Bureau (the “CFPB”) though, for institutions of the Bank’s asset size, compliance is subject to examination by the federal banking regulator, i.e., the FRB in the Bank’s case.
Many of these laws are implemented through regulations issued by the Consumer Financial Protection Bureau (the “CFPB”) though, for institutions of the Bank’s asset size, compliance with those regulations is subject to supervision and examination by the federal banking regulator, i.e., the FRB in the Bank’s case.
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.
Office of Foreign Assets Control Regulation The U.S. 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.
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.
However, the GLBA 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.
In addition to market competitive base wages, our rewards programs include performance-based bonus opportunities, equity compensation, Company-sponsored retirement plans, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, remote work arrangements, flexible work schedules, adoption assistance, and employee assistance programs.
In addition to market competitive base wages, our rewards programs include performance-based bonus opportunities, equity compensation, Company-sponsored retirement plans, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, hybrid remote work opportunities, flexible work schedules, and employee assistance programs.
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.
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.
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.
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.
In January 2018, the U.S. Department of Justice (the “DOJ”) rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion.
Department of Justice (the “DOJ”) rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion.
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.
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, Section 23B of the Federal Reserve Act and Regulation W generally require that an insured depository institution’s transactions with its affiliates, including but not limited to “covered transactions” 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.
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.
Regulatory authorities have increased their regulatory scrutiny of the Bank Secrecy Act (“BSA”) and anti-money laundering and countering the financing of terrorism (“AML/CFT”) programs maintained by financial institutions and have imposed cease and desist orders and civil money penalties against institutions found to be violating these obligations.
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.
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, 2024, our residential mortgage servicing portfolio totaled $280.8 million, the majority of which has been sold to the FHLMC.
Consumer Lending We offer a variety of loan products to our consumer customers, including automobile loans, secured installment loans and other types of secured and unsecured personal loans. As of December 31, 2023, our consumer indirect portfolio totaled $948.8 million, or 21% of our total loan portfolio. Outstanding consumer loan balances were concentrated in indirect automobile loans.
Consumer Lending We offer a variety of loan products to our consumer customers, including automobile loans, secured installment loans and other types of secured and unsecured personal loans. As of December 31, 2024, our consumer indirect portfolio totaled $845.8 million, or 19% of our total loan portfolio. Outstanding consumer loan balances were concentrated in indirect automobile loans.
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.
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, 2024, and updates the information for any bank mergers and acquisitions completed subsequent to the reporting date.
It is a member of the Federal Reserve System, and its deposits are insured under the DIF of the FDIC up to applicable legal limits.
It is a member of the Federal Reserve System, and its deposits are insured under the Deposit Insurance Fund (“DIF”) of the FDIC up to applicable legal limits.
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.
To render an independent and objective evaluation of our asset quality and credit administration process, our policy includes loan reviews, performed by our Credit Review function under the supervision of the Chief Risk Officer and governance provided by our Audit and Risk Oversight committees of the Board of Directors. - 10 - Table of Contents We assign risk ratings to loans in the commercial business and commercial mortgage portfolios.
The federal banking agencies’ guidance on incentive compensation policies intends to ensure that the incentive compensation policies of banking organizations do not encourage excessive risk-taking and undermine the safety and soundness of those organizations.
Incentive Compensation Our compensation practices are subject to oversight by the Federal Reserve. The federal banking agencies’ guidance on incentive compensation policies intends to ensure that the incentive compensation policies of banking organizations do not encourage excessive risk-taking and undermine the safety and soundness of those organizations.
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.
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.
We originate indirect consumer loans for a mix of new and used vehicles predominately through franchised new car dealers. The consumer indirect loan portfolio is primarily comprised of loans with terms that typically range from 36–84 months.
We originate indirect consumer loans for a mix of new and used vehicles predominately through franchised new car dealers. The consumer indirect loan portfolio is primarily comprised of loans with terms that typically range from 36–84 months. We have developed relationships with franchised new car dealers in Western, Central and the Capital District of New York.
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.
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. The Bank declared dividends of $21.0 million and $14.0 million in 2024 and 2023, respectively.
The impact of the DOJ ’ s rescission of the Cole Memo and related memoranda is unclear, but in the future may result in increased enforcement actions against the regulated cannabis industry generally.
The impact of the DOJ ’ s rescission of the Cole Memo and related memoranda is unclear, but in the future may result in increased enforcement actions against the regulated cannabis industry generally. Enforcement policies and practices may be highly variable between political administrations.
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.
We have evolved to meet changing customer needs by offering complementary physical, digital and virtual channels. 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.
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.
With $3.09 billion in assets under management as of December 31, 2024, 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, 2024, Courier Capital had total revenue of $10.3 million. Five Star REIT, Inc. Five Star REIT, Inc.
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.
The proceeds may also be used for general corporate purposes which may include the repayment of indebtedness. - 12 - 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.
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.
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.
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.
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.
The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. - 19 - Table of Contents The FRB reviews, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews are tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements.
We will continue to explore market expansion opportunities that complement current market areas as opportunities arise. Our primary focus will be on increasing the Bank’s market share within existing markets, while taking advantage of potential growth opportunities within our non-interest income lines of business by acquiring businesses that can be incorporated into existing operations.
Our primary focus will be on increasing the Bank’s market share within existing markets, while taking advantage of potential growth opportunities within our non-interest income line of business by acquiring businesses that can be incorporated into existing operations.
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.
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.
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.
Furthermore, a bank that is classified under the prompt corrective action regulations as “undercapitalized” will be prohibited from paying any dividends.
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.
Furthermore, bank loans and extensions of credit to affiliates also are subject to various collateral requirements. - 18 - Table of Contents 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 capital stock and surplus, and limits the aggregate outstanding amount of any insured depository institution’s covered transactions with all of its affiliates to no more than 20% of its capital stock and surplus.
These guidelines clarify how financial institutions can provide services to marijuana-related businesses “in a manner consistent with their obligations to know their customers and to report possible criminal activity.” The Bank has and will continue to follow this and other FinCEN guidance in the areas of cannabis banking.
These guidelines clarify how financial institutions can provide services to marijuana-related businesses “in a manner consistent with their obligations to know their customers and to report possible criminal activity.” The Bank has and will continue to follow this and other FinCEN guidance in the areas of cannabis banking. - 17 - Table of Contents Anti-Money Laundering and the USA Patriot Act A major focus of governmental policy on financial institutions is combating money laundering and terrorist financing.
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.
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 applicability date for the majority of the provisions in the CRA regulations is January 1, 2026, and additional requirements will be applicable on January 1, 2027.
Under the regulations, the applicability date for the majority of the provisions is January 1, 2026, and for additional requirements, January 1, 2027.
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.
The Federal Reserve Act and Regulation W impose limitations on a bank with respect to extensions of credit to, investments in, and certain other transactions with, its affiliates, including its parent FHC and the holding company’s other subsidiaries.
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.
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.
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.
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.
Loans not analyzed for a specific reserve are segmented into “pools” of loans based upon similar risk characteristics. This is referred to as the pooled loan component of the allowance for credit losses estimate. The Company has identified six portfolio segments of loans including commercial loans/lines, commercial mortgage, indirect loans, direct loans, residential lines of credit, and residential loans.
Loans not analyzed for a specific reserve are segmented into “pools” of loans based upon similar risk characteristics. This is referred to as the pooled loan component of the allowance for credit losses estimate.
Health and Safety The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees.
We also provide tuition and training reimbursement programs to support the professional and personal development of our employees. Health and Safety The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees.
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.
The Company had made the election under the FASB’s Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments—Credit Losses, 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.
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”).
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 “GLBA”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).
By employing digital channels across our current products and services, we deepen existing relationships and enter new geographies or market segments that would otherwise be prohibitively expensive targets using traditional approaches.
By employing digital channels across our current products and services, we deepen existing relationships and enter new geographies or market segments that would otherwise be prohibitively expensive targets using traditional approaches. Deepening our existing digital capabilities allows us to capitalize on a shift in customer preferences away from physical branches.
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.
Commencing in October 2013, prior to the Parent’s acquisition of Courier Capital, the Bank entered into a business relationship with LPL Financial (“LPL”), to provide investment advisory and broker-dealer services to the Bank’s customers, through LPL, an investment adviser registered under the Advisers Act that is subject to its provision.
We do not engage in sub-prime or other high-risk residential mortgage lending as a line of business. - 9 - Table of Contents We sell certain one-to-four family residential mortgages to the secondary mortgage market and typically retain the right to service the mortgages.
Approximately 92% of the loans and lines in our residential real estate portfolios were in first lien positions at December 31, 2024. We do not engage in sub-prime or other high-risk residential mortgage lending as a line of business. We sell certain one-to-four family residential mortgages to the secondary mortgage market and typically retain the right to service the mortgages.
The termination of deposit insurance for the Bank would have a material adverse effect on our earnings, operations and financial condition.
The termination of deposit insurance for the Bank would have a material adverse effect on our earnings, operations and financial condition. Management does not know of any practice, condition or violation that might lead to termination of deposit insurance.
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.
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.” The Parent’s primary business is the operation of its subsidiaries.
Investment Advisers Act of 1940, as amended (the “Advisers Act”). An investment adviser is any person or entity that provides advice to others, or that issues reports or analyses, regarding securities for compensation.
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. Investment Advisers Act of 1940, as amended (the “Advisers Act”). An investment adviser is any person or entity that provides advice to others, or that issues reports or analyses, regarding securities for compensation.
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 federal regulation and FRB policy, an FHC must serve as a source of strength for its subsidiary banks. Under the FRB’s policy, the FRB may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank.
Federal Deposit Insurance Assessments The Bank is a member of the FDIC and pays an insurance premium to the FDIC to fund the Deposit Insurance Fund (“DIF”) based upon the Bank’s assessable assets on a quarterly basis.
Federal Deposit Insurance Assessments The Bank is a member of the FDIC and pays an insurance premium to the FDIC to fund the DIF based upon the Bank’s assessable assets on a quarterly basis. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the U.S.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeA sudden downturn in the economy, or a prolonged downturn for specific industries, could result in borrowers being unable to repay their loans, thus exposing us to increased credit risk. - 21 - Table of Contents If our regulators impose limitations on our commercial real estate lending activities, earnings could be adversely affected.
Biggest changeAdditionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to consumer loans or residential real estate loans. A sudden downturn in the economy, or a prolonged downturn for specific industries, could result in borrowers being unable to repay their loans, thus exposing us to increased credit risk.
Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters; or a combination of these or other factors.
Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; tariffs; high unemployment, natural disasters; or a combination of these or other factors.
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.
We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, wire transactions, ATM and ITM transactions, checking transactions, and debit cards that we have issued to our customers and through our online banking portals.
If delinquencies and defaults increase, we may be required to increase our provision for loan losses, which could have an adverse effect on our business, financial condition and results of operations. We accept deposits that do not have a fixed term, and which may be withdrawn by the customer at any time for any reason.
If delinquencies and defaults increase, we may be required to increase our provision for credit losses, which could have an adverse effect on our business, financial condition and results of operations. We accept deposits that do not have a fixed term, and which may be withdrawn by the customer at any time for any reason.
As indicated in Note 1, Summary of Significant Accounting Policies – Recent Accounting Pronouncements, to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, the regulations, rules, standards, policies, and interpretations underlying GAAP are constantly evolving and may change significantly over time.
As indicated in Note 1, Summary of Significant Accounting Policies–Recent Accounting Pronouncements, to the consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K, the regulations, rules, standards, policies, and interpretations underlying GAAP are constantly evolving and may change significantly over time.
However, if our assumptions or judgments are wrong, the allowance for loan losses may not be sufficient to cover the actual credit losses.
However, if our assumptions or judgments are wrong, the allowance for credit losses may not be sufficient to cover the actual credit losses.
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.
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. - 23 - Table of Contents We operate in a highly competitive industry and market area.
Deterioration in economic conditions in our market, whether caused by inflation, recessionary conditions, public health emergencies, unemployment, or other factors beyond our control, could: • increase loan delinquencies; • increase problem assets and foreclosures; • increase claims and lawsuits; • decrease the demand for our products and services; and • decrease the value of collateral for loans, especially real estate, reducing customers’ borrowing power, the value of assets associated with non-performing loans and collateral coverage.
Deterioration in economic conditions in our market, whether caused by inflation, recessionary conditions, public health emergencies, unemployment, or other factors beyond our control, could: • increase loan delinquencies; • increase problem assets and foreclosures; • increase claims and lawsuits; • decrease the demand for our products and services; and - 21 - Table of Contents • decrease the value of collateral for loans, especially real estate, reducing customers’ borrowing power, the value of assets associated with non-performing loans and collateral coverage.
It is also possible that even with adequate capital we may still be unable to complete an acquisition on favorable terms, causing us to miss opportunities to increase our earnings and expand or diversify our operations. Our growth strategy is also dependent upon the successful integration of new businesses and any future acquisitions into our existing operations.
It is also possible that even with adequate capital we may still be unable to complete an acquisition on favorable terms, causing us to miss opportunities to increase our earnings and expand or diversify our operations. - 27 - Table of Contents Our growth strategy is also dependent upon the successful integration of new businesses and any future acquisitions into our existing operations.
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.
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.
If the losses from our indirect loan portfolio are higher than anticipated, it could have a material adverse effect on our financial condition and results of operations. In addition, our consumer lending activities are subject to numerous consumer protection laws and regulations, including fair lending laws.
If the losses from our indirect loan portfolio are higher than anticipated, it could have a material adverse effect on our financial condition and results of operations. - 22 - Table of Contents In addition, our consumer lending activities are subject to numerous consumer protection laws and regulations, including fair lending laws.
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.
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.
If we are unable to manage these risks effectively, our financial condition and results of operations could be materially adversely affected. Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.
If we are unable to manage these risks effectively, our financial condition and results of operations could be materially adversely affected. - 29 - Table of Contents Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.
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.
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. - 33 - Table of Contents Negative public opinion could damage our reputation and impact business operations and revenues.
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.
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 or if we have placed too much emphasis on ESG matters, which may result in adverse effects on the trading price of our common stock. ITEM 1B . UNRESOLVED STAFF COMMENTS None.
In January 2018, the DOJ rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion.
In January 2018, under the first Trump administration, the DOJ rescinded the “Cole Memo” and related memoranda which characterized the enforcement of the Controlled Substances Act against persons and entities complying with state regulatory systems permitting the use, manufacture and sale of medical marijuana as an inefficient use of their prosecutorial resources and discretion.
A decline in the fair value of the assets under management would decrease our investment advisory revenue. Investment performance is one of the most important factors in retaining existing investment advisory clients and competing for new investment advisory clients.
A decline in the fair value of the assets under management would decrease our investment advisory revenue. - 26 - Table of Contents Investment performance is one of the most important factors in retaining existing investment advisory clients and competing for new investment advisory clients.
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 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.
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.
At December 31, 2024, we had $3.56 billion of deposit liabilities, or 70% 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.
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.
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 Financial Accounting Standards Board (“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. - 32 - Table of Contents General Risk Factors We may not be able to attract and retain skilled people.
We seek to expand our branch network into nearby areas, continue to invest in our digital banking strategy, develop new sustainable revenue streams through BaaS, make strategic acquisitions of loans, portfolios, other regional banks and non-banking firms whose businesses we feel may be complementary with ours, and to continue to organically grow our core deposits.
We seek to expand our branch network into nearby areas, continue to invest in our digital banking strategy, make strategic acquisitions of loans, portfolios, other regional banks and non-banking firms whose businesses we feel may be complementary with ours, and to continue to organically grow our core deposits.
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information.
We depend on the accuracy and completeness of information about or from customers and counterparties. In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information.
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action and reputational harm, any of which could adversely affect our results of operations and financial condition. We are subject to cybersecurity regulations promulgated by the NY DFS.
An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action and reputational harm, any of which could adversely affect operations and financial condition.
In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, the actual cost of resolving a legal claim may be substantially higher than any amounts reserved for that matter.
We may still incur legal costs for a matter even if we have not established a reserve. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, the actual cost of resolving a legal claim may be substantially higher than any amounts reserved for that matter.
While we believe our relationships with key personnel are strong, we cannot guarantee that all of our key personnel will remain with the organization, which could result in the loss of some of our customers and could have a negative impact on our business, financial condition, and results of operations. - 31 - Table of Contents We use financial models for business planning purposes that may not adequately predict future results.
While we believe our relationships with key personnel are strong, we cannot guarantee that all of our key personnel will remain with the organization, which could result in the loss of some of our customers and could have a negative impact on our business, financial condition, and results of operations.
We rely heavily on communications, information systems (both internal and provided by third parties) and the internet to conduct our business. Our business depends on our ability to process and monitor a large volume of daily transactions in compliance with legal, regulatory and internal standards and specifications.
We rely heavily on communications, information technology (both on-premises and via service providers) and internet service to conduct our business. Our business depends on our ability to process and monitor a large volume of daily transactions in compliance with legal, regulatory, and internal standards and specifications.
One or more of our vendors may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by the third-party vendor. Certain of our vendors may have limited indemnification obligations or may not have the financial capacity to satisfy their indemnification obligations.
One or more of our vendors may experience a cybersecurity event or operational disruption and, if any such event does occur, it may not be adequately addressed, either operationally or financially, by the third-party vendor causing direct impact to our business.
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.
Our commercial business and commercial mortgage loans increase our exposure to credit risks. At December 31, 2024, our portfolio of commercial business and commercial mortgage loans totaled $1.25 billion, or 28% of total loans.
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.
The value of our goodwill and other intangible assets may decline in the future. As of December 31, 2024, we had $58.1 million of goodwill and $2.6 million of other intangible assets.
More recently, the United States Attorney General has indicated that the DOJ under his leadership does not intend to pursue cases against parties who comply with the laws in states which have legalized and are effectively regulating marijuana. However, enforcement policies and practices may be highly variable between political administrations.
Under the Biden administration, the United States Attorney General indicated that the DOJ did not intend to pursue cases against parties who comply with the laws in states which have legalized and are effectively regulating marijuana. However, the second Trump administration took office on January 20, 2025, and enforcement policies and practices may be highly variable between political administrations.
Any real or perceived shortcomings in our BSA/AML program may result in regulatory action against us and may prevent us from undertaking mergers and acquisitions or other expansion activities. Risks Related to Non-Banking Activities Our insurance brokerage subsidiary is subject to risk related to the insurance industry.
Any real or perceived shortcomings in our BSA/AML program may result in regulatory action against us and may prevent us from undertaking mergers and acquisitions or other expansion activities. Risks Related to Non-Banking Activities Our investment advisory and wealth management operations are subject to risk related to the regulation of the financial services industry and market volatility.
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.
The failure to train and periodically test for possible threats, greatly increases the risk of compromise and impact. 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.
If our regulators were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, or require higher capital ratios as a result of the level of commercial real estate loans held, our earnings would be adversely affected. Our indirect and consumer lending involves risk elements in addition to normal credit risk.
Our CRE level equaled 297% of total risk-based capital at December 31, 2024. If our regulators were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, or require higher capital ratios as a result of the level of commercial real estate loans held, our earnings would be adversely affected.
The securities laws and other laws that govern the activities of our registered investment advisor are complex and subject to change. The activities of our investment advisory and wealth management operations are subject primarily to provisions of the Advisers Act and the Employee Retirement Income Act of 1940, as amended (“ERISA”). We are a fiduciary under ERISA.
The activities of our investment advisory and wealth management operations are subject primarily to provisions of the Advisers Act and the Employee Retirement Income Act of 1940, as amended (“ERISA”). We are a fiduciary under ERISA. Our investment advisory services are also subject to state laws including anti-fraud laws and regulations.
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.
We are subject to environmental liability risk associated with our lending activities. 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.
In 2006, the federal bank regulatory agencies issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”).
If our regulators impose limitations on our commercial real estate lending activities, earnings could be adversely affected. In 2006, the federal bank regulatory agencies issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” (the “CRE Guidance”).
We use financial models to aid in planning for various purposes including our capital and liquidity needs, interest rate risk, potential charge-offs, reserves, and other purposes. The models used may not accurately account for all variables that could affect future results, may fail to predict outcomes accurately and/or may overstate or understate certain effects.
We use financial models for business planning purposes that may not adequately predict future results. We use financial models to aid in planning for various purposes including our capital and liquidity needs, interest rate risk, potential charge-offs, reserves, and other purposes.
The financial services market, including banking services, faces rapid changes with frequent introductions of new technology-driven products and services. Our future success may depend, in part, on our ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in our operations.
The financial services market continues to see rapid changes with steady and frequent introductions of new technology-driven products and services. Our future success may depend, in part, on our ability to leverage emerging technology to provide feature-rich products and services that provide value to our customers and our operations.
Accordingly, we could be subject to additional regulatory scrutiny with respect to that portion of our business. - 24 - Table of Contents We have implemented a program to provide financial products and services to customers that do business in the cannabis industry and the strict enforcement of federal laws and regulations regarding cannabis could result in our inability to continue to provide financial products and services to these customers and we could have legal action taken against us by the federal government and exposure to additional liabilities and regulatory compliance costs.
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. - 25 - Table of Contents We have implemented a program to provide financial products and services to customers that do business in the cannabis industry and the strict enforcement of federal laws and regulations regarding cannabis could result in our inability to continue to provide financial products and services to these customers and we could have legal action taken against us by the federal government and exposure to additional liabilities and regulatory compliance costs.
Legal and regulatory matters of any degree of significance could result in substantial cost and diversion of our efforts, which by itself could have a material adverse effect on our financial condition and operating results.
Legal and regulatory matters of any degree of significance could result in substantial cost and diversion of our efforts, which by itself could have a material adverse effect on our financial condition and operating results. We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated.
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.
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.
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.
We are subject to risks and losses resulting from fraudulent activities that could adversely impact our financial performance and results of operations.
Our investment advisory and wealth management operations are subject to risk related to the regulation of the financial services industry and market volatility. The financial services industry is subject to extensive regulation at the federal and state levels. It is very difficult to predict the future impact of the legislative and regulatory requirements affecting our business.
The financial services industry is subject to extensive regulation at the federal and state levels. It is very difficult to predict the future impact of the legislative and regulatory requirements affecting our business. The securities laws and other laws that govern the activities of our registered investment advisor are complex and subject to change.
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.
We are subject to cybersecurity regulations promulgated by agencies such as the FRB, NY DFS, and the SEC, as well as laws, such as those under the GLBA. Any failure by us to comply with laws and regulations could result in regulatory sanctions, public disclosure and reputational damage even if we do not experience a significant cybersecurity breach.
Additional risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through non-bank channels, namely automobile dealers.
While these loans have higher yields than many of our other loans, such loans involve risk elements in addition to normal credit risk. Additional risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through non-bank channels, namely automobile dealers.
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.
Our indirect and consumer lending involves risk elements in addition to normal credit risk. 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.
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.
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.
The regulation imposes heightened standards on broker-dealers and will require us to review and modify the policies and procedures of our wealth management operations, as well as associated supervisory and compliance controls. - 25 - Table of Contents Any claim of noncompliance, regardless of merit or ultimate outcome, could subject us to investigation by the SEC or other regulatory authorities or harm our reputation and customer relationships.
The regulation imposes heightened standards on broker-dealers and will require us to review and modify the policies and procedures of our wealth management operations, as well as associated supervisory and compliance controls.
Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future.
Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments.
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.
During the first quarter of 2024, the Bank experienced charge offs associated with fraudulent activity pertaining to deposit transactions conducted over the course of several business days ending in early March 2024 by an in-market business customer of the Bank. The deposit-related fraud event resulted in an $18.2 million pre-tax loss.
The ultimate resolution of a pending legal proceeding, depending on the remedy sought and granted, could adversely affect our results of operations and financial condition. Any future FDIC insurance premium increases may adversely affect our earnings. The amount that is assessed by the FDIC for deposit insurance is set by the FDIC based on a variety of factors.
The ultimate resolution of a pending legal proceeding, depending on the remedy sought and granted, could adversely affect our results of operations and financial condition.
Third-party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third-party vendors carefully, we do not control their actions.
Third-party vendors provide key components of our business infrastructure, such as infrastructure service delivery, application delivery, and an increased volume managed service functions. While we have selected these third-party vendors carefully, we relinquish many aspects of control.
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.
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.
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.
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. 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.
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.
The amount that is assessed by the FDIC for deposit insurance is set by the FDIC based on a variety of factors. 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.
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.
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 Emerging technology, including cloud computing and artificial intelligence (“AI”), introduces new risks while possibly being essential to support business strategy.
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.
Replacing these third-party providers could also entail significant time and expense, further emphasizing the need for stringent vendor due diligence processes. - 30 - Table of Contents Each year, more third-party service providers perform significant operational services on our behalf. These third-party vendors are subject to similar risks as us relating to cybersecurity, technology infrastructure, processes and talent.
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.
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.
Our compliance processes may not be sufficient to prevent assertions that we failed to comply with any applicable law, rule or regulation.
Any claim of noncompliance, regardless of merit or ultimate outcome, could subject us to investigation by the SEC or other regulatory authorities or harm our reputation and customer relationships. Our compliance processes may not be sufficient to prevent assertions that we failed to comply with any applicable law, rule or regulation.
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 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. Municipal deposits are price sensitive and could result in an increase in interest expense or funding fluctuations.
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.
Issues induced by these third parties, including a service disruption or poor service performance, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently, effectively, and in accordance with the expectations of our customers and regulators.
In addition, several U.S. financial institutions have experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service or sabotage systems. Other potential attacks have attempted to obtain unauthorized access to confidential information or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means.
Potential attacks have attempted to obtain unauthorized access to confidential information to obtain for sale or destroy, often through the introduction of computer viruses or malware (ransomware), cyber-attacks and other means.
As a result of these potential failures, we may not adequately prepare for future events and may suffer losses or other setbacks due to these failures. We depend on the accuracy and completeness of information about or from customers and counterparties.
The models used may not accurately account for all variables that could affect future results, may fail to predict outcomes accurately and/or may overstate or understate certain effects. As a result of these potential failures, we may not adequately prepare for future events and may suffer losses or other setbacks due to these failures.
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.
For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower’s products and services.
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.
While the Bank believes this incident was an isolated occurrence and has since instituted a remediation plan designed to strengthen its risk mitigation practices, there can be no assurance that such fraudulent actions will not occur again or that such acts will be detected in a timely manner.
In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information of our customers and clients. These risks may increase in the future as our customers continue to adapt to mobile payment and other internet-based product offerings and we expand the availability of web-based products and applications.
In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information of our customers and clients. These risks have increased as our customers have adopted digital banking solutions, and we have migrated many former on-premises services and technology to hosted third-party service providers.
Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments.
Such security attacks can originate from a wide variety of sources, including people who are involved with organized crime or rogue attackers taking advantage of modern tolls and services that have become readily available.
Due to the complexity and interconnectedness of information technology systems, the process of enhancing our systems can itself create a risk of systems disruptions and security issues. Risks Related to our Common Stock We may not pay or may reduce the dividends on our common stock.
Due to the complexity and interconnectedness of information technology systems, the process of enhancing our systems can itself create a risk of systems disruptions and security issues. We are subject to evolving laws and regulations relating to cybersecurity protection and data privacy, and failure to comply could expose the Company to regulatory liability, reputational risk and financial risk.
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.
Environmental, social and governance matters, and any related reporting obligations may impact our business. Despite the recent changes in federal governmental leadership, state legislatures, U.S. and international regulatory agencies, investors and other stakeholders at times may be focused on environmental, social, and governance (“ESG”) matters.
Removed
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.
Added
The Bank is pursuing all available sources of recovery, including legal recourse, to minimize the loss. On December 2, 2024, the primary perpetrator of the fraud pled guilty in the United States District Court of the Western District of New York to two felonies – financial institutions fraud and money laundering.
Removed
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.
Added
Among other things, the plea agreement requires the perpetrator to pay full restitution to the Bank. There can be no assurance that the Bank will be able to effect any further recovery or that the Bank will receive restitution from the perpetrator of the fraud, in whole or in part.
Removed
Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to consumer loans or residential real estate loans.
Added
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.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeAny material cybersecurity information, including strategic program development, is reported by the CISO to appropriate management and Board representatives to ensure timely awareness and escalation as necessary. Should there be a cybersecurity incident, we have a formal Incident Response plan including escalation processes designed to keep relevant management and committees informed of the mitigation and remediation efforts.
Biggest changeThe CISO reports on the status of the ISP including relevant risks, cybersecurity threats, program updates, and program reporting to the CRC and the ROC no less than four times per year. Any material cybersecurity information, including strategic program development, is reported by the CISO to appropriate management and Board representatives to ensure timely awareness and escalation as necessary.
The ISP, which is part of our Enterprise Risk Management Program, is organized in an operating framework that is supported by policies, standards, procedures, and guidelines that establish the information security control environment. Information Security collaborates with additional areas of our Enterprise Risk Management Program to ensure comprehensive risk oversight and reporting.
The ISP, which is part of our Enterprise Risk Management Program, is organized in an operating framework that is supported by policies, standards, procedures, and guidelines that establish the information security control environment. The Information Security team collaborates with additional areas of our Enterprise Risk Management Program to ensure comprehensive risk oversight and reporting.
The Company Risk Committee (“CRC”) serves as the management committee responsible for Information Security oversight and the CISO is a member of the committee. The Risk Oversight Committee (“ROC”) is a sub-committee of the Board of Directors (the “Board”) and provides direct oversight of Information Security on behalf of the Board. Kim E.
The Company Risk Committee (“CRC”) serves as the management committee responsible for Information Security oversight and the CISO is a member of the committee. The Risk Oversight Committee (“ROC”) is a sub-committee of the Board of Directors (the “Board”) and provides direct oversight of Information Security on behalf of the Board. Director Kim E.
Risks relating to cybersecurity and their potential impact are discussed more fully in “Risk Factors” in Part I, Item 1A herein. Governance We have established a dedicated team to manage and execute the ISP. A Chief Information Security Officer (“CISO”) has been appointed as a Senior Vice President of the Company.
Risks relating to cybersecurity and their potential impact are discussed more fully in “Risk Factors” in Part I, Item 1A herein. - 34 - Table of Contents Governance We have established a dedicated team to manage and execute the ISP. A Chief Information Security Officer (“CISO”) has been appointed as a Senior Vice President of the Company.
The CISO was appointed in August 2023 after serving the Company as a senior officer and technology leader for over 15 years and leads a team of Information Security professionals with diverse security backgrounds including relevant certifications (e.g., CISSP, GSEC, GCTI).
Our present CISO, Scott Bader, was appointed in August 2023 after serving the Company as a senior officer and technology leader for over 15 years and leads a team of Information Security professionals with diverse security backgrounds including relevant certifications (e.g., CISSP, GSEC, GCTI) .
As a member of our risk organization, the CISO reports to the CRO, a member of the Executive Management Committee. The CRO joined the Company in February 2023 with over 30 years of progressive risk management experience.
As a member of our risk organization, the CISO reports to the CRO, who is a member of the Executive Management Committee. Our CRO, Gary Pacos, joined the Company in February 2023 with over 30 years of progressive risk management experience.
TPRM is a function of our Risk Organization overseen by the Chief Risk Officer (“CRO”). We have not experienced any cybersecurity threats or incidents that have materially affected or are reasonably likely to affect our business strategy, results of operations, or financial condition.
We have not experienced any cybersecurity threats or incidents that have materially affected or are reasonably likely to affect our business strategy, results of operations, or financial condition.
VanGelder, the current Chair of the ROC, has served as a member of our Board since 2016, and has held progressive information technology leadership roles at the Eastman Kodak Company, with responsibilities including cybersecurity, global applications, and global technology infrastructure and has served as its Chief Information Officer since 2004. - 33 - Table of Contents The CISO reports on the status of the ISP including relevant risks, cybersecurity threats, program updates, and program reporting to the CRC and the ROC no less than four times per year.
VanGelder, the current Chair of the ROC, has served as a member of our Board since 2016, and has held progressive information technology leadership roles at the Eastman Kodak Company, with responsibilities including cybersecurity, global applications, and global technology infrastructure, and has served as its Chief Information Officer since 2004.
The MSSP also provides industry-leading Security Operations Center services that serve as a critical source for event and incident detection. The Board is actively engaged in the oversight and prudent management of risk, including those relating to cybersecurity and regulatory compliance. A comprehensive program update is delivered to the Board annually by the CISO.
The Board is actively engaged in the oversight and prudent management of risk, including those relating to cybersecurity and regulatory compliance. A comprehensive program update is delivered to the Board annually by the CISO.
The TPRM Program utilizes a risk-based approach to perform ongoing due diligence reviews of existing third-party relationships and new prospective third parties. Third-party risks are identified and evaluated in coordination with period reviews, although threat intelligence monitoring and sound vendor relationships are leveraged to identify third-party risks as announced.
Third-party risks are identified and evaluated in coordination with period reviews, although threat intelligence monitoring and sound vendor relationships are leveraged to identify third-party risks as announced. TPRM is a function of our Risk Organization overseen by our Chief Risk Officer (“CRO”).
We have invested in market-leading technology and award-winning security partners to execute key processes that ensure the confidentiality, integrity, and availability of company assets. We have a Third-Party Risk Management (“TPRM”) Program that includes the comprehensive evaluation of the cybersecurity risks of prospective and existing third-party relationships.
We have invested in market-leading technology and award-winning security partners to execute key processes that ensure the confidentiality, integrity, and availability of company assets. Recent investments have ensured the use of innovative technology and services with best-in-class providers.
The identification of incidents may come through internal monitoring and detection resources, external threat intelligence, third-party risk management efforts or various other event escalation methods. We leverage a Managed Security Services Provider (“MSSP”) for supplemental expertise and resources with the management and enhancement of critical threat monitoring solutions.
Should there be a cybersecurity incident, we have a formal Incident Response plan including escalation processes designed to keep relevant management and committees informed of the mitigation and remediation efforts. The identification of incidents may come through internal monitoring and detection resources, external threat intelligence, third-party risk management efforts or various other event escalation methods.
Added
We have a Third-Party Risk Management (“TPRM”) Program that includes the comprehensive evaluation of the cybersecurity risks of prospective and existing third-party relationships. The TPRM Program utilizes a risk-based approach to perform third-party onboarding and ongoing due diligence reviews of existing third-party relationships.
Added
We leverage a Managed Security Services Provider (“MSSP”) for supplemental expertise and resources with the management and enhancement of critical threat monitoring solutions. The MSSP also provides industry-leading Security Operations Center services that serve as a critical source for event and incident detection.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe 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.
Biggest changeWe also lease a 28,500 square foot facility in Amherst, New York, which serves as a regional administrative facility. This lease expires in December 2032, with two additional five-year extensions.
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.
For additional information, see Note 5, Premises and Equipment, Net, and Note 12, Commitments and Contingencies, of the notes to the consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Removed
ITEM 3. LEGAL PROCEEDINGS We are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania.
Added
ITEM 3. LEGAL PROCEEDINGS From time to time, we are a party to or otherwise involved in legal proceedings arising out of the normal course of business. Regardless of the outcome, litigation can have an adverse impact on us because of prosecution, defense and settlement costs, unfavorable awards, diversion of management resources and other factors.
Removed
Plaintiffs sought class certification to represent classes of consumers in New York and Pennsylvania along with statutory damages, interest and declaratory relief. The plaintiffs sought to represent a putative class of consumers who are alleged to have obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed.
Added
For more information with respect to our recent legal proceedings please refer to Note 12, Commitments and Contingencies, of the notes to the to the consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.
Removed
The plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. We dispute and believe we have meritorious defenses against these claims and plan to vigorously defend ourselves.
Added
Except as described in Note 12, management believes that the aggregate liability, if any, arising from such litigation would not have a material adverse effect on the Company’s consolidated financial statements. - 35 - Table of Contents ITEM 4. MINE SAF ETY DISCLOSURES Not applicable. PART II
Removed
On September 30, 2021, the Court granted plaintiffs’ motion for class certification and certified four different classes (two classes of New York consumers and two classes of Pennsylvania consumers). There are approximately 5,200 members in the New York classes and 300 members in the Pennsylvania classes.
Removed
On September 26, 2022, the lower Court denied the plaintiffs’ motion for partial summary judgment for most of the relief they seek and found that there were questions of fact as to whether the members of the class had purchased the subject vehicles for “consumer use” within the meaning of the relevant statutes.
Removed
The Court also denied our motion for partial summary judgment seeking an offset in the form of recoupment reducing any liability that may be imposed against us by the amounts that the borrowers owe for failing to repay their motor vehicle loans, determining that the Court could not enter a judgment on recoupment — which is a set off from liability — without first determining whether there was liability.
Removed
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.
Removed
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.
Removed
Once the lower court has issued a final adjudication, the parties will have an opportunity to appeal adverse rulings in the case.
Removed
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.
Removed
If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our insurer. We can provide no assurances that our insurer will cover the full legal costs, settlements or judgments we incur.
Removed
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.
Removed
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.
Removed
MINE SAF ETY DISCLOSURES Not applicable. - 35 - Table of Contents PART II

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 35 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 36 Item 6. [Reserved] 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 61 Item 8.
Biggest changeItem 4. Mine Safety Disclosures 36 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 36 Item 6. [Reserved] 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 38 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 63 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe 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.
Biggest changeThe Company’s repurchases of its common shares during the fourth quarter of 2024 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, 2024 — $ — — 766,447 November 1 - 30, 2024 180 23.84 — 766,447 December 1 - 31, 2024 — — — 766,447 Total 180 $ 23.84 — (1) This column reflects shares of Company common stock deemed surrendered to us 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, 2019 as reported by the Nasdaq Global Select Market, through December 31, 2024, (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.
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.
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 13, 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.
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.
During the quarter ended December 31, 2023, there were no shares repurchased pursuant to the 2022 Repurchase Program.
During the quarter ended December 31, 2024, there were no shares repurchased pursuant to the 2022 Repurchase Program.
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.
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, 2025, there were 20,077,893 shares of our common stock outstanding and there were 256 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 12/31/2018 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
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 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 12/31/2024 Financial Institutions, Inc. 100.00 73.99 108.30 86.65 80.80 109.51 NASDAQ Composite Index 100.00 144.92 177.06 119.45 172.77 223.87 S&P U.S. SmallCap Banks Index 100.00 90.82 126.43 111.47 112.03 132.44

Item 7. Management's Discussion & Analysis

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

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Biggest changeChange from 2022 to 2023 Change from 2021 to 2022 Increase (decrease) in: Volume Rate Total Volume Rate Total Interest income: Federal funds sold and interest-earning deposits $ 715 $ 2,465 $ 3,180 $ (255 ) $ 786 $ 531 Investment securities: Taxable (1,927 ) 1,477 (450 ) 4,798 964 5,762 Tax-exempt (770 ) 176 (594 ) (533 ) 139 (394 ) Total investment securities (2,697 ) 1,653 (1,044 ) 4,265 1,103 5,368 Loans: Commercial business 3,674 16,526 20,200 (4,606 ) 5,327 721 Commercial mortgage 22,073 31,559 53,632 7,371 11,518 18,889 Residential real estate loans 1,169 2,001 3,170 (474 ) (130 ) (604 ) Residential real estate lines (33 ) 2,358 2,325 (181 ) 680 499 Consumer indirect (480 ) 8,270 7,790 5,083 (1,619 ) 3,464 Other consumer 1,164 (518 ) 646 (70 ) 23 (47 ) Total loans 27,567 60,196 87,763 7,123 15,799 22,922 Total interest income 25,585 64,314 89,899 11,133 17,688 28,821 Interest expense: Deposits: Interest-bearing demand (240 ) 5,187 4,947 124 900 1,024 Savings and money market (388 ) 32,034 31,646 (22 ) 6,437 6,415 Time deposits 7,174 40,600 47,774 438 6,999 7,437 Total interest-bearing deposits 6,546 77,821 84,367 540 14,336 14,876 Short-term borrowings 2,758 2,632 5,390 1,593 (213 ) 1,380 Long-term borrowings 2,469 (544 ) 1,925 18 (13 ) 5 Total borrowings 5,227 2,088 7,315 1,611 (226 ) 1,385 Total interest expense 11,773 79,909 91,682 2,151 14,110 16,261 Net interest income $ 13,812 $ (15,595 ) $ (1,783 ) $ 8,982 $ 3,578 $ 12,560 Provision for Credit Losses The provision for credit losses was $13.7 million for the year ended December 31, 2023 compared with $13.3 million for 2022.
Biggest changeChange from 2023 to 2024 Change from 2022 to 2023 Increase (decrease) in: Volume Rate Total Volume Rate Total Interest income: Federal funds sold and interest-earning deposits $ 1,708 $ (26 ) $ 1,682 $ 715 $ 2,465 $ 3,180 Investment securities: Taxable (1,037 ) 3,303 2,266 (1,927 ) 1,477 (450 ) Tax-exempt (745 ) 151 (594 ) (770 ) 176 (594 ) Total investment securities (1,782 ) 3,454 1,672 (2,697 ) 1,653 (1,044 ) Loans: Commercial business (676 ) 2,210 1,534 3,674 16,526 20,200 Commercial mortgage 11,621 3,904 15,525 22,073 31,559 53,632 Residential real estate loans 1,378 2,298 3,676 1,169 2,001 3,170 Residential real estate lines (29 ) 325 296 (33 ) 2,358 2,325 Consumer indirect (5,844 ) 7,528 1,684 (480 ) 8,270 7,790 Other consumer 1,173 (268 ) 905 1,164 (518 ) 646 Total loans 7,623 15,997 23,620 27,567 60,196 87,763 Total interest income 7,549 19,425 26,974 25,585 64,314 89,899 Interest expense: Deposits: Interest-bearing demand (788 ) 2,302 1,514 (240 ) 5,187 4,947 Savings and money market 5,841 13,633 19,474 (388 ) 32,034 31,646 Time deposits 1,377 10,282 11,659 7,174 40,600 47,774 Total interest-bearing deposits 6,430 26,217 32,647 6,546 77,821 84,367 Short-term borrowings (1,904 ) (1,620 ) (3,524 ) 2,758 2,632 5,390 Long-term borrowings 140 (39 ) 101 2,469 (544 ) 1,925 Total borrowings (1,764 ) (1,659 ) (3,423 ) 5,227 2,088 7,315 Total interest expense 4,666 24,558 29,224 11,773 79,909 91,682 Net interest income $ 2,883 $ (5,133 ) $ (2,250 ) $ 13,812 $ (15,595 ) $ (1,783 ) Provision for Credit Losses The table below presents the composition of the provision for credit losses for the years ended December 31 (in thousands): 2024 2023 2022 Provision for credit losses–loans $ 5,645 $ 14,213 $ 10,975 Credit loss provision (benefit) for unfunded commitments 507 (531 ) 2,336 Credit loss benefit for debt securities (2 ) (1 ) - Provision for credit losses $ 6,150 $ 13,681 $ 13,311 The decrease in the provision for credit losses–loans in 2024 compared to 2023 was primarily driven by a shift in mix of loan balances (consumer indirect category decreased and represented a smaller percentage of the portfolio), combined with positive trends in qualitative factors and a slight decrease in loan specific reserves. - 46 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS See the “Allowance for Credit Losses” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s Discussion and Analysis for further discussion.
Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, the Capital District of New York and Northern and Central Pennsylvania. 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.
Our indirect lending network includes relationships with franchised automobile dealers in Western and Central New York, and the Capital District of New York. Effective January 1, 2024, we exited the Pennsylvania automobile market in order to align our focus more fully around our core Upstate New York market.
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.
With the exception of obligations in connection with our irrevocable loan commitments, limited partnership investments and tax credit investments as of December 31, 2024, 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.
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.
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, 2024 on such Agency MBS to be credit related.
Agency Mortgage-backed Securities With the exception of the non-Agency mortgage-backed securities (“non-Agency MBS”) discussed below, all of the mortgage-backed securities held by us as of December 31, 2023, were issued by U.S. Government sponsored entities and agencies (“Agency MBS”), primarily FNMA and FHLMC. The contractual cash flows of our Agency MBS are guaranteed by FNMA, FHLMC or GNMA.
Agency Mortgage-backed Securities With the exception of the non-Agency mortgage-backed securities (“non-Agency MBS”) discussed below, all of the mortgage-backed securities held by us as of December 31, 2024, were issued by U.S. Government sponsored entities and agencies (“Agency MBS”), primarily FNMA and FHLMC. The contractual cash flows of our Agency MBS are guaranteed by FNMA, FHLMC or GNMA.
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.
For the year ended December 31, 2024 and 2023 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe any of the securities are impaired due to reasons of credit quality.
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.
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, 2024, the Company’s capital levels remained characterized as “well-capitalized” under the BCBS rules.
As the portfolio is managed from a liquidity, earnings, and risk standpoint, sales from the AFS portfolio may be warranted based upon prevailing market factors. The following discussion provides further details of our assessment of the AFS securities portfolio by investment category. U.S.
As the portfolio is managed from a liquidity, earnings, and risk standpoint, sales from the AFS portfolio may be warranted based upon prevailing market factors. The following discussion provides further details of our assessment of the AFS securities portfolio by investment category.
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.
During the year ended December 31, 2024, 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 2023.
In May 2023, we borrowed $15.0 million under the FRB Bank Term Funding Program at an interest rate of 4.8%, which matures on May 8, 2024. In December 2023, we borrowed $50.0 million under the program at 4.89%, which matures on December 13, 2024 and $13.0 million at 4.88%, which matures on December 20, 2024.
In May 2023, we borrowed $15.0 million under the FRB Bank Term Funding Program at an interest rate of 4.8%, which matured on May 8, 2024. In December 2023, we borrowed $50.0 million under the program at 4.89%, which matured on December 13, 2024 and $13.0 million at 4.88%, which matured on December 20, 2024.
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.
The unrealized loss of these securities was driven by the timing of the purchases of fixed-rate securities during the extended low interest rate environments experienced in prior years, which has been compounded with subsequent increases in benchmark interest rates.
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.
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, 2024, we concluded that unrealized losses on our AFS securities were not impaired due to reasons of credit quality and no allowance for credit losses has been recognized on AFS securities.
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.
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, 2024.
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.
As of December 31, 2024, the Company’s capital levels remained characterized as “well-capitalized” under the Basel III rules, including the additional capital conservation buffer. - 61 - 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. - 60 - 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. - 62 - Table of Contents
See Note 14, Regulatory Matters of the notes to consolidated financial statements and the “Basel III Capital Rules” section below for further discussion.
See Note 13, Regulatory Matters of the notes to consolidated financial statements and the “Basel III Capital Rules” section below for further discussion.
The average FICO score for indirect loan production was approximately 713 and 714 during the years ended December 31, 2023 and 2022, respectively. 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, which includes a strong network of approximately 375 new automobile dealers.
The average FICO score for indirect loan production was approximately 724 and 713 during the years ended December 31, 2024 and 2023, respectively. 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, which includes a strong network of approximately 370 new automobile dealers.
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.
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 $60 thousand and $142 thousand of properties representing foreclosed asset holdings at December 31, 2024 and 2023, 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, 2023, the off-balance sheet commitments related to these investments totaled $27.6 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, 2024, the off-balance sheet commitments related to these investments totaled $8.6 million.
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.
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.
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.
Total public deposits were $1.07 billion and $1.02 billion at December 31, 2024 and December 31, 2023, respectively, and represented 21% and 20% 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.
Net loss on investment securities of $3.6 million for the full year 2023 reflected the loss on the sale of approximately $54 million of lower yielding available-for-sale agency mortgage-backed securities, reinvesting the proceeds of such sale into higher yielding bonds.
Net loss on investment securities of $3.6 million for 2023 reflected the loss on the sale of approximately $54 million of lower yielding AFS securities agency mortgage-backed securities, reinvesting the proceeds of such sale into higher yielding bonds.
(1) This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition. Refer to the “GAAP to Non-GAAP Reconciliation” section of this Item 7 for further information. The Company’s leverage ratio was 8.18% at December 31, 2023 compared to 8.33% at December 31, 2022.
(1) This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition. Refer to the “GAAP to Non-GAAP Reconciliation” section of this Item 7 for further information. Our leverage ratio was 9.15% at December 31, 2024 compared to 8.18% at December 31, 2023.
Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and other funding sources) and noninterest income, particularly fees and other revenue from insurance, investment advisory and financial services provided to customers or ancillary services tied to loans and deposits.
Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and other funding sources) and noninterest income, particularly investment advisory and financial services provided to customers or ancillary services tied to loans and deposits, and fees and other revenue from insurance, prior to the sale of the assets of SDN.
In 2023 and 2022, we incurred additional taxes of approximately $5.4 million and $2.0 million, respectively, associated with the capital gains of the previously mentioned COLI surrenders coupled with a 10% modified endowment contract penalty that is typical of general account surrenders.
In 2023, we incurred additional taxes of approximately $5.4 million associated with the capital gains of the previously mentioned COLI surrenders coupled with a 10% modified endowment contract penalty that is typical of general account surrenders.
Loans generally have significantly higher yields compared to other interest-earning assets and, as such, have a more positive effect on the net interest margin. An increase in the volume of average loans resulted in a $27.6 million increase in interest income and higher interest rates increased interest income by $60.2 million.
Loans generally have significantly higher yields compared to other interest-earning assets and, as such, have a more positive effect on the net interest margin. An increase in the volume of average loans resulted in a $7.6 million increase in interest income and higher interest rates increased interest income by $16.0 million.
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.
Loans Held for Sale and Loan Servicing Portfolio Loans held for sale (not included in the loan portfolio composition table) were entirely comprised of residential real estate loans and totaled $2.3 million and $1.4 million as of December 31, 2024 and 2023, respectively. We sell certain qualifying newly originated or refinanced residential real estate loans on the secondary market.
Income tax expense for 2023 and 2022 included $5.4 million and $2.0 million, respectively, of incremental taxes associated with the COLI surrender and redeployment strategy executed in in the respective year. Effective tax rates are impacted by items of income and expense not subject to federal or state taxation.
Income tax expense for 2023 included $5.4 million of incremental taxes associated with the COLI surrender and redeployment strategy executed in 2023. Effective tax rates are impacted by items of income and expense not subject to federal or state taxation.
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.
Therefore, these non-GAAP financial measures should not be considered in isolation, or as a substitute for comparable measures prepared in accordance with GAAP. - 42 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS FOR THE YEARS ENDED December 31, 2024 AND December 31, 2023 Net Interest Income and Net Interest Margin Net interest income was our primary source of revenue for the year ended December 31, 2024.
Investment securities are at amortized cost for both held to maturity and available for sale securities. Loans include net unearned income, net deferred loan fees and costs and non-accruing loans. Dollar amounts are shown in thousands.
Investment securities are at amortized cost for both held to maturity and available for sale securities. Loans include net unearned income, net deferred loan fees and costs and non-accruing loans.
The average FICO score for new home equity production was 750 and 769 during the years ended December 31, 2023 and 2022, respectively.
The average FICO score for new home equity production was 742 and 750 during the years ended December 31, 2024 and 2023, 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.
Through these programs, deposits in excess of the maximum insurable amount are placed with multiple participating financial institutions. Reciprocal deposits totaled $746.7 million at December 31, 2024, compared to $817.6 million at December 31, 2023, and represented 15% and 16% of total deposits as of the end of each year, respectively.
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.
These financial instruments include commitments to extend credit for $1.27 billion and standby letters of credit for $14.6 million as of December 31, 2024. 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.
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.
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 $1.61 billion at December 31, 2024, down $106.8 million compared to 2023, and represented 36% of the 2024 year-end loan portfolio versus 39% at December 31, 2023.
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 Bank’s leverage ratio and total risk-based capital ratio were 9.79% and 12.60%, respectively, at December 31, 2024, compared to 9.06% and 11.76%, respectively, at December 31, 2023.
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.
Management believes the unrealized losses on the AFS securities portfolio are temporary in nature. The securities portfolio continues to generate cash flow and given the high quality of our agency mortgaged-backed securities portfolio, management expects the bonds to ultimately mature at a terminal value equivalent to par.
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.
Planned Uses of Capital Resources The Company has various long-term contractual obligations as of December 31, 2024, which include: • Time deposits for $1.55 billion; • Supplemental executive retirement plans for $181 thousand; • Subordinated notes for $75.0 million • FHLB long-term advances for $50.0 million; and • Operating leases for $48.2 million.
The change in interest rate spread was a net result of a 202-basis points increase in the average cost of interest-bearing liabilities, partially offset by a 132-basis points increase in the average yield on average interest-earning assets. For the year ended December 31, 2023, the average yield on average interest-earning assets of 5.07% was 132-basis points higher than 2022.
The change in interest rate spread was a net result of a 57-basis points increase in the average cost of interest-bearing liabilities, partially offset by a 41-basis points increase in the average yield on average interest-earning assets. For the year ended December 31, 2024, the average yield on average interest-earning assets of 5.48% was 41-basis points higher than 2023.
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.
The portion of our time deposits by account that were in excess of the FDIC insurance limit was $328.4 million and $302.6 million at December 31, 2024 and 2023, respectively.
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.
We have also recorded a $16.4 million liability primarily related to committed contributions for tax credit investments in property placed in service on or before December 31, 2024.
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.
Additional financial highlights are as follows: At or For the Year Ended December 31, 2024 2023 2022 Performance ratios: Net (loss) income, returns on: Average assets -0.68 % 0.83 % 1.01 % Average equity -8.74 % 11.86 % 12.81 % Net (loss) income available to common shareholders, returns on: Average common equity -9.39 % 12.01 % 12.99 % Average tangible common equity (1) -10.92 % 14.64 % 15.72 % Average tangible assets (1) -0.71 % 0.82 % 1.00 % Common dividend payout ratio -43.64 % 37.85 % 32.40 % Net interest margin (fully tax-equivalent) 2.86 % 2.94 % 3.20 % Effective tax rate -38.9 % 20.3 % 20.3 % Efficiency ratio (2) 82.35 % 62.96 % 60.39 % Capital ratios: Leverage ratio 9.15 % 8.33 % 8.23 % Common equity Tier 1 capital ratio 10.54 % 9.42 % 10.28 % Tier 1 capital ratio 10.87 % 9.78 % 10.68 % Total risk-based capital ratio 13.25 % 12.13 % 13.12 % Average equity to average assets 7.77 % 7.03 % 7.88 % Common equity to assets 9.02 % 7.10 % 8.84 % Tangible common equity to tangible assets (1) 8.11 % 6.00 % 5.50 % (1) This is a non-GAAP measure that we believe is useful in understanding our financial performance and condition.
Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits. - 39 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Shareholders’ equity was $454.8 million at December 31, 2023, compared to $405.6 million at December 31, 2022.
Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public deposits. - 40 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Shareholders’ equity was $569.0 million at December 31, 2024, compared to $454.8 million at December 31, 2023.
Non-public deposits, the largest component of our funding sources, totaled $3.12 billion and $2.77 billion at December 31, 2023 and 2022, respectively, and represented 60% and 56% of total deposits as of the end of each year, respectively.
Non-public deposits, the largest component of our funding sources, totaled $3.21 billion and $3.12 billion at December 31, 2024 and 2023, respectively, and represented 63% and 60% of total deposits as of the end of each year, respectively.
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.
Approximately $1.1 million, or 3%, of the $41.4 million of nonaccrual loans, a component of non-performing loans, as of December 31, 2024 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.
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.
For additional information on the Company’s long-term contractual obligations above, see Note 9, Deposits, Note 19, Employee Benefit Plans, Note 10, Borrowings, and Note 7, Leases, in the accompanying consolidated financial statements. - 58 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS We have financial instruments with off-balance sheet risk established in the normal course of business to meet the financing needs of customers.
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.
We had approximately $251.4 million of immediate credit capacity with the FHLB and $848.4 million in secured borrowing capacity at the FRB discount window, none of which was outstanding at December 31, 2024. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain qualifying loans.
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.
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. No amounts have been drawn on the line of credit at December 31, 2024 and 2023.
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.
Residential real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $280.8 million and $269.4 million as of December 31, 2024 and 2023, respectively. - 52 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Allowance for Credit Losses The following table summarizes the activity in the allowance for credit losses–loans (in thousands) for the periods indicated.
The Company’s effective tax rates differ from statutory rates primarily because of interest income from tax-exempt securities, earnings on COLI and tax credit investments placed in service. Total assets were $6.16 billion at December 31, 2023, up $363.6 million from $5.80 billion at December 31, 2022.
The Company’s effective tax rates differ from statutory rates primarily because of interest income from tax-exempt securities, earnings on COLI and tax credit investments placed in service. Total assets were $6.12 billion at December 31, 2024, down $43.8 million from $6.16 billion at December 31, 2023.
Our CRE committed credit exposure at December 31, 2023 related to approximately 42% multi-family, 17% office, 8% retail, 7% hospitality, 7% home builder, and 7% industrial property. Approximately 71% of our office exposure at December 31, 2023, or 12% of our total CRE exposure, related to Class B or medial office space.
Our CRE committed credit exposure at December 31, 2024 related to approximately 44% multi-family, 17% office, 8% retail, 8% hospitality, 7% industrial property, and 5% home builder. Approximately 68% of our office exposure at December 31, 2024, or 12% of our total CRE exposure, related to Class B or medical office space.
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.
We had $155.0 million of credit available under unsecured federal funds purchased lines with various banks, with no amounts outstanding at December 31, 2024. Additionally, we had approximately $183.3 million of unencumbered liquid securities available for pledging.
The primary sources of liquidity for FII are dividends from the Bank and access to financial and capital markets. Dividends from the Bank are limited by various regulatory requirements related to capital adequacy and earnings trends. The Bank relies on cash flows from operations, core deposits, borrowings and short-term liquid assets.
Dividends from the Bank are limited by various regulatory requirements related to capital adequacy and earnings trends. The Bank relies on cash flows from operations, core deposits, borrowings and short-term liquid assets.
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.
The residential real estate line portfolio amounted to $75.6 million at December 31, 2024 down $1.8 million, compared to 2023 and represented 2% of total loans at both December 31, 2024 and December 31, 2023. The residential real estate loans and lines portfolios had a weighted average LTV at origination of approximately 70% at December 31, 2024 and 2023.
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.
We identified $33.7 million and $29.9 million in loans that continued to accrue interest which were classified as substandard as of December 31, 2024 and 2023, respectively. - 55 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS FUNDING ACTIVITIES Deposits The following table summarizes the composition of our deposits (in thousands) as of the dates indicated.
The Federal Reserve increased the intended federal funds rate, which is the cost of immediately available overnight funds, throughout 2022 and 2023, in an attempt by the Federal Reserve to curb inflation.
Throughout 2022 and 2023, the Federal Reserve increased the intended federal funds rate, which is the cost of immediately available overnight funds in an attempt by the Federal Reserve to curb inflation, resulting in a federal funds rate of 4.25% to 4.50% as of December 31, 2022.
Years ended December 31, 2023 2022 Average Balance Interest Average Rate Average Balance Interest Average Rate Interest-earning assets: Federal funds sold and other interest-earning deposits $ 80,415 $ 3,927 4.88 % $ 49,055 $ 747 1.52 % Investment securities (1) : Taxable 1,177,615 22,048 1.87 1,283,575 22,498 1.75 Tax-exempt (2) 72,313 1,993 2.76 100,633 2,587 2.57 Total investment securities 1,249,928 24,041 1.92 1,384,208 25,085 1.81 Loans: Commercial business 698,861 50,388 7.21 628,729 30,188 4.80 Commercial mortgage 1,908,355 124,240 6.51 1,502,904 70,608 4.70 Residential real estate loans 612,767 22,728 3.71 579,362 19,558 3.38 Residential real estate lines 76,350 5,608 7.34 77,132 3,283 4.26 Consumer indirect 997,538 53,435 5.36 1,008,026 45,645 4.53 Other consumer 28,741 2,184 7.60 14,636 1,538 10.51 Total loans (3) 4,322,612 258,583 5.98 3,810,789 170,820 4.48 Total interest-earning assets 5,652,955 286,551 5.07 5,244,052 196,652 3.75 Less: Allowance for credit losses (49,198 ) (42,689 ) Other noninterest-earning assets 421,626 405,370 Total assets $ 6,025,383 $ 5,606,733 Interest-bearing liabilities: Deposits: Interest-bearing demand $ 818,541 7,127 0.87 $ 909,799 2,180 0.24 Savings and money market 1,781,776 41,424 2.32 1,852,571 9,778 0.53 Time deposits 1,477,596 58,810 3.98 1,008,092 11,036 1.09 Total interest-bearing deposits 4,077,913 107,361 2.63 3,770,462 22,994 0.61 Short-term borrowings 186,910 6,890 3.69 86,139 1,500 1.74 Long-term borrowings 121,903 6,167 5.06 74,059 4,242 5.73 Total borrowings 308,813 13,057 4.23 160,198 5,742 3.58 Total interest-bearing liabilities 4,386,726 120,418 2.75 3,930,660 28,736 0.73 Noninterest-bearing demand deposits 1,030,648 1,105,281 Other noninterest-bearing liabilities 184,323 129,079 Shareholders’ equity 423,686 441,713 Total liabilities and shareholders’ equity $ 6,025,383 $ 5,606,733 Net interest income (tax-equivalent) $ 166,133 $ 167,916 Interest rate spread 2.32 % 3.02 % Net earning assets $ 1,266,229 $ 1,313,392 Net interest margin (tax-equivalent) 2.94 % 3.20 % Ratio of average interest-earning assets to average interest-bearing liabilities 128.87 % 133.41 % (1) Investment securities are shown at amortized cost.
Dollar amounts are shown in thousands. - 44 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Years Ended December 31, 2024 2023 2022 Average Balance Interest Average Rate Average Balance Interest Average Rate Average Balance Interest Average Rate Interest-earning assets: Federal funds sold and other interest-earning deposits $ 115,635 $ 5,609 4.85 % $ 80,415 $ 3,927 4.88 % $ 49,055 $ 747 1.52 % Investment securities (1) : Taxable 1,124,116 24,314 2.16 1,177,615 22,048 1.87 1,283,575 22,498 1.79 Tax-exempt (2) 46,967 1,399 2.98 72,313 1,993 2.76 100,633 2,587 2.57 Total investment securities 1,171,083 25,713 2.20 1,249,928 24,041 1.92 1,384,208 25,085 1.81 Loans: Commercial business 689,585 51,922 7.53 698,861 50,388 7.21 628,729 30,188 4.80 Commercial mortgage 2,082,846 139,765 6.71 1,908,355 124,240 6.51 1,502,904 70,608 4.70 Residential real estate loans 648,604 26,404 4.07 612,767 22,728 3.71 579,362 19,558 3.38 Residential real estate lines 75,951 5,904 7.77 76,350 5,608 7.34 77,132 3,283 4.26 Consumer indirect 894,720 55,119 6.16 997,538 53,435 5.36 1,008,026 45,645 4.53 Other consumer 45,790 3,089 6.75 28,741 2,184 7.60 14,636 1,538 10.51 Total loans (3) 4,437,496 282,203 6.36 4,322,612 258,583 5.98 3,810,789 170,820 4.48 Total interest-earning assets 5,724,214 313,525 5.48 5,652,955 286,551 5.07 5,244,052 196,652 3.75 Less: Allowance for credit losses (46,620 ) (49,198 ) (42,689 ) Other noninterest-earning assets 451,836 421,626 405,370 Total assets $ 6,129,430 $ 6,025,383 $ 5,606,733 Interest-bearing liabilities: Deposits: Interest-bearing demand $ 734,731 8,641 1.18 $ 818,541 7,127 0.87 $ 909,799 2,180 0.24 Savings and money market 2,012,139 60,898 3.03 1,781,776 41,424 2.32 1,852,571 9,778 0.53 Time deposits 1,511,507 70,469 4.66 1,477,596 58,810 3.98 1,008,092 11,036 1.09 Total interest-bearing deposits 4,258,377 140,008 3.29 4,077,913 107,361 2.63 3,770,462 22,994 0.61 Short-term borrowings 126,192 3,366 2.67 186,910 6,890 3.69 86,139 1,500 1.74 Long-term borrowings 124,679 6,268 5.03 121,903 6,167 5.06 74,059 4,242 5.73 Total borrowings 250,871 9,634 3.84 308,813 13,057 4.23 160,198 5,742 3.58 Total interest-bearing liabilities 4,509,248 149,642 3.32 4,386,726 120,418 2.75 3,930,660 28,736 0.73 Noninterest-bearing demand deposits 953,417 1,030,648 1,105,281 Other noninterest-bearing liabilities 190,381 184,323 129,079 Shareholders’ equity 476,384 423,686 441,713 Total liabilities and shareholders’ equity $ 6,129,430 $ 6,025,383 $ 5,606,733 Net interest income (tax-equivalent) $ 163,883 $ 166,133 $ 167,916 Interest rate spread 2.16 % 2.32 % 3.02 % Net earning assets $ 1,214,966 $ 1,266,229 $ 1,313,392 Net interest margin (tax-equivalent) 2.86 % 2.94 % 3.20 % Ratio of average interest-earning assets to average interest-bearing liabilities 126.94 % 128.87 % 133.41 % (1) Investment securities are shown at amortized cost.
Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2023, no significant concentrations, as defined above, existed in our portfolio in excess of 10% of total loans.
Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2024, no significant concentrations, as defined above, existed in our portfolio. Our largest loan portfolios are CRE and indirect automobile lending.
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 ratio of allowance for credit losses–loans to non-performing loans was 116% at December 31, 2024, compared with 192% at December 31, 2023, reflective of the lower allowance for credit losses–loans. - 53 - 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.
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.
In 2024 and 2023, we recognized tax credit investments resulting in a $4.6 million and $3.0 million, respectively, reduction in income tax expense, in each year, and a $775 thousand and $252 thousand net loss recorded in noninterest income, respectively. Our effective tax rate was -38.9% for 2024, compared to 20.3% for 2023.
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.
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.
Approximately 92% of the loans and lines were first lien positions at December 31, 2023 and 2022. Consumer indirect loans amounted to $948.8 million at December 31, 2023 down $74.8 million, or 7%, compared to 2022 and represented 21% of the 2023 year-end loan portfolio versus 25% at year-end 2022.
Approximately 92% of the loans and lines were first lien positions at December 31, 2024 and 2023. Consumer indirect loans amounted to $845.8 million at December 31, 2024 down $103.1 million, or 11%, compared to 2023 and represented 19% of the 2024 year-end loan portfolio versus 21% at year-end 2023.
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.
At December 31, 2024, both FII and the Bank exceeded all regulatory requirements. For detailed information on regulatory capital requirements, see Note 13, 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.
Net deferred loan fees (costs) included in interest income were as follows (in thousands): 2023 2022 2021 Commercial business $ (56 ) $ 2,002 $ 8,087 Commercial mortgage 2,324 2,200 1,573 Residential real estate loans (1,672 ) (1,829 ) (2,241 ) Residential real estate lines (373 ) (327 ) (426 ) Consumer indirect (1,792 ) (2,141 ) (1,549 ) Other consumer 19 18 6 Total $ (1,550 ) $ (77 ) $ 5,450 The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment.
Net deferred loan fees (costs) included in interest income were as follows (in thousands): - 45 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS 2024 2023 2022 Commercial business $ 155 $ (56 ) $ 2,002 Commercial mortgage 2,192 2,324 2,200 Residential real estate loans (1,551 ) (1,672 ) (1,829 ) Residential real estate lines (393 ) (373 ) (327 ) Consumer indirect (3,534 ) (1,792 ) (2,141 ) Other consumer 44 19 18 Total $ (3,087 ) $ (1,550 ) $ (77 ) The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment.
Net charge-offs were $8.5 million in 2023, representing 0.20% of average loans, compared to $5.2 million, or 0.14% of average loans in 2022. Non-performing loans increased $16.5 million to $26.7 million compared to a year ago and represented 0.60% of total loans at December 31, 2023, compared to 0.25% of total loans at December 31, 2022.
Net charge-offs were $8.7 million in 2024, representing 0.20% of average loans, which were relatively flat compared with $8.5 million, or 0.20% of average loans in 2023. Non-performing loans increased $14.7 million to $41.4 million compared to a year ago and represented 0.92% of total loans at December 31, 2024, compared to 0.60% of total loans at December 31, 2023.
Average interest-earning assets were $408.9 million higher than 2022 due to a $511.8 million increase in average loans and a $31.4 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $134.3 million decrease in average investment securities.
Average interest-earning assets were $71.3 million higher than 2023 due to a $114.9 million increase in average loans and a $35.2 million increase in the average balance of Federal Reserve interest-earning cash, partially offset by a $78.8 million decrease in average investment securities.
The increase in nonperforming loans related primarily to one commercial loan relationship totaling $13.6 million that was placed on nonaccrual status during the fourth quarter of 2023.
The increase in nonperforming loans related primarily to one $15.5 million commercial loan relationship that was placed on nonaccrual status during the third quarter of 2024.
On average, interest-bearing deposits grew $307.5 million from $3.77 billion for 2022 to $4.08 billion for 2023, while noninterest-bearing demand deposits (a principal component of net free funds) decreased $74.6 million, or 7%, to $1.03 billion.
On average, interest-bearing deposits grew $180.5 million from $4.08 billion for 2023 to $4.26 billion for 2024, while noninterest-bearing demand deposits (a principal component of net free funds) decreased $77.2 million, or 7%, to $953.4 million.
The increase was primarily attributed to an increase in income from company owned life insurance (“COLI”) and partially offset by an increase in net loss on investment securities and a decrease in service charges on deposits.
The decrease in noninterest income was primarily attributable to an increase in net loss on investment securities, a decrease in income from company owned life insurance, and a decrease in insurance income, partially offset by an increase in net gain (loss) on other assets.
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.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2023 AND DECEMBER 31, 2022 A discussion regarding our financial condition and results of operations at and for the year ended December 31, 2023 and year-to-year comparisons between 2023 and 2022, which are not included in this Form 10-K, can be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 and are incorporated by reference herein.
The Federal Reserve further increased the federal funds rate by 25-basis points each in February, March, May, and July 2023 resulting in a federal funds rate of 5.25% to 5.50% as of year-end 2023.
The Federal Reserve further increased the federal funds rate by 25-basis points each in February, March, May, and July 2023 resulting in a federal funds rate of 5.25% to 5.50% as of December 31, 2023. The federal funds rate remained at 5.50% until a 50-basis point reduction in September 2024.
We offer a broad array of deposit, lending, and other financial services to individuals, municipalities and businesses in Western and Central New York through our wholly-owned New York-chartered banking subsidiary, Five Star Bank (the “Bank”).
We offer a broad array of deposit, lending, and other financial services to individuals, municipalities and businesses in Western and Central New York through our wholly-owned New York-chartered banking subsidiary, Five Star Bank (the “Bank”). We have loan production offices in Baltimore, Maryland, and Syracuse, New York, which expands our footprint into the Mid-Atlantic and Central New York regions.
Short-term borrowings were $185.0 million at December 31, 2023, a decrease of $20.0 million from December 31, 2022.
Short-term borrowings were $99.0 million at December 31, 2024, a decrease of $86.0 million from December 31, 2023.
Company owned life insurance (“COLI”) income increased $6.6 million to $12.1 million in 2023, compared to $5.5 million in 2022. The increase was primarily attributable to income from the surrender and redeploy of $53.9 million in cash surrender COLI in 2023.
The $4.6 million decline in insurance income was also attributed to this transaction. Company owned life insurance (“COLI”) income decreased $6.6 million to $5.5 million in 2024, compared to $12.1 million in 2023. The decrease was primarily attributable to income from the surrender and redeploy of $53.9 million in cash surrender COLI in 2023.
Non-performing assets at December 31, 2023 were $26.8 million, an increase of $16.6 million from $10.2 million at December 31, 2022. The primary component of non-performing assets is non-performing loans, which were $26.7 million or 0.60% of total loans at December 31, 2023, compared with $10.2 million or 0.25% of total loans at December 31, 2022.
Non-performing assets at December 31, 2024 were $41.5 million, an increase of $14.7 million from $26.8 million at December 31, 2023. The primary component of non-performing assets is non-performing loans, which were $41.4 million or 0.92% of total loans at December 31, 2024, compared with $26.7 million or 0.60% of total loans at December 31, 2023.
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.
The maturities of our uninsured time deposits at December 31, 2024 were as follows: $102.7 million in three months or less; $94.6 million between three months and six months; $88.3 million between six months and one year; and $42.8 million over one year.
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.
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, the interest-earning asset rate changes increased interest income by $64.3 million during 2023 and a favorable volume variance increased interest income by $25.6 million, which collectively drove an $89.9 million increase in interest income. - 42 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Average interest-earning assets were $5.65 billion for 2023 compared to $5.24 billion for 2022, an increase of $408.9 million, or 8%, with average loans up $511.8 million from $3.81 billion for 2022 to $4.32 billion for 2023, while average securities were down $134.3 million from $1.38 billion for 2022 to $1.25 billion for 2023.
Overall, the interest-earning asset rate changes increased interest income by $19.4 million during 2024 and a favorable volume variance increased interest income by $7.5 million, which collectively drove a $27.0 million increase in interest income. - 43 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Average interest-earning assets were $5.72 billion for 2024 compared to $5.65 billion for 2023, an increase of $71.3 million, or 1%, with average loans up $114.9 million from $4.32 billion for 2023 to $4.44 billion for 2024, while average investment securities were down $78.8 million from $1.25 billion for 2023 to $1.17 billion for 2024.
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.
At December 31, 2024, our ownership of FHLB and FRB stock totaled $11.3 million and $7.0 million, respectively, and is included in other assets and recorded at cost, which approximates fair value. - 50 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS LENDING ACTIVITIES Total loans were $4.48 billion at December 31, 2024, an increase of $17.1 million, from December 31, 2023.
As of December 31, 2023, commercial real estate (“CRE”) loans make up approximately 65% of total commercial loans, and 40% of total loans, commercial and industrial loans approximated 30% of total commercial loans, and 19% of total loans, and business banking unit loans were approximately 4% of total commercial loans and 3% of total loans.
As of December 31, 2024, commercial real estate (“CRE”) loans made up approximately 67% of total commercial loans, and 43% of total loans, commercial and industrial loans approximated 29% of total commercial loans, and 19% of total loans, and business banking unit loans were approximately 4% of total commercial loans and 3% of total loans.
The FHLB borrowings are collateralized by securities from the Company’s investment portfolio and certain qualifying loans. At December 31, 2023 and 2022, the Company’s borrowings had a weighted average rate of 5.29% and 4.60%, respectively. We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements.
At December 31, 2024 and 2023, the Company’s borrowings had a weighted average rate of 4.68% and 5.30%, respectively. We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase agreements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

13 edited+5 added−4 removed16 unchanged
Biggest changeAn 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.
Biggest changeAn increase in the EVE amount is considered favorable, while a decline is considered unfavorable (dollars in thousands): December 31, 2024 December 31, 2023 Rate Shock Scenario: EVE Change Percentage Change EVE Change Percentage Change Pre-Shock Scenario $ 903,789 $ 627,519 - 300 Basis Points 906,208 $ 2,419 0.27 % 584,066 $ (43,453 ) -6.92 % - 200 Basis Points 908,905 5,116 0.57 603,181 (24,338 ) -3.88 - 300 Basis Points 908,459 4,670 0.52 616,940 (10,579 ) -1.69 + 100 Basis Points 894,135 (9,654 ) -1.07 626,463 (1,056 ) -0.17 The Pre-Shock Scenario EVE was $903.8 million at December 31, 2024, compared to $627.5 million at December 31, 2023.
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.
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. - 63 - 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, 2023 and 2022.
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, 2024 and 2023.
In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical data, based on third-party review and inputs.
In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity dates, and decay rates for non-maturity deposits are projected based on historical data (back-testing), based on third-party review and inputs.
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.
The analysis additionally presents a measurement of the interest rate sensitivity at December 31, 2024 and 2023. EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock Scenario.
We consider the net interest income at risk simulation modeling to be more informative in forecasting future income at risk. - 63 - Table of Contents
We consider the net interest income at risk simulation modeling to be more informative in forecasting future income at risk. - 65 - Table of Contents
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.
Model results in the declining rate scenario show a decrease 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, which will reprice downward slower due to market deposit competition.
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.
The following table sets forth the estimated changes to net interest income over the 12-month period ending December 31, 2025 assuming instantaneous changes in interest rates for the given rate shock scenarios (dollars in thousands): Changes in Interest Rate -300 bp -200 bp -100 bp +100 bp Estimated change in net interest income $ (15,663 ) $ (9,845 ) $ (4,058 ) $ 2,512 % Change -7.93 % (4.98 )% (2.05 )% 1.27 % 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.
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.
The Bank also had a significant amount of public deposits, which represented 21% of total deposits as of December 31, 2024. Net Interest Income at Risk A primary tool used to manage interest rate risk is “rate shock” simulation to measure the rate sensitivity.
This is a combination of an increase across the entire deposit portfolio, which has decreased wholesale borrowings and the higher costs associated with borrowings.
This is a combination of an increase across the entire deposit portfolio, which has decreased wholesale borrowings and the higher costs associated with borrowings. The simulation does not consider balance sheet growth or a change in the balance sheet mix.
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.
In addition to the changes in interest rate scenarios listed above, other scenarios are typically modeled to measure interest rate risk. These scenarios vary depending on the economic and interest rate environment. Furthermore, given the static balance sheet approach, retained earnings are considered to be reinvested in a noninterest earning asset.
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.
Of these deposits, the majority, or 56%, was in nonpublic variable interest rate and noninterest bearing products including demand (both noninterest- and interest- bearing), savings and money market accounts. In addition, fixed interest rate nonpublic certificate of deposit products comprised 15% of total deposits.
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.
As of December 31, 2024, our consumer indirect loan portfolio comprised 14% of total assets and was primarily fixed rate loans. Our commercial loan portfolio totaled 47% of total assets and was a combination of fixed and variable rate loans, lines and mortgages.
Removed
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
The MBS portfolio, including collateralized mortgages obligations, totaled 17% of total assets with durations averaging three to five years. Our liabilities are comprised primarily of deposits, which accounted for 92% of total liabilities as of December 31, 2024.
Removed
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.
Added
As intermediate and longer-term assets continue to mature and are replaced at higher yields, net interest income should improve over the longer-term time frame.
Removed
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
The increase in the Pre-Shock Scenario EVE at December 31, 2024 compared to December 31, 2023 was the result of overall value increase of the loan portfolio, slightly offset by deposits. The sensitivity in the down Rate Shock Scenarios to EVE grew more positive at December 31, 2024 compared to December 31, 2023.
Removed
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.
Added
This was a result from a combination of the strategic repositioning of the investment securities portfolio, commercial loan growth, and a better deposit valuation compared to the prior year. - 64 - Table of Contents Interest Rate Sensitivity Gap The following table presents an analysis of our interest rate sensitivity gap position at December 31, 2024.
Added
At December 31, 2024 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 $ 32,363 $ - $ - $ - $ 32,363 Investment securities 92,299 87,508 348,928 559,988 1,088,723 Loans 1,951,207 604,228 1,512,430 413,619 4,481,484 Total interest-earning assets $ 2,075,869 $ 691,736 $ 1,861,358 $ 973,607 5,602,570 Cash and due from banks 54,958 Other assets (1) 459,557 Total assets $ 6,117,085 INTEREST-BEARING LIABILITIES: Interest-bearing demand, savings and money market $ 2,609,208 $ - $ - $ - $ 2,609,208 Time deposits 545,435 942,911 56,826 - 1,545,172 Borrowings 99,000 34,880 50,000 39,962 223,842 Total interest-bearing liabilities $ 3,253,643 $ 977,791 $ 106,826 $ 39,962 4,378,222 Noninterest-bearing deposits 950,351 Other liabilities 219,528 Total liabilities 5,548,101 Shareholders’ equity 568,984 Total liabilities and shareholders’ equity $ 6,117,085 Interest sensitivity gap $ (1,177,774 ) $ (286,055 ) $ 1,754,532 $ 933,645 $ 1,224,348 Cumulative gap $ (1,177,774 ) $ (1,463,829 ) $ 290,703 $ 1,224,348 Cumulative gap ratio (2) 63.8 % 65.4 % 106.7 % 128.0 % Cumulative gap as a percentage of total assets (19.3 )% (23.9 )% 4.8 % 20.0 % (1) Includes net unrealized loss on securities available for sale and allowance for credit losses.

Other FISI 10-K year-over-year comparisons