Financial Institutions(FISI) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Presents the unaudited consolidated financial statements and accompanying notes for the periods ended June 30, 2024 Consolidated Statements of Financial Condition (Unaudited) Consolidated Statements of Financial Condition (Unaudited) - Key Figures | Metric (in thousands) | June 30, 2024 | December 31, 2023 | | :-------------------- | :------------ | :---------------- | | Total Assets | $6,131,772 | $6,160,881 | | Total Liabilities | $5,664,105 | $5,706,085 | | Total Shareholders' Equity | $467,667 | $454,796 | - Total assets decreased by $29.1 million from December 31, 2023, to June 30, 2024, primarily driven by changes in deposits and investment securities[6] Consolidated Statements of Income (Unaudited) Consolidated Statements of Income (Unaudited) - Key Figures (Three Months Ended June 30) | Metric (in thousands) | 2024 | 2023 | | :-------------------- | :---------- | :---------- | | Total Interest Income | $78,788 | $71,115 | | Total Interest Expense| $37,595 | $28,778 | | Net Interest Income | $41,193 | $42,337 | | Provision for Credit Losses | $2,041 | $3,230 | | Total Noninterest Income | $24,014 | $11,466 | | Total Noninterest Expense | $33,020 | $33,782 | | Net Income | $25,629 | $14,373 | | Net Income Available to Common Shareholders | $25,265 | $14,009 | | Basic EPS | $1.64 | $0.91 | | Diluted EPS | $1.62 | $0.91 | Consolidated Statements of Income (Unaudited) - Key Figures (Six Months Ended June 30) | Metric (in thousands) | 2024 | 2023 | | :-------------------- | :---------- | :---------- | | Total Interest Income | $157,201 | $134,886 | | Total Interest Expense| $75,926 | $50,734 | | Net Interest Income | $81,275 | $84,152 | | Provision (Benefit) for Credit Losses | $(3,415) | $7,444 | | Total Noninterest Income | $34,915 | $22,390 | | Total Noninterest Expense | $87,033 | $67,443 | | Net Income | $27,699 | $26,462 | | Net Income Available to Common Shareholders | $26,970 | $25,733 | | Basic EPS | $1.75 | $1.68 | | Diluted EPS | $1.73 | $1.67 | - Net income for Q2 2024 significantly increased to $25.6 million from $14.4 million in Q2 2023, largely due to a $13.5 million pre-tax gain from the sale of SDN assets[7][115][116] - However, net interest income decreased by $1.1 million YoY in Q2 2024 due to higher funding costs[7][115][116] Consolidated Statements of Comprehensive Income (Unaudited) Consolidated Statements of Comprehensive Income (Unaudited) - Key Figures (Three Months Ended June 30) | Metric (in thousands) | 2024 | 2023 | | :-------------------- | :---------- | :---------- | | Net Income | $25,629 | $14,373 | | Total Other Comprehensive Income (Loss), net of tax | $490 | $(7,100) | | Comprehensive Income | $26,119 | $7,273 | Consolidated Statements of Comprehensive Income (Unaudited) - Key Figures (Six Months Ended June 30) | Metric (in thousands) | 2024 | 2023 | | :-------------------- | :---------- | :---------- | | Net Income | $27,699 | $26,462 | | Total Other Comprehensive Income (Loss), net of tax | $(5,833) | $3,015 | | Comprehensive Income | $21,866 | $29,477 | - Total other comprehensive income (loss) significantly improved in Q2 2024 to a gain of $490 thousand from a loss of $7.1 million in Q2 2023, primarily due to changes in unrealized losses on available-for-sale securities[8][73][74] Consolidated Statements of Changes in Shareholders' Equity (Unaudited) Consolidated Statements of Changes in Shareholders' Equity (Unaudited) - Key Figures (Six Months Ended June 30, 2024) | Metric (in thousands) | Balance at Dec 31, 2023 | Net Income | Other Comprehensive Income (Loss) | Cash Dividends Declared | Balance at Jun 30, 2024 | | :-------------------- | :---------------------- | :--------- | :-------------------------------- | :---------------------- | :---------------------- | | Total Shareholders' Equity | $454,796 | $27,699 | $(5,833) | $(9,967) | $467,667 | - Shareholders' equity increased by $12.9 million from December 31, 2023, to June 30, 2024, primarily driven by net income, partially offset by an increase in accumulated other comprehensive loss and cash dividends[9][11][170] Consolidated Statements of Cash Flows (Unaudited) Consolidated Statements of Cash Flows (Unaudited) - Key Figures (Six Months Ended June 30) | Metric (in thousands) | 2024 | 2023 | | :-------------------- | :---------- | :---------- | | Net Cash Provided by Operating Activities | $47,964 | $14,815 | | Net Cash Provided by (Used in) Investing Activities | $46,895 | $(279,120) | | Net Cash (Used in) Provided by Financing Activities | $(72,954) | $314,087 | | Net Increase in Cash and Cash Equivalents | $21,905 | $49,782 | | Cash and Cash Equivalents, End of Period | $146,347 | $180,248 | - Net cash provided by operating activities significantly increased to $48.0 million in H1 2024 from $14.8 million in H1 2023[13][169] - Investing activities shifted from a net outflow of $279.1 million in H1 2023 to a net inflow of $46.9 million in H1 2024, largely due to proceeds from the sale of SDN assets and net proceeds from investment securities[13][169] Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation and Summary of Significant Accounting Policies Outlines the basis of presentation, significant accounting policies, and key events like the SDN sale and a fraud loss - The Company sold its subsidiary SDN Insurance Agency, LLC on April 1, 2024, generating $27 million in proceeds and a pre-tax gain of $13.5 million[14][112][116] - A fraudulent deposit activity in early March 2024 resulted in an $18.2 million pre-tax loss for the six months ended June 30, 2024, recorded as an operational loss in deposit-related charged-off items[19][115][140] Supplemental Cash Flow Information (in thousands) | Metric | 2024 | 2023 | | :----------------- | :------ | :------ | | Cash paid for interest | $83,951 | $61,108 | | Cash paid for income taxes | $3,107 | $4,678 | 2. Earnings Per Common Share ("EPS") Provides a reconciliation of earnings and shares used to calculate basic and diluted EPS for the current periods Earnings Per Common Share (EPS) Reconciliation (in thousands, except per share amounts) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income available to common shareholders | $25,265 | $14,009 | $26,970 | $25,733 | | Total basic weighted average common shares outstanding | 15,444 | 15,372 | 15,424 | 15,356 | | Total diluted weighted average common shares outstanding | 15,556 | 15,413 | 15,551 | 15,427 | | Basic earnings per common share | $1.64 | $0.91 | $1.75 | $1.68 | | Diluted earnings per common share | $1.62 | $0.91 | $1.73 | $1.67 | - Diluted EPS increased from $0.91 in Q2 2023 to $1.62 in Q2 2024, and from $1.67 in H1 2023 to $1.73 in H1 2024, reflecting higher net income available to common shareholders[24] 3. Investment Securities Details the Company's investment securities portfolio, including AFS and HTM securities and their credit quality Investment Securities Portfolio (in thousands) | Category | June 30, 2024 (Fair Value) | December 31, 2023 (Fair Value) | | :------------------------ | :------------------------- | :----------------------------- | | Securities available for sale | $871,635 | $887,730 | | Securities held to maturity | $115,849 | $137,030 | | Total Investment Securities | $987,484 | $1,024,760 | - The AFS portfolio had a net unrealized loss of $159.2 million at June 30, 2024, an increase from $150.3 million at December 31, 2023, predominantly caused by changes in market interest rates[32][142] - No allowance for credit losses was recognized on AFS securities, as management believes no securities were impaired due to credit quality, and issuers continue timely payments[33][144] - HTM municipal bonds are highly rated (A/AA/AAA equivalent), with no municipal bonds rated below investment grade as of June 30, 2024[34] 4. Loans Details the Company's loan portfolio composition, credit quality indicators, and allowance for credit losses Loan Portfolio Composition (in thousands) | Loan Type | June 30, 2024 (Principal Amount Outstanding) | December 31, 2023 (Principal Amount Outstanding) | | :-------------------- | :------------------------------------------- | :----------------------------------------------- | | Commercial business | $713,192 | $734,947 | | Commercial mortgage | $2,089,018 | $2,009,269 | | Residential real estate loans | $635,717 | $637,173 | | Residential real estate lines | $72,182 | $73,972 | | Consumer indirect | $865,066 | $915,723 | | Other consumer | $43,939 | $45,167 | | Total | $4,419,114 | $4,416,251 | - Total loans, net of allowance for credit losses, increased slightly to $4.418 billion at June 30, 2024, from $4.411 billion at December 31, 2023[36][145][148] - Commercial mortgage loans saw a notable increase of $80.6 million, while consumer indirect loans decreased by $54.2 million[36][145][148] Allowance for Credit Losses – Loans (in thousands) | Metric | Three months ended June 30, 2024 | Six months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2023 | | :---------------------------------------- | :------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- | | Beginning balance | $43,075 | $51,082 | $47,528 | $45,413 | | Net charge-offs | $1,122 | $4,243 | $636 | $2,725 | | Provision (benefit) for credit losses – loans | $1,999 | $(2,887) | $2,944 | $7,148 | | Ending balance | $43,952 | $43,952 | $49,836 | $49,836 | - The allowance for credit losses – loans decreased to $44.0 million at June 30, 2024, from $51.1 million at December 31, 2023[50][137][152][153] - The provision for credit losses was $2.0 million in Q2 2024, while a benefit of $2.9 million was recorded for H1 2024, reflecting improved forecasted losses and positive trends in qualitative factors[50][137][152][153] 5. Leases Provides information on the Company's operating lease agreements, including assets, liabilities, and future payments Operating Lease Right of Use Assets and Liabilities (in thousands) | Metric (Balance Sheet Location) | June 30, 2024 | December 31, 2023 | | :------------------------------ | :------------ | :---------------- | | Operating Lease Right of Use Assets, Net Book Value | $31,276 | $31,524 | | Operating Lease Liabilities (Right of use lease obligations) | $33,605 | $33,788 | - The weighted average remaining lease term for operating leases was 20.1 years at June 30, 2024, with a weighted-average discount rate of 3.92%[52] Net Lease Costs (in thousands) | Period | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Lease Costs | $830 | $829 | $1,680 | $1,698 | 6. Goodwill and Other Intangible Assets Details the carrying amounts of goodwill and other intangible assets, including the impact of the SDN asset sale Goodwill and Other Intangible Assets (in thousands) | Asset Category | June 30, 2024 | December 31, 2023 | | :---------------------- | :------------ | :---------------- | | Goodwill | $58,121 | $67,071 | | Other Intangibles, Net | $2,858 | $5,433 | - Goodwill decreased by $9.0 million due to the sale of SDN assets on April 1, 2024[55][57] - Other intangible assets also saw a reduction of $2.2 million from the SDN sale[55][57] Estimated Amortization Expense of Other Intangible Assets (in thousands) | Year | Amount | | :-------------------- | :----- | | 2024 (remainder of year) | $221 | | 2025 | $415 | | 2026 | $379 | | 2027 | $343 | | 2028 | $308 | | 2029 | $272 | | Thereafter | $920 | | Total | $2,858 | 7. Other Assets and Other Liabilities Provides a summary of the components of other assets and other liabilities as of June 30, 2024 Other Assets (in thousands) | Asset Category | June 30, 2024 | December 31, 2023 | | :---------------------------------- | :------------ | :---------------- | | Tax credit investments | $76,682 | $68,253 | | Net deferred tax asset | $48,358 | $48,733 | | Derivative instruments | $51,988 | $43,506 | | Operating lease right of use assets | $31,276 | $31,524 | | FHLB and FRB stock | $19,085 | $17,406 | | Accrued interest receivable | $24,494 | $24,481 | | Other | $49,489 | $80,454 | | Total other assets | $301,372 | $314,357 | Other Liabilities (in thousands) | Liability Category | June 30, 2024 | December 31, 2023 | | :---------------------------------- | :------------ | :---------------- | | Collateral on derivative instruments | $49,510 | $40,350 | | Derivative instruments | $45,284 | $37,521 | | Operating lease right of use obligations | $33,605 | $33,788 | | Accrued interest expense | $27,444 | $19,412 | | Other | $48,254 | $52,570 | | Total other liabilities | $204,097 | $183,641 | 8. Derivative Instrument and Hedging Activities Describes the Company's use of derivative financial instruments for interest rate risk management - The Company uses interest rate caps and swaps to manage interest rate risk and stabilize interest expense, with $2.9 million in accumulated other comprehensive loss related to derivatives expected to be reclassified to interest expense in the next twelve months[64][65] Fair Values of Derivative Instruments (in thousands) | Derivative Type (Notional Amount) | June 30, 2024 (Fair Value) | December 31, 2023 (Fair Value) | | :-------------------------------- | :------------------------- | :----------------------------- | | Cash flow hedges | $6,560 | $5,939 | | Interest rate swaps (not designated) | $45,274 (asset) / $45,275 (liability) | $37,517 (asset) / $37,519 (liability) | | Mortgage banking | $154 (asset) / $9 (liability) | $50 (asset) / $2 (liability) | Effect of Derivative Instruments on Income Statement (in thousands) | Line Item (Gain/Loss) | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income from derivative instruments, net | $377 | $703 | $551 | $1,199 | 9. Shareholders' Equity Provides a reconciliation of common stock shares outstanding and details on share repurchase programs Common Stock Shares Outstanding (Shares) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------- | :------------ | :---------------- | | Shares at period end | 15,472,395 | 15,407,406 | | Treasury stock at period end | 627,161 | 692,150 | | Total Issued Shares | 16,099,556 | 16,099,556 | - The Company had 15,472,395 shares of Common Stock outstanding as of July 31, 2024[2][72] - No shares have been repurchased under the 2022 Share Repurchase Program as of June 30, 2024[2][72] 10. Accumulated Other Comprehensive Loss Presents the components of other comprehensive income (loss) and activity in accumulated other comprehensive loss Other Comprehensive Income (Loss), Net of Tax (in thousands) | Component | Three months ended June 30, 2024 | Six months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2023 | | :-------------------------------------- | :------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- | | Securities available for sale and transferred securities | $529 | $(6,635) | $(8,648) | $1,986 | | Hedging derivative instruments | $(205) | $470 | $1,404 | $741 | | Pension obligations | $166 | $332 | $144 | $288 | | Total other comprehensive income (loss) | $490 | $(5,833) | $(7,100) | $3,015 | - Accumulated other comprehensive loss, net of tax, was $(125.8) million at June 30, 2024, an increase from $(119.9) million at December 31, 2023, primarily due to unrealized losses on available-for-sale securities[79][170] 11. Share-Based Compensation Plans Describes the Company's share-based compensation plans, vesting schedules, and associated compensation expense Share-Based Compensation Expense (in thousands) | Expense Category | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :---------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Salaries and employee benefits | $505 | $453 | $1,033 | $963 | | Other noninterest expense | $241 | $204 | $282 | $245 | | Total share-based compensation expense | $746 | $657 | $1,315 | $1,208 | - As of June 30, 2024, there was $4.5 million of unrecognized compensation expense related to unvested awards, expected to be recognized over a weighted average period of 2.13 years[86] 12. Employee Benefit Plans Outlines the Company's non-contributory defined benefit pension plan and details net periodic benefit expense Net Periodic Benefit Expense (in thousands) | Component | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Service cost | $491 | $447 | $982 | $895 | | Interest cost on projected benefit obligation | $861 | $855 | $1,722 | $1,710 | | Expected return on plan assets | $(1,005) | $(878) | $(2,009) | $(1,756) | | Amortization of unrecognized prior service credit | $(134) | $(123) | $(268) | $(245) | | Amortization of unrecognized net actuarial loss | $357 | $316 | $715 | $632 | | Net periodic benefit expense | $570 | $617 | $1,142 | $1,236 | - Net periodic benefit expense decreased to $570 thousand in Q2 2024 from $617 thousand in Q2 2023, and to $1.14 million in H1 2024 from $1.24 million in H1 2023[87] 13. Commitments and Contingencies Details the Company's off-balance sheet risk, contingent liabilities, and ongoing legal proceedings Off-Balance Sheet Commitments (in thousands) | Commitment Type | June 30, 2024 | December 31, 2023 | | :-------------------------- | :------------ | :---------------- | | Commitments to extend credit | $1,141,912 | $1,200,617 | | Standby letters of credit | $18,950 | $13,498 | - The allowance for credit losses for unfunded commitments totaled $3.1 million at June 30, 2024, a decrease from $3.6 million at December 31, 2023[90] - The Company is involved in a class action lawsuit regarding repossessed vehicle notices, with approximately 5,200 members in New York and 300 in Pennsylvania classes[90][183] - A bench trial is scheduled for May 5, 2025[90][183] 14. Fair Value Measurements Describes methodologies for determining fair value and categorizing assets and liabilities into a three-level hierarchy - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[91] Assets Measured at Fair Value on a Recurring Basis (June 30, 2024, in thousands) | Asset Category | Level 1 | Level 2 | Level 3 | Total | | :---------------------------------- | :------ | :---------- | :------ | :---------- | | Securities available for sale | $0 | $878,195 | $0 | $876,182 | | Derivative instruments – interest rate swaps | $0 | $45,274 | $0 | $45,274 | | Derivative instruments – mortgage banking | $0 | $154 | $0 | $154 | Assets Measured at Fair Value on a Nonrecurring Basis (June 30, 2024, in thousands) | Asset Category | Level 1 | Level 2 | Level 3 | Total | | :---------------------------------- | :------ | :------ | :---------- | :---------- | | Loans held for sale | $0 | $2,099 | $0 | $2,099 | | Collateral dependent loans | $0 | $0 | $29,954 | $29,954 | | Loan servicing rights | $0 | $0 | $1,437 | $1,437 | 15. Segment Reporting Presents financial information for the Company's reportable segments: Banking and All Other - The Company has one reportable segment, Banking, which includes all retail and commercial banking operations[105] - 'All Other' includes activities of Courier Capital and, prior to April 1, 2024, SDN[105] Segment Net Income (in thousands) | Segment | Three months ended June 30, 2024 | Six months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2023 | | :-------- | :------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- | | Banking | $16,496 | $19,417 | $14,815 | $27,448 | | All Other | $9,133 | $8,282 | $(442) | $(986) | | Total | $25,629 | $27,699 | $14,373 | $26,462 | - The 'All Other' segment's net income significantly improved in Q2 2024 to $9.1 million from a loss of $442 thousand in Q2 2023, largely due to the gain on the sale of SDN assets[106][116] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial condition, operational results, and key business activities Forward Looking Information - The report contains forward-looking statements regarding future financial performance, operations, and market conditions, which are subject to significant risks and uncertainties[110] - Key risk factors include fluctuations in market interest rates, credit losses, fraudulent activities, geographic concentration in the loan portfolio, and regulatory changes[110] General Business Overview and Strategy - Financial Institutions, Inc. is a financial holding company providing diversified financial services through Five Star Bank and Courier Capital, primarily in Western and Central New York[112] - The Company sold its insurance subsidiary, SDN, for $27 million, resulting in a $13.5 million pre-tax gain, and will now use the entity to refer insurance business to NFP[112] - A key business strategy involves fostering a community-oriented culture, leveraging digital capabilities, and expanding Banking-as-a-Service (BaaS) offerings to non-bank financial service providers and FinTechs[113] - The Company has implemented a program to provide financial products and services to legal cannabis-related businesses in New York State, acknowledging the unique regulatory risks due to conflicting state and federal laws[114] Executive Overview Summary of Q2 2024 Financial Results (in thousands, except per share) | Metric | Q2 2024 | Q2 2023 | Change ($) | Change (%) | | :---------------------------------------- | :---------- | :---------- | :---------- | :---------- | | Net Income | $25,629 | $14,373 | $11,256 | 78.3% | | Net Income Available to Common Shareholders | $25,265 | $14,009 | $11,256 | 80.3% | | Diluted EPS | $1.62 | $0.91 | $0.71 | 78.0% | | Return on Average Common Equity | 23.51% | 13.64% | 9.87% | 72.4% | | Return on Average Assets | 1.68% | 0.95% | 0.73% | 76.8% | | Net Interest Income | $41,193 | $42,337 | $(1,144) | -2.7% | | Net Interest Margin | 2.87% | 2.99% | -0.12% | -4.0% | | Provision for Credit Losses | $2,041 | $3,230 | $(1,189) | -36.8% | | Noninterest Income | $24,014 | $11,466 | $12,548 | 109.4% | | Noninterest Expense | $33,020 | $33,782 | $(762) | -2.3% | - Q2 2024 net income increased significantly due to a $13.5 million pre-tax gain from the SDN asset sale, partially offset by $371 thousand in professional services expenses related to a Q1 2024 deposit fraud event[115][116][117] Results of Operations Net Interest Income and Net Interest Margin Net interest income and margin declined year-over-year due to rising funding costs outpacing asset yield increases Net Interest Income and Net Interest Margin (Taxable Equivalent Basis, in thousands) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Interest Income (tax-equivalent) | $41,274 | $42,450 | $81,442 | $84,386 | | Net Interest Margin (tax-equivalent) | 2.87% | 2.99% | 2.83% | 3.04% | | Average Yield on Interest-Earning Assets | 5.50% | 5.02% | 5.47% | 4.87% | | Average Cost of Interest-Bearing Liabilities | 3.32% | 2.60% | 3.33% | 2.37% | - Net interest margin decreased by 12 basis points in Q2 2024 (2.87% vs. 2.99%) and 21 basis points in H1 2024 (2.83% vs. 3.04%) due to higher funding costs, partially offset by increased average yields on interest-earning assets[115][121][123] - Average loans increased by $107.2 million in Q2 2024 and $224.3 million in H1 2024, primarily driven by organic growth in commercial mortgages, contributing positively to interest income[115][122][123] Provision (Benefit) for Credit Losses A provision was recorded in Q2 2024, while a benefit was recorded for H1 2024 due to improved loss forecasts Provision (Benefit) for Credit Losses (in thousands) | Period | 2024 | 2023 | | :---------------------------------------- | :---------- | :---------- | | Three months ended June 30 | $2,041 | $3,230 | | Six months ended June 30 | $(3,415) | $7,444 | - Net charge-offs for Q2 2024 were $1.1 million (0.10% of average loans annualized), up from $636 thousand (0.06% of average loans annualized) in Q2 2023[116][153] Noninterest Income Noninterest income increased significantly, driven primarily by a one-time gain from the sale of SDN assets Noninterest Income Categories (in thousands) | Category | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Service charges on deposits | $979 | $1,223 | $2,056 | $2,250 | | Insurance income | $4 | $1,328 | $2,138 | $3,415 | | Company owned life insurance | $1,360 | $953 | $2,658 | $1,947 | | Investments in limited partnerships | $803 | $469 | $1,145 | $720 | | Income from derivative instruments, net | $377 | $703 | $551 | $1,199 | | Net gain (loss) on other assets | $13,508 | $(7) | $13,495 | $32 | | Total Noninterest Income | $24,014 | $11,466 | $34,915 | $22,390 | - The $13.5 million gain from the SDN sale was recorded in 'net gain (loss) on other assets,' significantly boosting noninterest income[116][138] - Service charges on deposits decreased by 20% in Q2 2024 due to changes in the Bank's fee policies[138] Noninterest Expense Noninterest expense decreased in Q2 due to the SDN sale but increased in H1 due to a significant fraud loss Noninterest Expense Categories (in thousands) | Category | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Salaries and employee benefits | $15,748 | $17,754 | $33,088 | $35,887 | | Professional services | $1,794 | $1,273 | $4,166 | $2,768 | | Computer and data processing | $5,342 | $4,750 | $10,728 | $9,441 | | Deposit-related charged-off items | $398 | $467 | $19,577 | $790 | | Total Noninterest Expense | $33,020 | $33,782 | $87,033 | $67,443 | - Salaries and employee benefits decreased by $2.0 million in Q2 2024 and $2.8 million in H1 2024, mainly due to the SDN sale and leadership changes[117][140] - Deposit-related charged-off items for H1 2024 included an $18.2 million loss from a fraud event, partially offset by $143 thousand in recoveries[140] - The efficiency ratio for Q2 2024 was 50.58% (down from 62.66% in Q2 2023) due to the SDN sale gain, while for H1 2024 it was 74.80% (up from 63.17% in H1 2023) due to the fraud loss[140] Income Taxes The effective tax rate was 15.0% for the quarter and six-month period, influenced by tax credit investments Income Tax Expense and Effective Tax Rate (in thousands) | Metric | Three months ended June 30, 2024 | Three months ended June 30, 2023 | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :---------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income Tax Expense | $4,517 | $2,418 | $4,873 | $5,193 | | Effective Tax Rate | 15.0% | 14.4% | 15.0% | 16.4% | - Tax benefits from tax credit investments reduced income tax expense by $1.3 million in Q2 2024 and $2.1 million in H1 2024[141] Analysis of Financial Condition Investing Activities The investment securities portfolio decreased slightly, with an increase in unrealized losses on AFS securities Investment Securities Portfolio Composition (in thousands) | Category | June 30, 2024 (Amortized Cost) | December 31, 2023 (Amortized Cost) | | :------------------------ | :----------------------------- | :--------------------------------- | | Securities available for sale | $1,030,844 | $1,037,990 | | Securities held to maturity | $128,274 | $148,160 | | Total Investment Securities | $1,159,115 | $1,186,146 | - The AFS investment securities portfolio decreased by $7.1 million from December 31, 2023, to June 30, 2024, primarily due to purchases for collateral for municipal deposits[142] - The AFS portfolio had a net unrealized loss of $159.2 million at June 30, 2024, compared to $150.3 million at December 31, 2023[142] Lending Activities The loan portfolio remained stable as commercial mortgage growth offset declines in other loan categories Loan Portfolio Composition (in thousands) | Loan Type | June 30, 2024 (Amount) | June 30, 2024 (% of Total) | December 31, 2023 (Amount) | December 31, 2023 (% of Total) | | :-------------------- | :--------------------- | :------------------------- | :------------------------- | :----------------------------- | | Commercial business | $713,947 | 16.0% | $735,700 | 16.5% | | Commercial mortgage | $2,085,870 | 46.8% | $2,005,319 | 44.9% | | Total commercial | $2,799,817 | 62.8% | $2,741,019 | 61.4% | | Total consumer | $1,661,651 | 37.2% | $1,721,120 | 38.6% | | Total loans | $4,461,468 | 100.0% | $4,462,139 | 100.0% | - Commercial mortgage loans increased by $80.6 million (4%) from December 31, 2023, to June 30, 2024, while consumer indirect loans decreased by $54.2 million[148] Non-Performing Assets (in thousands) | Metric | June 30, 2024 | December 31, 2023 | | :-------------------------- | :------------ | :---------------- | | Total nonaccrual loans | $25,173 | $26,639 | | Accruing loans 90+ days delinquent | $36 | $21 | | Total non-performing loans | $25,209 | $26,660 | | Foreclosed assets | $63 | $142 | | Total non-performing assets | $25,272 | $26,802 | - Non-performing assets decreased by $1.5 million to $25.3 million at June 30, 2024, from $26.8 million at December 31, 2023[156] Funding Activities Total deposits decreased due to a reduction in brokered deposits, while borrowings increased slightly Deposit Composition (in thousands) | Deposit Type | June 30, 2024 (Amount) | June 30, 2024 (% of Total) | December 31, 2023 (Amount) | December 31, 2023 (% of Total) | | :---------------------------- | :--------------------- | :------------------------- | :------------------------- | :----------------------------- | | Noninterest-bearing demand | $939,346 | 18.3% | $1,010,614 | 19.4% | | Interest-bearing demand | $711,580 | 13.9% | $713,158 | 13.7% | | Savings and money market | $2,007,256 | 39.1% | $2,084,444 | 40.0% | | Time deposits | $1,475,139 | 28.7% | $1,404,696 | 26.9% | | Total deposits | $5,133,321 | 100.0% | $5,212,912 | 100.0% | - Total deposits decreased by $79.6 million to $5.13 billion at June 30, 2024, primarily due to a reduction in brokered deposits by $180 million in April 2024[161] Borrowings (in thousands) | Borrowing Type | June 30, 2024 | December 31, 2023 | | :---------------------- | :------------ | :---------------- | | Short-term borrowings | $202,000 | $185,000 | | Long-term borrowings | $124,687 | $124,532 | | Total borrowings | $326,687 | $309,532 | - Short-term FHLB borrowings increased to $139.0 million at June 30, 2024, from $107.0 million at December 31, 2023[163] Liquidity and Capital Management The Company maintains a strong liquidity position and capital levels well above regulatory requirements - The Company had approximately $259.0 million of immediate credit capacity with the FHLB and $890.7 million in secured borrowing capacity at the FRB discount window as of June 30, 2024[164] - Shareholders' equity increased by $12.9 million to $467.7 million at June 30, 2024, primarily due to net income, partially offset by an increase in accumulated other comprehensive loss[170] Regulatory Capital Ratios (Company) | Capital Ratio | June 30, 2024 | December 31, 2023 | | :------------------------ | :------------ | :---------------- | | Tier 1 Leverage | 8.61% | 8.18% | | CET1 Capital | 10.03% | 9.43% | | Tier 1 Capital | 10.36% | 9.76% | | Total Risk-Based Capital | 12.65% | 12.13% | - The Company and Bank's capital levels remained 'well-capitalized' under Basel III rules as of June 30, 2024[173] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Discusses market risk management, focusing on interest rate sensitivity for net interest income and EVE - The Company uses rate shock simulations to estimate the impact of instantaneous and sustained parallel shifts in interest rates on net interest income and economic value of equity (EVE)[177] Estimated Change in Net Interest Income (12-month period ending June 30, 2025, in thousands) | Rate Shock Scenario | Estimated Change in Net Interest Income | | :------------------ | :-------------------------------------- | | -100 bp | $(5,472) | | +100 bp | $2,718 | | +200 bp | $5,189 | | +300 bp | $7,750 | Estimated Change in Economic Value of Equity (EVE) (in thousands) | Rate Shock Scenario | June 30, 2024 EVE | Change ($) | Percentage Change | | :------------------ | :---------------- | :--------- | :---------------- | | Pre-Shock Scenario | $675,993 | | | | -100 Basis Points | $662,806 | $(13,187) | -1.95% | | +100 Basis Points | $680,589 | $4,596 | 0.68% | - The static model indicates that net interest income is expected to increase in rising rate scenarios, while the sensitivity to EVE grows more negative in a -100-basis point scenario due to deposit mix shifts[177][180] ITEM 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes in internal controls - The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2024[181] - There were no material changes in the Company's internal control over financial reporting during the quarter ended June 30, 2024[182] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Provides an update on a class action lawsuit regarding repossessed vehicle notices, with a trial scheduled for 2025 - The Company is a party to a class action lawsuit filed on May 16, 2017, regarding non-compliant notices sent to defaulting consumers after vehicle repossessions in New York and Pennsylvania[183] - Four classes were certified (two NY, two PA), with approximately 5,200 members in NY and 300 in PA[183] - A bench trial is scheduled to commence on May 5, 2025[183] - The Company has not accrued a contingent liability as the amount of potential loss cannot be reasonably estimated[183] ITEM 1A. Risk Factors No material changes to previously disclosed risk factors occurred during the quarter - No material changes to previously disclosed risk factors occurred during the quarter ended June 30, 2024[184] ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities Reports on minimal issuer purchases of equity securities during the second quarter of 2024 Issuer Purchases of Equity Securities (Q2 2024) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------- | :------------------------------- | :--------------------------- | | June 1, 2024 – June 30, 2024 | 206 | $17.41 | | Total | 206 | $17.41 | - As of June 30, 2024, 766,447 shares remained available for repurchase under the 2022 Share Repurchase Program[185] ITEM 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the quarter - No directors or officers adopted or terminated any Rule 10b5-1 trading arrangements during Q2 2024[186] ITEM 6. Exhibits Lists all exhibits filed as part of the report, including certifications and XBRL documents - The exhibits include the Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Section 302 and 906 certifications, and Inline XBRL documents[187]