Broadening
horizons.
Building
opportunities.
2 0 2 1 A N N U A L R E P O R T
Financial Institutions, Inc. provides diversified financial services through its subsidiaries Five Star Bank, SDN Insurance Agency, LLC,
Courier Capital, LLC and HNP Capital, LLC.
Five Star Bank provides a wide range of consumer and commercial banking and lending services to individuals, municipalities
and businesses through a network of more than 45 offices throughout Western and Central New York State and a commercial loan
production office in Ellicott City (Baltimore), Maryland. Additional Five Star Bank information is available at www.five-starbank.com.
SDN Insurance Agency provides a broad range of insurance services to personal and business clients.
Courier Capital and HNP Capital provide customized investment management, investment consulting, and retirement plan services
to individuals, businesses, institutions, foundations, and retirement plans.
Financial Institutions, Inc. and its subsidiaries employ more than 600 individuals. The company’s stock is listed on the Nasdaq Global
Select Market under the symbol FISI. Additional information is available at www.fiiwarsaw.com.
CCoorrrppporaattee Prroofififile
01
It is my pleasure to share with you the 2021 Financial
Institutions, Inc. Annual Report.
The following pages detail how your company once again
fulfilled our purpose to make financial lives better in ways
that benefited customers, associates, shareholders,
and the communities we serve. Against the backdrop
of a global pandemic and its ongoing challenges, 2021
performance was strong.
We generated the highest net interest income and pre-
tax pre-provision income in company history. Continued
improvement in the economy, healthy commercial
and consumer indirect loan pipelines, interest and fee
revenue related to Paycheck Protection Program (“PPP”)
loans, the prudent deployment of excess liquidity into
low-risk securities, growth in revenue from our wealth
and insurance subsidiaries, a relatively benign credit
environment, and expense discipline contributed to
record-setting net income of $77.7 million or $4.78
per diluted share.
We also completed two bolt-on insurance acquisitions,
opened two new bank branches in Buffalo, relocated
a third urban branch in Elmira to a new location in an
area undergoing redevelopment, and identified and
made strategic investments for our future. All this was
accomplished during a time when the world navigated
a pandemic and experienced increased social and
geopolitical volatility.
As we managed through a frustrating time of shutdowns
and openings, we remained steadfast in our critical
mission to support customers and communities. We offered
a robust set of products and services designed to meet the
needs of customers and delivered education, advice, and
solutions to help them improve their financial well-being.
We invested in people and resources to address the needs
of the communities we serve, and supported organizations
across our operating footprint through donations, grants,
and community sponsorships. We also provided debt
and equity financing for numerous affordable and special
needs housing projects. I encourage you to read the Five
Star Bank 2021 Community Report, available on the Five
Star Bank and Financial Institutions, Inc. websites, to better
understand these initiatives and many more ways that our
company and our people gave back to their communities.
We were an active participant in the second round of
the PPP program, helping 1,200 businesses obtain $107
million of loans and assisting customers through the
loan forgiveness process. During the first quarter of 2021,
we worked with community partners to provide program
information and assistance to low-income and minority
communities. Many minority businesses either missed out
or felt as though they missed out on much-needed funding
in the first PPP round. In partnership with Rochester-
based community partners, we provided a webinar titled
“Ensuring Access for All,” providing information on the
program and letting businesses know that Five Star Bank
was there to help, no matter how large or small the loan.
We also provided hands-on support at two of our urban
Rochester branches.
In mid-June, Susan Holliday was named chair of our board
of directors. Susan has been on the board since 2002,
most recently serving as vice chair of the board and chair
of the Nominating & Governance Committee. She also
served as past chair of the Management Development
& Compensation Committee. Susan is the CEO of web
application design and development firm Dumbwaiter
Design and, from 1988 to 2016, she was the owner,
Financial Institutions, Inc. 2021 Annual Report
02
• Five new directors have been added to the board over
the past six years.
• The board is more diverse by both gender and ethnicity.
Fifty percent of independent directors represent diverse
groups —three are women and two belong to a racial or
ethnic minority group. Four of our diverse directors hold
key board leadership positions as chair of the board
and Executive Committee and chairs of the Nominating
& Governance, Risk Oversight, and Technology &
Data Committees.
• Board tenure remains balanced, with four independent
members between zero and five years; three members
between six and ten years; and three members with
tenure of more than ten years.
Advancing diversity, equity, and inclusion is an area of
focus for management as well. I am confident that with the
commitment of our executive team and board of directors
and input from our associates, we are forging a strategic
path forward to become a more diverse and equitable
place to work. A passion for progress is at the heart of our
human capital strategy and we have already begun to
make investments in our people that will create career
opportunities while also setting the highest standards for
inclusive leadership.
We are coming up on the two-year mark since the launch
of our internal Diversity and Inclusion Advisory Council.
Through the engagement and ideas of associate
volunteers, we receive healthy feedback, viewpoints, and
recommended actions that advance our mission to create
an inclusive and safe culture for all. This group has initiated
trainings our entire management-level population has
participated in, on topics including Unconscious Bias,
Conflict Without Contempt, and Conversations on Race.
I am incredibly honored to support the Council’s efforts
and proud of our associates for their courage to make
this an even better place to work.
president, and publisher of the Rochester Business Journal.
Her community involvement is extensive, and she has served
on a multitude of non-profit boards in the Rochester and
Finger Lakes Region over the past 30 years.
Susan’s committed service to the board, leadership
of key committees, and history of strong community
support and non-profit board participation position her
well for great success as board chair. She brings strong
integrity, inquisitiveness, willingness to challenge, and a
collaborative approach to the role. I have known Susan
for many years and am honored to partner with her to
lead our company.
I’d like to thank Bob Latella for his dedicated service and
leadership as board chair from 2014 to June 2021. We
benefitted greatly from Bob’s leadership and are grateful
that he remains on our board, providing valuable insights
and mentorship to newer board members.
Mauricio Riveros and Mark Zupan were elected to our
board at last June’s annual meeting of shareholders.
Mauricio and Mark are exceptional additions as they bring
diverse work and life experiences and market knowledge
that will benefit our entire organization.
Our board is committed to diversity and inclusion. Through
thoughtful succession planning and refreshment, the
following levels of diversity and tenure have been achieved:
To Our Shaareholderss, Cussstomers, Assoociateess, Commmunittyy LLeaaders, aand Partnerrs
03
$3,595
$3,679
solution, customer experience, and
Banking as a Service.
Net Income, Earnings
pper Share & Dividends
(($ in Millions, except per share amounts)
Total Loans
($ in Millions)
$3,087
$3,221
Net Income Available to
Common Shareholders
Diluted Earnings Per
Common Share
Cash Dividends Declared
per Common Share
$47.4
$36.9
$2.96
$2.30
$1.00
$1.04
$38.1
$2.39
$0.96
$32.1
$2.13
$0.85
$76.2
$4.78
$1.08
$2,735
$1,259
$18
$582
$1,516
$1,678
$2,048
$2,051
$17
$634
$16
$677
$17
$690
$876
$920
$850
$840
$14
$656
$958
2017
Commercial
2018
2019
Consumer
Other
2020
Residential
Real Estate
2021
Consumer
Indirect
Growing Noninterest Income
($ in Millions)
$34.7
$36.5
$40.4
$43.2
$46.9
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
$
Net income for the year was $77.7
million compared to $38.3 million
in 2020. After preferred dividends,
net income available to common
shareholders was $76.2 million, or
$4.78 per diluted share, compared
to $36.9 million, or $2.30 per diluted
share in 2020. Net income was higher
in 2021 primarily due to growth in
net interest income and noninterest
income and the positive impact of an
$8.3 million benefit for credit losses.
Improvement in the national
unemployment forecast, positive
trends in qualitative factors, lower
specific reserves and lower net
charge-offs resulted in the release
of credit loss reserves and a benefit
for credit losses in 2021. In the prior
year, we recognized a higher than
historical provision for credit losses of
$27.2 million because of uncertainty
regarding the long-term impact of the
COVID-19 pandemic on the economic
environment combined with the impact
of the adoption of the current expected
credit loss standard, or CECL.
Net interest income was $154.7 million
for the year, a $15.7 million increase
from 2020, primarily due to growth in
average interest-earnings assets and
the impact of interest and fee revenue
related to Paycheck Protection
Program (“PPP”) loans.
Noninterest income was $3.7 million
higher, at $46.9 million.
$
• Insurance income was $1.3 million
higher as a result of acquisition
activity and growth in the legacy
SDN insurance business.
• Investment advisory income
increased $2.1 million due to growth
in assets under management,
driven by a combination of market
gains, new customer accounts, and
contributions to existing accounts.
• Income from investments in limited
partnerships was $2.0 million higher
based on the performance of
underlying investments.
• Income from derivative instruments,
net decreased $2.8 million from
the prior year, primarily as a result
of fewer swap transactions with
commercial customers.
Noninterest expense of $112.8 million
was $3.5 million, or 3%, higher
than 2020, driven by increases
in personnel and computer and
data processing expenses. Higher
expense in these categories reflects
investments we are making in people
and systems to support strategic
initiatives including digital banking,
new bank branches, an enhanced
customer relationship management
Our ongoing program of providing
debt and equity financing for
affordable and special needs
housing resulted in federal and
state tax benefits related to historic
and low-income housing tax credit
investments, reducing income tax
expense by $2.6 million in 2021 and
$1.5 million in 2020. Our effective tax
rate for 2021 was 20.1% compared to
16.2% in 2020. The 2021 higher tax
rate was primarily the result of higher
pre-tax earnings.
Pre-tax pre-provision income1 was
$88.9 million, the highest in company
history and an increase of $16.0 million
from the previous year.
Investment securities increased by
$484.1 million during 2021 and totaled
$1.38 billion at December 31. Excess
liquidity has represented a challenge
for the last two years. Throughout
2021 our investment focus remained
consistent as we deployed excess
liquidity into high-quality low-risk
agency mortgage-backed securities.
Incremental performance was driven
by the reallocation of excess Federal
Reserve cash balances into securities
with higher relative yields.
Total loans increased by 2% to
$3.68 billion in 2021, driven by
increases in commercial mortgage
loans and consumer indirect loans
of 13% and 14%, respectively. We
experienced strong demand for
commercial real estate loans in 2021
from known, experienced sponsors
with what we believe are high-quality,
viable projects, driving growth in
commercial mortgage loans. Our
consumer indirect auto portfolio
grew in 2021 as we benefitted from
high auto valuations, good access
to quality credits through our dealer
network of more than 500 franchised
new auto dealerships and strong
credit discipline. This asset class
provided the opportunity to deploy
excess liquidity in a loan category
with short duration, strong credit
1: Non-GAAP measure; refer to GAAP to Non-GAAP reconciliations on page Appendix A.
Financial Institutions, Inc. 2021 Annual Report
04
Total Investment Securities
($ in Millions)
$1,041
$892
$777
$900
$1,384
2017
2018
2019
2020
2021
Common Book Value
& Tangible Common
Book Value1
(per share)
Common Book Value
Tangible Common Book Value1
Total Deposits
($ in Millions)
Transactional Deposits
Time Deposits
$3,210
$852
$3,367
$1,020
$3,556
$1,180
$2,358
$2,347
$2,376
$4,827
$922
$4,278
$885
$22.85
$23.79
$3,905
$3,393
$18.16
$19.01
$30.98
$26.26
$28.12
$26.35
$23.52
$21.66
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
performance and relatively higher
yield characteristics.
Commercial business loans
decreased 20% in 2021 as a result of
the forgiveness or repayment of PPP
loans. Excluding the impact of these
loans, commercial business loans
grew 7%.
The credit profile of our loan portfolio
continued to demonstrate stability
with total net charge-offs of $5.8
million, or 0.16% of total average
loans, compared to $13.8 million, or
0.40% of average loans, in 2020. The
allowance for credit losses moderated
in 2021 after a significant increase in
the prior year due to the adoption of
the CECL standard and pandemic-
related uncertainty. The allowance for
credit losses on loans to total loans
was 1.08% at year-end, down 38 basis
points from December 31, 2020.
Total deposits increased $548.7
million in 2021, driven by growth in all
deposit categories and contributing
to excess liquidity.
Common book value per share
increased 10%, to $30.98 at
December 31, 2021. Tangible common
book value per share1 (“TCBV”) grew
for the 14th consecutive year, from
$23.52 to $26.26 at year-end 2021,
representing an increase of 12%.
Over the four-year period from
year-end 2017 through 2021, TCBV
increased at a compound annual
growth rate of 10%.
Stock Repurchase Program
In November 2020, we announced
a stock repurchase program for up
to 801,879 shares of common stock
or approximately 5% of outstanding
shares. We repurchased 340,688
shares in 2021 for an average price
of $26.44 per share, inclusive of
transaction costs.
We repurchased 461,191 shares in
the first quarter of 2022 for an
average price of $31.99 per share,
completing the program. Our buyback
strategy allowed us to efficiently
deploy capital in a scenario with a
short earn-back period. We remain
focused on deploying capital in an
efficient and optimal fashion.
Dividends
We declared common stock
dividends of $1.08 per share in 2021,
representing an increase of 4%
from the prior year. In early 2022,
our board of directors increased
the dividend by 7%, to $0.29 per
share per quarter, or $1.16 per share
annualized. This was the company’s
twelfth consecutive annual dividend
increase, demonstrating our ongoing
commitment to shareholder return.
Fiinancccial RRRessults aandd CCapitaaal Acctioonns
1:
Non-GAAP measure; r
refer to GAAP
P to Non-GAAP reconciliations on page Appendix A.
05
In February 2021, our Buffalo-based SDN Insurance Agency acquired the assets of Landmark Group. Landmark,
a staple of the Rochester community since 1984, was an independent insurance brokerage firm delivering insurance,
surety and risk management solutions across several business sectors. Landmark’s principals remained with SDN
to lead our Rochester insurance operations and continue their long-term relationships with clients. The Landmark
acquisition expands our insurance business in the important growth markets of Rochester and nine-county Finger
Lakes region.
SDN completed a second bolt-on transaction in early August with the acquisition of North Woods Capital Benefits, a
Buffalo-based employee benefits and human resources advisory firm. This acquisition expands SDN’s employee benefits
business and adds important expertise to the organization. North Woods’ founder and director of client service also joined
SDN to continue their long-term client relationships and build new ones.
We opened two new Five Star Bank branches in the City of Buffalo during a time when many banks are closing branches
in urban markets. Growth in the Buffalo market has been and continues to be an important component of our long-
term strategic plan and we see great opportunity here. The new branches are located in areas undergoing significant
redevelopment and revitalization and we look forward to contributing to the positive momentum in these neighborhoods.
451 Elmwood Avenue — This 2,500 square-foot Five Star Bank branch is located at the corner of Elmwood
and Bryant Street on the first floor of the new Pardee Building at Elmwood Crossing, an adaptive redevelopment
project. The vibrant Elmwood Village neighborhood is a diverse community of locally owned shops and
restaurants, public art, and unique special events.
2222 Seneca Street — This 3,000 square-foot-freestanding Five Star Bank branch is located on a historic
avenue in the heart of Buffalo. We join other businesses in this neighborhood that are building a brighter future
through redevelopment and reinvention.
We also relocated our existing Five Star Bank branch in the City of Elmira in the summer of 2021. The 2,400-
square-foot branch is located on the first floor of a new development included in the NYS Downtown
Revitalization Initiative.
All three branches opened in 2021 are designed to serve as a financial solution centers, with no teller lines and no barriers
between bank associates and customers. They feature a blend of new technology including Interactive Teller Machines
and the comfort of community banking with Certified Personal Bankers. Our new design provides a cost-effective,
lower-square-footage approach to aligning services with shifting customer needs and preferences, including rapid
advancements in financial technology that enable consumers to bank anywhere, anytime.
We are committed to the use of green and energy efficient materials in construction and we sourced materials certified
by Cradle to Cradle, Declare, Forest Stewardship Council, Green Square, and GreenGuard for all three new branches.
Materials with a high percentage of recycled content were used when possible and energy-efficient LED lighting was
used throughout interiors and exteriors. Insulation performance and HVAC system air exchange rates exceed building
code requirements at all new locations.
Financial Institutions, Inc. 2021 Annual Report
06
Bank digitally anywhere,
anytime, any way you want.
for peer-to-peer payments for consumers and small
businesses. CHUCK™ is part of a broader payments
strategy that leverages the power of collaboration to
reach economies of scale in both innovation investment
and operating cost while promoting customer choice,
flexibility and empowerment.
We also entered into an agreement to enable our
customers to transact in Bitcoin seamlessly and securely
inside the Five Star Bank Digital Banking platform. Partners
in this initiative are our digital banking platform provider
Q2 and leading New York State Department of Financial
Services-regulated Bitcoin company NYDIG. We are
pleased to be among the first banks to deliver secure and
seamless Bitcoin services where customers can buy,
sell and hold Bitcoin in their Five Star accounts. We believe
this initiative is a testament to our commitment to evolve
and respond to quickly changing market conditions
and opportunities.
Through legacy and ongoing investments in infrastructure,
talent, technology and partnerships, we created an
“operating system” that enables us to deliver Banking-
as-a-Service (BaaS) capabilities to fintech partners
and wealth management firms looking to offer banking
products and services to their customers. For example,
we teamed up with Autobooks, a Detroit-based digital
payments provider for small businesses, to enable the
use of Five Star Bank’s digital banking platform.
Partnerships such as this provide the opportunity for
additional fee revenue, interest income, and insight into
consumer trends. We are collaborating with partners
on several additional initiatives that will drive our BaaS
line of business and will announce them as they come
to fruition.
We remain focused on the strength and stability of our
company through collaboration and partnership among
our bank, insurance, and investment lines of business
as we embrace innovation, technology and data. We will
leverage the cultural momentum, enhanced capabilities
and experience of our team to embrace industry changes
that represent opportunities for our company and all
stakeholders related to digital transformation that
complements traditional banking.
Five Star Bank, Member FDIC
While the fundamental strategic outcomes of sustained
deposit growth, credit-disciplined loan growth,
diversification of revenue, expense discipline, and
sustainable business practices remain critical and highly
correlated to high performance of a financial institution,
our strategy continues to evolve. During the 2021 planning
cycle, we added a sixth strategic outcome: Exceptional
Digital Experiences enabled by complementary fintech and
digital partnerships.
In recent years, we developed a roadmap to respond
to and capitalize on industry changes. We have made
critical investments in people, processes, and technology.
Following our successful 2020 conversion to Five Star Bank
Digital Banking, we’re now focused on the acceleration of
offerings through this digital banking platform. Our digital
transformation efforts are advancing, and we’ve made
several recent announcements.
Convenience just
got promoted.
Manage company finances.
Make electronic payments for
disbursements, receipts and payroll.
Complete mobile authorizations
on-the-go.
Five Star Bank, Member FDIC
Payments are rapidly rising in importance as the primary
touch point between customers and their banks, forming
the heart of active, primary banking relationships.
Along with other banks in the Alloy Labs consortium,
we announced the launch of CHUCK™, an open network
™
SStraateggiic IInvestmmennts inn Our Futturre
07
Another outcome of our 2021 strategy update was a
refresh of our human capital strategy in response to
the new normal way of working, the great resignation,
and the great reimagination. Long-term growth and
success are linked to our ability to attract, develop, and
retain associates in the context of a diverse and inclusive
workplace where everyone can thrive. Simply put: we
are ensuring we have the right people or access to the
right people, today and tomorrow, who are supported
by an organizational framework that nurtures a strong
and healthy culture.
One of the components of the strategy is the 2022 rollout
of Five Star Fulfilled, or our “new way of working.” Workforce
norms have changed dramatically since the onset of the
pandemic, and we are committed to embracing what
we’ve learned and emerging from the last two years with
a stronger culture. We recognize that working styles are
not one-size-fits-all and adopted a flexible philosophy
that embraces the benefits of both remote and in-office
work. Both styles of work are purposeful and meaningful,
and we are working with all associates to find the right
balance that fits each individual and the Five Star team.
Building on our strong track record of credit-disciplined
loan growth, combined with well-defined strategic
and risk frameworks that guide the evolution of our
company, we are open to leveraging available talent to
expand our commercial platform through the recruitment
of commercial professionals and establishment of loan
production offices in viable markets outside of our
existing footprint.
In the first quarter of 2022, we announced our first such
expansion. John G. Mangan was named senior vice
president, commercial real estate executive and mid-
Atlantic president and he will lead three commercial
real estate relationship managers in the Baltimore and
Washington, D.C. region for Five Star Bank.
Consolidation within the Baltimore and D.C. financial
services sector created an opening for us to capitalize
on opportunities where a community banking approach
provides a competitive advantage. We are taking
advantage of experienced and available talent to expand
to the Baltimore and Washington, D.C. region and I’m very
pleased that John and his team have joined us.
I believe that our resilience, nimbleness, and commitment
to process improvement from lessons learned enabled
us to successfully address unprecedented operating
conditions over the past two years and position us well
for the ongoing delivery of positive short-term results
and long-term value. These are exciting times and I am
incredibly proud of our accomplishments–my thanks and
deep appreciation to all our associates whose efforts
and dedication made them possible.
As a financial institution, our success has and continues
to be dependent on the success of our customers,
strength of our communities, and well-being of our
employees. On behalf of my teammates, our management
team, and the board of directors, I thank you for your
support and investment in Financial Institutions, Inc.
Cordially,y,
Martin K. Birmingham
M rti K Bi
President and Chief Executive Officer
i h
Our Five Star Promise
In March 2022, the Five
Star Promise Purpose
Statement and Core Values
were refreshed to support
corporate strategy and
provide clarity on our culture
and goals. The purpose
statement incorporates prior
elements, presented in a
new and fresh way that
directs us toward our goals.
Our Refreshed Purpose
By keeping the people of Five Star’s well-being at the heart of everything we do,
our team, our customers, and our communities will thrive and realize their dreams.
Our Values – focusing on the: H.E.A.R.T of everything we do. We Are:
Humble: Take genuine interest. Listen. Value diverse perspectives.
Empowered: Develop expertise. Share your knowledge. Take action.
Ambitious: Aim for excellence. Bring others with you. Celebrate our successes.
Resilient: Embrace change. Learn from experiences. Be part of the solution.
Transparent: Do the right thing. Communicate clearly and often. Welcome feedback.
Financial Institutions, Inc. 2021 Annual Report
08
Five Star Bank
James M. Ahrens
Director of Mortgage
Scott D. Bader
Technology Services Director
Adolph T. Barclift
Chief Information Security Officer
Amy M. Barone
Director of Operations
Adam J. Bickel
Business Banking Area Manager
Justin K. Bigham 1, 2
Executive Vice President, Chief
Community Banking Officer
Martin K. Birmingham 1, 2
President and Chief
Executive Officer
Samuel J. Burruano Jr. 1, 2
Executive Vice President,
Chief Legal Officer and
Corporate Secretary
Craig J. Burton
Commercial Real Estate Executive
and Finger Lakes/Southern Tier NY
Regional President
Diane M. Camelio
Director of Retail Relationships
David G. Case
Chief Credit Officer
Jonathan W. Chase
Retail Lending Administrator
Laurie R. Collins 1
Chief Human Resources Officer
Shelly J. Doran
Director of Investor and External
Relations
Sonia M. Dumbleton 2
Principal Accounting Officer
and Controller
Karla J.L. Gadley
Community Development Officer
Michael D. Grover
Director of Financial Planning
and Analysis and Tax
Leonid Gurevich
Deputy Chief Risk Officer
Kathryn Q. Lewis
Chief Compliance Officer
Jillian M. Mangiafesto
Senior Corporate Counsel and
Assistant Corporate Secretary
Laura J. Marlowe
Director of Marketing
Alison K. Miller
Commercial and Industrial
Executive and Central NY
Regional President
W. Jack Plants II 1, 2
Chief Financial Officer
and Treasurer
Randall R. Phillips 1
Chief Risk Officer
Steven D. Przybyl
Director of Total Rewards
and Analytics
Kevin B. Quinn 1
Chief Commercial Banking Officer
Kathleen R. Robbins
Director of Product Management
Abraham Rojo
Director of Digital Banking and
BaaS Solutions
Brenda B. Schell
Internal Audit Director
Sean M. Willett 1, 2
Executive Vice President, Chief
Administrative Officer
Taylor S. Veenema
Director of Corporate Strategy
and Execution
Laurie L. Wisniewski
Director of Corporate Planning
and Facilities
Jennifer L. Yungbluth
Chief Experience Officer
SDN Insurance
Agency, LLC
William E. Gallagher
President
Andrea B. Heffler
Director of Client Services
Courier Capital, LLC
Thomas J. Hanlon
President
Heather L. Wisinski
Senior Director of Operations
HNP Capital, LLC
Rebecca L. Westervelt
Managing Director
Board of Directors
Martin K. Birmingham
President and CEO of Financial
Institutions, Inc. and Five Star Bank
Donald K. Boswell 6, 8
President and CEO Emeritus of
the Western New York Public
Broadcasting Association (WNED-TV
and WBFO-FM)
Dawn H. Burlew 5, 7, 8
Director of Government Affairs &
Business Development, Global
Government Division of Corning
Incorporated
Andrew W. Dorn Jr. 4, 5, 7
Chairman of Coal Ash Recycling, LLC
Robert M. Glaser 3, 4
President of Glaser Consulting, LLC
Samuel M. Gullo 3, 5
Owner and Operator of
Family Furniture
Susan R. Holliday 4
Chair of the Board of Financial
Institutions, Inc. and Five Star Bank;
CEO of Dumbwaiter Design, LLC
Robert N. Latella 4, 6, 8
Of Counsel at Barclay Damon, LLP
Mauricio F. Riveros 8
Chief Operating Officer of The Pike
Companies, LTD.
Kim E. VanGelder 6, 7, 8
Chief Information Officer of Eastman
Kodak Company
Mark A. Zupan, PhD 3, 7
President of Alfred University
1:
Executive Management Committee Member
2: Also a Financial Institutions, Inc. corporate officer
3: Audit Committee; Robert M. Glaser, Chair
4: Executive Committee; Susan R. Holliday, Chair
5: Management Development and Compensation Committee; Andrew W. Dorn Jr., Chair
6: Nominating and Governance Committee; Donald K. Boswell, Chair
7: Risk Oversight Committee; Kim E. VanGelder, Chair
8: Technology and Data Committee; Dawn H. Burlew, Chair
FFive SStar Leaddeershhip
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
Form 10-K
(cid:3) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
For the fiscal year ended
December 31, 2021
OR
Commission file number 000-26481
FINANCIAL INSTITUTIONS, INC.
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
16-0816610
(I.R.S. Employer Identification No.)
220 LIBERTY STREET, WARSAW, NEW YORK
(Address of principal executive offices)
14569
(ZIP Code)
Registrant’s telephone number, including area code:
(585) 786-1100
Securities registered under Section 12(b) of the Exchange Act:
Title of each class
Common stock, par value $0.01 per share
Trading Symbol(s)
FISI
Name of exchange on which registered
Nasdaq Global Select Market
Securities registered under Section 12(g) of the Exchange Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:4) No (cid:5)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:4) No (cid:5)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (cid:5) No (cid:4)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes (cid:5) No (cid:4)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(cid:4)
(cid:4)
Accelerated filer
Smaller reporting company
Emerging growth company
(cid:5)
(cid:4)
(cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act (cid:4)
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued
its audit report. (cid:5)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes (cid:4) No (cid:5)
The aggregate market value of the registrant’s common stock, par value $0.01 per share, held by non-affiliates of the registrant, as computed by reference to
the June 30, 2021 closing price reported by Nasdaq, was approximately $466,346,000.
As of February 28, 2022, there were outstanding, exclusive of treasury shares, 15,526,641 shares of the registrant’s common stock.
Portions of the registrant’s proxy statement for the 2022 Annual Meeting of Shareholders are incorporated by reference in Part III of this Annual Report on
Form 10-K.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
PAGE
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
[Reserved]
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
4
19
31
32
33
33
34
35
36
62
65
137
137
137
137
138
138
138
138
138
140
141
142
FORWARD LOOKING INFORMATION
PART I
Statements and financial analysis contained in this Annual Report on Form 10-K that are based on other than historical data are forward-
looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide
current expectations or forecasts of future events and include, among others:
(cid:3)
(cid:3)
statements with respect to the beliefs, plans, objectives, goals, guidelines, expectations, anticipations, and future financial
condition, results of operations and performance of Financial Institutions, Inc. (the “Parent” or “FII”) and its subsidiaries
(collectively, the “Company,” “we,” “our” or “us”); and
statements preceded by, followed by or that include the words “may,” “could,” “should,” “would,” “believe,” “anticipate,”
“estimate,” “expect,” “intend,” “plan,” “projects” or similar expressions.
These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing
management’s views as of any subsequent date. Forward-looking statements involve significant risks and uncertainties and actual results
may differ materially from those presented, either expressed or implied, in this Annual Report on Form 10-K, including, but not limited
to, those presented in the Management’s Discussion and Analysis of Financial Condition and Results of Operations. Factors that might
cause such material differences include, but are not limited to:
(cid:3) Governmental and individual efforts to address the COVID-19 pandemic have introduced volatility into the U.S. and global
economy which has and may continue to adversely affect our business, financial condition and results of operations;
Changes in our operations in response to the COVID-19 pandemic have exposed us to additional risks;
(cid:3)
(cid:3) Mandatory COVID-19 vaccination of employees could impact our workforce and have a material adverse effect on our business
and results of operations;
If we experience greater credit losses than anticipated, earnings may be adversely impacted;
(cid:3)
(cid:3) Geographic concentration may unfavorably impact our operations;
(cid:3) Our commercial business and mortgage loans increase our exposure to credit risks;
(cid:3) Our indirect and consumer lending involves risk elements in addition to normal credit risk;
(cid:3)
(cid:3) We accept deposits that do not have a fixed term, and which may be withdrawn by the customer at any time for any reason;
(cid:3) We are subject to environmental liability risk associated with our lending activities;
(cid:3) We operate in a highly competitive industry and market area;
(cid:3)
Lack of seasoning in portions of our loan portfolio could increase risk of credit defaults in the future;
Changes to and replacement of the LIBOR Benchmark Interest Rate may adversely affect our business, financial condition,
and results of operations;
Legal and regulatory proceedings and related matters, such as the action brought by a class of consumers against us as described
in Part I, Item 3, “Legal Proceedings,” could adversely affect us and the banking industry in general;
(cid:3)
(cid:3) Any future FDIC insurance premium increases may adversely affect our earnings;
(cid:3) We are highly regulated, and any adverse regulatory action may result in additional costs, loss of business opportunities, and
reputational damage;
The policies of the Federal Reserve have a significant impact on our earnings;
(cid:3)
(cid:3) Our insurance brokerage subsidiary is subject to risk related to the insurance industry;
(cid:3) Our investment advisory and wealth management operations are subject to risk related to the regulation of the financial services
industry and market volatility;
(cid:3) We make certain assumptions and estimates in preparing our financial statements that may prove to be incorrect, which could
significantly impact our results of operations, cash flows and financial condition, and we are subject to new or changing
accounting rules and interpretations, and the failure by us to correctly interpret or apply these evolving rules and interpretations
could have a material adverse effect;
The value of our goodwill and other intangible assets may decline in the future;
(cid:3)
(cid:3) We may be unable to successfully implement our growth strategies, including the integration and successful management of
newly-acquired businesses;
(cid:3) Acquisitions may disrupt our business and dilute shareholder value;
(cid:3) Our tax strategies and the value of our deferred tax assets and liabilities could adversely affect our operating results and
regulatory capital ratios;
Liquidity is essential to our businesses;
(cid:3)
(cid:3) We rely on dividends from our subsidiaries for most of our revenue;
(cid:3)
If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses;
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(cid:3) We face competition in staying current with technological changes and banking alternatives to compete and meet customer
demands;
(cid:3) We rely on other companies to provide key components of our business infrastructure;
(cid:3) A breach in security of our or third party information systems, including the occurrence of a cyber incident or a deficiency in
cybersecurity, or a failure by us to comply with New York State cybersecurity regulations, may subject us to liability, result in
a loss of customer business or damage our brand image;
(cid:3) We are subject to interest rate risk, and a rising rate environment may reduce our income and result in higher defaults on our
loans, whereas a falling rate environment may result in earlier loan prepayments than we expect, which may reduce our income;
The soundness of other financial institutions could adversely affect us;
(cid:3)
(cid:3) We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all;
(cid:3) We may not pay or may reduce the dividends on our common stock;
(cid:3) 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;
(cid:3) Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect;
The market price of our common stock may fluctuate significantly in response to a number of factors;
(cid:3)
(cid:3) We may not be able to attract and retain skilled people;
(cid:3) We use financial models for business planning purposes that may not adequately predict future results;
(cid:3) We depend on the accuracy and completeness of information about or from customers and counterparties;
(cid:3) Our business may be adversely affected by conditions in the financial markets and economic conditions generally; and
(cid:3)
Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other external events
could significantly impact our business.
We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advise
readers that various factors, including those described above, could affect our financial performance and could cause our actual results
or circumstances for future periods to differ materially from those anticipated or projected. See also Item 1A, Risk Factors, of this
Annual Report on Form 10-K for further information. Except as required by law, we do not undertake, and specifically disclaim any
obligation to publicly release any revisions to any forward-looking statements to reflect the occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
ITEM 1. BUSINESS
GENERAL
The Parent is a financial holding company organized in 1931 under the laws of New York State (“New York” or “NYS”). The principal
office of the Parent is located at 220 Liberty Street, Warsaw, New York 14569 and its telephone number is (585) 786-1100. The Parent
was incorporated on September 15, 1931, but the continuity of the Company’s banking business is traced to the organization of the
National Bank of Geneva on March 28, 1817. Except as the context otherwise requires, the Parent and its direct and indirect subsidiaries
are collectively referred to in this report as the “Company.” Five Star Bank is referred to as “FSB” or “the Bank,” SDN Insurance
Agency, LLC is referred to as “SDN,” Courier Capital, LLC is referred to as “Courier Capital,” HNP Capital, LLC is referred to as
“HNP Capital” and Corn Hill Innovation Labs, LLC is referred to as “CHIL.” The consolidated financial statements include the accounts
of the Parent, the Bank, SDN, Courier Capital, HNP Capital and CHIL. The Parent’s common stock is traded on the Nasdaq Global
Select Market under the ticker symbol “FISI.”
- 4 -
At December 31, 2021, the Company had consolidated total assets of $5.52 billion, deposits of $4.83 billion and shareholders’ equity
of $505.1 million.
The Parent’s primary business is the operation of its subsidiaries. It does not engage in any other substantial business activities. The
Parent’s five direct wholly-owned subsidiaries are: (1) the Bank, which provides a full range of banking services to consumer,
commercial and municipal customers in Western and Central New York; (2) SDN, which sells various premium-based insurance policies
on a commission basis to commercial and consumer customers; (3) Courier Capital and (4) HNP Capital, which both provide customized
investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses, institutions,
foundations and retirement plans; and (5) CHIL, which oversees the Company's Banking as a Service and Fintech relationships. At
December 31, 2021, the Bank represented 99.3%, SDN represented 0.3%, Courier Capital and HNP Capital combined represented 0.4%
and CHIL represented 0.0% of the consolidated assets of the Company.
Five Star Bank
The Bank is a New York-chartered bank that has its headquarters at 55 North Main Street, Warsaw, NY, and 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 counties.
At December 31, 2021, the Bank had total assets of $5.48 billion, investment securities of $1.38 billion, net loans of $3.64 billion,
deposits of $4.85 billion and shareholders’ equity of $521.4 million. The Bank offers deposit products, which include checking and
NOW accounts, savings accounts, and certificates of deposit, as its principal source of funding. The Bank’s deposits are insured up to
the maximum permitted by the Bank Insurance Fund (the “Insurance Fund”) of the Federal Deposit Insurance Corporation (“FDIC”).
The Bank offers a variety of loan products to its customers, including commercial and consumer loans.
SDN Insurance Agency, LLC
SDN is a full-service insurance agency founded in 1923 and headquartered in Amherst, NY. SDN offers personal, commercial and
financial services products. For the year ended December 31, 2021, SDN had total revenue of $5.7 million. During 2021, SDN completed
the acquisition of assets of Landmark Group, an independent insurance brokerage firm, on February 1, 2021 and North Woods Capital
Benefits LLC, an employee benefits and human resources advisory firm, on August 2, 2021.
Most lines of personal insurance are provided, including automobile, homeowners, boat, recreational vehicle, landlord, and umbrella
coverage. Commercial insurance products are also provided, consisting of property, liability, automobile, inland marine, workers
compensation, bonds, crop and umbrella insurance. SDN also provides the following financial services products: life and disability
insurance, Medicare supplements, long-term care, annuities, mutual funds, retirement programs and New York State disability.
Courier Capital, LLC
Courier Capital is an SEC-registered investment advisory and wealth management firm founded in 1967 and based in Western New
York, with offices in Buffalo and Jamestown. With $2.19 billion in assets under management as of December 31, 2021, 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, 2021, Courier Capital had total revenue of $6.4 million.
HNP Capital, LLC
HNP Capital is an SEC-registered investment advisory and wealth management firm founded in 2009 and based in Western New York,
with offices in Rochester, New York. With $819.4 million in assets under management as of December 31, 2021, HNP Capital offers
customized investment advice, wealth management, investment consulting and retirement plan services to individuals, businesses and
institutions. For the year ended December 31, 2021, HNP Capital had total revenue of $4.2 million.
Corn Hill Innovation Labs, LLC
CHIL was initially established in 2021 to manage a joint venture with Alloy Labs Alliance, a group of innovative community banks, to
launch CHUCK, an open network for peer-to-peer payments for consumers and small businesses. CHIL's scope has since expanded to
oversee the Company's Banking as a Service and Fintech relationships. CHIL is based in Western New York, with its main office in
Rochester, New York.
Five Star REIT, Inc. Five Star REIT, Inc. (“Five Star REIT”), a wholly-owned subsidiary of the Bank, operates as a real estate
investment trust that holds residential mortgages and commercial real estate loans. Five Star REIT provides additional flexibility and
planning opportunities for the business of the Bank.
- 5 -
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 local communities
surrounding our primary service area. We believe this focus allows us to be more responsive to our customers’ needs and provide a high
level of personal service that differentiates us from larger competitors, resulting in long-standing and broad-based banking relationships.
Our core customers are primarily small- to medium-sized businesses, individuals and community organizations who prefer to build
banking, insurance and wealth management relationships with a community bank that offers high quality, competitively-priced products
and services with personalized service. Because of our identity and origin as a locally operated bank, we believe that our level of personal
service provides a competitive advantage over larger banks, which tend to consolidate decision-making authority outside local
communities.
A key aspect of our current business strategy is to foster a community-oriented culture where our customers and employees establish
long-standing and mutually beneficial relationships. We believe that we are well-positioned to be a strong competitor within our market
area because of our focus on community banking needs and customer service, our comprehensive suite of deposit, loan, insurance and
wealth management products typically found at larger banks, our highly experienced management team and our strategically located
banking centers. We have also broadened our service offerings to include financial advice and insurance solutions along with traditional
banking needs.
We have evolved to meet changing customer needs by opening what we refer to as financial solution center branches. These financial
solution centers have a smaller footprint than our traditional branches, focus on technology to provide solutions that fit our customer
preferences for transacting business with us, and these branches are staffed by certified personal bankers who are trained to meet a broad
array of customer needs. In recent years, we have opened four financial solution centers in the Rochester and Buffalo markets, and in
February 2020, the Federal Reserve Bank of New York and the New York State Department of Financial Services approved our
application to open two additional financial solution centers in Buffalo that opened in 2021. In addition, we are focused on continued
expansion of product delivery channels and are investing in our digital banking platform to allow for greater flexibility in the customer
experience. We believe that the foregoing factors all help to grow our core deposits, which supports a central element of our business
strategy - the growth of a diversified and high-quality loan portfolio.
Acquisition Strategy
We will continue to explore market expansion opportunities that complement current market areas as opportunities arise. Our primary
focus will be on increasing market share within existing markets, while taking advantage of potential growth opportunities within our
insurance and wealth management lines of business by acquiring new businesses that can be added to existing operations. We believe
our capital position remains strong enough to support an active merger and acquisition strategy, and expansion of our core financial
service businesses of banking, insurance and wealth management. Consequently, we continue to explore acquisition opportunities in
these activities. In evaluating acquisition opportunities, we will balance the potential for earnings accretion with maintaining adequate
capital levels, which could result in our common stock being the predominant form of consideration and/or the need for us to raise
capital.
Conversations with potential strategic partners occur on a regular basis. The evaluation of any potential opportunity will favor a
transaction that complements our core competencies and strategic intent, with a lesser emphasis being placed on geographic location or
size. Additionally, we remain committed to maintaining a diversified revenue stream. Our senior management team has experience in
acquisitions and post-acquisition integration of operations and is prepared to act promptly should a potential opportunity arise but will
remain disciplined with its approach. We believe this experience positions us to successfully acquire and integrate additional financial
services and banking businesses.
HUMAN CAPITAL RESOURCES STRATEGY
In order to continue to deliver on our mission of financial inclusion for all, it is crucial that we attract and retain talent who desire to
enable financial equality through delivery of capable solutions, thoughtful innovation and equitable consumer options in the markets
that we serve. 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, 2021, we had 625 employees situated across the United States. This represents an increase of 12 employees or 2%
from December 31, 2020.
- 6 -
As of December 31, 2021, approximately 65% of our current workforce is female, 35% male, and our average tenure is 6.56 years, a
decrease of 16% from an average tenure of 7.77 years as of December 31, 2020.
Total Rewards
As part of our compensation philosophy, we believe that we must offer and maintain market competitive total rewards programs for our
employees in order to attract and retain superior talent. 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.
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 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. In response to the COVID-19 pandemic, we implemented significant operating environment changes
that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with
government regulations. This includes supporting a majority of our employees to work from home or remotely, while implementing
additional safety measures for employees continuing critical on-site work. Many employees continue to work from home as we
transition to a more flexible work environment.
Talent
A core tenet of our talent system is to both develop talent from within and supplement with external hires. This approach has yielded
loyalty and commitment among our employees which in turn grows our business, our products, and our customers, while also adding
new talent, skillsets and ideas to support a continuous improvement mindset and our goals of a diverse and inclusive workforce.
We have conducted intentional, strategic hiring in 2021 to supplement the organization with new skill sets and perspectives. Our talent
acquisition team uses internal and external resources to recruit highly skilled and talented workers, and additionally we incent employee
referrals for open positions.
Our performance management framework positions our leaders as coaches who continuously develop and grow talent through ongoing
performance and development discussions, formal talent and development assessments, goal setting and feedback and performance-
based compensation programs.
Diversity and Inclusion
We strive toward having a powerful and diverse team of employees, knowing we are better together with our combined wisdom and
intellect. With a commitment to equality, inclusion and workplace diversity, we focus on understanding, accepting, and valuing the
differences between people. To accomplish this, we established a Diversity & Inclusion Advisory Council in 2020 made up of 18
employee representatives throughout our operating footprint. The Council meets regularly to provide feedback and ideas that guide our
DEI strategy. We have begun a series of DEI-focused trainings to raise awareness of unconscious bias and equip leaders to build
inclusive team experiences. We continued our commitment to equal employment opportunity through a robust affirmative action plan
which includes annual compensation analyses and ongoing reviews of our selection and hiring practices alongside a continued focus on
building and maintaining a diverse workforce.
MARKET AREAS AND COMPETITION
We provide a wide range of banking and financial services to individuals, municipalities and businesses through a network of over 45
offices and an extensive ATM network throughout Western and Central New York. The region includes the counties of Allegany,
Cattaraugus, Cayuga, Chautauqua, Chemung, Erie, Genesee, Livingston, Monroe, Ontario, Orleans, Schuyler, Seneca, Steuben, Wayne,
Wyoming and Yates counties. Our banking activities, though concentrated in the communities where we maintain branches, also extend
into neighboring counties. In addition, our consumer indirect lending presence includes the Capital District of New York and Northern
and Central Pennsylvania.
Our market area is economically diversified in that we serve both rural markets and the larger markets in and around Rochester and
Buffalo. Rochester and Buffalo are the two largest metropolitan areas in New York outside of New York City, with a combined
population of over two million people. We anticipate continuing to increase our presence in and around these metropolitan statistical
- 7 -
areas and complementary market areas in the coming years. For example, we opened two additional financial solution centers in Buffalo
in 2021.
We face significant competition in both making loans and attracting deposits, as Western and Central New York have a high density of
financial institutions. Our competition for loans comes principally from commercial banks, savings banks, savings and loan associations,
mortgage banking companies, credit unions, and other financial services companies. Our most direct competition for deposits has
historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from non-
traditional fintech firms and non-depository competitors such as the mutual fund industry, securities and brokerage firms and insurance
companies. We generally compete with other financial service providers on factors such as level of customer service, responsiveness to
customer needs, availability and pricing of products, and geographic location. Our industry frequently experiences merger activity,
which affects competition by eliminating some institutions while potentially strengthening the franchises of others.
The following table presents the Bank’s market share percentage for total deposits as of June 30, 2021, in each county where we have
operations. 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, 2021 and updates the information for
any bank mergers and acquisitions completed subsequent to the reporting date.
County
Allegany
Cattaraugus
Cayuga
Chemung
Erie
Genesee
Livingston
Monroe
Ontario
Orleans
Seneca
Steuben
Wyoming
Yates
Market
Share
7.8%
24.0%
6.9%
13.9%
0.4%
18.6%
32.6%
2.2%
13.1%
23.7%
26.2%
32.2%
66.2%
32.7%
Market
Rank
Number of
Branches (1)
2
2
6
3
11
2
1
8
2
2
1
2
1
1
1
4
1
2
6
2
5
8
4
2
2
5
4
2
(1) Number of branches current as of December 31, 2021.
INVESTMENT ACTIVITIES
Our investment policy is contained within our overall Asset-Liability Management and Investment Policy. This policy dictates that
investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets,
need for collateral and desired risk parameters. In pursuing these objectives, we consider the ability of an investment to provide earnings
consistent with factors related to quality, maturity, marketability, pledgeable nature and risk diversification. Our Chief Financial Officer
and Treasurer, guided by our Asset-Liability Committee (“ALCO”), is responsible for investment portfolio decisions within the
established policies.
Our investment securities strategy is focused on providing liquidity to meet loan demand and redeeming liabilities, meeting pledging
requirements, managing credit risks, managing overall interest rate risks and maximizing portfolio yield. Our current policy generally
limits security purchases to the following:
(cid:3) U.S. treasury securities;
(cid:3) 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);
(cid:3) 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;
(cid:3)
(cid:3)
(cid:3)
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Equity securities at the holding company level;
(cid:3)
(cid:3) Derivative instruments; and
(cid:3)
Limited partnership investments.
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.
Newly originated and refinanced fixed rate residential mortgage loans are either retained in our portfolio or sold to the secondary market
with servicing rights retained.
We continually evaluate and update our lending policy. The key elements of our lending philosophy include the following:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
To ensure consistent underwriting, employees must share a common view of the risks inherent in lending activities as well as
the standards to be applied in underwriting and managing credit risk;
Pricing of credit products should be risk-based;
The loan portfolio must be diversified to limit the potential impact of negative events; and
Careful, timely exposure monitoring through dynamic use of our risk rating system is required to provide early warning and
assure proactive management of potential problems.
Commercial Business and Commercial Mortgage Lending
We primarily originate commercial business loans in our market areas and underwrite them based on the borrower’s ability to service
the loan from operating income. We offer a broad range of commercial lending products, including term loans and lines of credit. Short
and medium-term commercial loans, primarily collateralized, are made available to businesses for working capital (including inventory
and receivables), business expansion (including acquisition of real estate, expansion and improvements) and the purchase of equipment.
We offer commercial business loans to customers in the agricultural industry for short-term crop production, farm equipment and
livestock financing. 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, 2021, $229.0 million, or
36%, of our aggregate commercial business loan portfolio were at fixed rates, while $409.3 million, or 64%, were at variable rates.
We also offer commercial mortgage loans to finance the purchase of real property, which generally consists of real estate with completed
structures. Commercial mortgage loans are secured by first liens on the real estate and are typically amortized over a 10 to 20-year
period. The underwriting analysis includes credit verification, appraisals and a review of the borrower’s financial condition and
repayment capacity. As of December 31, 2021, $659.6 million, or 47%, of the loans in our aggregate commercial mortgage portfolio
were at fixed rates, while $753.2 million, or 53%, were at variable rates.
We utilize government loan guarantee programs where available and appropriate.
Government Guarantee Programs
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed by Congress and signed into law on March
27, 2020. The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the SBA’s 7(a) loan program and the
Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. As of December 31, 2021, we had PPP loans
with an aggregate principal balance of $57.5 million that were covered by guarantees under this program.
We participate in other government loan guarantee programs offered by the SBA, U.S. Department of Agriculture, Rural Economic and
Community Development and Farm Service Agency, among others. As of December 31, 2021, we had loans with an aggregate principal
balance of $30.1 million that were covered by guarantees under these programs. The guarantees typically only cover a certain percentage
of these loans. By participating in these programs, we are able to broaden our base of borrowers while reducing credit risk.
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Residential Real Estate Lending
We originate fixed and variable rate one-to-four family residential mortgages collateralized by owner-occupied properties located in our
market areas. We offer a variety of real estate loan products, including home improvement loans, closed-end home equity loans, and
home equity lines of credit, which are generally amortized over periods of up to 30 years. Loans collateralized by one-to-four family
residential real estate generally have been originated in amounts of no more than 80% of appraised value or have mortgage insurance.
Mortgage title insurance and hazard insurance are normally required. We sell certain one-to-four family residential mortgages to the
secondary mortgage market and typically retain the right to service the mortgages. 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, 2021, our residential mortgage servicing portfolio totaled $272.7
million, the majority of which has been sold to the FHLMC. As of December 31, 2021, our residential real estate loan portfolio totaled
$577.3 million, or 16% of our total loan portfolio. As of December 31, 2021, our residential real estate lines portfolio totaled $78.5
million, or 2% of our total loan portfolio. As of December 31, 2021, $528.1 million, or 91%, of the loans in our residential real estate
loan portfolio were at fixed rates, while $49.2 million, or 9%, were at variable rates. The residential real estate lines portfolio primarily
consists of variable rate lines. Approximately 93% of the loans and lines in our residential real estate portfolios were in first lien positions
at December 31, 2021. We do not engage in sub-prime or other high-risk residential mortgage lending as a line-of-business.
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. At December 31, 2021, outstanding consumer loan balances were concentrated in indirect
automobile loans.
We originate indirect consumer loans for a mix of new and used vehicles through franchised new car dealers. The consumer indirect
loan portfolio is primarily comprised of loans with terms that typically range from 36 to 84 months. We have developed relationships
with franchised new car dealers in Western, Central and the Capital District of New York, and Northern and Central Pennsylvania. As
of December 31, 2021, our consumer indirect portfolio totaled $958.0 million, or 26% of our total loan portfolio. The consumer indirect
loan portfolio primarily consists of fixed rate loans with relatively short durations.
We also originate, independently of the indirect loans described above, consumer automobile loans, recreational vehicle loans, boat
loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically
range from 12 to 60 months and vary based upon the nature of the collateral and the size of loan. A portion of the consumer lending
program is underwritten on a secured basis using the customer’s financed automobile, mobile home, boat or recreational vehicle as
collateral. The other loans in our consumer portfolio totaled $14.5 million as of December 31, 2021, all of which were fixed rate loans.
Credit Administration
Our loan policy establishes standardized underwriting guidelines, as well as the loan approval process and the committee structures
necessary to facilitate and ensure the highest possible loan quality decision-making in a timely and businesslike manner. 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.
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;
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) Develop efforts to serve minority and other traditionally underserved communities; and
(cid:3)
Comply with all relevant laws and regulations.
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.
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We assign risk ratings to loans in the commercial business and commercial mortgage portfolios. We use those risk ratings to:
Profile the risk and exposure in the loan portfolio and identify developing trends and relative levels of risk;
Identify deteriorating credits;
Reflect the probability that a given customer may default on its obligations; and
(cid:3)
(cid:3)
(cid:3)
(cid:3) Assist with risk-based pricing.
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. Delinquent loan reports are
monitored by credit administration to identify adverse levels and trends. Loans, including loans individually evaluated for impairment,
are generally classified as non-accruing if they are past due as to maturity or payment of principal or interest for a period of more than
90 days, unless such loans are well-collateralized and in the process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as non-accruing if repayment in full of principal and/or interest is uncertain.
Allowance for Credit Losses
The allowance for credit losses is established through charges to earnings in the form of a provision for credit losses. 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;
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;
(cid:3)
(cid:3)
(cid:3) Historical net charge-off experience by segment;
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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(cid:3) National and local economic trends and conditions excluding the loss driver;
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Regulatory environment;
Portfolio administration;
Potential funding of unfunded commitments;
Evaluation of held to maturity investments; and
Evaluation of deferred interest receivable.
Our methodology for estimating the allowance for credit losses includes the following:
1. Collateral dependent commercial business and commercial mortgage loans, as well as, non-collateral dependent criticized loans
of two-million dollars and greater are typically reviewed individually and assigned a specific loss allowance, if considered
necessary, in accordance with U.S. generally accepted accounting principles (“GAAP”). In addition, reflective of the
heightened risk resulting from long-term deferrals afforded under the CARES Act of certain commercial business and
commercial mortgage loans and individual evaluation was performed on certain of the most at risk longer term deferrals and a
specific loss allowance was placed on them. Collectively, this is referred to as the Individually Evaluated component of the
allowance for credit losses estimate.
2. 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. Each segment, or pool, is quantitatively analyzed using a discounted cash flow approach over the
life of the loan. The pooled loans estimate is based upon periodic review of the collectability of the loans quantitatively
correlating historical
loan experience with reasonable and supportable forecasts using forward looking information.
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.
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3. The Company’s held to maturity (“HTM”) debt securities are also required to utilize the current expected credit losses approach
to estimate expected credit losses. The Company’s HTM debt securities included securities that are issued by U.S. government
or U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government,
are widely recognized as “risk free,” and have a long history of zero credit loss. The Company also carries a portfolio of HTM
municipal bonds. The Company measures its allowance for credit losses on HTM debt securities on a collective basis by major
security type. The estimate is based on historical credit losses, if any, adjusted for current conditions and reasonable and
supportable forecasts. The Company considers the nature of the collateral, potential future changes in collateral values and
available loss information.
4. The Company had made the election with the adoption of ASU 2016-13 of not measuring an allowance for credit losses for
accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a
timely manner, as described above.
5. The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet
commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not
recognized for commitments unconditionally cancellable by the Company. 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 fundings, under each segment, and applying the expected loss rates. Expected future fundings are based on historical
averages of funding rates (i.e., the likelihood of draws taken). To estimate future fundings on unfunded balances, current
funding rates are compared to historical funding rates.
Management presents a quarterly review of the adequacy of the allowance for credit losses to the Audit Committee of our Board of
Directors based on the methodology described above. 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.
Deposits
We maintain a full range of deposit products and accounts to meet the needs of the residents and businesses in our primary service area.
Products include an array of checking and savings account programs for individuals and businesses, including money market accounts,
certificates of deposit, sweep investment capabilities as well as Individual Retirement Accounts and other qualified plan accounts. We
rely primarily on competitive pricing of our deposit products, customer service and long-standing relationships with customers to attract
and retain these deposits and seek to make our services convenient to the community by offering a choice of several delivery systems
and channels, including telephone, mail, online, automated teller machines (“ATMs”), debit cards, point-of-sale transactions, automated
clearing house transactions (“ACH”), remote deposit, and mobile banking via telephone or wireless devices. We also take advantage of
the use of technology by offering business customers banking access via the Internet and various advanced cash management systems.
We also participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits exceeding
the maximum insurable amount. Through these programs, deposits in excess of the maximum insurable amount are placed with multiple
participating financial institutions. Reciprocal deposits totaled $771.4 million at December 31, 2021.
Borrowings
We have access to a variety of borrowing sources and use both short-term and long-term borrowings to support our asset base.
Borrowings from time-to-time include federal funds purchased, securities sold under agreements to repurchase, FHLB advances and
borrowings from the discount window of the FRB, as defined below.
Other sources of funds include scheduled amortization and prepayments of principal from loans and mortgage-backed securities,
maturities and calls of investment securities and funds provided by operations.
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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. These filings may be viewed by accessing the SEC Filings subsection of the Financials section of our website
(www.fiiwarsaw.com). Information available on our website is not a part of, and is not incorporated into, this Annual Report on Form
10-K.
All of the reports we file with the SEC, including this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as any amendments thereto may be accessed at www.sec.gov.
SUPERVISION AND REGULATION
We are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for the protection
of depositors, federal deposit insurance funds and the banking system as a whole and not for the protection of shareholders and creditors.
Elements of the laws and regulations applicable to the Company and material to our operations are described below. The description is
qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Also, such statutes,
regulations and policies are continually under review by Congress, state legislatures, and federal and state regulatory agencies. A change
in statutes, regulations or regulatory policies applicable to the Company could have a material effect on the business, financial condition
and results of operations of the Company.
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”). 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, a financial holding company
must serve as a source of strength for its subsidiary banks. Under this policy, the FRB may require, and has required in the past, a holding
company to contribute additional capital to an undercapitalized subsidiary bank. The BHC Act provides that a financial holding company
must obtain FRB approval before:
(cid:3) Acquiring, directly or indirectly, ownership or control of any voting shares of another bank, financial holding company or bank
holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or
controls the majority of such shares);
(cid:3) Acquiring all or substantially all of the assets of another bank, financial holding company or bank holding company, or
(cid:3) Merging or consolidating with another financial holding company or bank holding company.
The BHC Act generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of
the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing services for its subsidiaries. However, the Gramm-Leach-
Bliley Act amended portions of the BHC Act to authorize financial holding companies, such as us, to directly or through non-bank
subsidiaries engage in securities, insurance and other activities that are financial in nature or incidental to a financial activity. In order
to undertake and maintain these activities, a financial holding company must certify that all of the depository institutions controlled by
the company are well capitalized and well managed.
The Dodd-Frank Act, Economic Growth Act, and Volcker Rule. The Dodd-Frank Act significantly changed the regulation of
financial institutions, such as community banks, thrifts, and small bank and thrift holding companies, and the financial services industry.
Although it was enacted in 2010, certain provisions of the Dodd-Frank Act have yet to be fully implemented and may be impacted by
future legislation, rulemaking or executive orders. Our management continues to monitor the ongoing implementation of the Dodd-
Frank Act and as new regulations are issued, will assess their effect on our business, financial condition and results of operations.
In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“Economic Growth Act”) was enacted and
impacted several of the provisions of the Dodd-Frank Act. The law provided certain regulatory relief to community banks, like us, with
less than $10 billion in total consolidated assets. This relief includes an exemption from the Volcker Rule, as discussed below.
The Dodd-Frank Act prohibits banks and their affiliates from engaging in proprietary trading and from investing and sponsoring hedge
funds and private equity funds. The statutory provision implementing these restrictions is commonly called the “Volcker Rule.” The
Economic Growth Act exempts banks with less than $10 billion in total consolidated assets that does not engage in any covered activities
other than trading in certain government, agency, state or municipal obligations, from any significant compliance obligations under the
Volcker Rule. Because the Bank falls within the category of exempted banks, the Volcker Rule will not have a material effect on our
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business, financial condition and results of operations. We cannot predict whether we may become subject to the Volcker Rule, or a
similar rule, following additional legislative or regulatory action concerning community banks.
Depository Institution Regulation. The Bank is subject to regulation by the FDIC. This regulatory structure includes:
(cid:3)
(cid:3)
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(cid:3)
Real estate lending standards, which provide guidelines concerning loan-to-value ratios for various types of real estate loans;
Risk-based capital rules, including accounting for interest rate risk, concentration of credit risk and the risks posed by non-
traditional activities;
Rules requiring depository institutions to develop and implement internal procedures to evaluate and control credit and
settlement exposure to their correspondent banks;
Rules restricting types and amounts of equity investments; and
Rules addressing various safety and soundness issues, including operations and managerial standards, standards for asset
quality, earnings and compensation standards.
Capital Requirements. The Company and the Bank are each required to comply with applicable capital adequacy standards established
by the Federal Reserve. 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.
The Basel III Rules, among other things, (i) introduce a new capital measure called CET1, which consists primarily of retained earnings
and common stock, (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments, such as preferred stock
and certain convertible securities, meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most
deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the
scope of the deductions/adjustments to capital as compared to historical regulations.
Under the Basel III Rules, the current minimum capital ratios, including an additional capital conservation buffer applicable to the
Company and the Bank, are:
(cid:3)
(cid:3)
(cid:3)
7.0% CET1 to risk-weighted assets;
8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and
10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.
Banking institutions that do not hold capital above the required minimum levels, including the capital conservation buffer, will face
constraints on paying dividends and compensation based on the amount of the shortfall.
The Basel III Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement
that mortgage-servicing rights (“MSRs”), certain deferred tax assets and significant investments in non-consolidated financial entities
be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15%
of CET1.
The Basel III Rules prescribe a standardized approach for risk weightings for a variety of asset classes that, depending on the nature of
the assets, generally ranges from 0% for U.S. government and agency securities, to 600% for certain equity exposures.
The Economic Growth Act provided for a potential exception from the Basel III Rules for community banks that maintain a Community
Bank Leverage Ratio (“CBLR”) of at least 8.0% to 10.0%. The CBLR is calculated by dividing Tier 1 capital by the bank’s average
total consolidated assets. In the final rules approved by the FDIC in September 2019, qualifying community banking organizations that
opt in to using the CBLR are considered to be in compliance with the Basel III Rules as long as the bank maintains a CBLR of greater
than 9.0%. If a bank is not a qualifying community banking organization, does not opt in to using the CBLR, or cannot maintain a CBLR
of greater than 9.0%, the bank would have to comply with the Basel III Rules. We determined to comply with the Basel III Rules instead
of using the CBLR framework.
Leverage Requirements. BHCs and banks are also required to comply with minimum leverage ratio requirements. These requirements
provide for a minimum ratio of Tier 1 capital to total consolidated quarterly average assets (as defined for regulatory purposes), net of
the loan loss reserve, goodwill and certain other intangible assets (the “leverage ratio”), of 4.0%.
Liquidity Regulation. The liquidity coverage ratio (“LCR”), provided for in the Basel III liquidity framework, is designed to ensure
that a bank maintains an adequate level of unencumbered high quality liquid assets equal to the bank’s expected net cash outflows for a
thirty-day time horizon under an acute liquidity stress scenario. The rules as adopted apply in their most comprehensive form only to
advanced approaches financial or bank holding companies and depository institution subsidiaries of such financial or bank holding
companies and, in a modified form, to banking organizations having $50 billion or more in total consolidated assets. Accordingly, they
do not apply to either the Company or the Bank.
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Similarly, the Basel III framework included a standard, referred to as the net stable funding ratio (“NSFR”), which is designed to promote
more medium-and long-term funding of the assets and activities of banks over a one-year time horizon. Effective July 1, 2021, the NSFR
standard requires large financial institutions to maintain a 1.0 ratio of available stable funding to required stable funding. The scope of
financial institutions to which this standard applies is consistent with the LCR standard, and accordingly, neither the Company nor the
Bank is required to comply with this standard. As a result, we do not manage our balance sheet to be compliant with these rules.
Prompt Corrective Action. The Federal Deposit Insurance Act, as amended (“FDIA”), requires, among other things, the federal
banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements.
The FDIA establishes five capital categories for FDIC-insured banks: well capitalized, adequately capitalized, under-capitalized,
significantly under-capitalized and critically under-capitalized. 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.
The FDIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the
capital category in which an institution is classified.
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. The current requirements and the actual levels for the Company and the
Bank are detailed in Note 15, Regulatory Matters, of the notes to consolidated financial statements, included in this Annual Report on
Form 10-K.
Dividends. The FRB policy is that a financial holding company should pay cash dividends only to the extent that its net income for the
past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s
capital needs, asset quality and overall financial condition, and that it is inappropriate for a financial holding company experiencing
serious financial problems to borrow funds to pay dividends. Furthermore, a bank that is classified under the prompt corrective action
regulations as “under-capitalized” will be prohibited from paying any dividends.
The primary source of cash for dividends we pay is the dividends we receive from the Bank. The Bank is subject to various regulatory
policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums.
Approval of the New York State Department of Financial Services (the “NY DFS”) is required prior to paying a dividend if the dividend
declared by the Bank exceeds the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar
years. At January 1, 2022, the Bank could declare dividends of $77.0 million from retained net profits of the preceding two years. The
Bank declared dividends of $24.0 million and $23.0 million in 2021 and 2020, respectively.
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. 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. Government.
The current level of deposit insurance is $250,000. The coverage limit is per depositor, per insured depository institution for each account
ownership category.
The minimum designated reserve ratio for the DIF is 1.35% of estimated insured deposits. Under the Dodd-Frank Act, the FDIC defined
the deposit insurance assessment base for an insured depository institution as an amount equal to the institution’s average consolidated
total assets during the assessment period minus average tangible equity. Deposit insurance premiums for the Bank are calculated based
upon the average balance of total assets minus average tangible equity as of the close of business for each day during the calendar
quarter. As of September 30, 2018, the FDIC had exceeded the minimum reserve ratio of 1.35%. We received credits for the portion of
our regular assessments that contributed to growth in the reserve ratio to 1.35%, which applied to reduce regular assessments for quarters
when the reserve ratio is at least 1.38%. We used these credits to reduce our regular assessments through the first quarter of 2020.
The FDIC has the flexibility to adopt actual rates that are higher or lower than the total base assessment rates adopted without notice
and comment, if certain conditions are met.
The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions. It is also authorized to terminate
a depository bank’s deposit insurance upon a finding by the FDIC that the bank’s financial condition is unsafe or unsound or that the
institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or
imposed by the bank’s regulatory agency. The termination of deposit insurance for the Bank would have a material adverse effect on
our earnings, operations and financial condition.
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Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer
federal and state laws and regulations that are designed to protect consumers in transactions with banks. 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. 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. Violations of applicable consumer
protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution
and attorneys’ fees. Federal and state bank regulators, federal law enforcement agencies, state attorneys general and state and local
consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including
regulatory sanctions, customer rescission rights, fines and civil money penalties. Failure to comply with consumer protection
requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions the
Company may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.
The Dodd-Frank Act centralized responsibility for consumer financial protection by creating the Consumer Financial Protection Bureau
(“CFPB”), and giving it responsibility for implementing, examining and enforcing compliance with federal consumer protection laws.
The CFPB focuses on:
(cid:3)
Risks to consumers and compliance with the federal consumer financial laws, when it evaluates the policies and practices of a
financial institution;
The markets in which firms operate and risks to consumers posed by activities in those markets;
(cid:3)
(cid:3) Depository institutions that offer a wide variety of consumer financial products and services or a more specialized focus; and
(cid:3) Non-depository companies that offer one or more consumer financial products or services.
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other
things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that
materially interfere with consumers’ ability to understand a term or condition of a consumer financial product or service or take
unreasonable advantage of consumers’ (i) lack of financial savvy, (ii) inability to protect themselves in the selection or use of consumer
financial products or services, or (iii) reasonable reliance on a covered entity to act in their interests. The CFPB can issue cease-and-
desist orders against banks and other entities that violate consumer financial laws. The CFPB may also institute a civil action against an
entity in violation of federal consumer financial law in order to impose a civil penalty or injunction. The CFPB has examination and
enforcement authority over all banks with more than $10 billion in assets, as well as their affiliates.
Banking regulators take into account compliance with consumer protection laws when considering approval of a proposed transaction.
Community Reinvestment Act. Pursuant to the Community Reinvestment Act (the “CRA”), under federal and New York State law,
the Bank is obligated, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including
low- and moderate-income neighborhoods. The FRB of New York and NY DFS periodically assess the Bank’s record of performance
under the CRA and issue one of the following ratings: “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial
Noncompliance.”
The most recently completed evaluation of the Bank’s performance under the CRA was conducted by the FRB of New York from
January 1, 2013 through September 30, 2018 and resulted in an overall rating of “Satisfactory.” In reaching this rating, the FRB of New
York evaluated HMDA-reportable, small business, small farm, consumer loans, community development
investments,
philanthropic grants, and services provided.
loans,
The last CRA evaluation completed by NY DFS was for the time period from January 1, 2012 through September 30, 2017. This
performance evaluation resulted in an overall rating by the NY DFS of “Satisfactory.” In reaching this rating the NY DFS considered
the Bank’s lending practices by the areas served, the geographic distribution of loans, borrower characteristics and use in community
development projects, along with testing the ability of the Bank’s investment and service activities to meet community credit needs
Privacy Rules. Federal banking regulators, as required under the Gramm-Leach-Bliley Act, have adopted rules limiting the ability of
banks and other financial institutions to disclose nonpublic information about consumers to non-affiliated third parties. The rules require
disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal
information to non-affiliated third parties. The privacy provisions of the Gramm-Leach-Bliley Act affect how consumer information is
transmitted through diversified financial services companies and conveyed to outside vendors.
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 particular, we have established a program designed to ensure the safety of our information systems, adopted a written
cybersecurity policy, and designated an information security officer. We are subject to ongoing compliance and reporting requirements
of the NY DFS.
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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 USA PATRIOT Act of 2001 substantially broadened the scope of U.S. anti-money laundering
laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and
expanding the extra-territorial jurisdiction of the United States. Financial institutions are prohibited from entering into specified financial
transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk
customers and implement a written customer identification program. Financial institutions must take certain steps to assist government
agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities
routinely examine financial institutions for compliance with these obligations, and for the failure of a financial institution to maintain
and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or
regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory
authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even
if approval is not required. Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions
found to be violating these obligations.
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, under authority of various laws, including
designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. The Company is
responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade
and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions
could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger
or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Interstate Branching. Pursuant to the Dodd-Frank Act, national and state-chartered banks may open an initial branch in a state other
than its home state (e.g., a host state) by establishing a de novo branch at any location in such host state at which a bank chartered in
such host state could establish a branch. Applications to establish such branches must still be filed with the appropriate primary federal
regulator.
Transactions with Affiliates. FII, FSB, Five Star REIT, SDN, Courier Capital, HNP Capital and CHIL are affiliates within the meaning
of the Federal Reserve Act. The Federal Reserve Act imposes limitations on a bank with respect to extensions of credit to, investments
in, and certain other transactions with, its parent financial holding company and the holding company’s other subsidiaries. Furthermore,
bank loans and extensions of credit to affiliates also are subject to various collateral requirements.
Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act and the FRB’s Regulation W, limit
borrowings by FII and its nonbank subsidiaries from FSB, and also limit various other transactions between FII and its nonbank
subsidiaries, on the one hand, and FSB, on the other. For example, Section 23A of the Federal Reserve Act limits the aggregate
outstanding amount of any insured depository institution’s loans and other “covered transactions” with any particular nonbank affiliate
to no more than 10% of the institution’s total capital and limits the aggregate outstanding amount of any insured depository institution’s
covered transactions with all of its nonbank affiliates to no more than 20% of its total capital. “Covered transactions” are defined by
statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless
otherwise exempted by the FRB) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the
issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Section 23A of the Federal Reserve Act also generally
requires that an insured depository institution’s loans to its nonbank affiliates be, at a minimum, 100% secured, and Section 23B of the
Federal Reserve Act generally requires that an insured depository institution’s transactions with its nonbank affiliates be on terms and
under circumstances that are substantially the same or at least as favorable as those prevailing for comparable transactions with non-
affiliates. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking
organization. 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.
Insurance Regulation. SDN is required to be licensed or receive regulatory approval in nearly every state in which it does business. In
addition, most jurisdictions require individuals who engage in brokerage and certain other insurance service activities to be personally
licensed. These licensing laws and regulations vary from jurisdiction to jurisdiction. In most jurisdictions, licensing laws and regulations
generally grant broad discretion to supervisory authorities to adopt and amend regulations and to supervise regulated activities.
Investment Advisory Regulation. Courier Capital and HNP Capital are providers of investment consulting and financial planning
services and, as such, are each considered an “investment adviser” under the U.S. 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. While a FHC is generally excluded from regulation under the Advisers Act, the SEC has stated that this
exclusion does not apply to investment adviser subsidiaries of FHCs, such as Courier Capital and HNP Capital. Because Courier Capital
and HNP Capital each have over $100 million in assets under management, each is individually considered a “large adviser,” which
requires registration with the SEC by filing Form ADV, including Part 3 to Form ADV, or Form CRS, which discloses the material
terms of the advisor’s relationship with retail customers. Courier Capital and HNP Capital must update these forms at least once each
year and more frequently under certain specified circumstances. This registration covers Courier Capital or HNP Capital and its
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employees as well as other persons under their control and supervision, such as independent contractors, provided that their activities
are undertaken on behalf of Courier Capital or HNP Capital.
In addition to these registration requirements, the Advisers Act contains numerous other provisions that impose obligations on
investment advisors. For example, Section 206 includes anti-fraud provisions that courts have interpreted as establishing fiduciary duties
extending to all services undertaken on behalf of the client. These duties include, but are not limited to, the disclosure of all material
facts to clients, providing only suitable investment advice, and seeking best price execution of trades. Section 206 also has specific rules
relating to, among other things, advertising, safeguarding client assets, the engagement of third-parties, the duty to supervise persons
acting on the investment adviser’s behalf, and the establishment of an effective internal compliance program and a code of ethics.
Courier Capital and HNP Capital are subject to each of these obligations and, as applicable, restrictions, and are also subject to
examination by the SEC’s Office of Compliance, Investigations, and Examinations to assess their overall compliance with the Advisers
Act and the effectiveness of their internal controls.
Commencing in October 2013, prior to the Parent’s acquisition of Courier Capital and HNP Capital, the Bank entered into a partnership
with LPL Financial, one of the nation’s largest independent financial services companies (“LPL”), to provide investment advisory and
broker-dealer services to the Bank’s customers through LPL. This partnership continues and the Bank employs wealth advisors, who
are licensed by LPL, to provide investment advisory and broker-dealer services to the Bank’s customers. LPL is an investment adviser
registered under the Advisers Act and is subject to its provisions.
Incentive Compensation. Our compensation practices are subject to oversight by the Federal Reserve. The Federal banking agencies’
guidance on incentive compensation policies intend 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. 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 Dodd-Frank Act requires the federal banking agencies to establish joint regulations or guidelines prohibiting incentive-based
payment arrangements at specified regulated entities having at least $1 billion in total consolidated assets (which would include the
Company and the Bank) that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder
with excessive compensation, fees or benefits or that could lead to material financial loss to the entity. In addition, the agencies must
establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. In May
2016, six federal agencies, including the FRB, the FDIC and the SEC, invited public comments on a proposed rule to accomplish this
mandate; no final rule has since been issued, however, and it is uncertain at this time whether the agencies intend to further pursue the
rule for the foreseeable future.
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. The
findings of the supervisory initiatives are included in reports of examination. Deficiencies are incorporated into the organization’s
supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be
taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance
processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to
correct the deficiencies.
Other Future Legislation and Changes in Regulations. In addition to the specific proposals described above, from time to time,
various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such
initiatives may include proposals to expand or contract the powers of financial holding companies 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. 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. 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.
Regulatory and Economic Policies
Our business and earnings are affected by general and local economic conditions and by the monetary and fiscal policies of the U.S.
government, its agencies and various other governmental regulatory authorities. The FRB regulates the supply of money in order to
influence general economic conditions. Among the instruments of monetary policy available to the FRB are (i) conducting open market
operations in U.S. government obligations, (ii) changing the discount rate on financial institution borrowings, (iii) imposing or changing
reserve requirements against financial institution deposits, and (iv) restricting certain borrowings and imposing or changing reserve
requirements against certain borrowings by financial institutions and their affiliates. 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.
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ITEM 1A. RISK FACTORS
An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management
believes could affect us are described below. Before making an investment decision, you should carefully consider the risks and
uncertainties described below, together with all of the other information included or incorporated by reference herein. This Annual
Report on Form 10-K is qualified in its entirety by these risk factors. Further, to the extent that any of the information contained in this
Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements
identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking
statements made by or on behalf of us.
If any of the following risks occur, our financial condition and results of operations could be materially and adversely affected. If this
were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.
Risks Related to the COVID-19 Pandemic
Governmental and individual efforts to address the COVID-19 pandemic have introduced volatility into the U.S. and global
economy which has and may continue to adversely affect our business, financial condition and results of operations.
In response to the COVID-19 pandemic and resulting economic downturn in early 2020, the Federal Reserve reduced the target federal
funds rate to a range of 0.00% to 0.25%. This lower rate reduces the rate of interest we earn on loans and pay on borrowings and interest-
bearing deposits and can affect the value of financial instruments we hold. In an environment with lower interest rates, we will not be
able to earn as much on our interest-earning assets, which may reduce net interest margin and our ability to earn interest and receive
dividend income from investment securities will be reduced. While the FRB has indicated that it expects to raise the target federal funds
rate in response to inflationary pressure and labor market challenges, we cannot assure you that interest rates will increase or that such
an increase would increase our net income.
Since the start of the COVID-19 pandemic, we have been confronted with a significant and unfamiliar degree of uncertainty in estimating
the impact of the pandemic on credit quality, revenues, and asset values. Our credit risk has fluctuated along with the changes in the
U.S. economy: we increased our allowance for credit losses in early 2020 in response to higher unemployment levels, but in 2021, we
experienced a benefit from the provision for credit losses as employment levels improved. We make various assumptions and judgments
about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other
assets serving as collateral, and we provide an allowance for credit losses based on a number of factors. We believe that the allowance
for credit losses is adequate. However, if our assumptions or judgments are wrong, the allowance for credit losses may not be sufficient
to cover the actual credit losses. We may have to increase the allowance in the future in response to the COVID-19 pandemic and
resulting changes to the U.S. economy. The actual amount of future provisions for credit losses may vary from the amount of past
provisions.
If the borrower of a PPP loan under the CARES Act fails to qualify for loan forgiveness under the program, we will have to hold the
loan at an unfavorable interest rate as compared to a loan we may otherwise have extended to our customer. Even though those loans
are guaranteed by the SBA, we may not be able to collect from the SBA as quickly as those payments come due, and our cash flow and
earnings may be reduced accordingly. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that
there was a deficiency in the manner in which we originated, funded or serviced the PPP loan, the SBA may deny its liability under the
guaranty, reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to
the deficiency from us.
As a lender, we are exposed to the risk that customers will be unable to repay their loans according to their terms and that any collateral
securing the payment of their loans may not be sufficient to assure repayment. The collateral securing our indirect loan portfolio in
particular may not be sufficient to cover the full value of an outstanding loan because the collateral, namely automobiles, are depreciating
assets. If a significant proportion of our customers are unable to repay their loans and the collateral securing repayment is insufficient
to cover our losses, we may have to increase our allowance for credit losses, the quality of our loan portfolio will decline, our net income
will decrease, and our results of operations will be materially adversely impacted. In addition, our capital and leverage ratios may be
adversely impacted.
Continued economic disruption and fear of the spread of COVID-19 could result in business shutdowns, limitations on commercial
activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment and commercial property
vacancy rates and reduced profitability and ability for property owners to make mortgage payments.
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We believe our most significant exposure to COVID(cid:6)19-impacted businesses is within the following industries, representing the
following percentage of commercial real estate and commercial loan balances as of December 31, 2021:
retail and retail building, 14%;
hotel, motel and lodging, 4% ;
health care, 3%;
restaurants and food services, 2%;
entertainment and recreation, 2%; and
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3) mining, quarrying and oil & gas, less than 1%.
We have experienced charge-offs that were precipitated by the COVID-19 pandemic, such as the $8.2 million charge-off of a $11.9
million commercial loan in the hotel, motel and lodging industry in the first quarter of 2020 and related foreclosure in the third quarter
of 2020. We may experience additional charge-offs or credit losses related to the COVID-19 pandemic and other economic disruptions.
Changes in our operations in response to the COVID-19 pandemic have exposed us to additional risks.
Social distancing efforts imposed by state and local governments to address the COVID-19 pandemic caused us to change how we
operate our bank branches, with the interior of some branches closing to customers when required to comply with state or local laws. In
addition, to curb the spread of COVID-19, a significant proportion of our employees transitioned to working remotely. Both of these
changes may slow response times to customers’ inquiries or preclude providing the level of service our employees are typically able to
offer in person. Our reputation and results of operations may be impacted if our competitors are better able to adjust to the restrictions
on in-person interactions and remote work.
Furthermore, as some of our employees continue to work from home, our operational risk, including data security risk, is higher than it
would otherwise be, as cybercriminal activity has increased in an attempt to profit from the disruption to pre-pandemic operations. The
cybersecurity-related risks we face include more phishing, malware, and other cybersecurity attacks, vulnerability to disruptions of our
information technology infrastructure and telecommunications systems for remote operations, and unauthorized dissemination, misuse
or destruction of confidential or valuable information.
We continue to follow Centers for Disease Control and Prevention (“CDC”) guidelines and governmental mandates regarding COVID-
19 protocols and vaccinations. While it is not possible to predict the administrative costs, compliance costs or impacts to our available
workforce, we are developing compliance processes for implementing the Occupational Safety and Health Administration (“OSHA”)
testing and vaccination mandates while monitoring legal actions and state legislation regarding the mandates for further guidance.
Mandatory COVID-19 vaccination of employees could impact our workforce and have a material adverse effect on our business
and results of operations.
The imposition of government mandated vaccination or testing may impact our ability to retain current employees and attract new
employees. In the event of a vaccine mandate, some of our employees who are not vaccinated may seek exemptions or otherwise resist
vaccination. The imposition of vaccine mandates could potentially cause labor shortages if employees refuse to get vaccinated and their
employment is terminated, either voluntarily or involuntarily. Although the previously proposed vaccine mandates provide for the
alternative of weekly testing for the virus and allow employers to shift the cost burden of this testing to employees, labor markets,
competitive forces, and practical application may dictate that we would shoulder the cost of such testing, which could result in
meaningful costs that have not been incurred to date. If federal, state or local mandates take effect, those mandates may result in
employee attrition, which could adversely affect revenues and costs and could have an adverse effect on our business and results of
operations.
Credit Risks and Risks Related to Banking Activities
If we experience greater credit losses than anticipated, earnings may be adversely impacted.
As a lender, we are exposed to the risk that customers will be unable to repay their loans according to their terms and that any collateral
securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans
and could have a material adverse impact on our results of operations.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as collateral, and we provide an allowance for estimated credit losses
based on a number of factors. We believe that the allowance for credit losses is adequate. However, if our assumptions or judgments are
wrong, the allowance for loan losses may not be sufficient to cover the actual credit losses. 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
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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.
Geographic concentration may unfavorably impact our operations.
Substantially all of our operations are concentrated in the Western and Central New York region. As a result of this geographic
concentration, our results depend largely on economic conditions in these and surrounding areas. Deterioration in economic conditions
in our market could:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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.
Generally, we make loans to small to mid-sized businesses whose success depends on the regional economy. These businesses generally
have fewer financial resources in terms of capital or borrowing capacity than larger entities. Adverse economic and business conditions
in our market areas, including the impacts of the COVID-19 pandemic could reduce our growth rate, affect our borrowers’ ability to
repay their loans and, consequently, adversely affect our business, financial condition and performance. For example, we place
substantial reliance on real estate as collateral for our loan portfolio. A sharp downturn in real estate values in our market area could
leave many of these loans inadequately collateralized. If we are required to liquidate the collateral securing a loan to satisfy the debt
during a period of reduced real estate values, the impact on our results of operations could be materially adverse.
Our commercial business and mortgage loans increase our exposure to credit risks.
At December 31, 2021, our portfolio of commercial business and mortgage loans totaled $2.05 billion, or 56% of total loans. We plan
to continue to emphasize the origination of these types of loans, which generally expose us to a greater risk of nonpayment and loss than
residential real estate or consumer loans because repayment of such loans often depends on the successful operations and income stream
of the borrowers. 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. 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.
Our indirect and consumer lending involves risk elements in addition to normal credit risk.
A portion of our current lending involves the purchase of consumer automobile installment sales contracts from automobile dealers
located in Western, Central and the Capital District of New York, and Northern and Central Pennsylvania. These loans are for the
purchase of new or used automobiles. 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. 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 indirect automobile loans are
secured, such loans are secured by depreciating assets and characterized by loan-to-value ratios that could result in us not recovering the
full value of an outstanding loan upon default by the borrower. 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, and if we were unable to comply with the regulations applicable to
our consumer lending activities, our financial condition and results of operations may be adversely affected.
Lack of seasoning in portions of our loan portfolio could increase risk of credit defaults in the future.
As a result of our growth over the past several years, certain portions of our loan portfolio, such as the increased size of our commercial
loan portfolio and in particular the PPP loans we originated, are of relatively recent origin. Loans may not begin to show signs of credit
deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a
portfolio of older loans will usually behave more predictably than a newer portfolio. Because these portions of our portfolio are relatively
new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned.
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.
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We accept deposits that do not have a fixed term and which may be withdrawn by the customer at any time for any reason.
At December 31, 2021, we had $3.91 billion of deposit liabilities that have no maturity and, therefore, may be withdrawn by the depositor
at any time. These deposit liabilities include our checking, savings, and money market deposit accounts.
Market conditions may impact the competitive landscape for deposits in the banking industry. The low rate environment and future
actions the Federal Reserve may take may impact pricing and demand for deposits in the banking industry. The withdrawal of more
deposits than we anticipate could have an adverse impact on our profitability as this source of funding, if not replaced by similar deposit
funding, would need to be replaced with wholesale funding, the sale of interest-earning assets, or a combination of these two actions.
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. 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. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and
property damage regardless of whether we knew, had reason to know of, or caused the release of such substance. Environmental laws
may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell
the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may
increase our exposure to environmental liability. The remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our financial condition and results of operations.
We operate in a highly competitive industry and market area.
We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and may
have more financial resources than us. Such competitors primarily include national, regional and internet banks within the markets in
which we operate. We also face competition from many other types of financial institutions, including, without limitation, savings and
loan associations, credit unions, finance companies, brokerage firms, insurance companies and other financial intermediaries. The
financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and
continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company,
which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and
underwriting), and merchant banking. Technology has lowered barriers to entry and made it possible for nonbanks to offer products and
services traditionally provided by banks, such as automatic transfer and automatic payment systems. More recently, peer to peer lending
has emerged as an alternative borrowing source for our customers and many other non-banks offer lending and payment services, such
as consumer credit through buy now - pay later offerings, in competition with banks. Many of these competitors have fewer regulatory
constraints and may have lower cost structures. Additionally, due to their size, many of our larger competitors may be able to achieve
economies of scale and, as a result, may offer a broader range of products and services than we can at competitive prices or with low or
no fees.
Our ability to compete successfully depends on a number of factors, including, among other things:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
the ability to develop, maintain and build upon long-term customer relationships based on top quality service, high ethical
standards and safe, sound assets;
the ability to expand our market position;
the scope, relevance and pricing of products and services offered to meet customer needs and demands;
the rate at which we introduce new products and services relative to our competitors;
customer satisfaction with our level of service; and
industry and general economic trends.
Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth
and profitability, which, in turn, could have a material adverse effect on our financial condition and results of operations.
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Changes to and replacement of the LIBOR Benchmark Interest Rate may adversely affect our business, financial condition, and
results of operations.
In 2017, the United Kingdom’s Financial Conduct Authority, a regulator of financial services firms and financial markets in the United
Kingdom, stated that it will only support the regulatory oversight of the London Interbank Offered Rate ("LIBOR") interest rate indices
through 2021. This announcement, and, more generally, financial benchmark reforms and changes in the interbank lending markets,
have resulted in uncertainty about the interest rate benchmarks that will be used in the future. In the United States, efforts to identify a
set of alternative U.S. dollar reference interest rates are ongoing, and the Alternative Reference Rate Committee formally recommended
the use of a Secured Overnight Funding Rate (“SOFR”). SOFR is different from LIBOR in that it is a retrospective-looking secured rate
rather than a forward-looking unsecured rate. These differences could lead to a greater disconnect between our and the Bank’s costs to
raise funds for SOFR as compared to LIBOR. In addition to the discontinuance of LIBOR, there may be future changes in the rules or
methodologies used to calculate SOFR or other benchmarks, which may have a material adverse effect on the value of or return on our
financial assets and liabilities that are based on or are linked to LIBOR and other benchmarks. Once LIBOR rates are no longer available,
and we are required to implement replacement reference rates for the calculation of interest rates under our loan agreements with
borrowers, we may incur significant expense in effecting the transition and we may be subject to disputes or litigation with our borrowers
over the appropriateness or comparability to LIBOR of the replacement reference rates. The transition date for existing LIBOR loan
contracts is currently set as June 30, 2023 and impacts loans that have not yet matured or have been refinanced by that date. The
uncertainty related to these changes may have an unpredictable impact on the financial markets and could adversely impact our financial
condition or results of operations.
Legal and Regulatory Risks
Legal and regulatory proceedings and related matters could adversely affect us and the banking industry in general.
We have been, and may in the future be, subject to various legal and regulatory proceedings, including class action litigation. It is
inherently difficult to assess the outcome of these matters, and there can be no assurance that we will prevail in any proceeding or
litigation. 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.
As disclosed in Part I, Item 3, “Legal Proceedings,” an action has been brought against us by four individuals who sought and were
granted class certification to represent classes of consumers who allege to have obtained direct or indirect financing from us for the
purchase of vehicles that we later repossessed. 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 approximately 300 members in the Pennsylvania classes. If we settle these
claims or the litigation is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments
that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will insure the legal
costs, settlements or judgements we incur in excess of our deductible. If we are not successful in defending ourselves from these claims,
or if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially adversely affect
our business, results of operations and financial condition. Further, adverse determinations in such matters could result in actions by our
regulators that could materially adversely affect our business, financial condition or results of operations. There can be no guarantee
that proceedings that may have a material adverse effect on our business, results of operations or financial condition will not arise in the
near or long-term future.
We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably
estimated. 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. 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. These include the
depositor insurance fund’s reserve ratio, the Bank’s assessment base, which is equal to average consolidated total assets minus average
tangible equity, and various inputs into the FDIC’s assessment rate calculation.
If there are financial institution failures, we may be required to pay higher FDIC premiums. Such increases of FDIC insurance premiums
may adversely impact our earnings. See the section captioned “Supervision and Regulation” included in Part I, Item 1 “Business” for
more information about FDIC insurance premiums.
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We are highly regulated, and any adverse regulatory action may result in additional costs, loss of business opportunities, and
reputational damage.
As described in the section captioned “Supervision and Regulation” included in Part I, Item 1, “Business,” we are subject to extensive
supervision, regulation and examination. The various regulatory authorities with jurisdiction over us have significant latitude in
addressing our compliance with applicable laws and regulations including, but not limited to, those governing consumer credit, fair
lending, anti-money laundering, anti-terrorism, capital adequacy, asset quality and risk, management ability and performance, earnings,
liquidity, and various other factors affecting us. As part of this regulatory structure, we are subject to policies and other guidance
developed by the regulatory agencies with respect to, among other things, capital levels, the timing and amount of dividend payments,
the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Our regulators have broad
discretion to impose monetary fines or restrictions and limitations on our operations if they determine, for any reason, that our operations
are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory
policies of these agencies.
This supervisory framework could materially impact the conduct, growth and profitability of our operations. Any failure on our part to
comply with current laws, regulations, other regulatory requirements or safe and sound banking, insurance, or investment advisory
practices or concerns about our financial condition, or any related regulatory sanctions or adverse actions against us, could increase our
costs or restrict our ability to expand our business and result in damage to our reputation.
Additionally, shareholder activism and potential regulatory reform may lead to substantial new regulations and disclosure obligations,
including with respect to environmental, social, and governance matters, which may lead to additional compliance costs and impact the
manner in which we operate our business in ways that may materially adversely impact our results of operations and financial condition.
The policies of the Federal Reserve have a significant impact on our earnings.
The policies of the Federal Reserve impact us significantly. The Federal Reserve regulates the supply of money and credit in the United
States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing
deposits and can also affect the value of financial instruments we hold. Those policies determine, to a significant extent, our cost of
funds for lending and investing and impact our net interest income, our primary source of revenue. Changes in those policies are beyond
our control and are difficult to predict. Federal Reserve policies can also affect our borrowers, potentially increasing the risk that they
may fail to repay their loans. For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a
borrower’s products and services. This could adversely affect the borrower’s earnings and ability to repay its loan, which could have a
material adverse effect on our financial condition and results of operations.
Risks Related to Non-Banking Activities
Our insurance brokerage subsidiary is subject to risk related to the insurance industry.
SDN derives the bulk of its revenue from commissions and fees earned from brokerage services. SDN does not determine the insurance
premiums on which its commissions are based. Insurance premiums are cyclical in nature and may vary widely based on market
conditions. As a result, insurance brokerage revenues and profitability can be volatile. As insurance companies outsource the production
of premium revenue to non-affiliated brokers or agents such as SDN, those insurance companies may seek to further minimize their
expenses by reducing the commission rates payable to insurance agents or brokers, which could adversely affect SDN’s revenues.
In
addition, there have been and may continue to be various trends in the insurance industry toward alternative insurance markets including,
among other things, increased use of self-insurance, captives, and risk retention groups. While SDN has been able to participate in
certain of these activities and earn fees for such services, there can be no assurance that we will realize revenues and profitability as
favorable as those realized from SDN’s traditional brokerage activities.
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 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. Our investment advisory services are also subject to state laws including anti-
fraud laws and regulations.
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In addition, the broker-dealer services provided by Courier Capital and HNP Capital are subject to Regulation Best Interest, which
requires a broker-dealer to act in the best interest of a retail customer when making a recommendation to that customer of any securities
transaction or investment strategy involving securities. 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.
Any claim of noncompliance, regardless of merit or ultimate outcome, could subject us to investigation by the SEC or other regulatory
authorities. Our compliance processes may not be sufficient to prevent assertions that we failed to comply with any applicable law, rule
or regulation. If our investment advisory and wealth management operations are subject to investigation by the SEC or other regulatory
authorities or if litigation is brought by clients based on our failure to comply with applicable regulations, our results of operations could
be materially adversely affected.
Our investment advisory revenue may decrease as a result of poor investment performance, in either relative or absolute terms, which
could decrease our revenues and net income.
Our investment advisory business derives a significant amount of its revenues from investment management fees based on assets under
management. Our ability to maintain or increase assets under management is subject to a number of factors, including our clients'
evaluation of the past performance of our investment advisory business, in either relative or absolute terms, general market and economic
conditions, and competition from other investment management firms. 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. Poor investment performance could reduce our investment advisory revenues and impede the growth of
our investment advisory business in the following ways: existing clients may withdraw funds from our investment advisory business in
favor of better performing products or firms; asset-based management fees could decline from a decrease in assets under management;
our ability to attract funds from existing and new clients might diminish; and the investment advisory personnel may depart to join a
competitor or otherwise.
Strategic and Operational Risks
We make certain assumptions and estimates in preparing our financial statements that may prove to be incorrect, which could
significantly impact our results of operations, cash flows and financial condition, and we are subject to new or changing
accounting rules and interpretations, and the failure by us to correctly interpret or apply these evolving rules and interpretations
could have a material adverse effect.
Accounting principles generally accepted in the United States require us to use certain assumptions and estimates in preparing our
financial statements, including in determining credit loss reserves and reserves related to litigation, among other items. Certain of our
financial instruments, including available-for-sale securities and certain loans, require a determination of their fair value in order to
prepare our financial statements. Where quoted market prices are not available, we may make fair value determinations based on
internally developed models or other means, which ultimately rely to some degree on management judgment. Some of these and other
assets and liabilities may have no direct observable price levels, making their valuation particularly subjective, as they are based on
significant estimation and judgment. In addition, sudden illiquidity in markets or declines in prices of certain loans and securities may
make it more difficult to value certain balance sheet items, which may lead to the possibility that such valuations will be subject to
further change or adjustment. If assumptions or estimates underlying our financial statements are incorrect, we may experience material
losses that would impact our results of operations, cash flows and financial condition.
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. In particular, effective January 1,
2020, we have implemented FASB’s Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326) –
Measurement of Credit Losses on Financial Instruments, which requires us to recognize an allowance for credit losses based on historical
experience, current conditions and reasonable and supportable forecasts, as opposed to recognizing an allowance when it is probable
that a loss has been incurred. This change in GAAP increased our allowance for credit losses and created more volatility in the level of
our allowance for credit losses, and has been, and will continue to be, impacted by the Company’s loan and securities portfolios’
composition, attributes and quality. If we fail to interpret any one or more of these GAAP provisions correctly, or if our methodology
in applying them to our financial reporting or disclosures is at all flawed, our financial statements may contain inaccuracies that, if
severe enough, could warrant a later restatement by us, which in turn could result in a material adverse event.
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The value of our goodwill and other intangible assets may decline in the future.
As of December 31, 2021, we had $67.1 million of goodwill and $7.3 million of other intangible assets. Significant and sustained
declines in our stock price and market capitalization, significant declines in our expected future cash flows, significant adverse changes
in the business climate or slower growth rates may necessitate our taking charges in the future related to the impairment of our goodwill.
Future regulatory actions could also have a material impact on assessments of goodwill for impairment. If the fair value of our net assets
improves at a faster rate than the market value of our reporting units, or if we were to experience increases in book values of a reporting
unit in excess of the increase in fair value of equity, we may also have to take charges related to the impairment of our goodwill. If we
were to conclude that a future write-down of our goodwill is necessary, we would record the appropriate charge, which could have a
material adverse effect on our results of operations.
Identifiable intangible assets other than goodwill consist of core deposit intangibles and other intangible assets (primarily customer
relationships). 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.
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 seek to expand our branch network into nearby areas, continue to invest in our digital
banking strategy, develop new sustainable revenue streams through Banking as a Service (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. Any failure by us to effectively implement any one or more of these growth strategies could have
several negative effects, including a possible decline in the size or the quality, or both, of our loan portfolio or a decrease in profitability
caused by an increase in operating expenses.
We hope to continue an active merger and acquisition strategy. However, even if we use our common stock as the predominant form of
consideration, we may need to raise capital to negotiate a transaction on terms acceptable to us and there can be no assurance that we
will be able to raise a sufficient amount of capital to enable us to complete an acquisition. 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. While our senior management team has had extensive experience in acquisitions and post-acquisition integration, there is
no guarantee that our current or future integration efforts will be successful, and if our senior management is forced to spend a
disproportionate amount of time on integrating recently-acquired businesses, it may distract their attention from operating our business
or pursuing other growth opportunities.
Acquisitions may disrupt our business and dilute shareholder value.
We intend to continue to pursue a growth strategy for our business by expanding our branch network into communities within or
complementary to markets where we currently conduct business. We may consider acquisitions of loans or securities portfolios, lending
or leasing firms, commercial and small business lenders, residential lenders, direct banks, banks or bank branches, wealth and investment
management firms, securities brokerage firms, specialty finance or other financial services-related companies. We also intend to expand
our non-banking subsidiaries, SDN, Courier Capital and HNP Capital, by acquiring smaller insurance agencies, such as Landmark and
North Woods and wealth management firms in areas which complement our current footprint. We may be unsuccessful in expanding
our non-banking subsidiaries through acquisition because of the growing interest in acquiring insurance brokers and wealth management
firms, which could make it more difficult for us to identify appropriate targets and could make such acquisitions more expensive. Even
if we are able to identify appropriate acquisition targets, we may not have sufficient capital to fund acquisitions or be able to execute
transactions on favorable terms. If we are unable to pursue our growth strategy, we may not be able to achieve all of the expected benefits
of our historical acquisitions, which could adversely affect our results of operations and financial condition.
Acquiring other banks, businesses, or branches involves potential adverse impact to our financial results and various other risks
commonly associated with acquisitions, including, among other things:
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difficulty in estimating the value of the target company;
payment of a premium over book and market values that may dilute our tangible book value and earnings per share in the short
and long term;
potential exposure to unknown or contingent liabilities of the target company;
exposure to potential asset quality issues of the target company;
volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts;
challenge and expense of integrating the operations and personnel of the target company;
inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and other
projected benefits;
potential disruption to our business;
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potential diversion of our management’s time and attention;
the possible loss of key employees and customers of the target company;
potential changes in banking or tax laws or regulations that may affect the target company; and
additional regulatory burdens associated with new lines of business.
Our tax strategies and the value of our deferred tax assets and liabilities could adversely affect our operating results and
regulatory capital ratios.
Our tax strategies are dependent upon our ability to generate taxable income in future periods. Our tax strategies will be less effective
in the event we fail to generate taxable income. Our deferred tax assets are subject to an evaluation of whether it is more likely than not
that they will be realized for financial statement purposes. In making this determination, we consider all positive and negative evidence
available including the impact of recent operating results, reversals of existing taxable temporary differences, tax planning strategies
and projected earnings within the statutory tax loss carryover period. 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.
Liquidity is essential to our businesses.
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. Our efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated
reductions in our liquidity. In such events, our cost of funds may increase, thereby reducing our net interest income, or we may need to
sell a portion of our investment and/or loan portfolio, which, depending upon market conditions, could result in us realizing a loss.
We rely on dividends from our subsidiaries for most of our revenue.
We are a separate and distinct legal entity from our subsidiaries. A substantial portion of our revenue comes from dividends from our
Bank subsidiary. These dividends are the principal source of funds we use to pay dividends on our common and preferred stock, and to
pay interest and principal on our debt. Federal and/or state laws and regulations limit the amount of dividends that our Bank subsidiary
may pay to us. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the
prior claims of the subsidiary’s creditors. In the event our Bank subsidiary is unable to pay dividends to us, we may not be able to service
debt, pay obligations, or pay dividends on our common and preferred stock. The inability to receive dividends from our Bank subsidiary
could have a material adverse effect on our business, financial condition, and results of operations.
If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses.
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established processes and
procedures intended to identify, measure, monitor and report the types of risk to which we are subject, including credit risk, operations
risk, compliance risk, reputation risk, strategic risk, market risk, and liquidity risk. We seek to monitor and control our risk exposure
through a framework of policies, procedures and reporting requirements. Management of our risks in some cases depends upon the use
of analytical and/or forecasting models. If the models used to mitigate these risks are inadequate, we may incur losses. In addition, there
may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. If our risk
management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially
adversely affected.
Negative public opinion could damage our reputation and impact business operations and revenues.
As a financial institution, our earnings and capital are subject to risk associated with negative public opinion. Negative public opinion
could result from our actual or alleged conduct in any number of activities, including lending practices, the failure of any of our products
or services to meet our clients' expectations or applicable regulatory requirements, corporate governance and acquisitions, social media
and other marketing activities, the implementation of environmental, social and governance practices or actions taken by government
regulators and community organizations in response to any of the foregoing. 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.
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Technology and Cybersecurity Risks
We face competition in staying current with technological changes and banking alternatives to compete and meet customer
demands.
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. Some of our competitors have substantially
greater resources to invest in technological improvements than we currently have. We may not be able to effectively implement new
technology-driven products and services or be successful in marketing these products and services to our customers. In addition,
technology and other changes are allowing consumers to utilize alternative methods to complete financial transactions that have
historically involved banks. For example, consumers can now maintain funds in brokerage accounts or mutual funds that would have
historically been held as bank deposits. Consumers can also complete transactions such as paying bills and transferring funds directly
without using a traditional bank as an intermediary. The process of eliminating banks as intermediaries could result in the loss of
customer deposits, the related income generated from those deposits and additional fee income. We may not be able to effectively
compete with these banking alternatives for consumer deposits. As a result, our ability to effectively compete to retain or acquire new
business may be impaired, and our business, financial condition or results of operations, may be adversely affected.
We rely on other companies to provide key components of our business infrastructure.
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. Any problems caused
by these third parties, including as a result of them not providing us their services for any reason or them performing their services
poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently
and effectively. Replacing these third party vendors could also entail significant delay and expense.
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. 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. Financial or operational difficulties of a vendor could also impair our operations if those
difficulties interfere with the vendor’s ability to serve us. If a critical vendor is unable to meet our needs in a timely manner or if the
services or products provided by such a vendor are terminated or otherwise delayed and if we are not able to develop alternative sources
for these services and products quickly and cost-effectively, it could have a material adverse effect on our business. Federal banking
regulators have proposed rules on managing the risks of how banks select, engage and manage their outside vendors and issued voluntary
guidance for banks on similar issues. These regulations and guidance may affect the circumstances and conditions under which we work
with third parties and the cost of managing such relationships.
A breach in security of our or third party information systems, including the occurrence of a cyber incident or a deficiency in
cybersecurity, or a failure by us to comply with New York State cybersecurity regulations, may subject us to liability, result in
a loss of customer business or damage our brand image.
We 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. 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, 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. 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. These cybersecurity concerns are
further heightened due to the recent Russian invasion into Ukraine. Those same parties may also attempt to fraudulently induce
employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our
customers or clients. We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or
proprietary information. 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. 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.
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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. 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.
Market Risks
We are subject to interest rate risk, and a rising rate environment may reduce our income and result in higher defaults on our
loans, whereas a falling rate environment may result in earlier loan prepayments than we expect, which may reduce our income.
Our earnings and cash flows depend largely upon our net interest income. Interest rates are highly sensitive to many factors that are
beyond our control, including general economic conditions and policies of governmental and regulatory agencies, particularly the
Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on
loans and investments and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability
to originate loans and obtain deposits; (ii) the fair value of our financial assets and liabilities; and (iii) the average duration of our
mortgage-backed securities portfolio and other interest-earning assets.
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. In addition, our net interest margin may
contract in a rising rate environment because our funding costs may increase faster than the yield we earn on our interest-earning assets.
In a rising rate environment, loans with adjustable interest rates are more likely to experience a higher rate of default. The combination
of these events may adversely affect our financial condition and results of operations.
Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest
rates paid on deposits and other borrowings. In addition, in a falling rate environment or the recent environment where the Federal
Reserve has held the federal reference rate near 0.00%, loans may be prepaid sooner than we expect, which could result in a delay
between when we receive the prepayment and when we are able to redeploy the funds into new interest-earning assets and in a decrease
in the amount of interest income we are able to earn on those assets. 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. 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. We have exposure to
many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry,
including commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose
us to credit risk in the event of a default by our counterparty or client. In addition, our credit risk may be exacerbated when the collateral
held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due
us. Any such losses could have a material adverse effect on our financial condition and results of operations.
We may need to raise additional capital in the future and such capital may not be available on acceptable terms or at all.
We may need to raise additional capital in the future to provide sufficient capital resources and liquidity to meet our commitments and
business needs. Our ability to raise additional capital, if needed, will depend on our financial performance and, among other things,
conditions in the capital markets at that time, which is outside of our control.
In addition, we are highly regulated, and our regulators could require us to raise additional common equity in the future. We and our
regulators perform a variety of analyses of our assets, including the preparation of stress case scenarios, and as a result of those
assessments we could determine, or our regulators could require us, to raise additional capital.
We may not be able to access required capital on acceptable terms or at all. Any occurrence that may limit our access to the capital
markets, such as a decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital
markets, or a downgrade of our debt rating, may adversely affect our capital costs and ability to raise capital and, in turn, our liquidity.
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.
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Risks Related to our Common Stock
We may not pay or may reduce the dividends on our common stock.
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. This could adversely affect the market price of our common
stock.
We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our
common stock as to distributions and in liquidation, which could dilute our current shareholders or negatively affect the value
of our common stock.
In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured
by all or up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured
commercial paper, medium-term notes, senior notes, subordinated notes, preferred stock or securities convertible into or exchangeable
for equity securities. In the event of our liquidation, our lenders and holders of our debt and preferred securities would receive a
distribution of our available assets before distributions to the holders of our common stock. For example, our outstanding shares of
Series A 3% and Series B-1 8.48% Preferred Stock have a preferential right to receive dividends before holders of our common stock.
We must declare and pay annual dividends of $3 per share to Series A 3% Preferred Stock holders and of $8.48 per share to Series B-1
8.48% Preferred Stock holders before any dividends or dissolution payments can be paid to holders of common stock. Because our
decision to incur debt and issue securities in our future offerings will depend on market conditions and other factors beyond our control,
we cannot predict or estimate the amount, timing or nature of our future offerings and debt financings. Further, market conditions could
require us to accept less favorable terms for the issuance of our securities in the future. We may also issue additional shares of our
common stock or securities convertible into or exchangeable for our common stock that could dilute our current shareholders and effect
the value of our common stock.
Our certificate of incorporation, our bylaws, and certain banking laws may have an anti-takeover effect.
Provisions of our certificate of incorporation, our bylaws, and federal and state banking laws, including regulatory approval
requirements, could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our
shareholders. The combination of these provisions may discourage others from initiating a potential merger, takeover or other change
of control transaction, which, in turn, could adversely affect the market price of our common stock.
The market price of our common stock may fluctuate significantly in response to a number of factors.
Our quarterly and annual operating results have varied in the past and could vary significantly in the future, which makes it difficult for
us to predict our future operating results. Our operating results may fluctuate due to a variety of factors, many of which are outside of
our control, including the changing U.S. economic environment and changes in the commercial and residential real estate market, any
of which may cause our stock price to fluctuate. If our operating results fall below the expectations of investors or securities analysts,
the price of our common stock could decline substantially. Our stock price can fluctuate significantly in response to a variety of factors
including, among other things:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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, including the Russian invasion of Ukraine;
additions or departures of key members of management;
fluctuations in our quarterly or annual operating results; and
changes in analysts’ estimates of our financial performance.
- 30 -
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. Further, the rural location of our principal executive
offices and many of our bank branches make it challenging for us to attract skilled people to such locations. The unexpected loss of
services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of
our markets, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
We use financial models for business planning purposes that may not adequately predict future results.
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. 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.
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 may also rely on representations
of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause us to
enter into unfavorable transactions, which could have a material adverse effect on our financial condition and results of operations.
Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans
and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent
on the business environment in the markets where we operate, in the State of New York and in the United States as a whole. The acts
of war in Ukraine and the impact of sanctions on Russia and Russian companies may impact global markets, which may create
unfavorable or uncertain economic conditions. A favorable business environment is generally characterized by, among other factors,
economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong
business earnings. 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. The occurrence of any of
these conditions could have a material adverse effect on our financial condition and results of operations.
Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other external events
could significantly impact our business.
Severe weather, natural disasters, public health emergencies and pandemics, acts of war or terrorism, and other adverse external events
could have a significant impact on our ability to conduct business. Such events could affect the operations of our bank branches, stability
of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause
significant property damage, result in loss of revenue, and/or cause us to incur additional expenses. The occurrence of any such event
could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and
results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
- 31 -
ITEM 2. PROPERTIES
We own a 27,400 square foot building in Warsaw, New York that serves as our headquarters, and principal executive and administrative
offices. We lease a 52,300 square foot regional administrative facility located in Rochester, New York. This lease expires in August
2027, with options for two additional ten-year extensions.
We are engaged in the banking business through 48 branch offices, of which 31 are owned and 17 are leased, in the following fourteen
contiguous counties of Western and Central New York: Allegany, Cattaraugus, Cayuga, Chemung, Erie, Genesee, Livingston, Monroe,
Ontario, Orleans, Seneca, Steuben, Wyoming and Yates Counties. The operating leases for our branch offices expire at various dates
through the year 2061 and generally include options to renew. The Bank also has administrative operations at a leased facility in Amherst,
New York, for which the lease expired in September 2021 and is continuing on the same terms on a month-to-month basis.
SDN operates from a leased 14,400 square foot office located in Williamsville, New York. The lease expired in September 2021 and is
continuing on the same terms on a month-to-month basis. SDN also has operations at a leased facility in Rochester, New York.
The Bank has executed a lease for a 28,500 square foot administrative office located in Amherst, New York that will commence July
2022. This new location will replace the leased facility in Amherst, New York and the SDN leased facility in Williamsville, New York.
Courier Capital operates from an owned 11,000 square foot office, located in Buffalo, New York. Courier Capital also has operations at
an owned facility in Jamestown, New York.
We believe that our properties have been adequately maintained, are in good operating condition and are suitable for our business as
presently conducted, including meeting the prescribed security requirements. 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.
- 32 -
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.
We are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and
Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs sought and were granted class certification to
represent classes of consumers in New York and Pennsylvania seeking to recover statutory damages, interest and declaratory relief. The
plaintiffs allege that they obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed. The
plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply
with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. We dispute and believe we have meritorious
defenses against these claims and plan to continue to vigorously defend ourselves.
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 approximately 300 members in the Pennsylvania classes. Our motion seeking permission to appeal the class certification ruling and
a stay of proceedings pending any such appeal was denied. We are currently awaiting a ruling from the Superior Court of Pennsylvania
on our motion seeking permission to appeal the denial of our motion to dismiss the action for lack of standing. On February 8, 2022,
plaintiffs filed a motion for partial summary judgment for most of the relief they seek. We intend to oppose and file cross motions for
partial summary judgment. The parties agreed that our opposition and cross motion papers will be filed by March 21, 2022. Through
a Case Management Order dated February 10, 2022, the trial court directed, among other things, that discovery be completed by October
3, 2022, pre-trial motions be submitted by November 21, 2022, and that the case be ready for trial on March 6, 2023. 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
reasonably probable to occur nor are we able to currently reasonably estimate the amount of potential loss.
If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements
or judgments that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will
insure the legal costs, settlements or judgements we incur in excess of our deductible. If we are unsuccessful in defending ourselves
from these claims or if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially
adversely affect our business, results of operations and financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
- 33 -
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER 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, 2022, 15,526,641
shares of our common stock were outstanding and there were 206 registered shareholders of record.
We have paid regular quarterly cash dividends on our common stock and our Board of Directors presently intends to continue this
practice, subject to our results of operations and the need for those funds for debt service and other purposes. See the discussions in the
section captioned “Supervision and Regulation” included in Part I, Item 1, “Business,” in the section captioned “Liquidity and Capital
Management” included in Part II, Item 7, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and in Note 15, Regulatory Matters, in the accompanying financial statements included in Part II, Item 8, “Financial Statements and
Supplementary Data,” all of which are included elsewhere in this report and incorporated herein by reference thereto.
In November 2020, the Company's Board of Directors authorized a share repurchase program for up to 801,879 shares of common stock
(the "2020 Repurchase Program"). The program will expire at the earlier of the completion of all share repurchases or a Board vote to
retire the program.
The Company's repurchases of its common stock during the fourth quarter of 2021 were as follows:
Issuer Purchases of Equity Securities
Total Number of
Shares
Purchased (1)
Average Price
Paid Per Share
7,356
19,400
77,164
103,920
$
$
31.31
31.00
31.58
31.45
Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
6,364
19,400
76,485
102,249
Maximum
Number of
Shares that May
Yet Be
Purchased Under
the Plans or
Programs
557,076
537,676
461,191
Period
October 1 - 31, 2021
November 1 - 30, 2021
December 1 -31, 2021
Total
(1) This column reflects (i) the deemed surrender to us of 1,671 shares of common stock to satisfy tax withholding obligations in
connection with the vesting of employee restricted stock units and (ii) the purchase of an aggregate of 102,249 shares of common
stock under the 2020 Repurchase Program.
- 34 -
Stock Performance Graph
The stock performance graph below compares (a) the cumulative total return on our common stock for the period beginning December
31, 2016 as reported by the Nasdaq Global Select Market, through December 31, 2021, (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.
SmallCap Banks Index over the same period. Cumulative return assumes the reinvestment of dividends. During 2021, all SNL indices
were replaced with S&P Dow Jones indices. The SNL Bank $1B-$5B Index that has historically been used in our performance graph
has therefore been replaced with the comparable S&P U.S. SmallCap Banks Index. The graph was prepared by S&P Global Market
Intelligence and is expressed in dollars based on an assumed investment of $100.
Index
Financial Institutions, Inc.
NASDAQ Composite Index
S&P U.S. SmallCap Banks Index
ITEM 6.
[RESERVED]
Period Ending
12/31/16
100.00
100.00
100.00
12/31/17
93.48
129.64
104.33
12/31/18
79.67
125.96
87.06
12/31/19
102.93
172.18
109.22
12/31/20
76.16
249.51
99.19
12/31/21
111.48
304.85
138.09
- 35 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
ITEM 7.
OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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, “Risks 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.
INTRODUCTION
Financial Institutions, Inc. (the “Parent” and together with all its subsidiaries, “we,” “our,” or “us”), is a financial holding company
headquartered in New York State. 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”). 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. We offer insurance services through our wholly-owned
subsidiary, SDN Insurance Agency, LLC (“SDN”), a full-service insurance agency. We offer customized investment advice, wealth
management, investment consulting and retirement plan services through our wholly-owned subsidiaries Courier Capital, LLC (“Courier
Capital”) and HNP Capital, LLC (“HNP Capital”), SEC-registered investment advisory and wealth management firms. In addition, we
offer Banking as a Service and Fintech solutions through our wholly-owned subsidiary Corn Hill Innovation Labs, LLC (“CHIL”).
Our primary sources of revenue are net interest income (interest earned on our loans and securities, net of interest paid on deposits and
other funding sources) and noninterest income, particularly fees and other revenue from insurance, investment advisory and financial
services provided to customers or ancillary services tied to loans and deposits. Business volumes and pricing drive revenue potential,
and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence,
economic growth, and competitive conditions within the marketplace. We are not able to predict market interest rate fluctuations with
certainty and our asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on our
results of operations and financial condition.
EXECUTIVE OVERVIEW
2021 Financial Performance Review
Net income increased $39.4 million to $77.7 million for 2021, compared to $38.3 million for 2020. This resulted in a 1.46% return on
average assets and a 16.01% return on average equity. Net income available to common shareholders was $76.2 million or $4.78 per
diluted share for 2021, compared to $36.9 million or $2.30 per diluted share for 2020. We declared cash dividends of $1.08 per common
share during 2021, an increase of $0.04 per common share or 4% compared to the prior year.
Reflected in the increase in net income was an $8.3 million benefit for credit losses in the current year as compared to a provision of
$27.2 million in 2020. Improvement in the national unemployment forecast, positive trends in qualitative factors, a reduction in specific
reserves and lower net charge-offs resulted in the release of overall credit loss reserves and a corresponding benefit for credit losses in
each quarter of 2021. Results for 2020 were negatively impacted by a higher than historical provision for credit losses, driven by the
adoption of the current expected credit loss (“CECL”) standard and uncertainty around the long-term impact of the COVID-19 pandemic
on the economic environment.
Fully-taxable equivalent net interest income was $155.4 million in 2021, an increase of $15.5 million, or 11%, compared to 2020. The
increase was the result of a $603.5 million, or 14% increase in average interest-earning assets, partially offset by an eight-basis point
decrease in the net interest margin, to 3.14%.
The provision for credit losses - loans was a benefit of $7.0 million in 2021 compared to a provision of $26.2 million in 2020. Net
charge-offs decreased $8.1 million from the prior year to $5.8 million in 2021. Net charge-offs were an annualized 0.16% of average
loans in the current year compared to 0.40% in 2020. Non-performing loans increased $2.7 million to $12.2 million compared to a year
ago and represented 0.33% of total loans at December 31, 2021.
Noninterest income totaled $46.9 million for the full year 2021, an increase of $3.7 million, or 9%, when compared to the prior year.
The increase is primarily attributed to increases in investment advisory income, investments in limited partnerships and insurance
income, partially offset by decreases in income from derivatives instruments, and net gain on investment securities. The increase in
investment advisory income of $2.1 million was primarily due to an increase in assets under management driven by a combination of
market gains, new customer accounts and contributions to existing accounts. Income from investments in limited partnerships increased
$2.0 million compared to the prior year based on performance of the underlying investments. The increase in insurance income of $1.3
million was driven by the two 2021 bolt-on acquisitions (North Woods Capital Benefits LLC in August and Landmark Group in
February) and growth in the legacy SDN business, including the impact of increasing insurance premiums. Income from derivative
instruments, net was $2.8 million lower than the prior year, primarily due to the execution of fewer swap transactions in 2021.
- 36 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Noninterest expense for the full year 2021 totaled $112.8 million, a $3.5 million increase compared to $109.3 million in the prior year.
Computer and data processing expense increased $2.5 million year-over-year, as a result of strategic investments in technology,
including digital banking initiatives and a customer relationship management solution that was deployed across all lines of business late
in 2021. Salaries and benefits expense increased $1.6 million year-over-year, primarily due to higher performance-based incentive
compensation and commissions, investments in personnel and the impact of 2021 acquisitions.
Income tax expense for the year was $19.5 million, representing an effective tax rate of 20.1% compared to an effective tax rate of
16.2% in 2020. The year-over-year increase in effective tax rate is primarily the result of higher pre-tax earnings in comparison to the
prior year. Effective tax rates are impacted by items of income and expense not subject to federal or state taxation. The Company’s
effective tax rates differ from statutory rates primarily because of interest income from tax-exempt securities, earnings on company
owned life insurance and tax credit investments placed in service.
Total assets were $5.52 billion at December 31, 2021, up $608.5 million from $4.91 billion at December 31, 2020.
Investment securities were $1.38 billion at December 31, 2021, up $484.1 million from December 31, 2020. The increase from year-
end 2020 was primarily due to the reinvestment of cash flow from the portfolio, coupled with the deployment of excess liquidity from
higher deposit levels into cash flowing agency backed securities.
Total loans were $3.68 billion at December 31, 2021, up $84.3 million, or 2%, from December 31, 2020.
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Commercial mortgage loans totaled $1.41 billion, an increase of $158.9 million, or 13%, from December 31, 2020.
Commercial business loans totaled $638.3 million, a decrease of $155.9 million, or 20%, from December 31, 2020. The
decrease was primarily attributable to PPP loans. At December 31, 2021 the aggregate PPP loan balance was $55.3 million, net
of deferred fees compared to $248.0 million, net of deferred fees at December 31, 2020.
Residential real estate loans totaled $577.3 million, a decrease of $22.5 million, or 4%, from December 31, 2020.
Consumer indirect loans totaled $958.0 million, an increase of $117.6 million, or 14%, from December 31, 2020.
Total deposits were $4.83 billion at December 31, 2021, an increase of $548.7 million from December 31, 2020, which was the result
of growth in all deposit categories. Short-term borrowings were $30.0 million at December 31, 2021, an increase of $24.7 million from
December 31, 2020. Short-term borrowings and brokered deposits have historically been utilized to manage the seasonality of public
deposits.
Shareholders’ equity was $505.1 million at December 31, 2021, compared to $468.4 million at December 31, 2020. Common book
value per share was $30.98 at December 31, 2021, an increase of $2.86, or 10%, from $28.12 at December 31, 2020. Tangible common
book value per share(1) was $26.26 at December 31, 2021, an increase of $2.74, or 12%, from $23.52 at December 31, 2020. The increase
in shareholders’ equity as compared to December 31, 2020, is primarily attributable to net income less dividends paid, net of the change
in accumulated other comprehensive loss.
The Company’s leverage ratio was 8.23% at December 31, 2021 compared to 8.25% at December 31, 2020. The Bank’s leverage ratio
and total risk-based capital ratio were 8.98% and 12.38%, respectively, at December 31, 2021, compared to 8.97% and 12.58%,
respectively at December 31, 2020.
(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.
- 37 -
Additional financial highlights of the Company are as follows:
MANAGEMENT’S DISCUSSION AND ANALYSIS
Performance ratios:
Net income, returns on:
Average assets
Average equity
Net income available to common shareholders, returns on:
Average common equity
Average tangible common equity (1)
Average tangible assets (1)
Common dividend payout ratio
Net interest margin (fully tax-equivalent)
Effective tax rate
Efficiency ratio (2)
Capital ratios:
Leverage ratio
Common equity Tier 1 capital ratio
Tier 1 capital ratio
Total risk-based capital ratio
Average equity to average assets
Common equity to assets
Tangible common equity to tangible assets (1)
At or for the year ended December 31,
2019
2020
2021
1.46%
16.01%
16.29%
19.37%
1.45%
22.45%
3.14%
20.1%
55.76%
8.23%
10.28%
10.68%
13.12%
9.10%
8.84%
7.59%
0.82%
8.49%
8.50%
10.25%
0.80%
45.22%
3.22%
16.2%
60.22%
8.25%
10.14%
10.59%
13.56%
9.61%
9.18%
7.80%
1.14%
11.61%
11.74%
14.45%
1.13%
33.67%
3.28%
17.8%
60.59%
9.00%
10.31%
10.80%
12.77%
9.82%
9.62%
8.05%
(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.
(2) The efficiency ratio provides a ratio of operating expenses to operating income. Efficiency ratio is calculated by dividing noninterest
expense by net revenue, which is defined as the sum of tax-equivalent net interest income and noninterest income before net gains
on investment securities. The efficiency ratio is not a financial measurement required by GAAP. However, the efficiency ratio is
used by management in its assessment of financial performance specifically as it relates to noninterest expense control. Management
also believes such information is useful to investors in evaluating Company performance.
Operational, Accounting and Reporting Impacts Related to the COVID-19 Pandemic
The COVID-19 pandemic has negatively impacted the global economy, including our operating footprint of Western and Central New
York. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed
into law on March 27, 2020. The CARES Act provided an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the
economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions
applicable to the Company include, but are not limited to:
(cid:3)
(cid:3)
Accounting for Loan Modifications - The CARES Act provides that a financial institution may elect to suspend (1) the
application of GAAP for certain loan modifications related to COVID-19 that would otherwise be categorized as a troubled
debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the
related impairment for accounting purposes.
Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the
Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”),
administered directly by the SBA. On December 27, 2020, the Consolidated Appropriations Act, 2021 provided approximately
$284 billion for PPP loans in an additional round of funding under the program and extended the PPP through March 31, 2021.
This additional round of PPP loan funding was authorized for first-time borrowers and for second draws by certain borrowers
who have previously received PPP loans. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which
extended the program to May 31, 2021.
(cid:3) Mortgage Forbearance - Under the CARES Act, a borrower with a federally backed mortgage loan that was experiencing
financial hardship due to COVID-19 was able to request a forbearance until December 31, 2021.
- 38 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Also, in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit
Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency
(“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the
“agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions
applicable to the Company include, but are not limited to:
(cid:3)
(cid:3)
(cid:3)
Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify
as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term
modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not
TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of
repayment terms, or insignificant delays in payment.
Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to
designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed
by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not
be considered past due during the period of the deferral.
Nonaccrual Status and Charge-offs - During short-term COVID-19 modifications, these loans generally should not be reported
as nonaccrual or as classified.
Effective March 23, 2020 through July 9, 2020, for consumer customers, the Bank waived early CD penalty fees for withdrawals up to
$20,000 (limited to one penalty-free withdrawal per CD account); eliminated all insufficient funds (overdrafts) and returned item fees;
eliminated all Pay by Phone fees; waived all late fees; offered the opportunity for monthly mortgage, home equity loan or home equity
line payment relief; offered the opportunity to defer unsecured consumer loans or lines of credit and secured consumer loans and lines
of credit payments; and offered unsecured personal loans up to $5,000, up to 60 months at 2.95% APR subject to credit approval
(additional terms and conditions may apply). In addition, ATM access fees were reinitiated on September 19, 2020.
As of December 31, 2021, we have helped more than 2,900 customers obtain more than $370 million in loans through the PPP. We
have helped customers complete the forgiveness process for approximately $320 million of these PPP loans through December 31, 2021.
The Company had $532.4 million of loans with modifications related to COVID-19 during 2020, with $46.2 million and $113.0 million
still on deferral as of December 31, 2021 and 2020, respectively. As of December 31, 2021, we have provided payment deferrals for
approximately 6,600 borrowers, the majority being consumer indirect loan customers. Less than 1% of our loan customers have active
payment deferrals as of December 31, 2021 as the majority of customers whose loans were subject to COVID-19 related deferrals have
returned to making regular payments.
- 39 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
GAAP to Non-GAAP Reconciliation
(In thousands, except per share data)
Computation of ending tangible common equity:
Common shareholders’ equity
Less: goodwill and other intangible assets, net
Tangible common equity
Computation of ending tangible assets:
Total assets
Less: goodwill and other intangible assets, net
Tangible assets
Tangible common equity to tangible assets (1)
Common shares outstanding
Tangible common book value per share (2)
Computation of average tangible common equity:
Average common equity
Average goodwill and other intangible assets, net
Average tangible common equity
Computation of average tangible assets:
Average assets
Average goodwill and other intangible assets, net
Average tangible assets
Net income available to common shareholders
Return on average tangible common equity (3)
Return on average tangible assets (4)
At or for the year ended December 31,
2019
2020
2021
$
$
$
$
$
$
$
$
$
$
487,850
74,400
413,450
5,520,779
74,400
5,446,379
7.59%
15,747
26.26
468,085
74,411
393,674
5,335,808
74,411
5,261,397
76,237
19.37%
1.45%
$
$
$
$
$
$
$
$
$
$
451,035
73,789
377,246
4,912,306
73,789
4,838,517
7.80%
16,042
23.52
433,908
74,364
359,544
4,693,225
74,364
4,618,861
36,871
10.25%
0.80%
421,619
74,923
346,696
4,384,178
74,923
4,309,255
8.05%
16,003
21.66
403,689
75,557
328,132
4,285,825
75,557
4,210,268
47,401
14.45%
1.13%
$
$
$
$
$
$
$
$
$
$
(1) Tangible common equity divided by tangible assets.
(2) Tangible common equity divided by common shares outstanding.
(3) Net income available to common shareholders divided by average tangible common equity.
(4) Net income available to common shareholders divided by average tangible assets.
This table contains disclosure that includes calculations for tangible common equity, tangible assets, tangible common equity to tangible
assets, tangible common book value per share, average tangible common equity, average tangible assets, return on average tangible
common equity and return on average tangible assets, which are determined by methods other than in accordance with GAAP. We
believe that these non-GAAP measures are useful to our investors as measures of the strength of our capital and ability to generate
earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide supplemental information that
may help investors to analyze our capital position without regard to the effects of intangible assets. Non-GAAP financial measures have
inherent limitations and are not uniformly utilized by issuers. Therefore, these non-GAAP financial measures should not be considered
in isolation, or as a substitute for comparable measures prepared in accordance with GAAP.
- 40 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2021 AND DECEMBER 31, 2020
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, 2021. Net interest
income is the difference between interest income on interest-earning assets, such as loans and investment securities, and interest expense
on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is
affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the
sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial
instruments, contractual maturities and repricing frequencies.
We use interest rate spread and net interest margin to measure and explain changes in net interest income. Interest rate spread is the
difference between the yield on earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest
margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate
spread because noninterest-bearing sources of funds (“net free funds”), principally noninterest-bearing demand deposits and
shareholders’ equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt
investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are
discussed on a taxable equivalent basis.
The Federal Reserve influences the general market rates of interest, which impacts the deposit and loan rates offered by many financial
institutions. The intended federal funds rate, which is the cost of immediately available overnight funds, remained at a range of 0.00%
to 0.25% at year-end 2021. The Federal Reserve had previously decreased the intended federal funds rate by 150 basis points due to two
rate cuts in March of 2020. On March 3, 2020 it decreased 50 basis points and on March 16, 2020 another 100 basis points, resulting in
a range of 0.00% to 0.25% at year-end 2020. The Federal Reserve had previously decreased the intended federal funds rate by 25 basis
points in each of August, September and October 2019, resulting in a range of 1.50% to 1.75% at year-end 2019. Our loan portfolio is
significantly affected by changes in the prime interest rate and changes in the prime interest rate generally follow changes in the federal
funds rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, remained at 3.25% at year-end
2021. The prime interest rate had previously decreased to 3.25% in March 2020, reflecting the rate cuts of 50 and 100 basis points after
the previous three 25 basis point decreases to 4.75% in 2019.
The following table reconciles interest income per the consolidated statements of income to interest income adjusted to a fully taxable
equivalent basis for the years ended December 31 (in thousands):
Interest income per consolidated statements of income
Adjustment to fully taxable equivalent basis
Interest income adjusted to a fully taxable equivalent basis
Interest expense per consolidated statements of income
Net interest income on a taxable equivalent basis
Analysis of Net Interest Income and Net Interest Margin
2021
2020
2019
167,205
626
167,831
12,475
155,356
$
$
161,299
871
162,170
22,314
139,856
$
$
168,800
1,103
169,903
38,888
131,015
$
$
Net interest income on a taxable equivalent basis for 2021 was $155.4 million, an increase of $15.5 million compared to $139.9 million
for 2020. The increase in net interest income was due primarily to increases in average loans of $212.7 million, or 6%, and average
investment securities of $334.1 million, or 42% compared to 2020 and a decrease in the cost of average interest-bearing liabilities. In
addition, the increase in net interest income from 2020 included an increase in deferred fee amortization on PPP loans of $5.1 million,
due to accelerated amortization of fees on PPP loans paid-off, primarily through the forgiveness process.
Our net interest margin for 2021 was 3.14%, eight-basis points lower than 3.22% from the prior year. This decrease was a function of a
nine-basis point lower contribution from net free funds and a one-basis point increase in the interest rate spread. The change in interest
rate spread was a net result of a 34-basis point decrease in the yield on average interest-earning assets and a 35-basis point decrease in
the cost of interest-bearing liabilities.
For the year ended December 31, 2021, the yield on average interest-earning assets of 3.39% was 34-basis points lower than 2020. Loan
yields decreased 13-basis points during 2021 to 4.05%. The yield on investment securities decreased 56-basis points during 2021 to
1.75%. Overall, the interest-earning asset rate changes decreased interest income by $9.4 million during 2021 while a favorable volume
variance increased interest income by $15.0 million, which collectively drove a $5.7 million increase in interest income.
- 41 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Average interest-earning assets were $4.95 billion for 2021 compared to $4.35 billion for 2020, an increase of $603.5 million, or 14%,
with average loans up $212.7 million from $3.44 billion to $3.65 billion and average securities up $334.1 million from $794.9 million
to $1.13 billion. The growth in average loans reflected increases in the commercial loans, residential real estate loans and consumer
indirect loans categories. Commercial loans, in particular, were up $162.2 million from $1.90 billion to $2.06 billion, or 9%, from 2020.
Average balances of PPP loans net of deferred fees, which are included in commercial loans, were $175.4 million and $176.0 million
for 2021 and 2020, respectively. Residential real estate loans were up $5.8 million, or 1%, and residential real estate lines were down
$15.1 million, or 16%. Consumer indirect loans increased $60.6 million, or 7%, and other consumer loans decreased by $702 thousand,
or 4%. Loans comprised 73.8% of average interest-earning assets during 2021 compared to 79.1% during 2020. Loans generally have
significantly higher yields compared to securities and federal funds sold and interest-bearing deposits and, as such, can have a more
positive effect on the net interest margin. The yield on average loans was 4.05% for 2021, a decrease of 13 basis points compared to
4.18% for 2020. An increase in the volume of average loans resulted in a $9.0 million increase in interest income, partially offset by a
$4.6 million decrease due to the unfavorable rate variance. Securities comprised 22.8% of average interest-earning assets in 2021
compared to 18.3% in 2020. The taxable equivalent yield on average securities was 1.75% in 2021 compared to 2.31% in 2020. An
increase in the volume of average securities resulted in a $5.9 million increase in interest income, partially offset by a $4.5 million
decrease due to the unfavorable rate variance. Our asset mix negatively impacted net interest margin because loans constituted a smaller
percentage and investment securities constituted a larger percentage of our interest-earning assets in 2021.
For the year ended December 31, 2021, the cost of average interest-bearing liabilities of 0.34% was 35 basis points lower than 2020 and
the cost of average interest-bearing deposits of 0.23% was 34 basis points lower than 2020. Average short-term borrowings decreased
$86.0 million from $86.5 million to $538 thousand in 2021. The decrease in average short-term borrowings was a result of our use of
brokered deposits as a cost effective alternative to Federal Home Loan Bank ("FHLB") borrowings. The cost of long-term borrowings
decreased 34 basis points to 5.75%. Overall, interest-bearing liability rate and volume decreases resulted in $9.8 million of lower interest
expense during 2021.
Average interest-bearing liabilities of $3.67 billion in 2021 were $422.7 million, or 13%, higher than 2020. On average, interest-bearing
deposits grew $482.3 million and noninterest-bearing demand deposits (a principal component of net free funds) were up $199.8 million.
The increase in average deposits was due to growth in all deposit categories including non-public deposits, public deposits, reciprocal
deposits and brokered deposits, which were utilized as a cost-effective alternative to FHLB borrowings during 2021. For further
discussion of our reciprocal and brokered deposits, refer to the “Funding Activities – Deposits” section of this Management’s Discussion
and Analysis. Overall, interest-bearing deposit rate and volume changes resulted in $9.7 million of lower interest expense during 2021.
Average short-term and long-term borrowings were $74.3 million in 2021, $59.6 million lower than in 2020. Overall, short- and long-
term borrowing rate and volume changes resulted in $135 thousand of lower interest expense during 2021.
- 42 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following tables present, for the periods indicated, information regarding: (i) the average 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. 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.
Interest-earning assets:
Federal funds sold and other interest-earning
deposits
Investment securities:
Taxable
Tax-exempt
Total investment securities
Loans:
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total loans
Total interest-earning assets
Less: Allowance for credit losses
Other noninterest-earning assets
Total assets
Interest-bearing liabilities:
Deposits:
Interest-bearing demand
Savings and money market
Time deposits
Total interest-bearing deposits
Short-term borrowings
Long-term borrowings
Total borrowings
Total interest-bearing liabilities
Noninterest-bearing demand deposits
Other noninterest-bearing liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income (tax-equivalent)
Interest rate spread
Net earning assets
Net interest margin (tax-equivalent)
Ratio of average interest-earning assets to
average interest-bearing liabilities
Average
Balance
2021
Interest
Years ended December 31,
2020
Average
Rate
Average
Balance
Interest
Average
Rate
Average
Balance
2019
Interest
Average
Rate
$
169,504
$
216
0.13% $
112,802
$
315
0.28% $
22,023
$
395
1.80%
1,007,420
121,592
1,129,012
734,748
1,327,772
593,375
82,210
896,769
15,305
3,650,179
4,948,695
(50,230)
437,343
$ 5,335,808
$
827,891
1,864,567
907,973
3,600,431
538
73,749
74,287
3,674,718
1,105,227
70,472
485,391
$ 5,335,808
$ 1,273,977
16,736
2,981
19,717
29,467
51,719
20,162
2,784
42,181
1,585
147,898
167,831
1,156
3,363
3,599
8,118
120
4,237
4,357
12,475
14,186
4,149
18,335
26,667
49,962
21,320
3,802
40,003
1,766
143,520
162,170
1,091
4,788
11,943
17,822
1,604
2,888
4,492
22,314
1.66
2.45
1.75
4.01
3.90
3.40
3.39
4.70
10.36
4.05
3.39
0.14
0.18
0.40
0.23
22.33
5.75
5.87
0.34
626,221
168,687
794,908
735,535
1,164,827
587,620
97,321
836,168
16,007
3,437,478
4,345,188
(45,697)
393,734
$ 4,693,225
$
714,904
1,443,692
959,541
3,118,137
86,495
47,387
133,882
3,252,019
905,412
84,558
451,236
$ 4,693,225
14,382
5,253
19,635
29,630
52,514
20,995
5,508
39,235
1,991
149,873
169,903
1,372
4,365
22,757
28,494
7,923
2,471
10,394
38,888
2.27
2.46
2.31
3.63
4.29
3.63
3.91
4.78
11.03
4.18
3.73
0.15
0.33
1.24
0.57
1.85
6.09
3.36
0.69
610,251
212,493
822,744
569,941
1,021,220
547,505
107,654
882,056
16,047
3,144,423
3,989,190
(34,143)
330,778
$ 4,285,825
$
655,534
983,447
1,098,440
2,737,421
309,893
39,235
349,128
3,086,549
721,133
57,126
421,017
$ 4,285,825
2.36
2.47
2.39
5.20
5.14
3.83
5.12
4.45
12.41
4.77
4.26
0.21
0.44
2.07
1.04
2.56
6.30
2.98
1.26
$ 155,356
$ 139,856
$ 131,015
3.05%
3.14%
$ 1,093,169
3.04%
3.22%
$
902,641
3.00%
3.28%
134.67%
133.62%
129.24%
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. A discussion of the effects of changing interest rates on net interest
income is set forth in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” included elsewhere in this report.
- 43 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Rate /Volume Analysis
The following table presents, on a tax-equivalent basis, the relative contribution of changes in volumes and changes in rates to changes
in net interest income for the periods indicated. The change in interest income or interest expense not solely due to changes in volume
or rate has been allocated in proportion to the absolute dollar amounts of the change in each (in thousands):
Increase (decrease) in:
Interest income:
Federal funds sold and interest-earning deposits
Investment securities:
Taxable
Tax-exempt
Total investment securities
Loans:
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total loans
Total interest income
Interest expense:
Deposits:
Interest-bearing demand
Savings and money market
Time deposits
Total interest-bearing deposits
Short-term borrowings
Long-term borrowings
Total borrowings
Total interest expense
Net interest income
Provision for Credit Losses
Change from 2020 to 2021
Rate
Total
Volume
Change from 2019 to 2020
Rate
Total
Volume
$
117 $
(216) $
(99) $
488 $
(568) $
(80)
7,034
(1,155)
5,879
(29)
6,601
207
(548)
2,859
(75)
9,015
15,011
(4,484)
(13)
(4,497)
2,829
(4,844)
(1,365)
(470)
(681)
(106)
(4,637)
(9,350)
163
1,148
(610)
701
(3,047)
1,524
(1,523)
(822)
15,833 $
(98)
(2,573)
(7,734)
(10,405)
1,563
(175)
1,388
(9,017)
(333) $
$
2,550
(1,168)
1,382
2,800
1,757
(1,158)
(1,018)
2,178
(181)
4,378
5,661
65
(1,425)
(8,344)
(9,704)
(1,484)
1,349
(135)
(9,839)
15,500
370
(1,077)
(707)
7,333
6,823
1,490
(493)
(2,104)
(5)
13,044
12,825
116
1,707
(2,602)
(779)
(4,576)
499
(4,077)
(4,856)
17,681 $
$
(566)
(27)
(593)
(10,296)
(9,375)
(1,165)
(1,213)
2,872
(220)
(19,397)
(20,558)
(397)
(1,284)
(8,212)
(9,893)
(1,743)
(82)
(1,825)
(11,718)
(8,840) $
(196)
(1,104)
(1,300)
(2,963)
(2,552)
325
(1,706)
768
(225)
(6,353)
(7,733)
(281)
423
(10,814)
(10,672)
(6,319)
417
(5,902)
(16,574)
8,841
The provision for credit losses was a benefit of $8.3 million for the year ended December 31, 2021 compared with a provision of $27.2
million for 2020. There was a benefit for credit losses in each quarter of 2021 as a result of continued improvement in the national
unemployment forecast, the designated loss driver for our current expected credit loss (“CECL”) model, positive trends in qualitative
factors, a reduction in specific reserves and lower net charge-offs resulting in releases of credit loss reserves. The elevated level of
provision for credit losses for 2020 was driven by the adoption of the CECL standard and the impact of COVID-19 pandemic on the
economic environment. The designated loss driver for our CECL model is the national unemployment forecast, which spiked in early
2020 at the onset of the pandemic and improved in 2021. The provision for credit losses - loans varies based primarily on forecasted
unemployment rates, loan growth, net charge-offs, collateral values associated with collateral dependent loans and qualitative factors.
See the “Allowance for Credit Losses” and “Non-Performing Assets and Potential Problem Loans” sections of this Management’s
Discussion and Analysis for further discussion.
- 44 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Noninterest Income
The following table summarizes our noninterest income for the years ended December 31 (in thousands):
Service charges on deposits
Insurance income
Card interchange income
Investment advisory
Company owned life insurance
Investments in limited partnerships
Loan servicing
Income from derivative instruments, net
Net gain on sale of loans held for sale
Net gain on investment securities
Net gain (loss) on other assets
Net loss on tax credit investments
Other
Total noninterest income
2021
2020
2019
$
$
5,571
5,750
8,498
11,672
2,947
2,081
415
2,695
2,950
71
441
(431)
4,246
46,906
$
$
4,810
4,403
7,281
9,535
1,902
104
249
5,521
3,858
1,599
(61)
(275)
4,250
43,176
$
$
7,241
4,570
6,779
9,187
1,758
352
432
2,274
1,352
1,677
29
(528)
5,258
40,381
Service charges on deposits increased $761 thousand, or 16%, to $5.6 million in 2021, compared to $4.8 million in 2020. The increase
in 2021 was primarily due to our COVID-19 relief initiatives implemented from March 23, 2020 to July 9, 2020.
Insurance income increased $1.3 million, or 31%, to $5.8 million in 2021, compared to $4.4 million in 2020. The increase was primarily
due to two 2021 bolt-on acquisitions and growth in the legacy SDN business, including the impact of increasing insurance premiums.
Card interchange income increased $1.2 million, or 17%, to $8.5 million in 2021, compared to $7.3 million in 2020. The increase was
primarily due to an increase in customer transactions.
Investment advisory income increased $2.1 million, or 22%, to $11.7 million in 2021, compared to $9.5 million in 2020. The increase
was primarily due to an increase in assets under management driven by a combination of market gains, new customer accounts and
contributions to existing accounts.
Company owned life insurance income increased $1.0 million, or 55%, to $2.9 million in 2021, compared to $1.9 million in 2020. We
made additional investments in company-owned life insurance of $20.0 million in the third quarter of 2021 and $30.0 million in the
fourth quarter of 2020.
Income from investments in limited partnerships increased $2.0 million to $2.1 million in 2021, compared to $104 thousand in 2020.
We have investments in limited partnerships, primarily small business investment companies, and account for these investments under
the equity method. The income from these investments fluctuates based on the maturity and performance of the underlying investments.
Income from derivative instruments, net decreased $2.8 million to $2.7 million in 2021, compared to $5.5 million in 2020. Fee income
per transaction in 2021 was higher than in 2020, however, aggregate swap fee income decreased $2.2 million as a result of fewer swap
transactions. Mortgage derivative income was $589 thousand lower than 2020, primarily as a result of fewer mortgage loans in the
pipeline.
Net gain on sale of loans held for sale decreased $908 thousand to $3.0 million in 2021, compared to $3.9 million in 2020. The decrease
was primarily driven by lower transaction volumes and margins in 2021. Transaction volume and margin were at historically high levels
in the second half of 2020, driven by mortgage refinancing activity.
Net gain on investment securities decreased $1.5 million to $71 thousand in 2021, compared to $1.6 million in 2020. The amount and
timing of our sale of investment securities is dependent on several factors, including our prudent efforts to realize gains while managing
duration, premium and credit risk.
- 45 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Noninterest Expense
The following table summarizes our noninterest expense for the years ended December 31 (in thousands):
Salaries and employee benefits
Occupancy and equipment
Professional services
Computer and data processing
Supplies and postage
FDIC assessments
Advertising and promotions
Amortization of intangibles
Restructuring charges
Other
Total noninterest expense
2021
2020
2019
60,893
14,371
6,535
14,112
1,769
2,624
1,704
1,060
111
9,571
112,750
$
$
59,336
13,655
6,326
11,645
1,975
2,242
2,609
1,134
1,492
8,840
109,254
$
$
56,330
13,552
5,424
9,983
2,036
1,005
3,577
1,250
-
9,671
102,828
$
$
Salaries and employee benefits expense increased $1.6 million, or 3%, to $60.9 million in 2021, compared to $59.3 million in 2020. The
increase was primarily attributable to higher performance-based incentive compensation and commissions, investments in personnel
and the impact of 2021 acquisitions.
Occupancy and equipment expense increased $716 thousand, or 5%, to $14.4 million in 2021 compared to $13.7 million in 2020. The
increase was primarily due to the purchase of personal computers and security equipment for multiple locations and expenses related to
two bank branches opened in June 2021.
Computer and data processing expense increased $2.5 million, or 21%, to $14.1 million in 2021, compared to $11.6 million in 2020.
The increase was primarily due to investments in technology, including digital banking initiatives and a customer relationship
management solution that was deployed across all lines of business late in 2021.
Advertising and promotions expense decreased $905 thousand, or 35%, to $1.7 million in 2021, compared to $2.6 million in 2020. The
decrease was primarily related to a temporary reduction in external advertising expense. The Company decreased its total advertising
spend in both 2021 and 2020 as a result of the COVID-19 pandemic and is continuing to evaluate its long-term marketing strategy.
Restructuring charges were $1.5 million in 2020, representing non-recurring real estate related charges related to the 2020 closure of six
branches and a staffing reduction. Additional related restructuring charges of $111 thousand were incurred in 2021 as a result of property
valuation adjustments.
The efficiency ratio for the year ended December 31, 2021 was 55.76% compared with 60.22% for 2020. The lower efficiency ratio is
a result of higher net interest income associated with an increase in average interest-earning assets for the year, deferred fee amortization
on PPP loans, an increase in noninterest income and a decrease in interest expense compared to the prior year. The efficiency ratio is
calculated by dividing total noninterest expense by net revenue, defined as the sum of tax-equivalent net interest income and noninterest
income before net gains on investment securities. An increase in the efficiency ratio indicates that more resources are being utilized to
generate the same volume of income, while a decrease indicates a more efficient allocation of resources. The efficiency ratio, a banking
industry financial measure, is not required by GAAP. However, the efficiency ratio is used by management in its assessment of financial
performance specifically as it relates to noninterest expense control. Management also believes such information is useful to investors
in evaluating Company performance.
Income Taxes
We recorded income tax expense of $19.5 million for 2021, compared to $7.4 million for 2020. In 2021 and 2020, we recognized tax
credit investments resulting in a $2.6 million and $1.5 million reduction in income tax expense, respectively, and a $431 thousand and
$275 thousand net loss recorded in noninterest income, respectively.
Our effective tax rate was 20.1% for 2021 compared to 16.2% for 2020. Effective tax rates are typically impacted by items of income
and expense that are not subject to federal or state taxation. Our effective tax rates reflect the impact of these items, which include, but
are not limited to, interest income from tax-exempt securities, earnings on company owned life insurance and the impact of tax credit
investments. In addition, our effective tax rate for 2021 and 2020 reflects the New York State tax benefit generated by our real estate
investment trust.
- 46 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2020 AND DECEMBER 31, 2019
A discussion regarding our financial condition and results of operations for the year ended December 31, 2019 and year-to-year
comparisons between 2020 and 2019, 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, 2020 and are incorporated by reference herein.
ANALYSIS OF FINANCIAL CONDITION
OVERVIEW
At December 31, 2021, we had total assets of $5.52 billion, an increase of 12% from $4.91 billion as of December 31, 2020, largely
attributable to organic loan growth and an increase in our investment securities portfolio. Net loans were $3.64 billion as of December 31,
2021, up $97.0 million, or 3%, when compared to $3.54 billion as of December 31, 2020. The increase in net loans was primarily
attributable to organic growth in our consumer indirect loans. Non-performing assets totaled $12.2 million as of December 31, 2021,
down $317 thousand from a year ago. Total deposits amounted to $4.83 billion as of December 31, 2021, up $548.7 million, or 13%,
compared to December 31, 2020. As of December 31, 2021, borrowed funds totaled $103.9 million, compared to $78.9 million as of
December 31, 2020. Common book value per common share was $30.98 and $28.12 as of December 31, 2021 and 2020, respectively.
As of December 31, 2021, our total shareholders’ equity was $505.1 million compared to $468.4 million a year earlier.
INVESTING ACTIVITIES
The following table summarizes the composition of our available for sale and held to maturity securities portfolios (in thousands).
Securities available for sale:
U.S. Government agency and government-sponsored enterprise
securities
Mortgage-backed securities:
Agency mortgage-backed securities
Non-Agency mortgage-backed securities
Asset-backed securities
Total available for sale securities
Securities held to maturity:
State and political subdivisions
Mortgage-backed securities
Total held to maturity securities
Allowance for credit losses - securities
Total held to maturity securities, net
Total investment securities
Investment Securities Portfolio Composition
At December 31,
2021
2020
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
15,793
$
15,891 $
6,239
$
6,635
1,169,042
-
-
1,184,835
111,399
94,187
205,586
(5)
205,581
$ 1,390,416
1,162,214
410
-
1,178,515
113,511
96,309
209,820
$ 1,388,335 $
601,426
-
-
607,665
144,506
127,467
271,973
(7)
271,966
879,631
620,989
435
-
628,059
148,984
133,051
282,035
$
910,094
Our investment policy is contained within our overall Asset-Liability Management and Investment Policy. This policy dictates that
investment decisions will be made based on the safety of the investment, liquidity requirements, potential returns, cash flow targets,
need for collateral and desired risk parameters. In pursuing these objectives, we consider the ability of an investment to provide earnings
consistent with factors of quality, maturity, marketability, pledgeable nature and risk diversification. Our Chief Financial Officer and
Treasurer, guided by ALCO, is responsible for investment portfolio decisions within the established policies.
Our available for sale (“AFS”) investment securities portfolio increased $550.5 million from $628.1 million at December 31, 2020 to
$1.18 billion at December 31, 2021. The increase from year-end 2020 was primarily due to the reinvestment of cash flow from the
portfolio, coupled with the deployment of excess liquidity from higher deposit levels into cash flowing agency backed securities. Our
AFS portfolio had a net unrealized loss totaling $6.3 million at December 31, 2021 compared to a net unrealized gain of $20.4 million
at December 31, 2020. The fair value of most of the investment securities in the AFS portfolio fluctuates as market interest rates change.
- 47 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Impairment Assessment
For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that we
will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously recognized
allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither case is affirmative,
the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other factors. In making this
assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security
by a rating agency and any adverse conditions specifically related to the security, among other factors. If this assessment indicates that
a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis
of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and
an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost
basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Adjustments to the allowance are reported in our income statement as a component of credit loss expense. AFS securities are charged-
off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management
or when either of the aforementioned criteria regarding intent or requirement to sell is met. For the year ended December 31, 2021 and
2020 no allowance for credit losses has been recognized on AFS securities in an unrealized loss position as management does not believe
any of the securities are impaired due to reasons of credit quality.
As of December 31, 2021, we do not have the intent to sell any of our securities in a loss position and we believe that it is not likely that
we will be required to sell any such securities before the anticipated recovery of amortized cost. The unrealized losses are largely due
to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is
expected to recover as the bonds approach their maturity date, repricing date or if market yields for such investments decline. 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, 2021,
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. The following discussion provides further details of our assessment of the AFS securities
portfolio by investment category.
U.S. Government Agencies and Government Sponsored Enterprises (“GSE”). As of December 31, 2021, there was one security in
an unrealized loss position for less than 12 months in the U.S. Government agencies and GSE portfolio with an unrealized loss totaling
$97 thousand. The decline in fair value is attributable to changes in interest rates, not to credit quality. We did not have the intent to
sell this security and it was likely that we will not be required to sell the security before the anticipated recovery.
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, 2021, 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. The GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. Government.
As of December 31, 2021, there were 116 securities in the AFS Agency MBS portfolio that were in an unrealized loss position with
unrealized losses totaling $14.7 million. Of these, 28 were in an unrealized loss position for 12 months or longer and had an aggregate
fair value of $172.2 million and unrealized losses of $4.7 million dollars. The unrealized loss of these securities is driven by the timing
of the purchases of fixed-rate securities during the extended low interest rate environments experienced over the past two years, which
has been compounded with subsequent increases in benchmark interest rates. 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, 2021 on
such Agency MBS to be credit related. As of December 31, 2021, we did not intend to sell any Agency MBS that were in an unrealized
loss position, all of which were performing in accordance with their terms.
Non-Agency Mortgage-backed Securities. Our non-Agency MBS portfolio consists of positions in one privately issued whole loan
collateralized mortgage obligations with a fair value and net unrealized gain of $410 thousand as of December 31, 2021. As of that date,
the one non-Agency MBS was rated below investment grade. This security was not in an unrealized loss position.
Other Investments. As a member of the FHLB, the Bank is required to hold FHLB stock. The amount of required FHLB stock is based
on the Bank’s asset size and the amount of borrowings from the FHLB. We have assessed the ultimate recoverability of our FHLB stock
and believe that no impairment currently exists. As a member of the FRB system, we are required to maintain a specified investment in
FRB stock based on a ratio relative to our capital. At December 31, 2021, our ownership of FHLB and FRB stock totaled $4.4 million
and $6.4 million, respectively, and is included in other assets and recorded at cost, which approximates fair value.
- 48 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
LENDING ACTIVITIES
Total loans were $3.68 billion at December 31, 2021, an increase of $84.3 million, or 2%, from December 31, 2020. Commercial loans
represented 55.7% of total loans at the end of 2021. Consumer loans represented 44.3% of total loans at December 31, 2021. The
composition of our loan portfolio, excluding loans held for sale and including net unearned income and net deferred fees and costs, is
summarized as follows (in thousands):
Commercial business
Commercial mortgage
Total commercial
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total consumer
Total loans
Less: Allowance for credit losses
Total loans, net
Loan Portfolio Composition
At December 31,
2021
2020
Amount
Percent
Amount
Percent
$
$
638,293
1,412,788
2,051,081
577,299
78,531
958,048
14,477
1,628,355
3,679,436
39,676
3,639,760
17.3% $
38.4
55.7
15.7
2.2
26.0
0.4
44.3
100.0%
$
794,148
1,253,901
2,048,049
599,800
89,805
840,421
17,063
1,547,089
3,595,138
52,420
3,542,718
22.1%
34.9
57.0
16.7
2.5
23.4
0.4
43.0
100.0%
Commercial business loans decreased $155.9 million from December 31, 2020 to $638.3 million at December 31, 2021. The decrease
was driven by the forgiveness or repayment of PPP loans. PPP loans net of deferred fees are included in commercial business loans and
were $55.3 million at December 31, 2021 and $248.0 million at December 31, 2020. Accordingly, commercial business loans excluding
the impact of PPP loans increased 7% from December 31, 2020. Commercial mortgage loans increased $158.9 million, or 13%, from
December 31, 2020 to $1.41 billion at December 31, 2021. The credit risk related to commercial loans is largely influenced by general
economic conditions, including the impact of the COVID-19 pandemic on small to mid-sized business in our market area, inflation, and
the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.
Factors that are important to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of
existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an appropriate
allowance for credit losses, and sound nonaccrual and charge off policies.
An active credit risk management process is used for commercial loans to further ensure that sound and consistent credit decisions are
made. Credit risk is controlled by detailed underwriting procedures, comprehensive loan administration, and periodic review of
borrowers’ outstanding loans and commitments. Borrower relationships are formally reviewed and graded on an ongoing basis for early
identification of potential problems. Further analyses by customer, industry, and geographic location are performed to monitor trends,
financial performance, and concentrations.
We participate in various lending programs in which guarantees are supplied by U.S. government agencies, such as the SBA, U.S.
Department of Agriculture, Rural Economic and Community Development and Farm Service Agency, among others. As of
December 31, 2021, the principal balance of such loans (included in commercial loans) was $87.6 million and the guaranteed portion
amounted to $72.7 million. Excluding PPP Loans, the principal balance of such loans (included in commercial loans) was $30.1 million
and the guaranteed portion amounted to $15.2 million. Most of these loans were guaranteed by the SBA.
Commercial business loans were $638.3 million at the end of 2021, down $155.9 million, or 20%, since the end of 2020, and comprised
17.3% of total loans outstanding at December 31, 2021, compared to 22.1% at December 31, 2020. The decrease in commercial business
loans was primarily driven by the forgiveness or repayment of PPP loans. As of December 31, 2021, we had $55.3 million of PPP loans,
net of deferred loan fees and costs compared to $248.0 million at December 31, 2020. We typically originate business loans of up to
$15.0 million for small to mid-sized businesses in our market area for working capital, equipment financing, inventory financing,
accounts receivable financing, or other general business purposes. Loans of this type are in a diverse range of industries. As of December
31, 2021, commercial business SBA loans including PPP loans accounted for a total of $75.1 million, or 12% of our commercial business
loan portfolio.
- 49 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Commercial mortgage loans totaled $1.41 billion at December 31, 2021, up $158.9 million, or 13%, from December 31, 2020, and
comprised 38.4% of total loans, compared to 34.9% at December 31, 2020. Commercial mortgage loans include both owner occupied
and non-owner occupied commercial real estate loans. Approximately 23% and 24% of our commercial mortgage portfolio at
December 31, 2021 and 2020, respectively, was owner occupied commercial real estate. The majority of our commercial real estate
loans are secured by office buildings, manufacturing facilities, distribution/warehouse facilities, and retail centers, which are generally
located in our local market area. As of December 31, 2021, commercial mortgage SBA loans accounted for a total of $5.4 million or
less than one percent of our commercial mortgage loan portfolio.
We determine our current lending standards for commercial real estate and real estate construction lending by property type and
specifically address many criteria, including: maximum loan amounts, maximum loan-to-value (“LTV”), requirements for pre-leasing
or pre-sales, minimum debt-service coverage ratios, minimum borrower equity, and maximum loan to cost. 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 $1.63 billion at December 31, 2021, up $81.3 million compared to 2020, and represented 44.3% of the 2021
year-end loan portfolio versus 43.0% at year-end 2020. Loans in this classification include residential real estate loans, residential real
estate lines, indirect consumer and other consumer installment loans. Credit risk for these types of loans is generally influenced by
general economic conditions, including inflation, the impact of the COVID-19 pandemic on the employment income of these borrowers,
the characteristics of individual borrowers, and the nature of the loan collateral. Risks of loss are generally on smaller average balances
per loan spread over many borrowers. Once charged off, there is usually less opportunity for recovery on these smaller retail loans.
Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers, monitoring payment histories, and taking
appropriate collateral and guaranty positions.
Residential real estate portfolios include conventional first lien mortgages and home equity loans and lines of credit. For conventional
first lien mortgages, we generally limit the maximum loan to 85% of collateral value without credit enhancement (e.g. personal mortgage
insurance). A portion of our fixed-rate conventional mortgage loans are sold in the secondary market with servicing rights retained. Our
conventional mortgage products continue to be underwritten using FHLMC secondary marketing guidelines. Our underwriting
guidelines for home equity products include a combination of borrower FICO (credit score), the LTV of the property securing the loan
and evidence of the borrower having sufficient income to repay the loan. Currently, for home equity products, the maximum acceptable
LTV is 90%. The average FICO score for new home equity production was 768 and 764 during the years ended December 31, 2021 and
2020, respectively.
Residential real estate loans totaled $577.3 million at the end of 2021, down $22.5 million, or 4%, from the end of the prior year and
comprised 15.7% and 16.7% of total loans outstanding at December 31, 2021 and December 31, 2020, respectively. The residential real
estate line portfolio amounted to $78.5 million at December 31, 2021 down $11.3 million, or 13%, compared to 2020 and represented
2.2% of the 2021 year-end loan portfolio versus 2.5% at year-end 2020. The residential real estate loans and lines portfolios had a
weighted average LTV at origination of approximately 70% and 69% at December 31, 2021 and 2020, respectively. Approximately
93% and 92% of the loans and lines were first lien positions at December 31, 2021 and 2020, respectively.
Consumer indirect loans amounted to $958.0 million at December 31, 2021 up $117.6 million, or 14%, compared to 2020 and
represented 26.0% of the 2021 year-end loan portfolio versus 23.4% at year-end 2020. The loans are primarily for the purchase of
automobiles (both new and used) and light duty trucks primarily by individuals, but also by corporations and other organizations. The
loans are originated through dealerships and assigned to us with terms that typically range from 36 to 84 months. During the year ended
December 31, 2021, we originated $504.3 million in indirect loans with a mix of approximately 25% new vehicles and 75% used
vehicles. This compares with $318.9 million in indirect loans with a mix of approximately 33% new vehicles and 67% used vehicles for
the same period in 2020. We do business with over 450 franchised auto dealers located in Western, Central, and the Capital District of
New York, and Northern and Central Pennsylvania. The average FICO score for indirect loan production was 706 and 712 during the
years ended December 31, 2021 and 2020, respectively. Other consumer loans totaled $14.5 million at December 31, 2021, down 2.6
million, or 15%, compared to 2020, and represented less than one percent of the 2021 and 2020 year-end loan portfolio. Other consumer
loans consist of personal loans (collateralized and uncollateralized) and deposit account collateralized loans.
Our loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within our operating footprint.
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, 2021,
no significant concentrations, as defined above, existed in our portfolio in excess of 10% of total loans.
- 50 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 $6.2 million and $4.3 million as of December 31, 2021 and 2020,
respectively.
We sell certain qualifying newly originated or refinanced residential real estate loans on the secondary market. Residential real estate
loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $272.7 million and
$241.7 million as of December 31, 2021 and 2020, respectively.
Allowance for Credit Losses
The following table summarizes the activity in the allowance for credit losses - loans (in thousands).
Allowance for credit losses - loans, beginning of period, prior
to adoption of ASC 326
Impact of adopting ASC 326
Allowance for credit losses - loans, beginning of period, after
adoption of ASC 326
Net charge-offs (recoveries):
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total net charge-offs
Provision (benefit) for credit losses - loans
Allowance for credit losses - loans, end of year
Net loan charge-offs (recoveries) to average loans:
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total loans
Allowance for credit losses - loans to total loans
Allowance for credit losses - loans to nonaccrual loans
Allowance for credit losses - loans to non-performing loans
Credit Loss - Loans Analysis
Year Ended December 31,
2020
2021
2019
$
$
52,420
-
52,420
(212)
3,814
56
141
1,256
705
5,760
(6,984)
39,676
$
$
30,482
9,594
40,076
7,384
1,755
72
(3)
4,278
329
13,815
26,159
52,420
$
$
33,914
-
33,914
1,989
2,980
297
7
5,420
783
11,476
8,044
30,482
-0.03%
0.29%
0.01%
0.17%
0.14%
4.61%
0.16%
1.08%
349%
326%
1.00%
0.15%
0.01%
0.00%
0.51%
2.06%
0.40%
1.46%
564%
551%
0.35%
0.29%
0.05%
0.01%
0.61%
4.88%
0.37%
0.95%
353%
353%
Net charge-offs of $5.8 million in 2021 represented 0.16% of average loans compared to $13.8 million, or 0.40%, in 2020. The decrease
in commercial business net charge-offs in 2021 was primarily due to an $8.2 million partial charge-off of an $11.9 million commercial
loan downgraded in the first quarter of 2020 and for which a foreclosure occurred in the third quarter of 2020. The borrower’s business
was related to the hospitality industry and the downgrade and charge-off were precipitated by the impact of the COVID-19 pandemic.
The increase in commercial mortgage net charge-offs in 2021 was primarily due to a $3.8 million partial charge off of an $7.8 million
commercial loan downgraded in the fourth quarter of 2021. The allowance for credit losses - loans was $39.7 million at December 31,
2021, compared with $52.4 million at December 31, 2020. The ratio of the allowance for credit losses - loans to total loans was 1.08%
and 1.46% at December 31, 2021 and 2020, respectively. The ratio of allowance for credit losses - loans to non-performing loans was
326% at December 31, 2021, compared with 551% at December 31, 2020.
- 51 -
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
allocation is made for analytical purposes and is not necessarily indicative of the categories in which actual losses may occur. The total
allowance is available to absorb losses from any segment of the loan portfolio (in thousands).
Allowance for Credit Losses - Loans by Loan Category
At December 31,
2021
2020
Credit
Loss
Allowance
Percentage
of loans by
category to
total loans
Loan
Loss
Allowance
Percentage
of loans by
category to
total loans
$
$
11,099
14,777
1,604
379
11,611
206
39,676
17.3% $
38.4
15.7
2.2
26.0
0.4
100.0% $
13,580
21,763
3,924
674
12,165
314
52,420
22.1%
34.9
16.7
2.5
23.4
0.4
100.0%
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total
The Company adopted ASC 326 effective January 1, 2020, which resulted in an increase to the allowance for credit losses - loans of
$9.6 million and established a reserve for unfunded commitments of $2.1 million, for a total pre-tax cumulative effect adjustment of
$11.7 million.
The allowance for credit losses for pooled loans estimate is based upon periodic review of the collectability of the loans quantitatively
correlating historical loan experience with reasonable and supportable forecasts using forward looking information. 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. The Company establishes a specific reserve for
individually evaluated loans which do not share similar risk characteristics with the loans included in the forecasted allowance for credit
losses. These individually evaluated loans are removed from the pooling approach discussed above for the forecasted allowance for
credit losses, and include nonaccrual loans, TDRs, and other loans deemed appropriate by management. 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, 2021.
Assessing the adequacy of the allowance for credit losses involves substantial uncertainties and is based upon management’s evaluation
of the amounts required to meet estimated charge-offs in the loan portfolio after weighing a variety of factors, including the risk profile
of our loan products and customers.
Factors beyond our control, however, such as general national and local economic conditions, can adversely impact the adequacy of the
allowance for credit losses. As a result, no assurance can be given that adverse economic conditions or other circumstances will not
result in increased losses in the portfolio or that the allowance for credit losses will be sufficient to meet actual loan losses. See Part I,
Item 1A “Risk Factors” for the risks impacting this estimate. Management presents a quarterly review of the adequacy of the allowance
for credit losses to the Audit Committee of our Board of Directors based on the methodology that is described in further detail in Part I,
Item I “Business” under the section titled “Lending Activities.” See also “Critical Accounting Estimates” for additional information on
the allowance for credit losses.
The adequacy of the allowance for credit losses is subject to ongoing management review. While management evaluates currently
available information in establishing the allowance for credit losses - loans, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the evaluations. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review our allowance for credit losses - loans. Such agencies may require us to
increase the allowance based on their judgments about information available to them at the time of their examination.
- 52 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-performing Assets and Potential Problem Loans
The following table summarizes our non-performing assets (in thousands):
Nonaccrual loans:
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total nonaccrual loans
Accruing loans 90 days or more delinquent
Total non-performing loans
Foreclosed assets
Total non-performing assets
Nonaccrual loans to total loans
Non-performing loans to total loans
Non-performing assets to total assets
$
$
Non-performing Assets
At December 31,
2021
2020
602
6,414
2,373
200
1,780
-
11,369
797
12,166
-
12,166
$
$
1,975
2,906
2,587
323
1,495
-
9,286
231
9,517
2,966
12,483
0.31%
0.33%
0.22%
0.26%
0.26%
0.25%
Non-performing assets include non-performing loans and foreclosed assets. Non-performing assets at December 31, 2021 were $12.2
million, a decrease of $317 thousand from $12.5 million at December 31, 2020. The primary component of non-performing assets is
non-performing loans, which were $12.2 million or 0.33% of total loans at December 31, 2021, compared with $9.5 million or 0.26%
of total loans at December 31, 2020. The increase in nonperforming loans was primarily due to the downgrade of a $7.8 million
commercial mortgage loan, with $3.8 million partially charged-off, in the fourth quarter of 2021.
Approximately $7.8 million, or 69%, of the $11.4 million of nonaccrual loans, a component of non-performing loans, as of December 31,
2021 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. We had no TDRs included in nonaccrual loans at December 31, 2021 and $200 thousand at
December 31, 2020. Additionally, we had no TDRs that were accruing interest as of December 31, 2021 and December 31, 2020.
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 no properties representing foreclosed asset holdings at December 31,
2021 and two properties totaling $3.0 million at December 31, 2020. The decrease in foreclosed assets during 2021 was primarily the
result of the sale of an asset on which foreclosure occurred in the third quarter of 2020. The borrower's business was related to the
hospitality industry and the downgrade and partial charge-off in the first quarter of 2020 were precipitated by the impact of the COVID-
19 pandemic.
Potential problem loans are loans that are currently performing, but information known about possible credit problems of the borrowers
causes us to have concern as to the ability of such borrowers to comply with the present loan payment terms and may result in disclosure
of such loans as nonperforming at some time in the future. These loans remain in a performing status due to a variety of factors, including
payment history, the value of collateral supporting the credits, and/or personal or government guarantees. We consider loans classified
as substandard, which continue to accrue interest, to be potential problem loans. We identified $22.7 million and $17.9 million in loans
that continued to accrue interest which were classified as substandard as of December 31, 2021 and 2020, respectively.
- 53 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
FUNDING ACTIVITIES
Deposits
The following table summarizes the composition of our deposits (dollars in thousands).
Noninterest-bearing demand
Interest-bearing demand
Savings and money market
Time deposits
Total deposits
At December 31,
2021
2020
Amount
$ 1,107,561
864,528
1,933,047
921,954
$ 4,827,090
Percent
Amount
Percent
22.9% $ 1,018,549
731,885
17.9
1,642,340
40.0
19.1
885,593
100.0% $ 4,278,367
23.8%
17.1
38.4
20.7
100.0%
As of December 31, 2021 and 2020, the aggregate amount of uninsured deposits (deposits in amounts greater than $250,000, which is
the maximum amount for federal deposit insurance) was $1.29 billion and $1.08 billion, respectively. The portion of our time deposits
by account that were in excess of the FDIC insurance limit was $182.3 million and $155.3 million at December 31, 2021 and 2020,
respectively. The maturities of our uninsured time deposits at December 31, 2021 were as follows: $45.2 million in three months or less;
$74.7 million between three months and six months; $62.1 million between six months and one year; and $287 thousand over one year.
We offer a variety of deposit products designed to attract and retain customers, with the primary focus on building and expanding long-
term relationships. At December 31, 2021, total deposits were $4.83 billion, representing an increase of $548.7 million, or 13%, for the
year. The increase from December 31, 2020, was primarily due to growth in non-public, public and reciprocal deposits. Time deposits
were approximately 19% and 21% of total deposits at December 31, 2021 and 2020, respectively.
Nonpublic deposits, the largest component of our funding sources, totaled $2.70 billion and $2.55 billion at December 31, 2021 and
2020, respectively, and represented 56% and 60% of total deposits as of the end of each period, respectively. We have managed this
segment of funding through a strategy of competitive pricing that minimizes the number of customer relationships that have only a
single service high cost deposit account.
As an additional source of funding, we offer a variety of public (municipal) deposit products to the towns, villages, counties and school
districts within our market. Public deposits generally range from 20% to 30% of our total deposits. There is a high degree of seasonality
in this component of funding, because the level of deposits varies with the seasonal cash flows for these public customers. We maintain
the necessary levels of short-term liquid assets to accommodate the seasonality associated with public deposits. Total public deposits
were $1.10 billion and $834.9 million at December 31, 2021 and December 31, 2020, respectively, and represented 23% and 20% of
total deposits as of the end of each period, respectively.
We participate in reciprocal deposit programs, which enable depositors to receive FDIC insurance coverage for deposits otherwise
exceeding the maximum insurable amount. Through these programs, deposits in excess of the maximum insurable amount are placed
with multiple participating financial institutions. Reciprocal deposits totaled $771.4 million at December 31, 2021, compared to $612.3
million at December 31, 2020, and represented 16% and 14% of total deposits as of the end of each period, respectively.
Brokered deposits totaled $254.7 million and $279.6 million at December 31, 2021 and 2020, respectively, and represented 5% and 7%
of total deposits as of the end of each period, respectively.
Borrowings
The Company classifies borrowings as short-term or long-term in accordance with the original terms of the agreement. Outstanding
borrowings are summarized as follows as of December 31 (in thousands):
Short-term borrowings:
Short-term FHLB borrowings
Long-term borrowings:
Subordinated notes, net
Total borrowings
2021
2020
$
$
30,000
73,911
103,911
$
$
5,300
73,623
78,923
- 54 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Short-term Borrowings
Short-term FHLB borrowings have original maturities of less than one year and include overnight borrowings which we typically utilize
to address short term funding needs as they arise. Short-term FHLB borrowings at December 31, 2021 consisted of $30.0 million in
short-term borrowings. Short-term FHLB borrowings at December 31, 2020 consisted of $5.3 million in short-term borrowings. The
FHLB borrowings are collateralized by securities from the Company’s investment portfolio and certain qualifying loans. At
December 31, 2021 and 2020, the Company’s borrowings had a weighted average rate of 0.34% and 1.70%, respectively.
We have credit capacity with the FHLB and can borrow through facilities that include amortizing and term advances or repurchase
agreements. We had approximately $201.7 million of immediate credit capacity with the FHLB as of December 31, 2021. We had
approximately $613.4 million in secured borrowing capacity at the FRB discount window, none of which was outstanding at
December 31, 2021. The FHLB and FRB credit capacity are collateralized by securities from our investment portfolio and certain
qualifying loans. We had approximately $130.0 million of credit available under unsecured federal funds purchased lines with various
banks as of December 31, 2021, with no amounts outstanding at December 31, 2021. Additionally, we had approximately $534.6 million
of unencumbered liquid securities available for pledging.
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, 2021, no amounts have been drawn on the line of credit.
Long-term Borrowings
On October 7, 2020, we completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating rate
subordinated notes due 2030 to qualified institutional buyers and accredited institutional investors that were subsequently exchanged
for subordinated notes with substantially the same terms (the “2020 Notes”) registered under the Securities Act of 1933, as amended.
The 2020 Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum,
until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then
current three-month SOFR plus 4.265%, payable quarterly until maturity. The 2020 Notes are redeemable by us, in whole or in part, on
any interest payment date on or after October 15, 2025, and we may redeem the Notes in whole at any time upon certain other specified
events. We used the net proceeds for general corporate purposes, organic growth and to support regulatory capital ratios at Five Star
Bank.
On April 15, 2015, we issued $40.0 million of subordinated notes (the “2015 Notes”) in a registered public offering. The 2015 Notes
bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first 10 years. From April 15, 2025 to the April 15, 2030
maturity date, the interest rate will reset quarterly to an annual interest rate equal to the then current three-month London Interbank
Offered Rate (“LIBOR”) plus 3.944%, payable quarterly. After the discontinuance of LIBOR, the interest rate will be determined by an
alternate method as reasonably selected by the Company. The 2015 Notes are redeemable by us at any quarterly interest payment date
beginning on April 15, 2025 to maturity at par, plus accrued and unpaid interest. Proceeds, net of debt issuance costs of $1.1 million,
were $38.9 million. The 2020 and 2015 Notes qualify as Tier 2 capital for regulatory purposes.
Shareholders’ Equity
Total shareholders’ equity was $505.1 million at December 31, 2021, an increase of $36.8 million from $468.4 million at December 31,
2020. Net income for the year increased shareholders’ equity by $77.7 million, partially offset by common and preferred stock dividends
declared of $18.5 million. Accumulated other comprehensive loss included in shareholders’ equity increased $15.3 million during the
year due primarily to higher net unrealized losses on securities available for sale. Treasury stock included in shareholders' equity
increased $8.0 million primarily due to the purchase of shares of common stock in 2021 under our 2020 Repurchase Program. For
detailed information on shareholders’ equity, see Note 16, Shareholders’ Equity, of the notes to consolidated financial statements. FII
and the Bank are subject to various regulatory capital requirements. At December 31, 2021, both FII and the Bank exceeded all regulatory
requirements. For detailed information on regulatory capital requirements, see Note 15, 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. These obligations include the
withdrawal of deposits on demand or at their contractual maturity, the repayment of matured borrowings, the ability to fund new and
existing loan commitments and the ability to take advantage of new business opportunities. We achieve liquidity by maintaining a strong
base of both core customer funds and maturing short-term assets; we also rely on our ability to sell or pledge securities and lines-of-
credit and our overall ability to access to the financial and capital markets.
Liquidity for the Bank is managed through the monitoring of anticipated changes in loans, the investment portfolio, core deposits and
wholesale funds. The strength of the Bank’s liquidity position is a result of its base of core customer deposits. These core deposits are
supplemented by wholesale funding sources that include credit lines with the other banking institutions, the FHLB and the FRB.
- 55 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Cash and cash equivalents were $79.1 million as of December 31, 2021, a decrease of approximately $14.8 million from $93.9 million
as of December 31, 2020. During 2021, net cash provided by operating activities totaled $59.4 million and the principal source of
operating activity cash flow was net income adjusted for noncash income and expense items. Net cash used in investing activities totaled
$619.8 million, which included outflows of $502.4 million from net investment securities transactions and outflows of $90.1 million for
net loan originations. Net cash provided by financing activities of $545.7 million was attributed to a $548.7 million increase in deposits
and a $24.7 million increase in short-term borrowings, partially offset by $9.2 million in purchases of common stock for treasury and
$18.5 million in dividend payments.
Planned Uses of Capital Resources
The Company has various long-term contractual obligations as of December 31, 2021, which include:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Time deposits for $922.0 million;
Supplemental executive retirement plans for $1.0 million;
Subordinated notes for $75.0 million; and
Operating leases for $37.7 million.
For additional information on the Company's long-term contractual obligations above, see Note 11, Deposits, Note 21, Employee Benefit
Plans, Note 12, Borrowings, and Note 9, Leases, in the accompanying consolidated financial statements.
- 56 -
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. These financial instruments include commitments to extend credit for $936.3 million and standby letters of credit for $24.9
million as of December 31, 2021. 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.
We have committed to investments in limited partnerships primarily related to small business investment companies and tax credit
investments. As of December 31, 2021, the off-balance sheet commitments related to the limited partnership small business investment
companies and tax credit investments totaled $6.4 million and $9.7 million, respectively. We have also recorded a $20.2 million liability
primarily related to committed contributions for tax credit investments in property placed in service on or before December 31, 2021.
The timing of future contributions to be made to these tax credit investments cannot be specifically or reasonably determined.
With the exception of obligations in connection with our irrevocable loan commitments, limited partnership investments and tax credit
investments as of December 31, 2021, 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. For additional information on off-balance sheet arrangements, see
Note 1, Summary of Significant Accounting Policies and Note 14, Commitments and Contingencies, in the notes to the accompanying
consolidated financial statements.
Security Yields and Maturities Schedule
The following table sets forth certain information regarding the amortized cost (“Cost”), cost-weighted average yields (“Yield”), which
is defined as the book yield weighted against the ending book value, and contractual maturities of our debt securities portfolio as of
December 31, 2021. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Actual maturities
may differ from the contractual maturities presented because borrowers may have the right to call or prepay certain investments. No tax-
equivalent adjustments were made to the weighted average yields. The tax-exempt portfolio book balance has decreased by $43.3 million
since December 31, 2020 due to maturities in 2021 (dollars in thousands).
Due in less
than one
year
Cost
Yield
Due from one
to five years
Cost
Yield
Due after five
years through
ten years
Due after ten
years
Total
Cost
Yield
Cost
Yield
Cost
Yield
Available for sale debt securities:
U.S. Government agencies and government-
sponsored enterprises
Mortgage-backed securities
Held to maturity debt securities:
State and political subdivisions
Mortgage-backed securities
Total investment securities
$
-
1,469
1,469
35,419
-
35,419
$ 36,888
%- $
2.01
2.01
6,258
58,268
64,526
2.42% $
2.59
2.58
9,535
169,383
178,918
1.90% $
1.87
1.87
-
939,922
939,922
%- $
15,793
1,169,042
1,184,835
1.49
1.49
2.01
-
2.01
2.01% $
65,793
2,261
68,054
132,580
1.88
2.27
1.89
2.23% $
5,005
14,204
19,209
198,127
5,182
1.62
77,722
2.21
2.21
82,904
1.89% $ 1,022,826
111,399
1.92
94,187
2.38
2.38
205,586
1.56% $ 1,390,421
2.11%
1.60
1.61
1.91
2.36
2.13
1.68%
- 57 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Contractual Loan Maturity Schedule
The following table summarizes the contractual maturities of our loan portfolio at December 31, 2021. Loans, net of deferred loan
origination costs, include principal amortization and non-accruing loans. Demand loans having no stated schedule of repayment or
maturity and overdrafts are reported as due in one year or less (in thousands).
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect (1)
Other consumer
Total loans
Loans maturing after one year:
With a predetermined interest rate
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect (1)
Other consumer
With a floating or adjustable rate
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect (1)
Other consumer
Due from
one to
five years
Due from
five to
fifteen
years
$
Due in less
than one
year
211,616 $
400,396
76,973
3,133
376,857
6,578
235,502 $
689,943
255,345
10,364
581,191
7,354
$ 1,075,553 $ 1,779,699 $
$
88,389 $
370,551
235,649
12
581,191
7,354
147,113
319,392
19,696
10,352
-
-
Due after
fifteen
years
182,257 $
3,020
7,608
33,366
-
45
Total
638,293
1,412,788
577,299
78,531
958,048
14,477
226,296 $ 3,679,436
14,787 $
98
3,055
2
-
45
105,499
517,031
457,323
51
581,191
7,899
167,470
2,922
4,553
33,364
-
-
321,178
495,361
43,003
75,347
-
-
226,296 $ 2,603,883
8,918 $
319,429
237,373
31,668
-
500
597,888 $
2,323 $
146,382
218,619
37
-
500
6,595
173,047
18,754
31,631
-
-
Total loans maturing after one year
$ 1,779,699 $
597,888 $
(1) Amounts include prepayment assumptions based on actual historical experience.
- 58 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Capital Resources
The FRB has adopted a system using risk-based capital guidelines to evaluate the capital adequacy of bank holding companies on a
consolidated basis. 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, 2021, the Company’s capital levels remained characterized as “well-
capitalized” under the BCBS rules. See Note 15, Regulatory Matters of the notes to consolidated financial statements and the “Basel III
Capital Rules” section below for further discussion. The following table reflects the Company’s ratios and their components as of
December 31 (in thousands):
Common shareholders’ equity
Add: CECL transitional amount
Less: Goodwill and other intangible assets
Net unrealized loss on investment securities (1)
Hedging derivative instruments
Net periodic pension and postretirement benefits plan adjustments
Other
Common Equity Tier 1 (“CET1”) capital
Plus: Preferred stock
Less: Other
Tier 1 Capital
Plus: Qualifying allowance for credit losses
Subordinated Notes
Total regulatory capital
Adjusted average total assets (for leverage capital purposes)
Total risk-weighted assets
2021
2020
$
$
$
$
487,850
8,537
71,748
(4,971)
1,160
(9,396)
-
437,846
17,292
-
455,138
29,938
73,911
558,987
5,532,987
4,260,101
$
$
$
$
451,035
12,061
71,235
14,743
(316)
(12,299)
-
389,733
17,328
-
407,061
40,509
73,623
521,193
4,933,597
3,844,380
Regulatory Capital Ratios
Tier 1 Leverage (Tier 1 capital to adjusted average assets)
CET1 Capital (CET1 capital to total risk-weighted assets)
Tier 1 Capital (Tier 1 capital to total risk-weighted assets)
Total Risk-Based Capital (Total regulatory capital to total risk-weighted assets)
8.23%
10.28
10.68
13.12
8.25%
10.14
10.59
13.56
(1)
Includes unrealized gains and losses related to the Company’s reclassification of available for sale investment securities to the held
to maturity category.
We have elected to apply the 2020 CECL transition provision related to the impact of the CECL accounting standard on regulatory
capital, as provided by the US banking agencies’ March 2020 interim final rule. Under the 2020 CECL transition provision, the
regulatory capital impact of the Day 1 adjustment to the allowance for credit losses (after-tax) upon the January 1, 2020 CECL adoption
date has been deferred and will phase in to regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of
CECL, we are allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change
in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020, and December 31,
2021. The cumulative adjustment to the allowance for credit losses between January 1, 2020, and December 31, 2021, will also phase
in to regulatory capital at 25% per year commencing January 1, 2022.
Basel III Capital Rules
Under the Basel III Rules, the current minimum capital ratios, including an additional capital conservation buffer applicable to the
Company and the Bank, are:
(cid:3)
(cid:3)
(cid:3)
7.0% CET1 to risk-weighted assets;
8.5% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; and
10.5% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets.
As of December 31, 2021, the Company’s capital levels remained characterized as “well-capitalized” under the Basel III rules.
- 59 -
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. Application of critical accounting policies, which are those policies that management believes are the most
important to our financial position and results, requires management to make estimates, assumptions, and judgments that affect the
amounts reported in the consolidated financial statements and accompanying notes and are based on information available as of the date
of the financial statements. Future changes in information may affect these estimates, assumptions and judgments, which, in turn, may
affect amounts reported in the financial statements.
We have numerous accounting policies, of which the most significant are presented in Note 1, Summary of Significant Accounting
Policies, of the notes to consolidated financial statements. These policies, along with the disclosures presented in the other financial
statement notes and, in this discussion, provide information on how significant assets, liabilities, revenues and expenses are reported in
the consolidated financial statements and how those reported amounts are determined. Based on the sensitivity of financial statement
amounts to the methods, assumptions, and estimates underlying those amounts, management has determined that the accounting policies
with respect to the allowance for credit losses, valuation of goodwill and deferred tax assets, and accounting for defined benefit plans
require particularly subjective or complex judgments important to our financial position and results of operations, and, as such, are
considered to be critical accounting policies as discussed below. These estimates and assumptions are based on management’s best
estimates and judgment and are evaluated on an ongoing basis using historical experience and other factors, including the current
economic environment. We adjust these estimates and assumptions when facts and circumstances dictate. Illiquid credit markets and
volatile equity have combined with declines in consumer spending to increase the uncertainty inherent in these estimates and
assumptions. As future events cannot be determined with precision, actual results could differ significantly from our estimates.
Adequacy of the Allowance for Credit Losses
The allowance for credit losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Determining
the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and
the use of subjective measurements including, but not limited to, management’s assessment of the internal risk classifications of loans,
estimating future losses utilizing current forecasts, forward-looking estimates of qualitative factors including existing economic
conditions, portfolio administration, delinquency, the regulatory environment and the Company’s lending policies. Because current
economic conditions and borrower strength can change, and future events are inherently difficult to predict, the anticipated amount of
estimated loan losses, and therefore the appropriateness of the allowance for credit losses, could change significantly. As an integral
part of their examination process, various regulatory agencies also review the allowance for credit losses. Such agencies may require
additions to the allowance for credit losses or may require that certain loan balances be charged off or downgraded into criticized loan
categories when their credit evaluations differ from those of management, based on their judgments about information available to them
at the time of their examination. We believe the level of the allowance for credit losses is appropriate as recorded in the consolidated
financial statements.
For additional discussion related to our accounting policies for the allowance for credit losses, see the sections titled “Allowance for
Credit Losses” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note
1, Summary of Significant Accounting Policies, of the notes to consolidated financial statements.
Valuation of Goodwill
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in accordance with the purchase method
of accounting for business combinations. Goodwill has an indefinite useful life and is not amortized but is tested for impairment. GAAP
requires goodwill to be tested for impairment at our reporting unit level on an annual basis and more frequently if events or circumstances
indicate that there may be impairment. We test goodwill for impairment as of October 1st of each year.
Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. In testing goodwill for impairment, GAAP
permits us to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less
than its carrying value. If, after assessing the totality of events and circumstances, we determine it is not more likely than not that the
fair value of a reporting unit is less than its carrying value, no further testing is performed. However, if we conclude otherwise, we
would then be required to perform a goodwill impairment test by comparing the fair value of the reporting unit with its carrying value.
If the carrying value of the reporting unit exceeds its fair value, a goodwill impairment charge is recognized for the difference, but not
to exceed the amount of goodwill allocated to the reporting unit.
- 60 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Valuation of Deferred Tax Assets and Liabilities
The determination of deferred tax expense or benefit is based on changes in the carrying amounts of assets and liabilities that generate
temporary differences. The carrying value of our net deferred tax assets or liabilities assumes that we will be able to generate sufficient
future taxable income based on estimates and assumptions (after consideration of historical taxable income as well as tax planning
strategies). If these estimates and related assumptions change, we may be required to record valuation allowances against our deferred
tax assets and liabilities resulting in additional income tax expense or benefit in the consolidated statements of income. We evaluate
deferred tax assets and liabilities on a quarterly basis and assess the need for a valuation allowance, if any. A valuation allowance is
established when management believes that it is more likely than not that some portion of its deferred tax assets and liabilities will not
be realized. Changes in valuation allowance from period to period are included in our tax provision in the period of change. For additional
discussion related to our accounting policy for income taxes see Note 19, Income Taxes, of the notes to consolidated financial statements.
Defined Benefit Pension Plan
We have a defined benefit pension plan covering substantially all employees. For employees hired prior to December 31, 2006, who
met participation requirements on or before January 1, 2008 (“Tier 1 Participant”), the benefits are generally based on years of service
and the employee’s highest average compensation during five consecutive years of employment. For eligible employees who were hired
on and after January 1, 2007 (“Tier 2 Participant”), the benefits are generally based on a cash balance benefit formula. Assumptions are
made concerning future events that will determine the amount and timing of required benefit payments, funding requirements and
defined benefit pension expense. The major assumptions are the weighted average discount rate used in determining the current benefit
obligation, the weighted average expected long-term rate of return on plan assets, the rate of compensation increase and the estimated
mortality rate. The weighted average discount rate was based upon the projected benefit cash flows and the market yields of high grade
corporate bonds that are available to pay such cash flows as of the measurement date, December 31. The weighted average expected
long-term rate of return is estimated based on current trends experienced by the assets in the plan as well as projected future rates of
return on those assets and reasonable actuarial assumptions for long term inflation, and the real and nominal rate of investment return
for a specific mix of asset classes. The current target asset allocation model for the plans is detailed in Note 21 to the consolidated
financial statements. The expected returns on these various asset categories are blended to derive one long-term return assumption. The
assets are invested in certain collective investment and mutual funds, common stocks, U.S. Treasury and other U.S. government agency
securities, and corporate and municipal bonds and notes. The rate of compensation increase is based on reviewing the compensation
increase practices of other plan sponsors in similar industries and geographic areas as well as the expectation of future increases.
Mortality rate assumptions are based on mortality tables published by third-parties such as the Society of Actuaries (“SOA”), considering
other available information including historical data as well as studies and publications from reputable sources. We review the pension
plan assumptions on an annual basis with our actuarial consultants to determine if the assumptions are reasonable and adjust the
assumptions to reflect changes in future expectations.
The assumptions used to calculate 2021 expense for the defined benefit pension plan were a weighted average discount rate of 2.32%,
a weighted average long-term rate of return on plan assets of 5.25% and a rate of compensation increase of 3.00%. Defined benefit
pension expense in 2022 is expected to decrease to $1.8 million from the $1.9 million recorded in 2021.
Due to the long-term nature of pension plan assumptions, actual results may differ significantly from the actuarial-based estimates.
Differences resulting in actuarial gains or losses are required to be recorded in shareholders’ equity as part of accumulated other
comprehensive income (loss) and amortized to defined benefit pension expense in future years. For 2021, the actual return on plan assets
in the qualified defined benefit pension plan was $6.4 million, compared to an expected return on plan assets of $5.2 million. Total
pretax losses recognized in accumulated other comprehensive income (loss) at December 31, 2021 were $12.6 million for the defined
benefit pension plan. Actuarial pretax net gains recognized in other comprehensive income (loss) for the year ended December 31, 2021
were $3.1 million for the defined benefit pension plan.
Defined benefit pension expense is recorded in “Salaries and employee benefits” expense on the consolidated statements of income.
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.
- 61 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset-Liability Management
The principal objective of our interest rate risk management is to evaluate the interest rate risk inherent in assets and liabilities, determine
the appropriate level of risk to us given our business strategy, operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the guidelines approved by our Board of Directors. Management is responsible for
reviewing with the Board of Directors our activities and strategies, the effect of those strategies on net interest income, the fair value of
the portfolio and the effect that changes in interest rates will have on the portfolio and exposure limits. Management has developed an
Asset-Liability Management and Investment Policy that meets the strategic objectives and regularly reviews the activities of the Bank.
Portfolio Composition
Our balance sheet assets are a mix of fixed and variable rate assets with consumer indirect loans, commercial loans, and MBSs
comprising a significant portion of our assets. Our consumer indirect loan portfolio comprised 17% of assets and is primarily fixed rate
loans with relatively short durations. Our commercial loan portfolio totaled 37% of assets and is a combination of fixed and variable
rate loans, lines and mortgages. The MBS portfolio, including collateralized mortgages obligations, totaled 23% of assets with durations
averaging three to five years.
Our liabilities are comprised primarily of deposits, which account for 96% of total liabilities. Of these deposits, the majority, or 50%, is
in nonpublic variable rate and noninterest bearing products including demand (both noninterest- and interest- bearing), savings and
money market accounts. In addition, fixed rate nonpublic certificate of deposit products comprise 6% of total deposits. The Bank also
has a significant amount of public deposits, which represented 23% of total deposits as of December 31, 2021.
Net Interest Income at Risk
A primary tool used to manage interest rate risk is “rate shock” simulation to measure the rate sensitivity. Rate shock simulation is a
modeling technique used to estimate the impact of changes in rates on net interest income as well as economic value of equity.
Net interest income at risk is measured by estimating the changes in net interest income resulting from instantaneous and sustained
parallel shifts in interest rates of different magnitudes over a period of 12 months. The following table sets forth the estimated changes
to net interest income over the 12-month period ending December 31, 2022 assuming instantaneous changes in interest rates for the
given rate shock scenarios (dollars in thousands):
Estimated change in net interest income
% Change
-100 bp
Changes in Interest Rate
+200 bp
+100 bp
+300 bp
$
(3,875)
$
(2.63)%
$
548
0.37%
1,346
$
0.91%
2,035
1.38%
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. This is a result of assumed commercial loan products and investment security cash flow repricing at a higher
frequency than underlying borrowing and deposit costs. As intermediate and longer-term assets continue to mature and are replaced at
higher yields, net interest income improves over longer term timeframes. Model results in the declining rate scenario indicate decreases
in net interest income due to assets having the ability to reprice downward, while deposit and borrowing liabilities reach modeled floors.
In addition to the changes in interest rate scenarios listed above, other scenarios are typically modeled to measure interest rate risk.
These scenarios vary depending on the economic and interest rate environment.
The simulation referenced above is based on our assumption as to the effect of interest rate changes on assets and liabilities and assumes
a parallel shift of the yield curve. It also includes certain assumptions about the future pricing of loans and deposits in response to
changes in interest rates. Further, it assumes that delinquency rates would not change as a result of changes in interest rates, although
there can be no assurance that this will be the case. While this simulation is a useful measure as to net interest income at risk due to a
change in interest rates, it is not a forecast of 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.
- 62 -
Economic Value of Equity At Risk
The economic (or “fair”) value of financial instruments on our balance sheet will also vary under the interest rate scenarios previously
discussed. This variance is measured by simulating changes in our economic value of equity (“EVE”), which is calculated by subtracting
the estimated fair value of liabilities from the estimated fair value of assets. Fair values for financial instruments are estimated by
discounting projected cash flows (principal and interest) at current replacement rates for each account type, while fair values of non-
financial assets and liabilities are assumed to equal book value and do not vary with interest rate fluctuations. An economic value
simulation is a static measure for balance sheet accounts at a given point in time, but this measurement can change substantially over
time as the characteristics of our balance sheet evolve and as interest rate and yield curve assumptions are updated.
The amount of change in economic value under different interest rate scenarios depends on the characteristics of each class of financial
instrument, including the stated interest rate or spread relative to current market rates or spreads, the likelihood of prepayment, whether
the rate is fixed or floating, and the maturity date of the instrument. As a general rule, fixed-rate financial assets become more valuable
in declining rate scenarios and less valuable in rising rate scenarios, while fixed-rate financial liabilities gain in value as interest rates
rise and lose value as interest rates decline. The longer the duration of the financial instrument, the greater the impact a rate change will
have on its value. In our economic value simulations, estimated prepayments are factored in for financial instruments with stated maturity
dates, and decay rates for non-maturity deposits are projected based on historical data, based on third-party review and inputs.
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, 2021 and 2020. The analysis additionally presents a measurement of the interest
rate sensitivity at December 31, 2021 and 2020. EVE amounts are computed under each respective Pre-Shock Scenario and Rate Shock
Scenario. An increase in the EVE amount is considered favorable, while a decline is considered unfavorable.
Rate Shock Scenario:
Pre-Shock Scenario
- 100 Basis Points
+ 100 Basis Points
+ 200 Basis Points
+ 300 Basis Points
December 31, 2021
December 31, 2020
EVE
$ 775,697
Change
746,770 $ (28,927)
6,741
782,438
10,665
786,362
9,226
784,923
Percentage
Change
-3.73%
0.87
1.37
1.19
EVE
$ 583,156
Change
574,345 $ (8,811)
34,612
617,768
55,068
638,224
68,362
651,518
Percentage
Change
-1.51%
5.94
9.44
11.72
The Pre-Shock Scenario EVE was $775.7 million at December 31, 2021, compared to $583.2 million at December 31, 2020. The
increase in the Pre-Shock Scenario EVE at December 31, 2021 compared to December 31, 2020 resulted primarily from growth in our
investment securities portfolio, which is also the driver for the increased EVE Up Rate Shock Scenarios. The increase in sensitivity in
the -100 basis point Rate Shock Scenario to EVE is a result of rates rising on a linked year basis, allowing for more sensitivity to
downward rate movements. The sensitivity is further compounded by growth of fixed-rate long term assets which are not receiving the
full value appreciation typically observed in down rate scenarios, due to discount rate flooring assumptions, coupled with continued
growth of deposits through 2021.
- 63 -
Interest Rate Sensitivity Gap
The following table presents an analysis of our interest rate sensitivity gap position at December 31, 2021. All interest-earning assets
and interest-bearing liabilities are shown based on the earlier of their contractual maturity or re-pricing date. The expected maturities
are presented on a contractual basis or, if more relevant, based on projected call dates. Investment securities are at amortized cost for
both securities available for sale and securities held to maturity. Loans, net of deferred loan origination costs, include principal
amortization adjusted for estimated prepayments (principal payments in excess of contractual amounts) and non-accruing loans. Because
the interest rate sensitivity levels shown in the table could be changed by external factors such as loan prepayments and liability decay
rates or by factors controllable by us, such as asset sales, it is not an absolute reflection of our potential interest rate risk profile (in
thousands).
At December 31, 2021
Over Three
Months
Through
One Year
Over
One Year
Through
Five Years
Over
Five
Years
Three
Months
or Less
INTEREST-EARNING ASSETS:
Federal funds sold and other interest-earning
deposits
Investment securities
Loans
Total interest-earning assets
$
29,304
69,248
1,386,180
$ 1,484,732
Cash and due from banks
Other assets (1)
Total assets
INTEREST-BEARING LIABILITIES:
Interest-bearing demand, savings and money
market
Time deposits
Borrowings
Total interest-bearing liabilities
$ 2,797,575
395,628
30,000
$ 3,223,203
Noninterest-bearing deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
$
-
171,911
551,159
723,070
$
245
643,549
1,324,897
$ 1,968,691
-
485,589
-
485,589
$
$
-
40,737
-
40,737
$
$
$
$
-
505,713
423,402
929,115
-
-
73,911
73,911
Interest sensitivity gap
Cumulative gap
Cumulative gap ratio (2)
Cumulative gap as a percentage of total assets
$ (1,738,471)
$ (1,738,471)
46.1%
(31.5)%
$
237,481
$ (1,500,990)
59.5%
(27.2)%
$ 1,927,954
426,964
$
$
855,204
$ 1,282,168
111.4%
7.7%
133.5%
23.2%
Total
$
29,549
1,390,421
3,685,638
5,105,608
49,563
365,608
$ 5,520,779
$ 2,797,575
921,954
103,911
3,823,440
1,107,561
84,636
5,015,637
505,142
$ 5,520,779
$ 1,282,168
(1)
Includes net unrealized loss on securities available for sale and allowance for credit losses.
(2) Cumulative total interest-earning assets divided by cumulative total interest-bearing liabilities.
For purposes of interest rate risk management, we direct more attention on simulation modeling, such as “net interest income at risk” as
previously discussed, rather than gap analysis. We consider the net interest income at risk simulation modeling to be more informative
in forecasting future income at risk.
- 64 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting............................................................................................
Report of Independent Registered Public Accounting Firm (on the Consolidated Financial Statements) (PCAOB ID: 49)........
Report of Independent Registered Public Accounting Firm (on Internal Control over Financial Reporting) (PCAOB ID: 49)...
Consolidated Statements of Financial Condition at December 31, 2021 and 2020 .......................................................................
Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019 .....................................................
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019 ...........................
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020 and 2019 ............
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 ..............................................
Notes to Consolidated Financial Statements ..................................................................................................................................
Page
66
67
69
70
71
72
73
75
76
- 65 -
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for Financial Institutions,
Inc. and its subsidiaries (the “Company”), as such term is defined in Exchange Act Rule 13a-15(f). The Company’s system of internal
control over financial reporting has been designed to provide reasonable assurance to the Company’s management and board of directors
regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
Any system of internal control over financial reporting, no matter how well designed, has inherent limitations, including the possibility
that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because
of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control
will provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management has, including the Company’s principal executive officer and principal financial officer as identified
below, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. To make this
assessment, we used the criteria for effective internal control over financial reporting described in Internal Control – Integrated
Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment and
based on such criteria, we believe that, as of December 31, 2021, the Company’s internal control over financial reporting was effective.
RSM US LLP, the Company’s independent registered public accounting firm that audited the Company’s consolidated financial
statements as of and for the year ended December 31, 2021 has issued a report on internal control over financial reporting as of
December 31, 2021. That report appears herein.
/s/ Martin K. Birmingham
President and Chief Executive Officer
March 10, 2022
/s/ W. Jack Plants, II
Senior Vice President, Chief Financial Officer and Treasurer
March 10, 2022
- 66 -
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Financial Institutions, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Financial Institutions, Inc. and Subsidiaries (the
Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the
consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted
in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report
dated March 10, 2022 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to
be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the
critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating
the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it
relates.
Allowance for Credit Losses – Loans
As described in Notes 1 and 6 to the financial statements, the Company’s allowance for credit losses - loans was $39,676,000 at
December 31, 2021, which consisted of an allowance for credit losses for pooled loans ($33,905,000) and a specific reserve for
individually evaluated loans ($5,771,000). Management estimates the allowance for credit losses for pooled loans utilizing a discounted
cash flow (DCF) method. The DCF implements a probability of default with a loss given default applied to future cash flows that are
adjusted to present value. The Company uses forecasts to predict how modeled economic factors will perform. In addition, qualitative
factors that are likely to cause estimated credit losses to differ from historical loss experience, including but not limited to: national and
local economic trends and conditions (excluding national unemployment), levels and trends in delinquencies, non-accrual loans and
classified assets, trends in volume, terms and concentrations of loans, changes in lending policies and procedures, quality of credit
review function and administration and changes in regulatory environment. The establishment of probability of default/loss given
default, reasonable and supportable forecasts, and qualitative factor adjustments require a significant amount of judgement by
management and involve a high degree of estimation uncertainty.
We identified the determination of the allowance for credit losses for pooled loans as a critical audit matter as auditing the underlying
development of probability of default/loss given default, reasonable and supportable forecasts, and qualitative factor adjustments
required significant auditor judgment as amounts determined by management rely on analyses that are highly subjective and include
significant estimation uncertainty.
- 67 -
Our audit procedures related to the determination of the allowance for credit losses for pooled loans included the following, among
others:
• We obtained an understanding of the relevant controls related to management’s establishment, review and approval of
probability of default/loss given default, reasonable and supportable forecasts, and qualitative factor adjustments, and tested
such controls for design and operating effectiveness.
• We tested the completeness and accuracy of data used by management in determining the probability of default/loss given
default by agreeing this data to both internal and external information, as applicable.
• We evaluated the reasonableness of the forecasts utilized by management by comparing them to external information.
• We tested the completeness and accuracy of information, evaluated the appropriateness and agreed the qualitative factor
adjustments included in the allowance for credit losses - loans calculation.
/s/ RSM US LLP
We have served as the Company’s auditor since 2018.
Chicago, Illinois
March 10, 2022
- 68 -
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Financial Institutions, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Financial Institutions, Inc. and Subsidiaries' (the Company) internal control over financial reporting as of December 31,
2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated statement of financial condition of the Company as of December 31, 2021, the related consolidated statements of
income, comprehensive income, changes in shareholders’ equity and cash flows for the year then ended, and the related notes to the
consolidated financial statements of the Company and our report dated March 10, 2022 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in
accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Chicago, Illinois
March 10, 2022
- 69 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(in thousands, except share and per share data)
ASSETS
Cash and due from banks
Securities available for sale, at fair value
Securities held to maturity, at amortized cost (net of allowance for credit losses of $5 and
$7, respectively) (fair value of $209,820 and $282,035, respectively)
Loans held for sale
Loans (net of allowance for credit losses of $39,676 and $52,420, respectively)
Company owned life insurance
Premises and equipment, net
Goodwill and other intangible assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand
Interest-bearing demand
Savings and money market
Time deposits
Total deposits
Short-term borrowings
Long-term borrowings, net of issuance costs of $1,089 and $1,377, respectively
Other liabilities
Total liabilities
Commitments and contingencies (Note 14)
Shareholders’ equity:
Series A 3% preferred stock, $100 par value; 1,533 shares authorized; 1,435 shares
issued
Series B-1 8.48% preferred stock, $100 par value; 200,000 shares authorized; 171,486
and 171,847 shares issued, respectively
Total preferred equity
Common stock, $0.01 par value; 50,000,000 shares authorized; 16,099,556 shares
issued
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Treasury stock, at cost – 354,103 and 57,630 shares, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to the consolidated financial statements.
December 31,
2021
2020
$
$
$
$
79,112
1,178,515
$
$
$
205,581
6,202
3,639,760
123,898
40,111
74,400
173,200
5,520,779
1,107,561
864,528
1,933,047
921,954
4,827,090
30,000
73,911
84,636
5,015,637
143
17,149
17,292
161
126,105
384,007
(13,207)
(9,216)
505,142
5,520,779
$
93,878
628,059
271,966
4,305
3,542,718
100,895
40,610
73,789
156,086
4,912,306
1,018,549
731,885
1,642,340
885,593
4,278,367
5,300
73,623
86,653
4,443,943
143
17,185
17,328
161
125,118
324,850
2,128
(1,222)
468,363
4,912,306
- 70 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
$
$
$
$
$
$
2021
Years ended December 31,
2020
2019
$
$
$
$
$
$
147,898
19,091
216
167,205
8,118
120
4,237
12,475
154,730
(8,336)
163,066
5,571
5,750
8,498
11,672
2,947
2,081
415
2,695
2,950
71
441
(431)
4,246
46,906
60,893
14,371
6,535
14,112
1,769
2,624
1,704
1,060
111
9,571
112,750
97,222
19,525
77,697
1,460
76,237
4.81
4.78
1.08
15,841
15,937
$
$
$
$
$
$
143,520
17,464
315
161,299
17,822
1,604
2,888
22,314
138,985
27,184
111,801
4,810
4,403
7,281
9,535
1,902
104
249
5,521
3,858
1,599
(61)
(275)
4,250
43,176
59,336
13,655
6,326
11,645
1,975
2,242
2,609
1,134
1,492
8,840
109,254
45,723
7,391
38,332
1,461
36,871
2.30
2.30
1.04
16,022
16,063
149,873
18,532
395
168,800
28,494
7,923
2,471
38,888
129,912
8,044
121,868
7,241
4,570
6,779
9,187
1,758
352
432
2,274
1,352
1,677
29
(528)
5,258
40,381
56,330
13,552
5,424
9,983
2,036
1,005
3,577
1,250
-
9,671
102,828
59,421
10,559
48,862
1,461
47,401
2.97
2.96
1.00
15,972
16,031
(in thousands, except per share data)
Interest income:
Interest and fees on loans
Interest and dividends on investment securities
Other interest income
Total interest income
Interest expense:
Deposits
Short-term borrowings
Long-term borrowings
Total interest expense
Net interest income
(Benefit) provision for credit losses
Net interest income after (benefit) provision for credit losses
Noninterest income:
Service charges on deposits
Insurance income
Card interchange income
Investment advisory
Company owned life insurance
Investments in limited partnerships
Loan servicing
Income from derivative instruments, net
Net gain on sale of loans held for sale
Net gain on investment securities
Net gain (loss) on other assets
Net loss on tax credit investments
Other
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment
Professional services
Computer and data processing
Supplies and postage
FDIC assessments
Advertising and promotions
Amortization of intangibles
Restructuring charges
Other
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Earnings per common share (Note 20):
Basic
Diluted
Cash dividends declared per common share
Weighted average common shares outstanding:
Basic
Diluted
See accompanying notes to the consolidated financial statements.
- 71 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands)
Net income
Other comprehensive (loss) income, net of tax:
Securities available for sale and transferred securities
Hedging derivative instruments
Pension and post-retirement obligations
Total other comprehensive (loss) income, net of tax
Comprehensive income
See accompanying notes to the consolidated financial statements.
Years ended December 31,
2020
2019
2021
77,697
$
38,332
$
48,862
(19,714)
1,476
2,903
(15,335)
62,362
$
13,870
202
2,569
16,641
54,973
$
9,323
(242)
470
9,551
58,413
$
$
- 72 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
Years ended December 31, 2021, 2020 and 2019
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Shareholders’
Equity
$
$
(21,281) $ (2,486) $
-
-
(21,281) $ (2,486) $
396,293
(710)
395,583
48,862
9,551
-
1,151
(293)
1,406
-
-
125
(4)
(1,457)
(15,977)
438,947
(8,719)
430,228
38,332
16,641
(209)
1,333
-
-
165
(4)
(1,457)
(16,666)
468,363
-
9,551
(2,783)
-
-
-
-
-
-
-
-
-
-
-
-
-
(293)
-
554
165
85
-
-
-
(14,513) $ (1,975) $
-
-
(14,513) $ (1,975) $
-
16,641
-
-
-
-
-
-
-
-
2,128
-
-
(209)
-
511
272
179
-
-
-
$ (1,222) $
(in thousands,
except per share data)
Balance at December 31, 2018
Cumulative-effect adjustment
Balance at January 1, 2019
Comprehensive income:
Net income
Other comprehensive income, net of tax
Reclassification of income tax effects
Common stock issued
Purchase of common stock for treasury
Share-based compensation plans:
Share-based compensation
Restricted stock units released
Restricted stock awards issued, net
Stock awards
Cash dividends declared:
Series A 3% Preferred-$3.00 per share
Series B-1 8.48% Preferred-$8.48 per share
Common-$1.00 per share
Balance at December 31, 2019
Cumulative-effect adjustment
Balance at January 1, 2020
Comprehensive income:
Net income
Other comprehensive income, net of tax
Purchase of common stock for treasury
Share-based compensation plans:
Share-based compensation
Restricted stock units released
Restricted stock awards issued, net
Stock awards
Cash dividends declared:
Preferred
Equity
$
$
17,328
-
17,328
$
$
Common
Stock
161
-
161
Additional
Paid-in
Capital
$ 122,704
-
$ 122,704
Retained
Earnings
$ 279,867
(710)
$ 279,157
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,151
-
1,406
(554)
(165)
40
48,862
-
2,783
-
-
-
-
-
-
-
-
-
17,328
-
17,328
$
$
$
$
-
-
-
161
-
161
-
-
-
$ 124,582
-
$ 124,582
(4)
(1,457)
(15,977)
$ 313,364
(8,719)
$ 304,645
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
38,332
-
-
1,333
(511)
(272)
(14)
-
-
-
-
Series A 3% Preferred-$3.00 per share
Series B-1 8.48% Preferred-$8.48 per share
Common-$1.04 per share
Balance at December 31, 2020
-
-
-
17,328
$
$
-
-
-
161
-
-
-
$ 125,118
(4)
(1,457)
(16,666)
$ 324,850
$
Continued on next page
See accompanying notes to the consolidated financial statements.
- 73 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity (Continued)
Years ended December 31, 2021, 2020 and 2019
(in thousands,
except per share data)
Balance at December 31, 2020
Balance carried forward
Comprehensive income:
Net income
Other comprehensive loss, net of
tax
Common stock issued
Purchases of common stock for
treasury
Purchases of 8.48% preferred stock
Share-based compensation plans:
Share-based compensation
Restricted stock units released
Restricted stock awards issued, net
Stock awards
Cash dividends declared:
Series A 3% Preferred-$3.00 per
share
Series B-1 8.48% Preferred-$8.48
per share
Common-$1.08 per share
Balance at December 31, 2021
Preferred
Equity
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Shareholders’
Equity
$
17,328
$
161
$
125,118
$
324,850
$
2,128
$
(1,222) $
468,363
77,697
-
-
-
-
-
(36)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3
-
(7)
1,743
(574)
(223)
45
-
-
-
-
-
-
-
-
-
(4)
-
-
298
(9,235)
-
-
574
223
146
-
(15,335)
-
-
-
-
-
-
-
-
-
-
17,292
$
$
-
-
161
$
-
-
126,105
(1,456)
(17,080)
384,007
$
$
-
-
(13,207) $
-
-
(9,216) $
77,697
(15,335)
301
(9,235)
(43)
1,743
-
-
191
(4)
(1,456)
(17,080)
505,142
See accompanying notes to the consolidated financial statements.
- 74 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Years ended December 31,
2020
2021
2019
$
77,697
$
38,332
$
48,862
Depreciation and amortization
Net amortization of premiums on securities
(Benefit) provision for credit losses
Share-based compensation
Deferred income tax expense (benefit)
Proceeds from sale of loans held for sale
Originations of loans held for sale
Income on company owned life insurance
Net gain on sale of loans held for sale
Net gain on investment securities
Net (gain) loss on other assets
Noncash restructuring charges against assets
Increase in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investment securities:
Available for sale
Held to maturity
Proceeds from principal payments, maturities and calls on investment securities:
Available for sale
Held to maturity
Proceeds from sales of securities available for sale
Proceeds from sales of securities held to maturity
Net loan originations
Loans sold to others
Purchases of company owned life insurance, net of proceeds received
Proceeds from sales of other assets
Purchases of premises and equipment
Cash consideration paid for acquisition, net of cash acquired
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Net increase (decrease) in short-term borrowings
Repurchase of preferred stock
Issuance of long-term debt
Debt issuance costs
Purchases of common stock for treasury
Cash dividends paid to preferred shareholders
Cash dividends paid to common shareholders
Net cash provided by (used in) financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
See accompanying notes to the consolidated financial statements.
8,049
5,493
(8,336)
1,743
5,218
81,334
(80,281)
(2,947)
(2,950)
(71)
(441)
392
(9,342)
(2,596)
72,962
(784,064)
(18,425)
150,919
83,684
51,891
-
(90,058)
-
(20,056)
3,510
(9,403)
(1,420)
(633,422)
548,723
24,700
(43)
-
-
(9,235)
(1,460)
(16,991)
545,694
(14,766)
93,878
79,112
$
7,893
3,474
27,184
1,333
(4,523)
97,238
(93,461)
(1,902)
(3,858)
(1,599)
61
202
(37,565)
10,646
43,455
(396,879)
(7,345)
97,685
93,046
107,098
52
(390,932)
-
(30,051)
519
(4,264)
-
(531,071)
722,692
(270,200)
-
35,000
(779)
(209)
(1,461)
(16,496)
468,547
(19,069)
112,947
93,878
$
8,213
2,069
8,044
1,406
369
41,479
(41,626)
(1,758)
(1,352)
(1,677)
(29)
-
(21,263)
14,973
57,710
(195,660)
(23,494)
82,358
83,508
178,059
-
(167,234)
21,077
(68)
360
(3,639)
-
(24,733)
188,768
(194,000)
-
-
-
(293)
(1,461)
(15,799)
(22,785)
10,192
102,755
112,947
$
- 75 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Institutions, Inc. (individually referred to herein as the “Parent Company” and together with all of its subsidiaries, collectively
referred to herein as the “Company”) is a financial holding company organized in 1931 under the laws of New York State (“New York”).
At December 31, 2021, the Company conducted its business through its five subsidiaries: Five Star Bank (the “Bank”), a New York
chartered bank; SDN Insurance Agency, LLC (“SDN”), a full service insurance agency; Courier Capital, LLC (“Courier Capital”) and
HNP Capital, LLC (“HNP Capital”), SEC-registered investment advisory and wealth management firms; and Corn Hill Innovation Labs,
LLC (“CHIL”), which oversees the Company's Banking as a Service and Fintech relationships. The Company provides a full range of
banking and related financial services to consumer, commercial and municipal customers through its bank and nonbank subsidiaries.
The accounting and reporting policies conform to general practices within the banking industry and to U.S. generally accepted
accounting principles (“GAAP”).
The Company has evaluated events and transactions for potential recognition or disclosure through the day the financial statements were
issued and determined there were no material recognizable subsequent events.
The following is a description of the Company’s significant accounting policies.
(a.) Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
(b.) Use of Estimates
In preparing the consolidated financial statements in conformity with GAAP, management is required to make estimates and
assumptions that affect the reported amount of assets and liabilities as of the date of the statement of financial condition and reported
amounts of revenue and expenses during the reporting period. Material estimates relate to the determination of the allowance for
credit losses, the carrying value of goodwill and deferred tax assets, and assumptions used in the defined benefit pension plan
accounting. These estimates and assumptions are based on management’s best estimates and judgment and are evaluated on an
ongoing basis using historical experience and other factors, including the current economic environment. The Company adjusts
these estimates and assumptions when facts and circumstances dictate. As future events cannot be determined with precision, actual
results could differ significantly from the Company’s estimates.
(c.) Cash Flow Reporting
Cash and cash equivalents include cash and due from banks, federal funds sold and interest-bearing deposits in other banks. Net
cash flows are reported for loans, deposit transactions and short-term borrowings.
Supplemental cash flow information is summarized as follows for the years ended December 31 (in thousands):
Supplemental information:
Cash paid for interest
Cash paid for income taxes, net of refunds received
Noncash investing and financing activities:
Real estate and other assets acquired in settlement of loans
Accrued and declared unpaid dividends
Decrease in net unsettled security purchases
Securities transferred from held to maturity to available for sale (at cost)
Common stock issued for Courier Capital contingent earn-out
Common stock issued for acquisition
Assets acquired and liabilities assumed in business combinations:
Fair value of assets acquired
2021
2020
2019
$
$
$
$
14,709
10,832
-
4,624
-
-
301
712
$
$
28,875
7,462
2,966
4,535
-
-
-
-
37,225
9,853
557
4,365
(2,650)
26,175
1,151
-
-
- 76 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d.) Investment Securities
Investment securities are classified as either available for sale (“AFS”) or held to maturity (“HTM”). Debt securities that
management has the positive intent and ability to hold to maturity are classified as held to maturity and are recorded at amortized
cost. Other investment securities are classified as available for sale and recorded at fair value, with unrealized gains and losses
excluded from earnings and reported as a component of comprehensive income (loss) and shareholders’ equity.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains
and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
(e.) Loans Held for Sale and Loan Servicing Rights
The Company generally makes the determination of whether to identify a mortgage as held for sale at the time the loan is closed
based on the Company’s intent and ability to hold the loan. Loans held for sale are recorded at the lower of cost or market computed
on the aggregate portfolio basis. The amount by which cost exceeds market value, if any, is accounted for as a valuation allowance
with changes included in the determination of results of operations for the period in which the change occurs. The amount of loan
origination costs and fees are deferred at origination and recognized as part of the gain or loss on sale of the loans, determined using
the specific identification method, in the consolidated statements of income.
The Company originates and sells certain residential real estate loans in the secondary market. The Company typically retains the
right to service the mortgages upon sale. Mortgage-servicing rights (“MSRs”) represent the cost of acquiring the contractual rights
to service loans for others. MSRs are recorded at their fair value at the time a loan is sold and servicing rights are retained. MSRs
are reported in other assets in the consolidated statements of financial position and are amortized to noninterest income in the
consolidated statements of income in proportion to and over the period of estimated net servicing income. The Company uses a
valuation model that calculates the present value of future cash flows to determine the fair value of servicing rights. In using this
valuation method, the Company incorporates assumptions to estimate future net servicing income, which include estimates of the
cost to service the loan, the discount rate, an inflation rate and prepayment speeds. On a quarterly basis, the Company evaluates its
MSRs for impairment and charges any such impairment to current period earnings. In order to evaluate its MSRs the Company
stratifies the related mortgage loans on the basis of their predominant risk characteristics, such as interest rates, year of origination
and term, using discounted cash flows and market-based assumptions. Impairment of MSRs is recognized through a valuation
allowance, determined by estimating the fair value of each stratum and comparing it to its carrying value. Subsequent increases in
fair value are adjusted through the valuation allowance, but only to the extent of the valuation allowance.
Mortgage loan servicing includes collecting monthly mortgagor payments, forwarding payments and related accounting reports to
investors, collecting escrow deposits for the payment of mortgagor property taxes and insurance, paying taxes and insurance from
escrow funds when due and administrating foreclosure actions when necessary. Loan servicing income (a component of noninterest
income in the consolidated statements of income) consists of fees earned for servicing mortgage loans sold to third parties, net of
amortization expense and impairment losses associated with capitalized mortgage servicing assets.
(f.) Loans
Loans are classified as held for investment when management has both the intent and ability to hold the loan for the foreseeable
future, or until maturity or payoff. Loans are carried at the principal amount outstanding, net of any unearned income and
unamortized deferred fees and costs on originated loans. Loan origination fees and certain direct loan origination costs are deferred,
and the net amount is amortized into net interest income over the contractual life of the related loans or over the commitment period
as an adjustment of yield. Interest income on loans is based on the principal balance outstanding computed using the effective
interest method.
- 77 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A loan is considered delinquent when a payment has not been received in accordance with the contractual terms. The accrual of
interest income for commercial loans is discontinued when there is a clear indication that the borrower’s cash flow may not be
sufficient to meet payments as they become due, while the accrual of interest income for retail loans is discontinued when loans
reach specific delinquency levels. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as
to interest or principal payments, unless the loan is well secured and in the process of collection. Additionally, if management
becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is
management’s practice to place such loans on a nonaccrual status immediately, rather than delaying such action until the loans
become 90 days past due. When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed,
amortization of related deferred loan fees or costs is suspended, and income is recorded only to the extent that interest payments are
subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectability
of the principal is in doubt, payments received are applied to loan principal. A nonaccrual loan may be returned to accrual status
when all delinquent principal and interest payments become current in accordance with the terms of the loan agreement, the
borrower has demonstrated a period of sustained performance (generally a minimum of six months) and the ultimate collectability
of the total contractual principal and interest is no longer in doubt.
The Company’s loan policy dictates the guidelines to be followed in determining when a loan is charged-off. All charge offs are
approved by the Bank’s senior loan officers or loan committees, depending on the amount of the charge off, and are reported in
aggregate to the Bank’s Board of Directors. Commercial business and commercial mortgage loans are charged-off when a
determination is made that the financial condition of the borrower indicates that the loan will not be collectible in the ordinary
course of business. Residential mortgage loans and home equities are generally charged-off or written down when the credit
becomes severely delinquent and the balance exceeds the fair value of the property less costs to sell. Indirect and other consumer
loans, both secured and unsecured, are generally charged-off in full during the month in which the loan becomes 120 days past due,
unless the collateral is in the process of repossession in accordance with the Company’s policy.
A loan is accounted for as a troubled debt restructuring if the Company, for economic or legal reasons related to the borrower’s
financial condition, grants a significant concession to the borrower that it would not otherwise consider. A troubled debt
restructuring may involve the receipt of assets from the debtor in partial or full satisfaction of the loan, or a modification of terms
such as a reduction of the stated interest rate or face amount of the loan, a reduction of accrued interest, an extension of the maturity
date at a stated interest rate lower than the current market rate for a new loan with similar risk, or some combination of these
concessions. Troubled debt restructurings generally remain on nonaccrual status until there is a sustained period of payment
performance (usually six months or longer) and there is a reasonable assurance that the payments will continue. See Allowance for
Credit Losses below for further policy discussion and see Note 6 – Loans for additional information.
(g.) Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to
extend credit, standby letters of credit and financial guarantees. Such financial instruments are recorded in the consolidated financial
statements when they are funded or when related fees are incurred or received. The Company periodically evaluates the credit risks
inherent in these commitments and establishes loss allowances for such risks if and when these are deemed necessary.
The Company recognizes as liabilities the fair value of the obligations undertaken in issuing the guarantees under the standby letters
of credit, net of the related amortization at inception. The fair value approximates the unamortized fees received from the customers
for issuing the standby letters of credit. The fees are deferred and recognized on a straight-line basis over the commitment period.
Standby letters of credit outstanding typically have original terms ranging from one to five years. Fees received for providing loan
commitments and letters of credit that result in loans are typically deferred and amortized to interest income over the life of the
related loan, beginning with the initial borrowing. Fees on commitments and letters of credit are amortized to other income as
banking fees and commissions over the commitment period when funding is not expected.
(h.) Allowance for Credit Losses
The allowance for credit losses ("ACL") is evaluated on a regular basis and established through charges to earnings in the form of
a provision (benefit) for credit losses. When a loan or portion of a loan is determined to be uncollectible, the portion deemed
uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. This evaluation is
inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
- 78 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Portfolio Segmentation and “Pooled Loans” Calculation
Loans are pooled based on their homogeneous risk characteristics. Once loans have been segmented into pools, a loss rate is applied
to the amortized cost basis. The Company has divided its portfolio into six segments, as the loans within the segments have similar
characteristics. Characteristics considered include: purpose, tenor, amortization, repayment source, payment frequency, collateral
and recourse. 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.
The Company utilizes the Discounted Cash Flow (“DCF”) method for its pooled segment calculation. The DCF method implements
a probability of default with loss given default and exposure at default estimation. The probability of default and loss given default
are applied to future cash flows that are adjusted to present value and these discounted expected losses become the Allowance for
Credit Losses.
DCF analysis is reliant upon a variety of loan-level data, peripheral model outputs and key assumptions. The data fields required to
create the contractual portion of the forward-looking cash flow schedule relate to the terms of each loan and include information
regarding payment amount, payment frequency, interest rate, interest type, maturity date, amortization term, etc. Contractual terms
must be adjusted for prepayments to arrive at expected cashflows. The Company modeled amortizing/installment notes with a
prepayment rate, annualized to one-year. For loans where principal collection is dominated by borrower election, e.g. lines of credit,
interest-only, etc., and not by contractual obligation, the Company modeled a statistical tendency to repay as a curtailment rate,
normalized to a one-year rate.
The Company uses forecasts to predict how modeled economic factors will perform. The Company currently elects to forecast
economic factors over a period for which it can produce a reliable and defensible forecast from widely accepted economic forecast
resources. After the forecast period, the following eight quarters are reverted on a straight-line basis to the economic factor’s
average. The Company uses an eight-quarter straight-line reversion to reduce the potential for a spike impact on the model caused
by a rapid reversion. Additionally, as the Company is past its point of forecast, a straight-line reversion represents a most-likely
scenario absent a reasonable and supportable forecast.
In the Company’s analysis at the portfolio level, it found that the best model for predicting defaults considers the National
Unemployment Rate. With the large number of observations afforded by using peer data, the default curve is less sensitive to
unusual loss events and has a much smoother shape. The national unemployment rate is an extremely strong predictor of defaults
and explains almost all variation in the default rate.
The reserve is calculated based on a life of loan basis. The life of loan is assumed with consideration of prepayments and contractual
maturity dates. If a given loan does not have a populated maturity date, based upon historical experience, the Company elected to
amortize the loan for a length of time equal to the average life of the loan’s segment before the remaining balance will balloon with
the exception of Commercial Demand Lines of Credit where the Company uses one year, reflecting the demand nature of these
exposures with annual review.
Management also considers Qualitative Factors (“QF”) that are likely to cause estimated credit losses with the Company’s existing
portfolio to differ from historical loss experience, including but not limited to: national and local economic trends and conditions
(excluding national unemployment), levels and trends in delinquencies, non-accrual loans and classified assets, trends in volume,
terms and concentrations of loans, changes in lending policies and procedures, quality of credit review function and administration,
and changes in regulatory environment. The Company will periodically assess what adjustments are necessary to qualitatively adjust
the ACL based on their assessment of current expected credit losses.
The range for the QF in a specific pool represents the difference, in basis points, between the portfolio segment loss explained by
the regression analysis (r-squared factor) and the total loss for that period, looking back to 2006, when the Company experienced
its highest four quarter loss rate. In this approach, the Company is capturing, based upon historical experience, its largest potential
loss rate. Where possible, the QFs are calculated using available data sources to support the allocation of basis points within the
ranges. For example, delinquency for a segment is mapped backed to 2006 and current delinquency is allocated a QF based upon
where it lies in that range.
- 79 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Individually Evaluated Loans
Excluded from pooled analysis are loans to be individually evaluated due to the assets not maintaining similar risk characteristics
to those in the six designated segments. These loans are generally considered to be collateral dependent and, therefore, an analysis
of the collateral position versus the pooled loan discounted cash flow approach better reflects the potential loss. Individually
evaluated accounts include: loans over 90 days past due, loans marked as Trouble Debt Restructure (“TDR”), loans placed on non-
accrual status and criticized assets with exposure greater than $2.0 million.
In addition, certain commercial loans are on long-term deferral due to the impacts of the COVID-19 pandemic. While not criticized
assets, these loans reflect unique characteristics and warrant individual analysis. Management reviewed these loans and elected to
remove certain loans from the pooled loan analysis based upon characteristics including industry, which evidence a higher risk of
loss from the impact of the pandemic. These loans were individually evaluated, and reserves allocated to them based upon collateral
position. Management continues to assess the status of these loans for risk characteristics.
Held to Maturity (“HTM”) Debt Securities
The Company’s HTM debt securities are also required to utilize the current expected credit losses approach to estimate expected
credit losses. The Company’s HTM debt securities included securities that are issued by U.S. government agencies or U.S.
government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely
recognized as “risk free,” and have a long history of zero credit loss. The Company also carries a portfolio of HTM municipal
bonds. The Company measures its allowance for credit losses on HTM debt securities on a collective basis by major security type.
The estimate is based on historical credit losses, if any, adjusted for current conditions and reasonable and supportable forecasts.
The Company considers the nature of the collateral, potential future changes in collateral values and available loss information.
Available for Sale (“AFS”) Debt Securities
For AFS securities in an unrealized loss position, we first assess whether (i) we intend to sell, or (ii) it is more likely than not that
we will be required to sell the security before recovery of its amortized cost basis. If either case is affirmative, any previously
recognized allowances are charged-off and the security's amortized cost is written down to fair value through income. If neither
case is affirmative, the security is evaluated to determine whether the decline in fair value has resulted from credit losses or other
factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to
the rating of the security by a rating agency and any adverse conditions specifically related to the security, among other factors. If
this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are
compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the
amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that
the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses
is recognized in other comprehensive income. Adjustments to the allowance are reported in our income statement as a component
of provision for credit losses. AFS securities are charged-off against the allowance or, in the absence of any allowance, written
down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or
requirement to sell is met.
- 80 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accrued Interest Receivable
Upon adoption of ASU 2016-13 and its related amendments on January 1, 2020, the Company made the following elections
regarding accrued interest receivable:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Presenting accrued interest receivable balances separately within other assets on the statement of financial condition.
Excluding accrued interest receivable that is included in the amortized cost of financing receivables and debt securities
from related disclosure requirements.
Continuing our policy to write off accrued interest receivable by reversing interest income. For commercial loans, the
write off typically occurs upon becoming 90 days past due. For consumer loans, the write off typically occurs upon
becoming 120 days past due. Historically, the Company has not experienced uncollectible accrued interest receivable
on its investment securities. However, the Company would generally write off accrued interest receivable by reversing
interest income if the Company does not reasonably expect to receive payments. Due to the timely manner in which
accrued interest receivables are written off, the amounts of such write offs are immaterial.
The Company had made the election with the adoption of ASU 2016-13 of not measuring an allowance for credit
losses for accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest
receivable balances in a timely manner, as described above.
Reserve for Unfunded Commitments
The reserve for unfunded commitments (the “Unfunded Reserve”) represents the expected credit losses on off-balance sheet
commitments such as unfunded commitments to extend credit and standby letters of credit. However, a liability is not recognized
for commitments unconditionally cancellable by the Company. 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 fundings,
under each segment, and applying the expected loss rates. Expected future fundings are based on historical averages of funding
rates (i.e., the likelihood of draws taken). Average funding rates are determined based on the most recent 20 quarters (5 years) of
actual fundings on lines of credit. The average funding rate for each segment is compared to the current funding rate on each line
to determine the average fundings available to be drawn. The fund up rate (the difference between the average funding rate and the
current funding rate) for each segment is then applied within the CECL model to the unfunded commitment balance to estimate the
expected future fundings under each segment. The loss rate derived for each segment in the current CECL calculation is then applied
to the expected future fundings to derive the estimate of allowance for credit losses for unfunded commitments.
(i.) Other Real Estate Owned
Other real estate owned consists of properties acquired through foreclosure or by acceptance of a deed in lieu of foreclosure. These
assets are initially recorded at fair value less estimated costs to sell, which establishes the cost basis. Subsequently, other real estate
owned is carried at the lower of the cost basis or fair value less estimated selling costs. At the time of foreclosure, or when
foreclosure occurs in-substance, the excess, if any, of the loan over the fair market value of the assets received, less estimated selling
costs, is charged to the allowance for credit losses and any subsequent valuation write-downs are charged to other expense. In
connection with the determination of the allowance for credit losses and the valuation of other real estate owned, management
obtains appraisals for properties. Operating costs associated with the properties are charged to expense as incurred. Gains on the
sale of other real estate owned are included in income when title has passed and the sale has met the minimum down payment
requirements prescribed by GAAP. The balance of other real estate owned was $0 and $3.0 million at December 31, 2021 and 2020,
respectively.
- 81 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(j.) Company Owned Life Insurance
The Company holds life insurance policies on certain current and former employees. The Company is the owner and beneficiary of
the policies. The cash surrender value of these policies is included as an asset on the consolidated statements of financial condition,
and any increase in cash surrender value is recorded as noninterest income on the consolidated statements of income. In the event
of the death of an insured individual under these policies, the Company would receive a death benefit which would be recorded as
noninterest income.
(k.) Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is computed on the straight-
line method over the estimated useful lives of the assets. The Company generally amortizes buildings and building improvements
over a period of 15 to 39 years and software, furniture and equipment over a period of 3 to 10 years. Leasehold improvements are
amortized over the shorter of the lease term or the useful life of the improvements. Premises and equipment are periodically
reviewed for impairment or when circumstances present indicators of impairment.
(l.) Goodwill and Other Intangible Assets
The excess of the cost of an acquisition over the fair value of the net assets acquired consists primarily of goodwill, core deposit
intangibles, and other identifiable intangible assets. Intangible assets are acquired assets that lack physical substance but can be
distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged
either on its own or in combination with a related contract, asset, or liability. The Company’s intangible assets consist of core
deposits and other intangible assets (primarily customer relationships). Core deposit intangible assets are amortized on an
accelerated basis over their estimated life of approximately nine and a half years. Other intangible assets are amortized on an
accelerated basis over their weighted average estimated life of approximately twenty years. The Company reviews long-lived assets
and certain identifiable intangibles for impairment at least annually, or whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable, in which case an impairment charge would be recorded.
Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event
occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The impairment testing process is conducted by assigning net assets and goodwill to each reporting unit. An initial qualitative
evaluation is made to assess the likelihood of impairment and determine whether further quantitative testing to calculate the fair
value is necessary. When the qualitative evaluation indicates that impairment is more likely than not, quantitative testing is required
whereby the fair value of each reporting unit is calculated and compared to the recorded book value. If the calculated fair value of
the reporting unit exceeds its carrying value, then goodwill is not considered impaired. However, if the carrying value of a reporting
unit exceeds its calculated fair value, a goodwill impairment charge is recognized. See Note 8 for additional information on goodwill
and other intangible assets.
(m.) Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) Stock
The non-marketable investments in FHLB and FRB stock are included in other assets in the consolidated statements of financial
condition at par value or cost and are periodically reviewed for impairment. The dividends received relative to these investments
are included in other noninterest income in the consolidated statements of income.
As a member of the FHLB system, the Company is required to maintain a specified investment in FHLB of New York (“FHLBNY”)
stock in proportion to its volume of certain transactions with the FHLB. FHLBNY stock totaled $4.4 million and $2.6 million as of
December 31, 2021 and 2020, respectively.
As a member of the FRB system, the Company is required to maintain a specified investment in FRB stock based on a ratio relative
to the Company’s capital. FRB stock totaled $6.4 million and $6.1 million as of December 31, 2021 and 2020, respectively.
- 82 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n.) Equity Method Investments
The Company has investments in limited partnerships, primarily Small Business Investment Companies, and accounts for these
investments under the equity method. These investments are included in other assets in the consolidated statements of financial
condition and totaled $9.9 million and $7.9 million as of December 31, 2021 and 2020, respectively.
(o.) Derivative Instruments and Hedging Activities
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging
(“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial
statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts
for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s
objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the
fair value of derivatives depends on the intended use of the derivative. Changes in fair value of the Company’s derivatives
designated in a qualifying hedging relationship are recorded in accumulated other comprehensive income (loss). Changes in fair
value of the Company’s derivatives not designated in a qualifying hedging relationship are recognized directly in earnings.
In accordance with the FASB’s fair value measurement guidance, the Company made an accounting policy election to measure the
credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty
portfolio.
(p.) Treasury Stock
Acquisitions of treasury stock are recorded at cost. The reissuance of shares in treasury is recorded at weighted-average cost.
(q.) Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over financial
assets is deemed surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of
conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets and the Company does
not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
- 83 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(r.) Revenue Recognition
ASC 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature,
amount, timing and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods or services to
customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an
amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as
performance obligations are satisfied.
The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial
instruments, such as our loans, letters of credit, derivatives and investment securities, as well as revenue related to our loan servicing
activities, as these activities are subject to other GAAP. Descriptions of our primary revenue-generating activities that are within
the scope of ASC 606, which are presented in our income statements as components of noninterest income are as follows:
(cid:3)
(cid:3)
Transactions and service-based revenues - these include service charges on deposits, investment advisory, and ATM and debit
card fees. Revenue is recognized when the transactions occur or as services are performed over primarily monthly or quarterly
periods. Payment is typically received in the period the transactions occur or, in some cases, within 90 days of the service
period. Fees may be fixed or, where applicable, based on a percentage of transaction size or managed assets.
Insurance income - Insurance commissions are received on the sale of insurance products, and revenue is recognized upon the
placement date of the insurance policies. Payment is normally received within the policy period. In addition to placement, SDN
also provides insurance policy related risk management services. Revenue is recognized as these services are provided.
(s.) Employee Benefits
The Company maintains an employer sponsored 401(k) plan where participants may make contributions in the form of salary
deferrals and the Company may provide discretionary matching contributions in accordance with the terms of the plan.
Contributions due under the terms of our defined contribution plans are accrued as earned by employees.
The Company also participates in a non-contributory defined benefit pension plan for certain employees who previously met
participation requirements. The Company also provides post-retirement benefits, principally health and dental care, to employees
of a previously acquired entity. The Company has closed the pension and post-retirement plans to new participants. The actuarially
determined pension benefit is based on years of service and the employee’s highest average compensation during five consecutive
years of employment. The Company’s policy is to at least fund the minimum amount required by the Employment Retirement
Income Security Act of 1974. The cost of the pension and post-retirement plans are based on actuarial computations of current and
future benefits for employees and is charged to noninterest expense in the consolidated statements of income.
The Company recognizes an asset or a liability for a plan’s overfunded status or underfunded status, respectively, in the consolidated
financial statements and reports changes in the funded status as a component of other comprehensive income, net of applicable
taxes, in the year in which changes occur.
Effective January 1, 2016, the Company’s 401(k) plan was amended, and the Company’s prior matching contribution was
discontinued. Concurrent with the 401(k) plan amendment, the Company’s defined benefit pension plan was amended to modify
the current benefit formula to reflect the discontinuance of the matching contribution in the 401(k) plan, and to open the defined
benefit pension plan up to eligible employees who were hired on and after January 1, 2007, which provides those new participants
with a cash balance benefit formula.
(t.) Share-Based Compensation Plans
Compensation expense for stock options, restricted stock awards and restricted stock units is based on the fair value of the award
on the measurement date, which, for the Company, is the date of grant and is recognized ratably over the service period of the
award. The fair value of stock options is estimated using the Black-Scholes option-pricing model. The fair value of restricted stock
awards and restricted stock units is generally the market price of the Company’s stock on the date of grant.
Share-based compensation expense is included in the consolidated statements of income under salaries and employee benefits for
awards granted to management and in other noninterest expense for awards granted to directors.
- 84 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(u.) Income Taxes
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment date. A valuation allowance is recognized on deferred
tax assets if, based upon the weight of available evidence, it is more likely than not that some or all of the assets may not be realized.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
The Company has investments directly and indirectly in several limited partnerships formed by third parties that generate investment
tax credits related to rehabilitation of certified real property and qualified affordable housing projects. As a limited partner in the
partnerships, we have determined that we are not the primary beneficiary of these investments because the general partners have
the power to direct the activities that most significantly influence the economic performance of their respective partnerships and
have the obligation to absorb expected losses and the right to receive residual returns. As we are not the primary beneficiary of
these investments, we do not consolidate them.
For limited partnerships that generate tax credits related to the rehabilitation of certified real property, at the time that a structure is
placed into service, the limited partnership is eligible for federal and New York State tax credits. The federal tax credit impact is
recorded as a reduction of income tax expense. For a New York State tax credit generated after January 1, 2015, the amount not
used in the current tax year is treated as a refund or overpayment of tax to be credited to next year’s tax. Since the realization of the
tax credit does not depend on the Company’s generation of future taxable income or the Company’s ongoing tax status or tax
position, the credit is not considered an element of income tax accounting (ASC 740). The Company includes the tax credit in non-
interest income as opposed to a reduction of income tax expense. At the time that a structure is placed into service, the Company
records a loss on tax credit investments in noninterest income to reduce the investment to the present value of the expected cash
flows from its partnership interest.
For limited partnerships that generate tax credits related to qualified affordable housing projects, the investments are accounted for
using the proportional amortization method. Under this method, the Company amortizes the initial cost of the investment in
proportion to the tax credits and other tax benefits received and recognizes the net amount as a reduction of income tax expense.
The tax credit investments are included in other assets in the consolidated statements of financial condition and totaled $57.0 million
and $34.4 million as of December 31, 2021 and 2020, respectively. We do not have any loss reserves recorded related to these
investments because we believe the likelihood of any loss is remote. For all legally binding unfunded equity commitments, we
increase our recognized investment and recognize a liability. As of December 31, 2021 and 2020, we had liabilities of $20.2 million
and $17.5 million, respectively, related to these investments that are included in other liabilities in the consolidated statements of
financial condition. We continue to invest in these limited partnerships.
(v.) Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in shareholders’ equity during a period, except those resulting from transactions
with shareholders. In addition to net income, other components of the Company’s comprehensive income (loss) include the after-
tax effect of changes in net unrealized gain / loss on securities available for sale, changes in unrealized gain / loss on hedging
derivative instruments and changes in net actuarial gain / loss on defined benefit post-retirement plans. Comprehensive income
(loss) is reported in the accompanying consolidated statements of changes in shareholders’ equity and consolidated statements of
comprehensive income (loss). See Note 17 - Accumulated Other Comprehensive Income (Loss) for additional information.
(w.) Earnings Per Common Share
The Company calculates earnings per common share (“EPS”) using the two-class method in accordance with FASB ASC Topic
260, “Earnings Per Share”. The two-class method requires the Company to present EPS as if all of the earnings for the period are
distributed to common shareholders and any participating securities, regardless of whether any actual dividends or distributions are
made. All outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends are considered
participating securities.
- 85 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basic EPS is computed by dividing distributed and undistributed earnings available to common shareholders by the weighted
average number of common shares outstanding for the period. Distributed and undistributed earnings available to common
shareholders represent net income reduced by preferred stock dividends and distributed and undistributed earnings available to
participating securities. Common shares outstanding include common stock and vested restricted stock awards. Diluted EPS reflects
the assumed conversion of all potential dilutive securities. A reconciliation of the weighted-average shares used in calculating basic
earnings per common share and the weighted average common shares used in calculating diluted earnings per common share for
the reported periods is provided in Note 20 - Earnings Per Common Share.
(x.) Reclassifications
Certain items in prior financial statements have been reclassified to conform to the current presentation. These reclassifications did
not result in any changes to previously reported net income or shareholders’ equity.
(y.) Recent Accounting Pronouncements
In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), who is responsible for regulating the London Interbank
Offered Rate (“LIBOR”), announced its intention that it would no longer be necessary to persuade or compel its panel banks to
submit LIBOR rates after December 31, 2021. On March 5, 2021, the ICE Benchmark Administration (“IBA”), the administrator
of LIBOR, released the results of its consultation on the cessation timeline for certain LIBOR tenors. In coordination with the IBA,
the FCA also confirmed when certain LIBOR tenors will cease to exist. The results of the consultation indicated that certain LIBOR
tenors (overnight, one-month, three-month, six-month, and twelve-month USD LIBOR) will be extended to June 30, 2023 to allow
some legacy contracts that cannot be easily amended to mature on their current terms. Notwithstanding the extension of certain
LIBOR tenors to 2023, banks may no longer offer new LIBOR-based contracts after December 31, 2021. Given that LIBOR is a
widely used pricing index for loan and derivative contracts, a Company-wide initiative was introduced to assess all LIBOR
exposures through the Company’s loan, deposit, borrowing and derivative categories, while developing a plan for the ultimate
cessation of the index. In developing the transition plan, the Company has followed best practice recommendations from the Federal
Reserve’s Alternative Reference Rate Committee, our third-party derivative advisor and the Internal Swaps and Derivatives
Association. To date, the Company has identified the portion of loan notes that reference LIBOR, which are primarily representative
of commercial relationships. Additionally, the Company has one designated derivative instrument that is utilized to hedge the
LIBOR characteristic of a future dated borrowing (i.e. Federal Home Loan Bank Advance). In 2015, the Company issued $40
million in fixed to floating rate subordinated notes that currently bear a fixed rate of interest at 6.00% until April 2025, when the
rate converts to a floating rate equal to three-month LIBOR plus 3.944%; the indenture under which the notes were issued includes
language allowing an alternate index to be applied in the event that LIBOR becomes unavailable at the floating rate determination
date. At this time, no other borrowing or deposit relationships have been identified that utilize LIBOR as an index.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting. The ASU provides temporary optional expedients and exceptions to GAAP guidance on
contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR
and other interbank offered rates to alternative rates, such as SOFR. ASU 2020-04 became effective during the first quarter of 2020
and applies to contract modifications and amendments made as of the beginning of the reporting period including the ASU’s
issuance date, March 12, 2020, through December 31, 2022. The adoption of this guidance in 2020 resulted in the application of
certain practical expedients, which did not have a material effect on the Company's consolidated financial statements.
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain
optional expedients and exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are
affected by the discounting transition. The ASU also amends the expedients and exceptions in ASC 848 to capture the incremental
consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting
transition. ASU 2021-01 was effective upon issuance and applies through December 31, 2022. The adoption of this guidance
resulted in the application of certain practical expedients, which did not have a material effect on the Company's consolidated
financial statements.
- 86 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(2.) BUSINESS COMBINATIONS
On February 1, 2021, SDN completed the acquisition of the assets of Landmark Group (“Landmark”), an independent insurance
brokerage firm. Consideration for the acquisition included common shares of Company stock and cash. As a result of the acquisition,
SDN recorded goodwill of $611 thousand and other intangible assets of $399 thousand. The goodwill and other intangible assets are
expected to be deductible for income tax purposes. The allocation of acquisition cost to the assets acquired and liabilities assumed and
pro forma results of operations for this acquisition have not been presented because the effect of this acquisition was not material to the
Company’s consolidated financial statements.
On August 2, 2021, SDN completed the acquisition of the assets of North Woods Capital Benefits LLC ("North Woods"), an employee
benefits and human resources advisory firm. As a result of the acquisition, SDN recorded goodwill of $399 thousand and other intangible
assets of $263 thousand. The goodwill and other intangible assets are expected to be deductible for income tax purposes. The allocation
of acquisition cost to the assets acquired and liabilities assumed and pro forma results of operations for this acquisition have not been
presented because the effect of this acquisition was not material to the Company’s consolidated financial statements.
There were no business combinations during 2020 or 2019.
- 87 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(3.) RESTRUCTURING CHARGES
On July 17, 2020, the Bank announced management’s decision to adopt a full-service branch model that streamlines retail branches to
better align with shifting customer needs and preferences. The transformation resulted in six branch closures and a reduction in staffing.
The announcement was the result of a nine-month comprehensive assessment of all lines of business and functional areas, conducted in
partnership with a leading process improvement organization. The data-driven analysis identified, among other things, overlapping
service areas, automation opportunities and streamlining of processes and operations that would enhance customer experiences and
facilitate the long-term sustainability of current and future branches. The announced consolidations represented about ten percent of the
branch network and impacted approximately six percent of the total Company workforce. Where possible, those impacted were offered
alternative roles or the opportunity to apply for open positions in other areas of the Company. Separated associates received a
comprehensive severance package based on tenure.
In October 2020, the Company announced the planned closure of one additional branch in January 2021. This location was not included
in the branch consolidations announced in July 2020, as alternative options were being considered and consolidation was not possible
given its significant distance from other Bank branches.
The Company incurred total pre-tax expense related to the branch closures of approximately $1.7 million, including approximately $0.2
million in employee severance, $0.5 million in lease termination costs and $1.0 million in valuation adjustments on branch facilities
during 2020. Additional related restructuring charges of $111 thousand were incurred in 2021 as a result of property valuation
adjustments. The Company expects approximately $0.4 million of total costs will result in future cash expenditures. The Company
anticipates annual expense savings of approximately $2.7 million as a result of these branch closures.
The following table represents the consolidated statements of income classification of the Company’s restructuring charges (in
thousands):
Income Statement Location
2021
2020
2019
Severance costs
Lease termination costs
Valuation adjustments
Valuation adjustments
Total
Salaries and employee benefits
Restructuring charges
Restructuring charges
Net loss (gain) on sale of other
assets
$
$
-
-
111
11
122
$
$
242
454
1,038
-
1,734
$
$
The following table represents the changes in the restructuring reserve (in thousands):
Balance, January 1, 2019
No activity during the period
Balance, December 31, 2019
Restructuring charges
Cash payments
Charges against assets
Balance, December 31, 2020
Restructuring charges
Cash payments
Charges against assets
Balance, December 31, 2021
-
-
-
-
-
-
-
-
1,734
(287)
(202)
1,245
122
(192)
(730)
445
$
$
In contemplation of the transactions noted above, certain long-lived assets had met the held for sale criteria as of December 31, 2021.
Long lived assets held for sale totaled $3.2 million as of December 31, 2021 and is included in other assets on the Company's
consolidated statement of financial position. No long-lived assets had met the held for sale criteria as of December 31, 2020. For the
year ended December 31, 2021 the Company recognized a gain of $111 thousand on the sale of certain long-lived assets held for sale.
- 88 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(4.) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities are summarized below (in thousands).
December 31, 2021
Securities available for sale:
U.S. Government agencies and government sponsored enterprises $
Mortgage-backed securities:
15,793
$
195
$
97
$
15,891
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Government National Mortgage Association
Collateralized mortgage obligations:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Privately issued
Total mortgage-backed securities
Total available for sale securities
Securities held to maturity:
State and political subdivisions
Mortgage-backed securities:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Government National Mortgage Association
Collateralized mortgage obligations:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Government National Mortgage Association
Total mortgage-backed securities
Total held to maturity securities
Allowance for credit losses - securities
Total held to maturity securities, net
576,163
430,010
122,266
15,346
25,257
-
1,169,042
$ 1,184,835
$
111,399
9,275
8,706
27,400
19,485
23,840
5,481
94,187
205,586
(5)
205,581
$
$
$
$
6,565
952
298
26
-
410
8,251
8,446
2,412
411
137
706
368
565
84
2,271
4,683
$
$
$
5,242
6,435
2,082
433
477
-
14,669
14,766
577,486
424,527
120,482
14,939
24,780
410
1,162,624
$ 1,178,515
300
$
113,511
-
144
2
3
-
-
149
449
$
9,686
8,699
28,104
19,850
24,405
5,565
96,309
209,820
December 31, 2020
Securities available for sale:
U.S. Government agencies and government sponsored enterprises $
Mortgage-backed securities:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Government National Mortgage Association
Collateralized mortgage obligations:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Privately issued
Total mortgage-backed securities
Total available for sale securities
$
- 89 -
6,239
$
396
$
-
$
6,635
350,627
225,645
22,107
3,047
-
-
601,426
607,665
$
15,549
3,155
830
97
-
435
20,066
20,462
$
44
24
-
-
-
-
68
68
$
366,132
228,776
22,937
3,144
-
435
621,424
628,059
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(4.) INVESTMENT SECURITIES (Continued)
December 31, 2020 (continued)
Securities held to maturity:
State and political subdivisions
Mortgage-backed securities:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Government National Mortgage Association
Collateralized mortgage obligations:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Government National Mortgage Association
Total mortgage-backed securities
Total held to maturity securities
Allowance for credit losses - securities
Total held to maturity securities, net
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
144,506
$
4,478 $
- $
148,984
10,776
5,858
37,084
29,988
35,897
7,864
127,467
271,973
(7)
271,966
$
$
$
703
382
1,578
1,075
1,581
265
5,584
10,062 $
-
-
-
-
-
-
-
- $
11,479
6,240
38,662
31,063
37,478
8,129
133,051
282,035
The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed
throughout this footnote. For AFS debt securities, AIR totaled $2.1 million and $1.2 million as of December 31, 2021 and December
31, 2020, respectively. For HTM debt securities, AIR totaled $696 thousand and $905 thousand as of December 31, 2021 and December
31, 2020, respectively. AIR is included in other assets on the Company’s consolidated statements of financial condition.
For the years ended December 31, 2021 and 2020, credit loss (credit) expense for HTM investment securities was $(5) thousand and
$(7) thousand, respectively.
Investment securities with a total fair value of $637.6 million and $567.4 million at December 31, 2021 and 2020, respectively, were
pledged as collateral to secure public deposits and for other purposes required or permitted by law.
Interest and dividends on securities for the years ended December 31 are summarized as follows (in thousands):
2021
2020
2019
Taxable interest and dividends
Tax-exempt interest and dividends
Total interest and dividends on securities
$
$
16,736
2,355
19,091
Sales of securities available for sale for the years ended December 31 were as follows (in thousands):
Proceeds from sales
Gross realized gains
Gross realized losses
$
2021
51,891
251
180
$
$
$
14,186
3,278
17,464
2020
107,098
1,642
43
$
$
$
14,382
4,150
18,532
2019
178,059
2,391
714
- 90 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(4.) INVESTMENT SECURITIES (Continued)
The scheduled maturities of securities available for sale and securities held to maturity at December 31, 2021 are shown below (in
thousands). Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay
obligations.
Debt securities available for sale:
Due in one year or less
Due from one to five years
Due after five years through ten years
Due after ten years
Total available for sale securities
Debt securities held to maturity:
Due in one year or less
Due from one to five years
Due after five years through ten years
Due after ten years
Total held to maturity securities
Amortized
Cost
Fair
Value
$
$
$
$
1,469
64,526
178,918
939,922
1,184,835
35,419
68,054
19,209
82,904
205,586
$
$
$
$
1,479
66,843
182,096
928,097
1,178,515
35,700
70,227
19,414
84,479
209,820
- 91 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(4.) INVESTMENT SECURITIES (Continued)
Unrealized losses on investment securities for which an allowance for credit losses has not been recorded and the fair value of the related
securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss
position as of December 31 are summarized as follows (in thousands):
December 31, 2021
Securities available for sale:
U.S. Government agencies and government sponsored
enterprises
Mortgage-backed securities:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Government National Mortgage Association
Collateralized mortgage obligations:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Total mortgage-backed securities
Total available for sale securities
Total temporarily impaired securities
December 31, 2020
Securities available for sale:
U.S. Government agencies and government sponsored
enterprises
Mortgage-backed securities:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Government National Mortgage Association
Collateralized mortgage obligations:
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Privately issued
Total mortgage-backed securities
Total available for sale securities
Total temporarily impaired securities
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
$
9,438 $
97 $
- $
- $
9,438 $
97
333,489
283,965
108,448
13,364
24,780
764,046
773,484
773,484 $
3,597
3,353
2,082
61,249
110,931
-
1,645
3,082
-
394,738
394,896
108,448
433
477
9,942
10,039
10,039 $
-
-
172,180
172,180
172,180 $
-
-
4,727
4,727
4,727 $
13,364
24,780
936,226
945,664
945,664 $
5,242
6,435
2,082
433
477
14,669
14,766
14,766
- $
- $
- $
- $
- $
18,155
10,932
-
-
-
-
29,087
29,087
29,087 $
44
24
-
-
-
-
68
68
68 $
-
-
-
8
-
-
8
8
8 $
-
-
-
-
-
-
-
-
- $
18,155
10,932
-
8
-
-
29,095
29,095
29,095 $
-
44
24
-
-
-
-
68
68
68
$
$
$
- 92 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(4.) INVESTMENT SECURITIES (Continued)
The total number of security positions, for which an allowance for credit losses has not been recorded, in the investment portfolio in an
unrealized loss position at December 31, 2021 was 116 compared to eight at December 31, 2020. At December 31, 2021, the Company
had a position in 28 investment securities with a fair value of $172.2 million dollars and a total unrealized loss of $4.7 million dollars
that has been in a continuous unrealized loss position for more than 12 months. At December 31, 2021, there were a total of 88 securities
positions in the Company’s investment portfolio with a fair value of $773.5 million and a total unrealized loss of $10.0 million that had
been in a continuous unrealized loss position for less than 12 months. At December 31, 2020, the Company had a position in one
investment security with a fair value of eight thousand dollars and a total unrealized loss of less than one thousand dollars that has been
in a continuous unrealized loss position for more than 12 months. At December 31, 2020, there were a total of seven securities positions
in the Company’s investment portfolio with a fair value of $29.1 million and a total unrealized loss of $68 thousand that had been in a
continuous unrealized loss position for less than 12 months. The unrealized loss on investment securities was predominantly caused by
changes in market interest rates subsequent to purchase. The fair value of most of the investment securities in the Company’s portfolio
fluctuates as market interest rates change.
Securities Available for Sale
As of December 31, 2021, no allowance for credit losses has been recognized on available for sale securities in an unrealized loss
position as management does not believe any of the securities are impaired due to reasons of credit quality. This is based upon our
analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors related to our available for sale
securities and in consideration of our historical credit loss experience and internal forecasts. The issuers of these securities continue to
make timely principal and interest payments under the contractual terms of the securities. Furthermore, management does not have the
intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that we
will not have to sell any such securities before a recovery of cost. The unrealized losses are due to increases in market interest rates over
the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach
their maturity date or repricing date or if market yields for such investments decline.
Securities Held to Maturity
The Company’s HTM investment securities include debt securities that are issued by U.S. government agencies or U.S. government-
sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as
“risk free,” and have a long history of zero credit loss. In addition, the Company’s HTM investment securities include debt securities
that are issued by state and local government agencies, or municipal bonds.
The Company monitors the credit quality of our municipal bonds through the use of a credit rating agency or by ratings that are derived
by an internal scoring model. The scoring methodology for the internally derived ratings is based on a series of financial ratios for the
municipality being reviewed as compared to typical industry figures. This information is used to determine the financial strengths and
weaknesses of the municipality, which is indicated with a numeric rating. This number is then converted into a letter rating to better
match the system used by the credit rating agencies. As of December 31, 2021, $105.6 million of our municipal bonds were rated as an
equivalent to Standard & Poor’s A/AA/AAA, with $5.8 million internally rated to be the equivalent of Standard & Poor’s A/AA/AAA
rating. Additionally, no municipal bonds were rated below investment grade. As of December 31, 2020, $135.7 million of our municipal
bonds were rated as an equivalent to Standard & Poor’s A/AA/AAA, with $8.5 million internally rated to be the equivalent of Standard
& Poor’s A/AA/AAA rating. Additionally, as of December 31, 2020, one municipal bond was rated below investment grade, with a
BB+ Standard & Poor’s equivalent rating. The below investment grade bond represented exposure of $279 thousand, or 0.19% of the
municipal bond portfolio and had been closely monitored for repayment.
As of December 31, 2021, the Company had no past due or nonaccrual held to maturity investment securities.
- 93 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(5.) LOANS HELD FOR SALE AND LOAN SERVICING RIGHTS
Loans held for sale were entirely comprised of residential real estate loans and totaled $6.2 million and $4.3 million as of December 31,
2021 and 2020, respectively.
The Company sells certain qualifying newly originated or refinanced residential real estate loans on the secondary market. Residential
real estate loans serviced for others, which are not included in the consolidated statements of financial condition, amounted to $272.7
million and $241.7 million as of December 31, 2021 and 2020, respectively. In connection with these mortgage-servicing activities, the
Company administered escrow and other custodial funds which amounted to approximately $4.9 million and $4.5 million as of
December 31, 2021 and 2020, respectively.
The activity in capitalized loan servicing assets is summarized as follows for the years ended December 31 (in thousands):
Mortgage servicing assets, beginning of year
Originations
Amortization
Mortgage servicing assets, end of year
Valuation allowance
Mortgage servicing assets, net, end of year
(6.) LOANS
2021
2020
2019
1,376
520
(378)
1,518
(1)
1,517
$
$
1,129
601
(354)
1,376
(56)
1,320
$
$
1,022
349
(242)
1,129
-
1,129
$
$
The Company’s loan portfolio consisted of the following at December 31 (in thousands):
2021
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total
Allowance for credit losses - loans
Total loans, net
2020
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total
Allowance for credit losses - loans
Total loans, net
Principal
Amount
Outstanding
Net Deferred
Loan (Fees)
Costs
Loans, Net
$
$
$
$
639,368
1,415,486
563,579
75,515
923,052
14,355
3,631,355
798,409
1,256,525
586,537
86,708
812,816
16,913
3,557,908
$
$
$
$
(1,075) $
(2,698)
13,720
3,016
34,996
122
48,081
$
(4,261) $
(2,624)
13,263
3,097
27,605
150
37,230
$
638,293
1,412,788
577,299
78,531
958,048
14,477
3,679,436
(39,676)
3,639,760
794,148
1,253,901
599,800
89,805
840,421
17,063
3,595,138
(52,420)
3,542,718
- 94 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(6.) LOANS (Continued)
The CARES Act was passed by Congress and signed into law on March 27, 2020. The CARES Act established the PPP, an expansion
of the SBA’s 7(a) loan program and the EIDL, administered directly by the SBA. The Company had $57.5 million and $253.1 million
of PPP loans, principal amount outstanding (included in Commercial business above) as of December 31, 2021 and 2020, respectively.
In addition, the CARES Act provides that a financial institution may elect to suspend (1) the application of GAAP for certain loan
modifications related to COVID-19 that would otherwise be categorized as a TDR and (2) any determination that such loan modifications
would be considered a TDR, including the related impairment for accounting purposes. Accordingly, the Company had $532.4 million
of loans with modifications related to COVID-19 during 2020, with $46.2 million and $113.0 million still on deferral as of December
31, 2021 and 2020, respectively.
The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of December 31,
2021 and December 31, 2020, AIR for loans totaled $12.7 million and $13.6 million, respectively, and is included in other assets on the
Company’s consolidated statements of financial condition.
The Company’s significant concentrations of credit risk in the loan portfolio relate to a geographic concentration in the communities
that the Company serves.
Certain executive officers, directors and their business interests are customers of the Company. Transactions with these parties are based
on the same terms as similar transactions with unrelated third parties and do not carry more than normal credit risk. Borrowings by these
related parties amounted to $44.7 million and $32.8 million at December 31, 2021 and 2020, respectively. During 2021, new borrowings
amounted to $19.0 million (including borrowings of executive officers and directors that were outstanding at the time of their
appointment), and repayments and other reductions were $7.1 million.
Past Due Loans Aging
The Company’s recorded investment, by loan class, in current and nonaccrual loans, as well as an analysis of accruing delinquent loans
is set forth as of December 31 (in thousands):
30-59
Days
Past
Due
60-89
Days
Past
Due
Greater
Than 90
Days
Total
Past
Due
Nonaccrual Current
Total
Loans
Nonaccrual
with no
allowance
2021
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total loans, gross
2020
Commercial business
Commercial mortgage
Residential real estate loans
Residential real estate lines
Consumer indirect
Other consumer
Total loans, gross
$
659 $
69
1,148
18
5,706
121
$ 7,721 $
34 $
-
141
3
770
1
949 $
797 $ 1,490 $
602 $ 637,276 $ 639,368 $
-
-
-
-
-
69
1,289
21
6,476
122
6,414
2,373
200
1,780
-
1,409,003
559,917
75,294
914,796
14,233
1,415,486
563,579
75,515
923,052
14,355
797 $ 9,467 $
11,369 $3,610,519 $3,631,355 $
$
264 $
822
984
40
3,966
133
87 $
26
60
15
1,348
18
$ 6,209 $ 1,554 $
351 $
848
1,044
55
5,314
382
- $
-
-
-
-
231
231 $ 7,994 $
1,975 $ 796,083 $ 798,409 $
2,906
2,587
323
1,495
-
1,256,525
586,537
86,708
812,816
16,913
1,252,771
582,906
86,330
806,007
16,531
9,286 $3,540,628 $3,557,908 $
477
781
2,373
200
1,780
-
5,611
1,502
2,709
2,587
323
1,495
-
8,616
The Company had $797 thousand of PPP loans greater than 90 days past due and still accruing interest (included in Commercial business
above) as of December 31, 2021. Repayment of PPP loans is guaranteed by the SBA.
There were no loans past due greater than 90 days and still accruing interest as of December 31, 2020. There was less than one thousand
dollars and $231 thousand in consumer overdrafts which were past due greater than 90 days as of December 31, 2021 and 2020,
respectively. Consumer overdrafts are overdrawn deposit accounts which have been reclassified as loans but by their terms do not accrue
interest.
- 95 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(6.) LOANS (Continued)
Interest income on nonaccrual loans, if recognized, is recorded using the cash basis method of accounting. There was no interest income
recognized on nonaccrual loans during the years ended December 31, 2021, 2020 and 2019. For the years ended December 31, 2021,
2020 and 2019, estimated interest income of $211 thousand, $430 thousand, and $508 thousand, respectively, would have been recorded
if all such loans had been accruing interest according to their original contractual terms.
Troubled Debt Restructurings
A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the
modification constitutes a concession. Commercial loans modified in a TDR may involve temporary interest-only payments, term
extensions, reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the
current market rate for new debt with similar risk, collateral concessions, forgiveness of principal, forbearance agreements, or
substituting or adding a new borrower or guarantor.
There were no loans modified as a TDR during the years ended December 31, 2021 and 2020. There were no loans modified as a TDR
during the years ended December 31, 2021 and 2020 that defaulted during the year ended December 31, 2021. For purposes of this
disclosure, a loan modified as a TDR is considered to have defaulted when the borrower becomes 90 days past due.
Collateral Dependent Loans
Management has determined that specific commercial loans on nonaccrual status, all loans that have had their terms restructured in a
troubled debt restructuring and other loans deemed appropriate by management where repayment is expected to be provided substantially
through the operation or sale of the collateral to be collateral dependent loans. Collateral dependent loans at December 31, 2021 and
2020 included certain criticized COVID-19 bridge loans not otherwise classified as nonaccrual. The amortized cost basis of collateral
dependent loans categorized by collateral type are set forth as of the dates indicated (in thousands):
December 31, 2021
Commercial business
Commercial mortgage
Total
December 31,
2020
Commercial business
Commercial mortgage
Total
Collateral Type
Business Assets Real Property
Total
Specific
Reserve
$
$
$
$
326 $
-
326 $
2,379 $
-
2,379 $
993
37,936
38,929
-
36,625
36,625
$
$
$
$
1,319
37,936
39,255
2,379
36,625
39,004
$
$
$
$
1,055
4,716
5,771
1,383
8,187
9,570
- 96 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(6.) LOANS (Continued)
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt
such as: current financial information, historical payment experience, credit documentation, public information, and current economic
trends, among other factors such as the fair value of collateral. The Company analyzes commercial business and commercial mortgage
loans individually by classifying the loans as to credit risk. Risk ratings are updated any time the situation warrants. The Company uses
the following definitions for risk ratings:
Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the
Company’s credit position at some future date.
Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies
are not corrected.
Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and
values, highly questionable and improbable.
Loans that do not meet the criteria above that are analyzed individually as part of the process described above are considered
“uncriticized” or pass-rated loans and are included in groups of homogeneous loans with similar risk and loss characteristics.
- 97 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(6.) LOANS (Continued)
The following tables sets forth the Company’s commercial loan portfolio, categorized by internally assigned asset classification, as of
the dates indicated (in thousands):
Term Loans Amortized Cost Basis by Origination Year
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted
to Term
Total
December 31,
2021
Commercial Business
Uncriticized
Special mention
Substandard
Doubtful
Total
Commercial Mortgage
Uncriticized
Special mention
Substandard
Doubtful
Total
December 31, 2020
Commercial Business
Uncriticized
Special mention
Substandard
Doubtful
Total
Commercial Mortgage
Uncriticized
Special mention
Substandard
Doubtful
Total
- $ 629,545
3,859
-
4,889
-
-
-
- $ 638,293
- $1,306,303
81,641
-
24,844
-
-
-
- $1,412,788
Total
- $ 782,045
5,151
-
6,952
-
-
-
- $ 794,148
- $1,093,425
144,682
-
15,794
-
-
-
- $1,253,901
$141,925 $ 91,338 $ 68,433 $ 42,631 $ 24,847 $ 12,033 $ 248,338 $
44
745
-
$141,970 $ 91,726 $ 68,768 $ 43,420 $ 25,442 $ 13,426 $ 253,541 $
1,993
3,210
-
1,344
49
-
132
256
-
166
169
-
180
415
-
-
45
-
$342,483 $339,988 $176,753 $147,247 $ 128,381 $ 167,739 $
11,184
1,001
-
2,450
77
-
29,759
2,950
-
2,344
11,607
-
8,269
3,209
-
27,635
6,000
-
$354,668 $342,515 $209,462 $161,198 $ 139,859 $ 201,374 $
3,712 $
-
-
-
3,712 $
Term Loans Amortized Cost Basis by Origination Year
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted
to Term
$350,992 $112,469 $ 82,029 $ 31,990 $
8,195 $ 16,600 $ 179,770 $
-
193
-
360
211
-
21
1,183
-
709
464
-
$351,185 $113,040 $ 83,233 $ 33,163 $
41
202
-
1,025
309
-
8,438 $ 17,934 $ 187,155 $
2,995
4,390
-
$310,364 $227,406 $163,839 $161,771 $ 74,915 $ 154,399 $
14,299
189
-
42,305
2,521
-
19,505
1,890
-
27,530
1,648
-
12,256
3
-
28,744
9,344
-
$324,852 $272,232 $185,234 $190,949 $ 87,174 $ 192,487 $
731 $
43
199
-
973 $
- 98 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(6.) LOANS (Continued)
The Company utilizes payment status as a means of identifying and reporting problem and potential problem retail loans. The Company
considers nonaccrual loans and loans past due greater than 90 days and still accruing interest to be non-performing. The following tables
sets forth the Company’s retail loan portfolio, categorized by payment status, as of the dates indicated (in thousands):
Term Loans Amortized Cost Basis by Origination Year
2021
2020
2019
2018
2017
Prior
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted
to Term
Total
December 31,
2021
Residential Real Estate Loans
Performing
Nonperforming
Total
Residential Real Estate Lines
Performing
Nonperforming
Total
Consumer Indirect
Performing
Nonperforming
Total
Other Consumer
Performing
Nonperforming
Total
December 31, 2020
Residential Real Estate Loans
Performing
Nonperforming
Total
Residential Real Estate Lines
Performing
Nonperforming
Total
Consumer Indirect
Performing
Nonperforming
Total
Other Consumer
Performing
Nonperforming
Total
$ 92,620 $ 129,240 $ 85,876 $ 65,866 $
79
55
225
557
$ 92,699 $ 129,295 $ 86,101 $ 66,423 $
50,932
899
51,831
$ 150,392 $
558
$ 150,950 $
- $
-
- $
- $ 574,926
2,373
-
- $ 577,299
$
$
- $
-
- $
- $
-
- $
- $
-
- $
- $
-
- $
-
-
-
$ 452,601 $ 206,472 $ 122,849 $ 90,998 $
417
515
436
230
$ 453,018 $ 206,987 $ 123,285 $ 91,228 $
51,598
136
51,734
$
$
4,422 $
-
4,422 $
3,738 $
-
3,738 $
1,681 $
-
1,681 $
763 $
-
763 $
280
-
280
$
$
$
$
$
$
- $
-
- $
70,521 $
39
70,560 $
7,810 $ 78,331
200
7,971 $ 78,531
161
31,750 $
46
31,796 $
- $
-
- $
1,044 $
-
1,044 $
2,549 $
-
2,549 $
- $ 956,268
-
1,780
- $ 958,048
- $ 14,477
-
-
- $ 14,477
Term Loans Amortized Cost Basis by Origination Year
2020
2019
2018
2017
2016
Prior
Revolving
Loans
Amortized
Cost Basis
Revolving
Loans
Converted
to Term
Total
$ 137,926 $ 103,923 $ 87,153 $ 66,446 $
-
199
765
665
$ 137,926 $ 104,122 $ 87,918 $ 67,111 $
67,473
233
67,706
$ 134,292 $
725
$ 135,017 $
- $
-
- $
- $ 597,213
2,587
-
- $ 599,800
$
$
- $
-
- $
- $
-
- $
- $
-
- $
- $
-
- $
-
-
-
$ 295,216 $ 202,187 $ 166,773 $ 111,008 $
70
652
319
287
$ 295,286 $ 202,839 $ 167,092 $ 111,295 $
47,793
132
47,925
$
$
6,774 $
-
6,774 $
3,177 $
-
3,177 $
1,765 $
-
1,765 $
907 $
-
907 $
369
-
369
$
$
$
$
$
$
- $
-
- $
79,257 $
65
79,322 $
10,225 $ 89,482
323
10,483 $ 89,805
258
15,949 $
35
15,984 $
- $
-
- $
508 $
-
508 $
3,563 $
-
3,563 $
- $ 838,926
-
1,495
- $ 840,421
- $ 17,063
-
-
- $ 17,063
- 99 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(6.) LOANS (Continued)
Allowance for Credit Losses - Loans
The following tables set forth the changes in the allowance for credit losses - loans for the years ended December 31 (in thousands):
Commercial
Business
Commercial
Mortgage
Residential
Real Estate
Loans
Residential
Real Estate
Lines
Consumer
Indirect
Other
Consumer
Total
2021
Allowance for credit losses -
loans:
Beginning balance
Charge-offs
Recoveries
Provision (benefit)
Ending balance
2020
Allowance for credit losses -
loans:
Beginning balance, prior to
adoption of ASC 326
Impact of adopting ASC 326
Beginning balance, after
adoption of ASC 326
Charge-offs
Recoveries
Provision (benefit)
Ending balance
$
$
$
13,580
(669)
881
(2,693)
11,099 $
21,763
(3,999)
185
(3,172)
14,777 $
3,924
(148)
92
(2,264)
1,604 $
674
(141)
-
(154)
379 $
12,165
(7,236)
5,980
702
11,611 $
314 $ 52,420
(1,026)
(13,219)
321
7,459
(6,984)
597
206 $ 39,676
11,358 $
(246)
11,112
(9,093)
1,709
9,852
13,580 $
5,681 $
7,310
12,991
(1,792)
37
10,527
21,763 $
1,059 $
3,290
4,349
(100)
28
(353)
3,924 $
118 $
607
11,852 $
(1,234)
414 $ 30,482
9,594
(133) $
725
-
3
(54)
674 $
10,618
(9,959)
5,681
5,825
12,165 $
40,076
281
(21,625)
(681)
7,810
352
362
26,159
314 $ 52,420
- 100 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
Commercial
Business
Commercial
Mortgage
Residential
Real Estate
Loans
Residential
Real Estate
Lines
Consumer
Indirect
Other
Consumer
Total
$
$
$
$
$
$
$
14,312
(2,481)
492
(965)
11,358
214
11,144
571,222
1,177
570,045
$
$
$
$
$
$
$
5,219
(2,997)
17
3,442
5,681
479
5,202
1,108,315
3,146
1,105,169
$
$
$
$
$
$
$
1,112
(340)
43
244
1,059
-
1,059
560,717
-
560,717
$
$
$
$
$
$
$
210 $
(13)
6
(85)
118 $
12,572 $
(10,810)
5,390
4,700
11,852 $
489
(1,170)
387
708
414 $
33,914
(17,811)
6,335
8,044
30,482
- $
118 $
- $
11,852 $
- $
414 $
693
29,789
101,048 $ 822,179 $
15,984 $3,179,465
- $
- $
101,048 $ 822,179 $
- $
4,323
15,984 $3,175,142
(6.) LOANS (Continued)
2019
Allowance for loan losses:
Beginning balance
Charge-offs
Recoveries
Provision (benefit)
Ending balance
Evaluated for impairment:
Individually
Collectively
Loans:
Ending balance
Evaluated for impairment:
Individually
Collectively
Risk Characteristics
Commercial business loans primarily consist of loans to small to mid-sized businesses in our market area in a diverse range of industries.
These loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the
borrower’s business. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate
in value. The credit risk related to commercial loans is largely influenced by general economic conditions, including the impact of the
COVID-19 pandemic on small to mid-sized business in our market area, inflation and the resulting impact on a borrower’s operations
or on the value of underlying collateral, if any.
Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans,
potentially resulting in higher potential losses on an individual customer basis. Loan repayment is often dependent on the successful
operation and management of the properties, as well as on the collateral securing the loan. Economic events, including the impact of the
COVID-19 pandemic on the ability of the tenants to pay rent at these properties, inflation or conditions in the real estate market could
have an adverse impact on the cash flows generated by properties securing the Company’s commercial real estate loans and on the value
of such properties.
Residential real estate loans (comprised of conventional mortgages and home equity loans) and residential real estate lines (comprised
of home equity lines) are generally made based on the borrower’s ability to make repayment from his or her employment and other
income but are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally
influenced by general economic conditions, including the impact of the COVID-19 pandemic on the employment income of these
borrowers, inflation, the characteristics of individual borrowers, and the nature of the loan collateral.
Consumer indirect and other consumer loans may entail greater credit risk than residential mortgage loans and home equities, particularly
in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such
as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment
of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances such as job loss, illness or personal bankruptcy, including the
heightened risk that such circumstances may arise as a result of the COVID-19 pandemic including inflation. Furthermore, the
application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered
on such loans.
- 101 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(7.) PREMISES AND EQUIPMENT, NET
Major classes of premises and equipment at December 31 are summarized as follows (in thousands):
Land and land improvements
Buildings and leasehold improvements
Furniture, fixtures, equipment and vehicles
Premises and equipment
Accumulated depreciation and amortization
Premises and equipment, net
2021(1)
2020
5,019
50,253
39,759
95,031
(54,920)
40,111
$
$
6,022
56,842
40,996
103,860
(63,250)
40,610
$
$
(1) The premises and equipment balance at December 31, 2021, excludes amounts reclassified to assets held for sale. See Note 3 -
Restructuring Charges for additional information.
Depreciation and amortization expense included in occupancy and equipment expense on the consolidated statements of income for the
years ended December 31 was as follows (in thousands):
Occupancy and equipment expense
Computer and data processing expense
Total depreciation and amortization expense
(8.) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
2021
2020
2019
$
$
3,905
659
4,564
$
$
4,109
637
4,746
$
$
4,382
599
4,981
Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, and more frequently if an event occurs
or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The
Company performs its annual impairment test of goodwill as of October 1st of each year. See Note 1 for the Company’s accounting
policy for goodwill and other intangible assets.
The Company completed qualitative assessments for the Banking, Courier Capital and HNP Capital reporting units and a quantitative
assessment for the SDN reporting unit during 2021. The results of the 2021 annual impairment tests for the Company’s reporting units
indicated no goodwill impairment.
Based on volatility in the capital markets and overall economic conditions as a result of the COVID(cid:6)19 pandemic accompanied by a
decline in the Company’s stock price, a quantitative assessment was performed for the Banking reporting unit in the third quarter of
2020. Based on this quantitative assessment, the Company concluded that goodwill was not impaired.
The Company completed a quantitative assessment in relation to the SDN reporting unit as of its 2020 annual test date and determined
that goodwill was not impaired.
The Company completed qualitative assessments in relation to the Courier Capital and the HNP Capital reporting units as of their 2020
annual test date and determined it was not more likely than not that the fair value of these reporting units were less than their carrying
values.
The results of the 2019 annual impairment tests for the Company’s reporting units indicated no goodwill impairment.
Declines in the market value of the Company’s publicly traded stock price or declines in the Company’s ability to generate future cash
flows may increase the potential that goodwill recorded on the Company’s consolidated statement of financial condition be designated
as impaired and that the Company may incur a goodwill write-down in the future.
- 102 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(8.) GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
The change in the balance for goodwill during the years ended December 31 was as follows (in thousands):
Balance, January 1, 2020
No activity during the period
Balance, December 31, 2020
Acquisitions
Balance, December 31, 2021
Banking
All Other(1)
Total
$
$
48,536
-
48,536
-
48,536
$
$
17,526
-
17,526
1,009
18,535
$
$
66,062
-
66,062
1,009
67,071
(1) All Other includes the SDN, Courier Capital and HNP Capital reporting units. The amounts are reported net of $4.7 million
accumulated impairment related to the SDN reporting unit.
Other Intangible Assets
The Company has other intangible assets that are amortized, consisting of core deposit intangibles and other intangibles (primarily
related to customer relationships). Changes in the gross carrying amount, accumulated amortization and net book value for the years
ended December 31 were as follows (in thousands):
Core deposit intangibles:
Gross carrying amount
Accumulated amortization
Net book value
Other intangibles:
Gross carrying amount
Accumulated amortization
Net book value
2021
2020
$
$
$
$
2,042
(2,039)
3
14,545
(7,219)
7,326
$
$
$
$
2,042
(2,014)
28
13,883
(6,184)
7,699
Core deposit intangibles and other intangibles amortization expense was $25 thousand and $1.0 million, respectively, for the year ended
December 31, 2021. Core deposit intangibles and other intangibles amortization expense was $70 thousand and $1.1 million,
respectively, for the year ended December 31, 2020. Core deposit intangibles and other intangibles amortization expense was $115
thousand and $1.1 million, respectively, for the year ended December 31, 2019. Estimated amortization expense of other intangible
assets for each of the next five years is as follows (in thousands):
2022
2023
2024
2025
2026
$
985
910
838
766
694
- 103 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(9.) LEASES
Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”), establishes a right of use model that requires a lessee to record
a right of use asset and a lease liability for all leases with terms longer than 12 months. The Company is obligated under a number of
non-cancellable operating lease agreements for land, buildings and equipment with terms, including renewal options reasonably certain
to be exercised, extending through 2061. One building lease was subleased with terms that extended through June 30, 2021.
The following table represents the consolidated statements of financial condition classification of the Company’s right of use assets and
lease liabilities as of December 31 (in thousands):
Operating Lease Right of Use Assets:
Gross carrying amount
Accumulated amortization
Net book value
Operating Lease Liabilities:
Right of use lease obligations
Balance Sheet Location
Other assets
Other assets
Other liabilities
2021
2020
$
$
$
27,063
(4,993)
22,070
$
$
23,697
(3,741)
19,956
23,867
$
21,507
The weighted average remaining lease term for operating leases was 24.0 years at December 31, 2021 and the weighted-average discount
rate used in the measurement of operating lease liabilities was 3.71%. The Company utilizes its incremental borrowing rate at lease
inception, on a collateralized basis, over a similar term for the discount rate.
The following table represents lease costs and other lease information for the years ended December 31 (in thousands):
Lease Costs:
Operating lease costs
Variable lease costs (1)
Sublease income
Net lease costs
Other information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Initial recognition of operating lease right of use assets
Initial recognition of operating lease liabilities
Right of use assets obtained in exchange for new operating lease liabilities
2021
2020
2019
$
$
$
$
$
$
2,830
427
(23)
3,234
2,647
-
-
4,251
$
$
$
$
$
$
2,673
410
(46)
3,037
2,599
-
-
477
$
$
$
$
$
$
2,758
428
(46)
3,140
2,641
23,275
23,985
620
(1) Variable lease costs primarily represent variable payments such as common area maintenance, insurance, taxes and utilities.
- 104 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(9.) LEASES (Continued)
Future minimum payments under non-cancellable operating leases with initial or remaining terms of one year or more are as follows at
December 31, 2021 (in thousands):
Year ended December 31(1),
2022
2023
2024
2025
2026
Thereafter
Total future minimum operating lease payments
Amounts representing interest
Present value of net future minimum operating lease payments
$
$
2,215
1,766
1,452
1,378
1,299
29,575
37,685
(13,818)
23,867
(1) Operating lease payments exclude $13.8 million of future minimum lease payments for leases signed but not yet commenced.
(10.) OTHER ASSETS
A summary of other assets as of December 31 are as follows (in thousands):
Operating lease right of use assets
Tax credit investments
Derivative instruments
Collateral on derivative instruments
Other
Total other assets
2021
2020
$
$
22,070
57,010
16,504
4,640
72,976
173,200
$
$
19,956
34,370
20,120
19,630
62,010
156,086
- 105 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(11.) DEPOSITS
A summary of deposits as of December 31 are as follows (in thousands):
Noninterest-bearing demand
Interest-bearing demand
Savings and money market
Time deposits, due:
Within one year
One to two years
Two to three years
Three to four years
Four to five years
Thereafter
Total time deposits
Total deposits
2021
2020
1,107,561
864,528
1,933,047
880,892
23,572
9,881
6,485
1,124
-
921,954
4,827,090
$
$
1,018,549
731,885
1,642,340
841,581
30,847
5,186
5,417
2,562
-
885,593
4,278,367
$
$
Time deposits in denominations of $250,000 or more at December 31, 2021 and 2020 amounted to $220.8 million and $200.7 million,
respectively.
Interest expense by deposit type for the years ended December 31 is summarized as follows (in thousands):
Interest-bearing demand
Savings and money market
Time deposits
Total interest expense on deposits
(12.) BORROWINGS
2021
2020
2019
1,156
3,363
3,599
8,118
$
$
1,091
4,788
11,943
17,822
$
$
1,372
4,365
22,757
28,494
$
$
The Company classifies borrowings as short-term or long-term in accordance with the original terms of the applicable agreement.
Outstanding borrowings consisted of the following as of December 31 (in thousands):
Short-term borrowings:
Short-term FHLB borrowings
Long-term borrowings:
Subordinated notes, net
Total borrowings
Short-term borrowings
2021
2020
$
$
30,000
73,911
103,911
$
$
5,300
73,623
78,923
Short-term FHLB borrowings have original maturities of less than one year and include overnight borrowings which we typically utilize
to address short term funding needs as they arise. Short-term FHLB borrowings at December 31, 2021 and 2020 consisted of $30 million
and $5.3 million, respectively, in short-term borrowings. The FHLB borrowings are collateralized by securities from the Company’s
investment portfolio and certain qualifying loans. At December 31, 2021 and 2020, the Company’s borrowings had a weighted average
rate of 0.34% and 1.70%, respectively.
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, 2021 and 2020, no amounts have been drawn on the line of credit.
- 106 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(12.) BORROWINGS (Continued)
Long-term borrowings
On October 7, 2020, the Company completed a private placement of $35.0 million in aggregate principal amount of fixed-to-floating
rate subordinated notes due 2030 to qualified institutional buyers and accredited institutional investors that were subsequently exchanged
for subordinated notes with substantially the same terms (the “2020 Notes”) registered under the Securities Act of 1933, as amended.
The 2020 Notes have a maturity date of October 15, 2030 and bear interest, payable semi-annually, at the rate of 4.375% per annum,
until October 15, 2025. Commencing on that date, the interest rate will reset quarterly to an interest rate per annum equal to the then
current three-month secured overnight financing rate (“SOFR”) plus 4.265%, payable quarterly until maturity. Proceeds, net of debt
issuance costs of $779 thousand, were $34.2 million. The net proceeds from this offering were used for general corporate purposes,
including but not limited to, contribution of capital to the Bank to support both organic growth and regulatory capital ratios. The 2020
Notes qualify as Tier 2 capital for regulatory purposes.
On April 15, 2015, the Company issued $40.0 million of 6.0% fixed to floating rate subordinated notes due April 15, 2030 (the “2015
Notes”) in a registered public offering. The 2015 Notes bear interest at a fixed rate of 6.0% per year, payable semi-annually, for the first
10 years. From April 15, 2025 to the April 15, 2030 maturity date, the interest rate will reset quarterly to an annual interest rate equal to
the then current three-month London Interbank Offered Rate (LIBOR) plus 3.944%, payable quarterly. After the discontinuance of
LIBOR, the interest rate will be determined by an alternate method as reasonably selected by the Company. The 2015 Notes are
redeemable by the Company at any quarterly interest payment date beginning on April 15, 2025 to maturity at par, plus accrued and
unpaid interest. Proceeds, net of debt issuance costs of $1.1 million, were $38.9 million. The net proceeds from this offering were used
for general corporate purposes, including but not limited to, contribution of capital to the Bank to support both organic growth and
opportunistic acquisitions. The 2015 Notes qualify as Tier 2 capital for regulatory purposes.
The Company adopted ASU 2015-03 that requires debt issuance costs to be reported as a direct deduction from the face value of the
2015 Notes and the 2020 Notes, and not as a deferred charge. The debt issuance costs will be amortized as an adjustment to interest
expense through April 15, 2025 for the 2015 Notes and through October 15, 2025 for the 2020 Notes.
(13.) DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally
manages its exposures to a wide variety of business and operational risks through management of its core business activities. The
Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and
duration of its assets and liabilities, and the use of derivative financial instruments. Specifically, the Company enters into derivative
financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and
uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used
to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected
cash payments.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest
rate movements. To accomplish this objective, the Company primarily uses interest rate caps and interest rate swaps as part of its interest
rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a
counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During 2021, such derivatives
were used to hedge the variable cash flows associated with short-term borrowings. Interest rate swaps designated as cash flow hedges
involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of
the agreements without exchange of the underlying notional amount. The Company is hedging its exposure to the variability in future
cash flows for forecasted transactions over a period of approximately 60 months. As of December 31, 2021, the Company had one
outstanding forward interest rate derivative with a notional value of $50.0 million that was designated as a cash flow hedge of interest
rate risk. The derivative becomes effective in April 2022.
- 107 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(13.) DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES (Continued)
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in
accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which
the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will
be reclassified to interest expense as interest payments are made on the Company’s borrowings. During the next twelve months, the
Company estimates that $53 thousand will be reclassified as an increase to interest expense.
Interest Rate Swaps
The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies.
These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such
that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this
program do not meet hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are
recognized directly in earnings.
Credit-risk-related Contingent Features
The Company has agreements with certain of its derivative counterparties that contain one or more of the following provisions: (a) if
the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by
the lender, the Company could also be declared in default on its derivative obligations, and (b) if the Company fails to maintain its status
as a well-capitalized institution, the counterparty could terminate the derivative positions and the Company would be required to settle
its obligations under the agreements.
Mortgage Banking Derivatives
The Company extends rate lock agreements to borrowers related to the origination of residential mortgage loans. To mitigate the interest
rate risk inherent in these rate lock agreements when the Company intends to sell the related loan, once originated, as well as closed
residential mortgage loans held for sale, the Company enters into forward commitments to sell individual residential mortgages. Rate
lock agreements and forward commitments are considered derivatives and are recorded at fair value.
- 108 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(13.) DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES (Continued)
Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the notional amounts, respective fair values of the Company’s derivative financial instruments, as well as their
classification on the balance sheet as of December 31 (in thousands):
Derivatives designated as hedging instruments
Cash flow hedges
Total derivatives
Derivatives not designated as hedging
instruments
Cash flow hedges
Interest rate swaps (1)
Credit contracts
Mortgage banking
Total derivatives
Asset derivatives
Liability derivatives
Gross notional amount
2021
2020
$
$
50,000
50,000
$
$
50,000
50,000
Balance
sheet
line item
Other
assets
Fair value
2021
2020
Balance
sheet
line item
Other
Fair value
2021
2020
$
$
1,559 $
1,559 $
-
-
liabilities $
$
- $
- $
311
311
$
-
$ 100,000
853,445
631,907
113,833
113,434
18,199
$ 985,477
28,225
$ 873,566
Other
assets
Other
assets
Other
assets
Other
assets
Other
$
- $
-
liabilities $
- $
-
14,702
19,626
-
243
$ 14,945 $
23
471
20,120
Other
liabilities
Other
liabilities
Other
liabilities
14,708
19,837
1
4
$ 14,713 $
86
1
19,924
(1) The Company secured its obligations under these contracts with $4.6 million and $19.6 million in cash at December 31, 2021 and
2020, respectively.
Effect of Derivative Instruments on the Income Statement
The table below presents the effect of the Company’s derivative financial instruments on the income statement for the years ended
December 31 (in thousands):
Undesignated derivatives
Line item of gain (loss)
recognized in income
Gain (loss) recognized in income
2021
2020
2019
Cash flow hedges
Interest rate swaps
Credit contracts
Mortgage banking
Total undesignated
Income from derivative instruments, net
Income from derivative instruments, net
Income from derivative instruments, net
Income from derivative instruments, net
$
$
-
2,852
74
(231)
2,695
$
$
-
4,707
455
359
5,521
$
$
-
2,189
29
56
2,274
- 109 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(14.) COMMITMENTS AND CONTINGENCIES
Financial Instruments with Off-Balance Sheet Risk
The Company has financial instruments with off-balance sheet risk established in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk extending beyond amounts recognized in the financial statements.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments
to extend credit and standby letters of credit is essentially the same as that involved with extending loans to customers. The Company
uses the same credit underwriting policies in making commitments and conditional obligations as for on-balance sheet instruments.
Off-balance sheet commitments as of December 31 consist of the following (in thousands):
Commitments to extend credit
Standby letters of credit
2021
$
936,298
24,913
$
2020
1,012,810
22,393
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
agreement. Commitments generally have fixed expiration dates or other termination clauses which may require payment of a fee.
Commitments may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash
requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if any, is based
on management’s credit evaluation of the borrower. Standby letters of credit are conditional lending commitments issued by the
Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support
private borrowing arrangements. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in
extending loan facilities to customers.
Unfunded Commitments
At December 31, 2021 and December 31, 2020, the allowance for credit losses for unfunded commitments totaled $1.8 million and $3.1
million, respectively, and was included in other liabilities on the Company's consolidated statements of financial condition. For the years
ended December 31, 2021 and 2020, credit loss (benefit) expense for unfunded commitments was $(1.3) million and $1.0 million,
respectively, and was included in provision (benefit) for credit losses on the Company’s consolidated statements of income.
Contingent Liabilities and Litigation
In the ordinary course of business there are various threatened and pending legal proceedings against the Company. Management
believes that the aggregate liability, if any, arising from such litigation would not have a material adverse effect on the Company’s
consolidated financial statements.
We are party to an action filed against us on May 16, 2017 by Matthew L. Chipego, Charlene Mowry, Constance C. Churchill and
Joseph W. Ewing in the Court of Common Pleas in Philadelphia, Pennsylvania. Plaintiffs sought and were granted class certification to
represent classes of consumers in New York and Pennsylvania seeking to recover statutory damages, interest and declaratory relief. The
plaintiffs allege that they obtained direct or indirect financing from us for the purchase of vehicles that we later repossessed. The
plaintiffs specifically claim that the notices the Bank sent to defaulting consumers after their vehicles were repossessed did not comply
with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. We dispute and believe we have meritorious
defenses against these claims and plan to continue to vigorously defend ourselves.
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 approximately 300 members in the Pennsylvania classes. Our motion seeking permission to appeal the class certification ruling and
a stay of proceedings pending any such appeal was denied. We are currently awaiting a ruling from the Superior Court of Pennsylvania
on our motion seeking permission to appeal the denial of our motion to dismiss the action for lack of standing. On February 8, 2022,
plaintiffs filed a motion for partial summary judgment for most of the relief they seek. The Company intends to oppose and file cross
motions for partial summary judgment. The parties agreed that the Company’s opposition and cross motion papers will be filed by
March 21, 2022. Through a Case Management Order dated February 10, 2022, the trial court directed, among other things, that discovery
be completed by October 3, 2022, pre-trial motions be submitted by November 21, 2022, and that the case be ready for trial on March
6, 2023. 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 reasonably probable to occur nor are we able to currently reasonably estimate the amount of potential loss.
- 110 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(14.) COMMITMENTS AND CONTINGENCIES (Continued)
If we settle these claims or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements
or judgments that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will
insure the legal costs, settlements or judgements we incur in excess of our deductible. If we are unsuccessful in defending ourselves
from these claims or if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially
adversely affect our business, results of operations and financial condition.
(15.) REGULATORY MATTERS
General
The supervision and regulation of financial and bank holding companies and their subsidiaries is intended primarily for the protection
of depositors, the deposit insurance funds regulated by the FDIC and the banking system as a whole, and not for the protection of
shareholders or creditors of bank holding companies. The various bank regulatory agencies have broad enforcement power over financial
holding companies and banks, including the power to impose substantial fines, operational restrictions and other penalties for violations
of laws and regulations and for safety and soundness considerations.
Capital
Banks and bank holding companies are subject to various regulatory capital requirements administered by state and federal banking
agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures
of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators about components, risk weighting and other factors.
The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, became effective for the Company and
the Bank on January 1, 2015 (subject to a phase-in period for certain provisions). Quantitative measures established by the Basel III
Capital Rules to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table that follows) of
Common Equity Tier 1 capital (“CET1”), Tier 1 capital and Total capital to risk-weighted assets, and of Tier 1 capital to adjusted
quarterly average assets (each as defined in the regulations).
The Economic Growth Act provided for a potential exception from the Basel III Rules for community banks that maintain a Community
Bank Leverage Ratio (“CBLR”) of at least 8.0% to 10.0%. The CBLR is calculated by dividing Tier 1 capital by the bank’s average
total consolidated assets. In the final rules approved by the FDIC in September 2019, qualifying community banking organizations that
opt in to using the CBLR are considered to be in compliance with the Basel III Rules as long as the bank maintains a CBLR of greater
than 9.0%. 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.
The Company’s and the Bank’s Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock,
and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include
most components of accumulated other comprehensive income in Common Equity Tier 1. Common Equity Tier 1 for both the Company
and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.
Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. For the Company, additional Tier 1 capital at
December 31, 2021 includes, subject to limitation, $17.3 million of preferred stock.
Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes a permissible portion
of the allowance for credit losses. Tier 2 capital for the Company also includes qualified subordinated debt. At December 31, 2021, the
Company’s Tier 2 capital included $73.9 million of Subordinated Notes.
The Common Equity Tier 1, Tier 1 and Total capital ratios are calculated by dividing the respective capital amounts by risk-weighted
assets. Risk-weighted assets are calculated based on regulatory requirements and include total assets, with certain exclusions, allocated
by risk weight category, and certain off-balance-sheet items, among other things. The leverage ratio is calculated by dividing Tier 1
capital by adjusted quarterly average total assets, which exclude goodwill and other intangible assets, among other things.
- 111 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(15.) REGULATORY MATTERS (Continued)
The Basel III Capital Rules require the Company and the Bank to maintain (i) a minimum ratio of Common Equity Tier 1 capital to risk-
weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 capital
ratio, effectively resulting in a minimum ratio of Common Equity Tier 1 capital to risk-weighted assets of at least 7.0%), (ii) a minimum
ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1
capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of Total capital (that is, Tier 1 plus
Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio,
effectively resulting in a minimum total capital ratio of 10.5%) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of
Tier 1 capital to average quarterly assets.
The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and
does not have any current applicability to the Company or the Bank. The capital conservation buffer is designed to absorb losses during
periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Banking institutions with a ratio
of Common Equity Tier 1 capital to risk-weighted assets below the effective minimum will face constraints on dividends, equity
repurchases and compensation based on the amount of the shortfall.
- 112 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(15.) REGULATORY MATTERS (Continued)
The following table presents actual and required capital ratios as of December 31, 2021 and 2020 for the Company and the Bank under
the Basel III Capital Rules. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations,
as amended to reflect the changes under the Basel III Capital Rules (in thousands):
2021
Tier 1 leverage:
Company
Bank
CET1 capital:
Company
Bank
Tier 1 capital:
Company
Bank
Total capital:
Company
Bank
2020
Tier 1 leverage:
Company
Bank
CET1 capital:
Company
Bank
Tier 1 capital:
Company
Bank
Total capital:
Company
Bank
Actual
Amount
Ratio
Minimum Capital
Required – Basel III
Ratio
Amount
Required to be
Considered Well
Capitalized
Amount
Ratio
$
$
455,138
496,337
437,846
496,337
455,138
496,337
558,987
526,274
407,061
441,929
389,733
441,929
407,061
441,929
521,193
482,439
8.23% $
8.98
10.28
11.68
10.68
11.68
13.12
12.38
8.25% $
8.97
10.14
11.52
10.59
11.52
13.56
12.58
221,319
220,963
298,207
297,489
362,109
361,237
447,311
446,233
197,344
197,064
269,107
268,483
326,772
326,015
403,660
402,725
4.00% $
4.00
7.00
7.00
8.50
8.50
10.50
10.50
4.00% $
4.00
7.00
7.00
8.50
8.50
10.50
10.50
276,649
276,204
276,907
276,240
340,808
339,987
426,010
424,984
246,680
246,330
249,885
249,306
307,550
306,838
384,438
383,547
5.00%
5.00
6.50
6.50
8.00
8.00
10.00
10.00
5.00%
5.00
6.50
6.50
8.00
8.00
10.00
10.00
As of December 31, 2021 and 2020, the Company and Bank were considered “well capitalized” under all regulatory capital guidelines.
Such determination has been made based on the Tier 1 leverage, CET1 capital, Tier 1 capital and total capital ratios.
Federal Reserve Requirements
The Bank is typically required to maintain cash on hand or on deposit at the FRB of New York according to the reserve requirements
set by the FRB. In March 2020, the FRB reduced the required reserve to 0%. Accordingly, as of December 31, 2021 and 2020, the Bank
was not required to maintain a reserve balance at the FRB of New York. The reserve requirement for the Bank totaled $6.4 million as
of December 31, 2019.
Dividend Restrictions
In the ordinary course of business, the Company is dependent upon dividends from the Bank to provide funds for the payment of
dividends to shareholders and to provide for other cash requirements. Banking regulations may limit the amount of dividends that may
be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank
to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined
with the retained net profits for the preceding two years.
- 113 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(16.) SHAREHOLDERS’ EQUITY
The Company’s authorized capital stock consists of 50,210,000 shares of capital stock, 50,000,000 of which are common stock, par
value $0.01 per share, and 210,000 of which are preferred stock, par value $100 per share, which is designated into two classes, Class
A of which 10,000 shares are authorized, and Class B of which 200,000 shares are authorized. There are two series of Class A preferred
stock: Series A 3% preferred stock and the Series A preferred stock. There is one series of Class B preferred stock: Series B-1 8.48%
preferred stock. There were 172,921 and 173,282 shares of preferred stock issued and outstanding as of December 31, 2021 and 2020,
respectively.
Common Stock
The following table sets forth the changes in the number of shares of common stock for the years ended December 31:
2021
Shares outstanding at beginning of year
Shares issued for Landmark Group acquisition
Restricted stock awards issued
Restricted stock units released
Stock awards
Treasury stock purchases
Shares outstanding at end of year
2020
Shares outstanding at beginning of year
Restricted stock awards issued
Restricted stock units released
Stock awards
Treasury stock purchases
Shares outstanding at end of year
Share Repurchases
Outstanding
Treasury
Issued
16,041,926
12,831
9,350
24,069
5,972
(348,695)
15,745,453
16,002,899
12,798
24,921
8,439
(7,131)
16,041,926
57,630
(12,831)
(9,350)
(24,069)
(5,972)
348,695
354,103
96,657
(12,798)
(24,921)
(8,439)
7,131
57,630
16,099,556
-
-
-
-
-
16,099,556
16,099,556
-
-
-
-
16,099,556
In November 2020, the Company’s Board of Directors authorized a share repurchase program of common stock for up to 801,879 shares
of common stock. Repurchased shares are recorded in treasury stock, at cost, which includes any applicable transaction costs. 340,688
shares were repurchased at an average price of $26.44 during the year ended December 31, 2021. No shares were repurchased under
this program during the year ended December 31, 2020. As of December 31, 2021, the remaining number of shares authorized for
repurchase under the repurchase program was 461,191.
Preferred Stock
Series A 3% Preferred Stock. There were 1,435 shares of Series A 3% preferred stock issued and outstanding as of December 31, 2021
and 2020. Holders of Series A 3% preferred stock are entitled to receive an annual dividend of $3.00 per share, which is cumulative and
payable quarterly. Holders of Series A 3% preferred stock have no pre-emptive right in, or right to purchase or subscribe for, any
additional shares of the Company’s capital stock and have no voting rights. Dividend or dissolution payments to the Class A shareholders
must be declared and paid, or set apart for payment, before any dividends or dissolution payments can be declared and paid, or set apart
for payment, to the holders of Class B preferred stock or common stock. The Series A 3% preferred stock is not convertible into any
other of the Company’s securities.
Series B-1 8.48% Preferred Stock. There were 171,486 shares and 171,847 shares of Series B-1 8.48% preferred stock issued and
outstanding as of December 31, 2021 and 2020. Holders of Series B-1 8.48% preferred stock are entitled to receive an annual dividend
of $8.48 per share, which is cumulative and payable quarterly. Holders of Series B-1 8.48% preferred stock have no pre-emptive right
in, or right to purchase or subscribe for, any additional shares of the Company’s common stock and have no voting rights. Accumulated
dividends on the Series B-1 8.48% preferred stock do not bear interest, and the Series B-1 8.48% preferred stock is not subject to
redemption. Dividend or dissolution payments to the Class B shareholders must be declared and paid, or set apart for payment, before
any dividends or dissolution payments are declared and paid, or set apart for payment, to the holders of common stock. The Series B-1
8.48% preferred stock is not convertible into any other of the Company’s securities.
- 114 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(17.) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the components of other comprehensive income (loss) for the years ended December 31 (in thousands):
Pre-tax
Amount
Tax Effect
Net-of-tax
Amount
2021
Securities available for sale and transferred securities:
Change in unrealized gain (loss) during the year
Reclassification adjustment for net gains included in net income (1)
Total securities available for sale and transferred securities
Hedging derivative instruments:
Change in unrealized gain (loss) during the year
Pension and post-retirement obligations:
Net actuarial gain (loss) arising during the year
Amortization of net actuarial loss and prior service cost included in income
Total pension and post-retirement obligations
Other comprehensive loss
2020
Securities available for sale and transferred securities:
Change in unrealized gain (loss) during the year
Reclassification adjustment for net gains included in net income (1)
Total securities available for sale and transferred securities
Hedging derivative instruments:
Change in unrealized gain (loss) during the year
Pension and post-retirement obligations:
Net actuarial gain (loss) arising during the year
Amortization of net actuarial loss and prior service cost included in income
Total pension and post-retirement obligations
Other comprehensive income
2019
Securities available for sale and transferred securities:
Change in unrealized gain (loss) during the year
Reclassification adjustment for net gains included in net income (1)
Total securities available for sale and transferred securities
Hedging derivative instruments:
Change in unrealized gain (loss) during the year
Pension and post-retirement obligations:
Net actuarial gain (loss) arising during the year
Amortization of net actuarial loss and prior service cost included in income
Total pension and post-retirement obligations
Other comprehensive income
$
$
$
$
$
$
(26,643)
139
(26,504)
1,984
3,162
741
3,903
(20,617)
19,928
(1,281)
18,647
271
2,201
1,254
3,455
22,373
13,648
(1,176)
12,472
(327)
(879)
1,398
519
12,664
$
$
$
$
$
$
(6,826)
36
(6,790)
508
810
190
1,000
(5,282)
5,106
(329)
4,777
69
565
321
886
5,732
3,456
(307)
3,149
(85)
(303)
352
49
3,113
$
$
$
$
$
$
(19,817)
103
(19,714)
1,476
2,352
551
2,903
(15,335)
14,822
(952)
13,870
202
1,636
933
2,569
16,641
10,192
(869)
9,323
(242)
(576)
1,046
470
9,551
(1)
Includes amounts related to the amortization/accretion of unrealized net gains and losses related to the Company’s reclassification
of available for sale investment securities to the held to maturity category. The unrealized net gains/losses will be amortized/accreted
over the remaining life of the investment securities as an adjustment of yield.
- 115 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(17.) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)
Activity in accumulated other comprehensive income (loss), net of tax, was as follows (in thousands):
Hedging
Derivative
Instruments
Securities
Available for
Sale and
Transferred
Securities
Pension and
Post-
retirement
Obligations
Accumulated
Other
Comprehensive
Income (Loss)
Balance at January 1, 2021
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income (loss)
Net current period other comprehensive income (loss)
Balance at December 31, 2021
Balance at January 1, 2020
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income (loss)
Net current period other comprehensive income
Balance at December 31, 2020
Balance at January 1, 2019
Reclassification adjustment for net gains included in net income
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive
income (loss)
Net current period other comprehensive (loss) income
Balance at December 31, 2019
$
$
$
$
$
$
(316) $
1,476
-
1,476
1,160
$
(518) $
202
-
202
(316) $
(276) $
-
(242)
-
(242)
(518) $
14,743
(19,817)
$
(12,299) $
2,352
103
(19,714)
(4,971) $
873
14,822
(952)
13,870
14,743
$
$
(7,769) $
(681)
10,192
(869)
9,323
873
$
551
2,903
(9,396) $
(14,868) $
1,636
933
2,569
(12,299) $
(13,236) $
(2,102)
(576)
1,046
470
(14,868) $
2,128
(15,989)
654
(15,335)
(13,207)
(14,513)
16,660
(19)
16,641
2,128
(21,281)
(2,783)
9,374
177
9,551
(14,513)
- 116 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(17.) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (Continued)
The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the
years ended December 31 (in thousands):
Details About Accumulated Other
Comprehensive Income (Loss) Components
Realized gain (loss) on sale of investment securities
Amortization of unrealized holding gains (losses) on
investment securities transferred from available for
sale to held to maturity
Amortization of pension and post-retirement items:
Prior service credit (1)
Net actuarial losses (1)
Amount Reclassified from
Accumulated Other
Comprehensive Income
(Loss)
2021
2020
Affected Line Item in the
Consolidated Statement of Income
$
71
$
1,599 Net gain on investment securities
(210)
(139)
36
(103)
3
(744)
(741)
190
(551)
(654) $
Interest income
Total before tax
Income tax benefit (expense)
(318)
1,281
(329)
952 Net of tax
34
Salaries and employee benefits
(1,288) Salaries and employee benefits
(1,254) Total before tax
Income tax benefit
321
(933) Net of tax
19
Total reclassified for the period
$
(1) These items are included in the computation of net periodic pension expense. See Note 21 – Employee Benefit Plans for additional
information.
(18.) SHARE-BASED COMPENSATION
The Company maintains certain stock-based compensation plans, approved by the Company’s shareholders, that are administered by
the Management Development and Compensation Committee (the “Compensation Committee”) of the Board. In May 2015, the
Company’s shareholders approved the 2015 Long-Term Incentive Plan (the “2015 Plan”) to replace the 2009 Management Stock
Incentive Plan and the 2009 Directors’ Stock Incentive Plan (collectively, the “2009 Plans”). A total of 438,076 shares transferred from
the 2009 Plans were available for grant pursuant to the 2015 Plan. In addition, any shares subject to outstanding awards under the 2009
Plans that are canceled, expired, forfeited or otherwise not issued or are settled in cash will become available for future award grants
under the 2015 Plan. In June 2021, the Company's shareholders approved the Amended and Restated 2015 Long-Term Incentive Plan
(the “Plan”), which increased the total number of shares available for grant under the Plan by 734,000 shares. As of December 31, 2021,
there were approximately 816,000 shares available for grant under the 2015 Plan.
Under the Plan, the Compensation Committee may establish and prescribe grant guidelines including various terms and conditions for
the granting of stock-based compensation. For stock options, the exercise price of each option equals the market price of the Company’s
stock on the date of the grant. All options expire after a period of ten years from the date of grant and generally become fully exercisable
over a period of 3 to 5 years from the grant date. When an option recipient exercises their options, the Company issues shares from
treasury stock and records the proceeds as additions to capital. Shares of restricted stock granted to employees generally vest over 2 to
3 years from the grant date. Fifty percent of the shares of restricted stock granted to non-employee directors generally vests on the date
of grant and the remaining fifty percent generally vests one year from the grant date. Vesting of the shares may be based on years of
service, established performance measures or both. If restricted stock grants are forfeited before they vest, the shares are reacquired into
treasury stock. Restricted stock units granted to employees generally fully vest on the third anniversary of the date of grant.
The share-based compensation plans were established to allow for the granting of compensation awards to attract, motivate and retain
employees, executive officers and non-employee directors who contribute to the long-term growth and profitability of the Company and
to give such persons a proprietary interest in the Company, thereby enhancing their personal interest in the Company’s success.
- 117 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(18.) SHARE-BASED COMPENSATION (Continued)
The Plan uses metrics that measure the Company's performance on a relative basis against a peer group, which was defined as the SNL
Small Cap Bank & Thrift Index. The SNL Small Cap Bank & Thrift Index was discontinued August 7, 2021 and was replaced with the
S&P U.S. SmallCap Banks Index. As the award agreements do not contain successor language pertaining to the removal or modification
of an index, the Compensation Committee approved the application of the survivorship peer group with the S&P U.S. SmallCap Banks
Index used as the basis for measuring relative performance of existing awards.
The Company awarded grants of restricted stock units to certain members of management during the year ended December 31, 2021.
Fifty percent of the shares subject to each grant that ultimately vest are contingent on achieving specified return on average equity
(“ROAE”) targets relative to the market index the Compensation Committee has selected as a peer group for this purpose. These shares
will be earned based on the Company’s achievement of a relative ROAE performance requirement, on a percentile basis, compared to
the market index over a three-year performance period ending December 31, 2023. The shares earned based on the achievement of the
ROAE performance requirement, if any, will vest on the third anniversary of the grant date assuming the recipient’s continuous service
to the Company. The remaining fifty percent of the PSUs that ultimately vest are contingent upon achievement of an average return on
average assets (“ROAA”) performance requirement over a three-year performance period ending December 31, 2023. The shares earned
based on the achievement of the ROAA performance requirement, if any, will vest on the third anniversary of the grant date assuming
the recipient’s continuous service to the Company. If earned at target level, members of management will receive up to 22,178 shares
of our common stock in the aggregate.
The grant-date fair values for both the ROAE and the ROAA portions of PSUs granted during the year ended December 31, 2021 are
equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be
paid on the underlying shares.
The Company granted additional restricted stock units to management during the year ended December 31, 2021. These awards will
vest after completion of a three-year service requirement. If earned, members of management will receive up to 63,998 shares of our
common stock, in the aggregate. The average market price of the restricted stock units on the date of grant was $27.55.
During the year ended December 31, 2021, the Company granted a total of 9,350 restricted shares of common stock to non-employee
directors, of which 4,670 shares vested immediately and 4,680 shares will vest after completion of a one-year service requirement. The
weighted average market price of the restricted stock on the date of grant was $32.06. In addition, the Company issued a total of 5,972
shares of common stock in-lieu of cash for the annual retainer of seven non-employee directors during the year ended December 31,
2021. The weighted average market price of the stock on the date of grant was $32.03.
The Company awarded grants of restricted stock units to certain members of management during the year ended December 31, 2020.
Fifty percent of the shares subject to each grant will be earned based on the Company’s achievement of a relative ROAE performance
requirement, on a percentile basis, compared to the market index over a three-year performance period ending December 31, 2022. The
shares earned based on the achievement of the ROAE performance requirement, if any, will vest on the third anniversary of the grant
date assuming the recipient’s continuous service to the Company. The remaining fifty percent of the PSUs that ultimately vest are
contingent upon achievement of an average return on average assets (“ROAA”) performance requirement over a three-year performance
period ending December 31, 2022. The shares earned based on the achievement of the ROAA performance requirement, if any, will
vest on the third anniversary of the grant date assuming the recipient’s continuous service to the Company. If earned at target level,
members of management will receive up to 23,302 shares of our common stock in the aggregate.
The grant-date fair values for both the ROAE and the ROAA portions of PSUs granted during the year ended December 31, 2020 are
equal to the closing market price of our common stock on the date of grant reduced by the present value of the dividends expected to be
paid on the underlying shares.
The Company granted additional restricted stock units to management during the year ended December 31, 2020. These awards will
vest after completion of a three-year service requirement. If earned, members of management will receive up to 58,806 shares of our
common stock, in the aggregate. The average market price of the restricted stock units on the date of grant was $25.02.
During the year ended December 31, 2020, the Company granted a total of 12,798 restricted shares of common stock to non-employee
directors, of which 6,399 shares vested immediately and 6,399 shares will vest after completion of a one-year service requirement. The
weighted average market price of the restricted stock on the date of grant was $17.57. In addition, the Company issued a total of 8,439
shares of common stock in-lieu of cash for the annual retainer of four non-employee directors during the year ended December 31, 2020.
The weighted average market price of the stock on the date of grant was $19.54.
- 118 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(18.) SHARE-BASED COMPENSATION (Continued)
The Company awarded grants of restricted stock units to certain members of management during the year ended December 31, 2019.
Fifty percent of the shares subject to each grant will be earned upon achievement of an ROAA performance requirement for the
Company’s fiscal year ending December 31, 2021. The remaining fifty percent of the shares will be earned based on the Company’s
achievement of a relative total shareholder return (“TSR”) performance requirement, on a percentile basis, compared to the market index
over a three-year performance period ending December 31, 2021. If earned at target level, members of management will receive up to
21,970 shares of our common stock in the aggregate, which will vest on February 26, 2022 assuming the recipient’s continuous service
to the Company.
The grant-date fair value of the TSR performance award granted on February 26, 2019 was determined using the Monte Carlo simulation
model on the date of grant, assuming the following (i) expected term of 2.84 years, (ii) risk free interest rate of 2.43%, (iii) expected
dividend yield of 3.20% and (iv) expected stock price volatility over the expected term of the TSR performance award of 21.3%. The
grant-date fair value of the TSR performance award granted on May 22, 2019 was determined using the Monte Carlo simulation model
on the date of grant, assuming the following (i) expected term of 2.61 years, (ii) risk free interest rate of 2.18%, (iii) expected dividend
yield of 3.60% and (iv) expected stock price volatility over the expected term of the TSR performance award of 22.0%. The grant-date
fair value of all other restricted stock awards is equal to the closing market price of the Company's common stock on the date of grant.
The Company granted additional restricted stock units to management during the year ended December 31, 2019. These awards will
vest after completion of a three-year service requirement. If earned, members of management will receive up to 54,476 shares of our
common stock, in the aggregate. The average market price of the restricted stock units on the date of grant was $25.60.
During the year ended December 31, 2019, the Company granted a total of 8,226 restricted shares of common stock to non-employee
directors, of which 4,113 shares vested immediately and 4,113 shares will vest after completion of a one-year service requirement. The
weighted average market price of the restricted stock on the date of grant was $27.33. In addition, the Company issued a total of 4,192
shares of common stock in -lieu of cash for the annual retainer of three non-employee directors during the year ended December 31,
2019. The weighted average market price of the stock on the date of grant was $29.78.
The restricted stock awards granted to the directors and the restricted stock units granted to management in 2021, 2020 and 2019 do not
have rights to dividends or dividend equivalents.
The Company uses the Black-Scholes valuation method to estimate the fair value of its stock option awards. There were no stock options
awarded during 2021, 2020 or 2019. There was no unrecognized compensation expense related to unvested stock options as of December
31, 2021. There was no stock option activity for the year ended December 31, 2021.
The following is a summary of restricted stock award and restricted stock units activity for the year ended December 31, 2021:
Outstanding at beginning of year
Granted
Vested
Forfeited
Outstanding at end of period
Weighted
Average
Market
Price at
Grant Date
25.65
28.00
26.13
26.56
26.56
Number of
Shares
168,513
95,526
(35,138)
(32,911)
195,990
$
$
As of December 31, 2021, there was $2.4 million of unrecognized compensation expense related to unvested restricted stock awards
and restricted stock units that is expected to be recognized over a weighted average period of 1.8 years.
- 119 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(18.) SHARE-BASED COMPENSATION (Continued)
The Company amortizes the expense related to share-based compensation over the vesting period. Share-based compensation expense
is recorded as a component of salaries and employee benefits in the consolidated statements of income for awards granted to management
and as a component of other noninterest expense for awards granted to directors. The share-based compensation expense included in the
statements on income for the years ended December 31 was as follows (in thousands):
2021
2020
2019
Salaries and employee benefits
Other noninterest expense
Total share-based compensation expense
(19.) INCOME TAXES
$
$
1,460
283
1,743
$
$
1,107
226
1,333
The income tax expense for the years ended December 31 consisted of the following (in thousands):
Current tax expense:
Federal
State
Total current tax expense
Deferred tax expense (benefit):
Federal
State
Total deferred tax expense (benefit)
Total income tax expense
2021
2020
$
$
11,453
2,854
14,307
4,384
834
5,218
19,525
$
$
10,041
1,873
11,914
(3,306)
(1,217)
(4,523)
7,391
$
$
$
$
1,175
231
1,406
2019
8,882
1,308
10,190
280
89
369
10,559
Income tax expense differed from the statutory federal income tax rate for the years ended December 31 as follows:
Statutory federal tax rate
Increase (decrease) resulting from:
Tax exempt interest income
Tax credits and adjustments
Non-taxable earnings on company owned life insurance
State taxes, net of federal tax benefit
Nondeductible expenses
Goodwill and contingent consideration adjustments
Other, net
Effective tax rate
2021
2020
2019
21.0%
(0.7)
(2.6)
(0.6)
3.0
-
-
-
20.1%
21.0%
(2.0)
(3.4)
(0.9)
1.1
0.1
-
0.3
16.2%
21.0%
(1.9)
(3.0)
(0.6)
1.9
0.2
-
0.2
17.8%
Total income tax expense (benefit) was as follows for the years ended December 31 (in thousands):
Income tax expense
Shareholder’s equity
2021
2020
2019
$
19,525
(5,282)
$
7,391
5,732
$
10,559
3,113
- 120 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(19.) INCOME TAXES (Continued)
The Company recognizes deferred income taxes for the estimated future tax effects of differences between the tax and financial statement
bases of assets and liabilities considering enacted tax laws. These differences result in deferred tax assets and liabilities, which are
included in other assets in the Company’s consolidated statements of financial condition. The Company also assesses the likelihood that
deferred tax assets will be realizable based on, among other considerations, future taxable income and establishes, if necessary, a
valuation allowance for those deferred tax assets determined to not likely be realizable. A deferred tax asset valuation allowance is
recognized if, based on the weight of available evidence (both positive and negative), it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The future realization of deferred tax benefits depends upon the existence of sufficient
taxable income within the carry-back and carry-forward periods. Management’s judgment is required in determining the appropriate
recognition of deferred tax assets and liabilities, including projections of future taxable income.
In 2021 and 2020, the Company recognized the impact of its investments in limited partnerships that generated qualifying tax credits
resulting in a $2.6 million and $1.5 million reduction in income tax expense, respectively, and a $431 thousand and $275 thousand net
loss recorded in noninterest income, respectively. See Note 1 for the Company’s accounting policy for income taxes and these tax credit
investments.
The Company’s net deferred tax asset is included in other assets in the consolidated statements of financial condition. The tax effects of
temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows at December 31 (in thousands):
2021
2020
Deferred tax assets:
Allowance for credit losses
Leases - right of use obligations
Deferred compensation
Investment in limited partnerships
SERP agreements
Share-based compensation
Tax attribute carryforward benefits
Net unrealized loss on securities available for sale
Other
Gross deferred tax assets
Deferred tax liabilities:
Leases - right of use assets
Investments in limited partnerships
Prepaid expenses
Prepaid pension costs
Intangible assets
Depreciation and amortization
Net unrealized gain on securities available for sale
Loan servicing assets
Deferred loan origination costs
Other
Gross deferred tax liabilities
Net deferred tax asset
$
$
10,627
5,993
1,365
-
262
759
446
1,712
579
21,743
5,533
126
662
1,677
2,418
3,471
-
389
830
403
15,509
6,234
$
$
14,239
5,510
1,149
1,418
323
602
-
-
236
23,477
5,113
-
635
1,183
2,286
2,046
5,079
338
623
4
17,307
6,170
- 121 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(19.) INCOME TAXES (Continued)
Based upon the Company’s historical and projected future levels of pre-tax and taxable income, the scheduled reversals of taxable
temporary differences to offset future deductible amounts, and prudent and feasible tax planning strategies, management believes it is
more likely than not that the deferred tax assets will be realized. As such, no valuation allowance has been recorded as of December 31,
2021 or 2020.
The Company and its subsidiaries are primarily subject to federal and New York income taxes. The federal income tax years currently
open for audits are 2018 through 2021. The New York income tax years currently open for audits are 2019 through 2021.
At December 31, 2021, the Company had no federal or New York net operating loss or tax credit carryforwards. The Company has a
capital loss carryforward totaling $1.7 million as of December 31, 2021 that was generated in the 2020 tax year. A portion of the capital
loss will be carried back to prior years and the remainder, if unused, will expire in 2025. Realization of this tax benefit is dependent on
the ability to generate sufficient capital gains in an appropriate tax year to offset the remaining capital loss carryforward. Management
has determined it is more likely than not to be realized, therefore we have not established a valuation allowance on this tax benefit.
The Company’s unrecognized tax benefits and changes in unrecognized tax benefits were not significant as of or for the years ended
December 31, 2021, 2020 and 2019. There were no material interest or penalties recorded in the income statement in income tax expense
for the years ended December 31, 2021, 2020 and 2019. As of December 31, 2021 and 2020, there were no amounts accrued for interest
or penalties related to uncertain tax positions.
(20.) EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS for each of the years
ended December 31 (in thousands, except per share amounts). All outstanding unvested share-based payment awards that contain rights
to non-forfeitable dividends are considered participating securities.
Net income available to common shareholders
Weighted average common shares outstanding:
Total shares issued
Unvested restricted stock awards
Treasury shares
Total basic weighted average common shares outstanding
Incremental shares from assumed:
Exercise of stock options
Vesting of restricted stock awards
Total diluted weighted average common shares outstanding
2021
2020
2019
$
76,237
$
36,871
$
47,401
16,100
(5)
(254)
15,841
-
96
15,937
16,100
(5)
(73)
16,022
-
41
16,063
16,086
(4)
(110)
15,972
-
59
16,031
2.97
2.96
Basic earnings per common share
Diluted earnings per common share
$
$
4.81
4.78
$
$
2.30
2.30
$
$
For each of the periods presented, average shares subject to the following instruments were excluded from the computation of diluted
EPS because the effect would be antidilutive:
Stock options
Restricted stock awards
Total
-
3
3
-
54
54
-
4
4
There were no participating securities outstanding for the years ended December 2021, 2020 and 2019; therefore, the two-class method
of calculating basic and diluted EPS was not applicable for the years presented.
- 122 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(21.) EMPLOYEE BENEFIT PLANS
Supplemental Executive Retirement Agreements
The Company has non-qualified Supplemental Executive Retirement Agreements (“SERPs”) covering certain former executives. The
unfunded liability related to the SERPs was $1.0 million and $1.3 million at December 31, 2021 and 2020, respectively. SERP expense
was $39 thousand, $51 thousand and $366 thousand for 2021, 2020 and 2019, respectively.
Defined Contribution Plan
Employees that meet specified eligibility conditions are eligible to participate in the Company sponsored 401(k) plan. Under the plan,
participants may make contributions, in the form of salary deferrals, up to the maximum Internal Revenue Code limit. The Company is
also permitted to make additional discretionary contributions, although no such additional discretionary contributions were made in
2021, 2020 or 2019.
Defined Benefit Pension Plan
The Company participates in The New York State Bankers Retirement System (the “Plan”), a defined benefit pension plan covering
substantially all employees. For employees hired prior to December 31, 2006, who met participation requirements on or before January
1, 2008 (“Tier 1 Participant”), the benefits are generally based on years of service and the employee’s highest average compensation
during five consecutive years of employment.
Effective January 1, 2016, the Plan was amended to open the Plan to eligible employees who were hired on and after January 1, 2007
(“Tier 2 Participant”) and provide these eligible participants with a cash balance benefit formula.
The following table provides a reconciliation of the Company’s changes in the Plan’s benefit obligations, fair value of assets and a
statement of the funded status as of and for the year ended December 31 (in thousands):
Change in projected benefit obligation:
Projected benefit obligation at beginning of period
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid and plan expenses
Projected benefit obligation at end of period
Change in plan assets:
Fair value of plan assets at beginning of period
Actual return on plan assets
Employer contributions
Benefits paid and plan expenses
Fair value of plan assets at end of period
Funded status at end of period
2021
2020
97,560
4,196
2,202
(1,945)
(4,331)
97,682
102,176
6,382
-
(4,331)
104,227
6,545
$
$
84,328
3,693
2,537
11,154
(4,152)
97,560
87,827
18,501
-
(4,152)
102,176
4,616
$
$
The accumulated benefit obligation was $90.1 million and $88.9 million at December 31, 2021 and 2020, respectively.
The Company’s funding policy is to contribute, at a minimum, an actuarially determined amount that will satisfy the minimum funding
requirements determined under the appropriate sections of Internal Revenue Code. The Company has no minimum required contribution
for the 2022 fiscal year.
- 123 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(21.) EMPLOYEE BENEFIT PLANS (Continued)
Estimated benefit payments under the Plan over the next ten years at December 31, 2021 are as follows (in thousands):
2022
2023
2024
2025
2026
2027 - 2031
$
3,731
3,935
4,199
4,425
4,663
25,686
Net periodic pension cost consists of the following components for the years ended December 31 (in thousands):
2021
2020
2019
Service cost
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of unrecognized loss
Net periodic pension cost
$
$
4,196
2,202
(5,225)
724
1,897
$
$
3,693
2,537
(5,136)
1,270
2,364
$
$
The actuarial assumptions used to determine the net periodic pension cost were as follows:
Weighted average discount rate
Rate of compensation increase
Expected long-term rate of return
2021
2020
2019
2.32%
3.00%
5.25%
3.09%
3.00%
6.00%
The actuarial assumptions used to determine the projected benefit obligation were as follows:
Weighted average discount rate
Rate of compensation increase
2021
2020
2019
2.70%
3.00%
2.32%
3.00%
3,207
2,777
(4,736)
1,445
2,693
4.13%
3.00%
6.50%
3.09%
3.00%
The weighted average discount rate was based upon the projected benefit cash flows and the market yields of high grade corporate bonds
that are available to pay such cash flows.
The Plan’s overall investment strategy is to invest in a diversified portfolio while managing the variability between the assets and
projected liabilities of underfunded pension plans. The Plan’s Board Members approved a migration (the “Migration”) of substantially
all of the Plan’s assets to one fund, Commingled Pensions Trust Fund (LDI Diversified Balanced) of JPMorgan Chase Bank, N.A.
(“JPMCB LDI Diversified Balanced Fund” or the “Fund”). The Fund is a collective investment fund managed by the Plan’s trustee (the
“Trustee”) under the Declaration of Trust. The Trustee is the Fund’s manager and makes day-to-day investment decisions for the Fund.
The Fund is a group trust within the meaning of Internal Revenue Service Revenue Ruling 81-100, as amended. In reliance upon
exemptions from the registration requirements of the federal securities laws, neither the Fund nor the Fund’s Units are registered with
the SEC or any state securities commission. Because the Fund is not subject to registration under federal or state securities laws, certain
protections that might otherwise be provided to investors in registered funds are not available to investors in the Fund. However, as a
bank-sponsored collective investment trust holding qualified retirement plan assets, the Fund is required to comply with applicable
provisions of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and the Trustee is subject to supervision
and regulation by the Office of the Comptroller of the Currency and the Department of Labor.
- 124 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(21.) EMPLOYEE BENEFIT PLANS (Continued)
Prior to the Migration, the Plan’s overall investment strategy was to achieve a mix of approximately 97% of investments for long-term
growth and 3% for near-term benefit payments with a wide diversification of asset types, fund strategies, and fund managers. The Board
made the election in their December 2018 meeting and the Migration had an effective trade date of February 28, 2019. The Fund employs
a liability driven investing (“LDI”) strategy for pension plans that are seeking a solution that is balanced between growth and hedging.
The Bloomberg Barclays Long A U.S. Corporate Index, the Fund’s primary liability-performance benchmark, is used as a proxy for
plan projected liabilities. The growth-oriented portion of the Fund invests in a mix of asset classes that the Fund’s Trustee believes will
collectively maximize total risk-adjusted return through a combination of capital appreciation and income. This portion of the Fund will
comprise between 35% and 90% of the portfolio and will invest directly or indirectly via underlying funds in a broad mix of global
equity, credit, global fixed income, real estate and cash-plus strategies. The remaining portion of the Fund, between 10% and 65% of
the portfolio, provides exposure to U.S. long duration fixed income and is used to minimize volatility relative to a plan’s projected
liabilities. This portion of the Fund will invest directly or indirectly via underlying funds in investment grade corporate bonds and
securities issued by the U.S. Treasury and its agencies or instrumentalities.
The following table represents the Plan’s target asset allocation and actual asset allocation, respectively, as of December 31, 2021 and
2020:
Asset category:
Cash and cash equivalents
Equity securities
Fixed income securities
Alternative investments
2021
2020
Target
Allocation
Actual
Allocation
Target
Allocation
Actual
Allocation
0.00%
30.00
15.00
55.00
0.00%
35.65
34.98
29.37
0.00%
28.25
59.75
12.00
0.00%
31.56
62.60
5.84
Cash equivalents include repurchase agreements, banker’s acceptances, commercial paper, negotiable certificates of deposit, U.S.
government securities with less than one year to maturity and funds (including the Commingled Pension Trust Fund (Liquidity) of
JPMorgan Chase Bank, N.A. (“JPMorgan”)) established to invest in these types of highly liquid, high quality instruments. Equity
securities primarily include investments in common stocks, depository receipts, preferred stocks, commingled pension trust funds,
exchange traded funds and real estate investment trusts. Fixed income securities include corporate bonds, government issues, credit card
receivables, mortgage backed securities, municipals, commingled pension trust funds and other asset backed securities. Alternative
investments are real estate interests and related investments held within a commingled pension trust fund.
The Fund is valued utilizing the valuation policies set forth by JP Morgan’s asset management committee. Underlying investments for
which market quotations are readily available are valued at their market value. Underlying investments for which market quotations are
not readily available are fair valued by approved affiliated and/or unaffiliated pricing vendors,
third-party broker-dealers or
methodologies as approved by the asset management committee. Fixed income instruments are valued based on prices received from
approved affiliated and unaffiliated pricing vendors or third-party broker-dealers (collectively referred to as “Pricing Services”). The
Pricing Services use multiple valuation techniques to determine the valuation of fixed income instruments. In instances where sufficient
market activity exists, the Pricing Services may utilize a market-based approach through which trades or quotes from market makers are
used to determine the valuation of these instruments. In instances where sufficient market activity may not exist, the Pricing Services
also utilize proprietary valuation models which may consider market transactions in comparable securities and the various relationships
between securities in determining fair value and/or market characteristics in order to estimate the relevant cash flows, which are then
discounted to calculate the fair values. Equities and other exchange-traded instruments are valued at the last sales price or official market
closing price on the primary exchange on which the instrument is traded before the net asset values (“NAV”) of the Funds are calculated
on a valuation date. Futures contracts are generally valued on the basis of available market quotations. Forward foreign currency
exchange contracts are valued utilizing market quotations from approved Pricing Services. The Fund invests in the Commingled Pension
Trust Fund (“Strategic Property Fund”) of JPMorgan (the “SPF”), which holds significant amounts of investments which have been fair
valued at December 31, 2021 and 2020.
During the years ended December 31, 2021 and 2020, there were no transfers in or out of Levels 1, 2 or 3. In addition, there were no
changes in valuation methodologies during the years ended December 31, 2021 and 2020.
- 125 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(21.) EMPLOYEE BENEFIT PLANS (Continued)
The major categories of Plan assets measured at fair value on a recurring basis as of December 31 are presented in the following tables
(in thousands).
2021
Cash equivalents:
Cash (including foreign currencies)
Short term investment funds
Total cash equivalents
Equity securities:
Commingled pension trust funds
Total equity securities
Fixed income securities:
Commingled pension trust funds
Corporate bonds
Total fixed income securities
Other investments:
Commingled pension trust funds
Total Plan investments
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total
Fair Value
$
$
-
-
-
-
-
-
-
-
-
-
$
$
-
-
-
37,157
37,157
36,459
-
36,459
30,611
104,227
$
$
-
-
-
-
-
-
-
-
-
-
$
-
-
-
37,157
37,157
36,459
-
36,459
30,611
104,227
$
At December 31, 2021, the portfolio was substantially managed by one investment firm, with control of approximately 100% of the
Plan’s assets. A portfolio concentration of 100% in the JPMCB LDI Diversified Balanced Fund, a CPTF, existed at December 31, 2021.
2020
Cash equivalents:
Cash (including foreign currencies)
Short term investment funds
Total cash equivalents
Equity securities:
Commingled pension trust funds
Total equity securities
Fixed income securities:
Commingled pension trust funds
Corporate bonds
Total fixed income securities
Other investments:
Commingled pension trust funds
Total Plan investments
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total
Fair Value
$
$
6
-
6
-
-
-
-
-
-
6
$
$
-
1,253
1,253
31,848
31,848
63,171
5
63,176
5,893
102,170
$
$
-
-
-
-
-
-
-
-
-
-
$
6
1,253
1,259
31,848
31,848
63,171
5
63,176
5,893
102,176
$
At December 31, 2020, the portfolio was substantially managed by one investment firm, with control of approximately 99% of the
Plan’s assets with the remaining 1% under the direct control of the Plan. A portfolio concentration of 99% in the JPMCB LDI Diversified
Balanced Fund, a CPTF, existed at December 31, 2020.
- 126 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(21.) EMPLOYEE BENEFIT PLANS (Continued)
Postretirement Benefit Plan
An entity acquired by the Company provided health and dental care benefits to retired employees who met specified age and service
requirements through a postretirement health and dental care plan in which both the acquired entity and the retirees shared the cost. The
plan provided for substantially the same medical insurance coverage as for active employees until their death and was integrated with
Medicare for those retirees aged 65 or older. In 2001, the plan’s eligibility requirements were amended to curtail eligible benefit
payments to only retired employees and active employees who had already met the then-applicable age and service requirements under
the Plan. In 2003, retirees under age 65 began contributing to health coverage at the same cost-sharing level as that of active employees.
Retirees ages 65 or older were offered new Medicare supplemental plans as alternatives to the plan historically offered. The cost sharing
of medical coverage was standardized throughout the group of retirees aged 65 or older. In addition, to be consistent with the
administration of the Company’s dental plan for active employees, all retirees who continued dental coverage began paying the full
monthly premium. The accrued liability included in other liabilities in the consolidated statements of financial condition related to this
plan amounted to $33 thousand and $108 thousand as of December 31, 2021 and 2020, respectively. The postretirement expense for the
plan that was included in salaries and employee benefits in the consolidated statements of income was not significant for the years ended
December 31, 2021, 2020 and 2019. The plan is not funded.
The components of accumulated other comprehensive loss related to the defined benefit plan and postretirement benefit plan as of
December 31 are summarized below (in thousands):
Defined benefit plan:
Net actuarial loss
Prior service credit (cost)
Postretirement benefit plan:
Net actuarial loss
Prior service credit
Total
Deferred tax benefit
Amounts included in accumulated other comprehensive loss
2021
2020
(12,587)
-
(12,587)
(46)
-
(46)
(12,633)
3,237
(9,396)
$
$
(16,412)
-
(16,412)
(127)
3
(124)
(16,536)
4,237
(12,299)
$
$
Changes in plan assets and benefit obligations recognized in other comprehensive income on a pre-tax basis during the years ended
December 31 are as follows (in thousands):
Defined benefit plan:
Net actuarial gain
Amortization of net loss
Amortization of prior service credit
Postretirement benefit plan:
Net actuarial gain (loss)
Amortization of net loss
Amortization of prior service credit
Total recognized in other comprehensive income
2021
2020
3,101
724
-
3,825
61
20
(3)
78
3,903
$
$
2,212
1,270
-
3,482
(12)
18
(34)
(28)
3,454
$
$
- 127 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(22.) FAIR VALUE MEASUREMENTS
Determination of Fair Value – Assets Measured at Fair Value on a Recurring and Nonrecurring Basis
Valuation Hierarchy
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly
transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or
liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives
the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
There have been no changes in the valuation techniques used during the current period. The fair value hierarchy is as follows:
(cid:3)
(cid:3)
(cid:3)
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or
indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or
liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or
corroborated by market data by correlation or other means.
Level 3 - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions
about the assumptions that market participants would use in pricing the assets or liabilities.
Transfers between levels of the fair value hierarchy are recorded as of the end of the reporting period.
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is
based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may
be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty
credit quality and the company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation
adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation
methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore,
estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed
description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of
such instruments pursuant to the valuation hierarchy, is set forth below.
Securities available for sale: Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these
securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements
consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading
levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among
other things.
Derivative instruments: The fair value of derivative instruments is determined using quoted secondary market prices for similar
financial instruments and are classified as Level 2 in the fair value hierarchy.
Loans held for sale: The fair value of loans held for sale is determined using quoted secondary market prices and investor
commitments. Loans held for sale are classified as Level 2 in the fair value hierarchy.
- 128 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(22.) FAIR VALUE MEASUREMENTS (Continued)
Collateral dependent loans: Fair value of collateral dependent loans with specific allocations of the allowance for credit losses -
loans is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy.
Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable and collateral value
is determined based on appraisals performed by qualified licensed appraisers hired by the Company. These appraisals may utilize
a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised and
reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of
valuation, and/or management’s expertise and knowledge of the client and the client’s business. Such discounts are typically
significant and result in a Level 3 classification of the inputs for determining fair value. Collateral dependent loans are reviewed
and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified
above.
Long-lived assets held for sale: The fair value of the long-lived assets held for sale was based on estimated market prices from
independently prepared current appraisals, adjusted for expected costs to sell, and are classified as Level 3 in the fair value hierarchy.
Loan servicing rights: Loan servicing rights do not trade in an active market with readily observable market data. As a result, the
Company estimates the fair value of loan servicing rights by using a discounted cash flow model to calculate the present value of
estimated future net servicing income. The assumptions used in the discounted cash flow model are those that we believe market
participants would use in estimating future net servicing income, including estimates of loan prepayment rates, servicing costs,
ancillary income, impound account balances, and discount rates. The significant unobservable inputs used in the fair value
measurement of the Company’s loan servicing rights are the constant prepayment rates and weighted average discount rate.
Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value
measurement. Although the constant prepayment rate and the discount rate are not directly interrelated, they will generally move in
opposite directions. Loan servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs,
as well as significant management judgment and estimation.
Other real estate owned (foreclosed assets): Nonrecurring adjustments to certain commercial and residential real estate properties
classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are
generally based on third party appraisals of the property, resulting in a Level 3 classification. The appraisals are sometimes further
discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or
management’s expertise and knowledge of the client and client’s business. Such discounts are typically significant and result in a
Level 3 classification of the inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less costs
to sell, an impairment loss is recognized.
Commitments to extend credit and letters of credit: Commitments to extend credit and fund letters of credit are principally at
current interest rates, and, therefore, the carrying amount approximates fair value. The fair value of commitments is not material.
- 129 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(22.) FAIR VALUE MEASUREMENTS (Continued)
Assets Measured at Fair Value
The following tables present for each of the fair-value hierarchy levels the Company’s assets that are measured at fair value on a recurring
and non-recurring basis as of December 31 (in thousands):
2021
Measured on a recurring basis:
Securities available for sale:
U.S. Government agencies and government sponsored enterprises
Mortgage-backed securities
Other assets:
Hedging derivative instruments
Fair value adjusted through comprehensive income
Other assets:
Derivative instruments – interest rate products
Derivative instruments – credit contracts
Derivative instruments – mortgage banking
Other liabilities:
Derivative instruments – interest rate products
Derivative instruments – credit contracts
Derivative instruments – mortgage banking
Fair value adjusted through net income
Measured on a nonrecurring basis:
Loans:
Loans held for sale
Collateral dependent loans
Other assets:
Long-lived assets held for sale
Loan servicing rights
Total
$
$
$
$
$
$
Quoted Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
15,891
1,162,624
1,559
1,180,074
14,702
-
243
(14,708)
(1)
(4)
232
6,202
-
-
-
6,202
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
33,484
2,560
1,517
37,561
$
15,891
1,162,624
1,559
$ 1,180,074
$
$
$
$
14,702
-
243
(14,708)
(1)
(4)
232
6,202
33,484
2,560
1,517
43,763
There were no transfers between Levels 1 and 2 during the years ended December 31, 2021 and 2020. There were no liabilities measured
at fair value on a nonrecurring basis during the years ended December 31, 2021 and 2020.
- 130 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(22.) FAIR VALUE MEASUREMENTS (Continued)
2020
Measured on a recurring basis:
Securities available for sale:
U.S. Government agencies and government sponsored enterprises
Mortgage-backed securities
Other liabilities:
Hedging derivative instruments
Fair value adjusted through comprehensive income
Other assets:
Derivative instruments – interest rate products
Derivative instruments – credit contracts
Derivative instruments – mortgage banking
Other liabilities:
Derivative instruments – interest rate products
Derivative instruments – credit contracts
Derivative instruments – mortgage banking
Fair value adjusted through net income
Measured on a nonrecurring basis:
Loans:
Loans held for sale
Collateral dependent loans
Other assets:
Loan servicing rights
Other real estate owned
Total
$
$
$
$
$
$
Quoted Prices
in Active
Markets for
Identical
Assets or
Liabilities
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
6,635
621,424
(311)
627,748
19,626
23
471
(19,837)
(86)
(1)
196
4,305
-
-
-
4,305
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
29,434
1,320
2,966
33,720
$
$
$
$
$
$
6,635
621,424
(311)
627,748
19,626
23
471
(19,837)
(86)
(1)
196
4,305
29,434
1,320
2,966
38,025
There were no transfers between Levels 1 and 2 during the years ended December 31, 2020 and 2019. There were no liabilities measured
at fair value on a nonrecurring basis during the years ended December 31, 2020 and 2019.
The following table presents additional quantitative information about assets measured at fair value on a recurring and nonrecurring
basis for which the Company has utilized Level 3 inputs to determine fair value (dollars in thousands).
Asset
Collateral dependent loans
Loan servicing rights
Long-lived assets held for sale
Fair
Value
Valuation Technique
$
$
$
33,484 Appraisal of collateral (1)
1,517 Discounted cash flow
2,560 Appraisal of collateral (1)
Unobservable Input
Appraisal adjustments (2)
Discount rate
Constant prepayment rate
Appraisal adjustments (2)
Unobservable Input
Value / Range
24.7% (3) / 0 - 45%
10.2% (3)
14.4% (3)
11-40%
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally include various
Level 3 inputs which are not identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
(3) Weighted averages.
- 131 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(22.) FAIR VALUE MEASUREMENTS (Continued)
Changes in Level 3 Fair Value Measurements
There were no assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as of or during the years
ended December 31, 2021 and 2020.
Disclosures about Fair Value of Financial Instruments
The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.
Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial
instrument, including estimates of timing, amount of expected future cash flows and the credit standing of the issuer. Such estimates do
not consider the tax impact of the realization of unrealized gains or losses. In some cases, the fair value estimates cannot be substantiated
by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the
financial instrument. Care should be exercised in deriving conclusions about our business, its value or financial position based on the
fair value information of financial instruments presented below.
The estimated fair value approximates carrying value for cash and cash equivalents, FHLB and FRB stock, accrued interest receivable,
non-maturity deposits, short-term borrowings and accrued interest payable. Fair value estimates for other financial instruments not
included elsewhere in this disclosure are discussed below.
Securities held to maturity: The fair value of the Company’s investment securities held to maturity is primarily measured using
information from a third-party pricing service. The fair value measurements consider observable data that may include dealer quotes,
market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bond’s terms and conditions, among other things.
Loans: The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest
rates at which similar loans would be made for the same remaining maturities. Loans were first segregated by type such as
commercial, residential mortgage, and consumer, and were then further segmented into fixed and variable rate and loan quality
categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.
Time deposits: The fair value of time deposits was estimated using a discounted cash flow approach that applies prevailing market
interest rates for similar maturity instruments. The fair values of the Company’s time deposit liabilities do not take into consideration
the value of the Company’s long-term relationships with depositors, which may have significant value.
Long-term borrowings: Long-term borrowings consist of $75 million of subordinated notes. The subordinated notes are publicly
traded and are valued based on market prices, which are characterized as Level 2 liabilities in the fair value hierarchy.
- 132 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(22.) FAIR VALUE MEASUREMENTS (Continued)
The following presents the carrying amount, estimated fair value, and placement in the fair value measurement hierarchy of the
Company’s financial instruments as of December 31(in thousands):
Financial assets:
Cash and cash equivalents
Securities available for sale
Securities held to maturity, net
Loans held for sale
Loans
Loans(cid:7)¹(cid:8)
Long-lived assets held for sale
Accrued interest receivable
Derivative instruments – cash flow hedge
Derivative instruments – interest rate products
Derivative instruments – credit contracts
Derivative instruments – mortgage banking
FHLB and FRB stock
Financial liabilities:
Non-maturity deposits
Time deposits
Short-term borrowings
Long-term borrowings
Accrued interest payable
Derivative instruments – cash flow hedges
Derivative instruments – interest rate products
Derivative instruments – credit contracts
Derivative instruments – mortgage banking
(1) Comprised of collateral dependent loans.
Level in
Fair Value
Measurement
Hierarchy
2021
2020
Carrying
Amount
Estimated
Fair
Value
Carrying
Amount
Estimated
Fair
Value
Level 1
Level 2
Level 2
Level 2
Level 2
Level 3
Level 3
Level 1
Level 2
Level 2
Level 2
Level 2
Level 2
Level 1
Level 2
Level 1
Level 2
Level 1
Level 2
Level 2
Level 2
Level 2
$
79,112 $
79,112 $
93,878 $
1,178,515
205,581
6,202
3,606,276
33,484
2,560
15,482
1,559
14,702
-
243
10,770
3,905,136
921,954
30,000
73,911
2,147
-
14,708
1
4
1,178,515
209,820
6,202
3,642,351
33,484
2,560
15,482
1,559
14,702
-
243
10,770
3,905,136
920,699
30,000
77,792
2,147
-
14,708
1
4
628,059
271,973
4,305
3,513,284
29,434
-
15,635
-
19,626
23
471
8,619
3,392,774
885,593
5,300
73,623
4,381
311
19,837
86
1
93,878
628,059
282,035
4,305
3,549,770
29,434
-
15,635
-
19,626
23
471
8,619
3,392,774
887,113
5,300
83,953
4,381
311
19,837
86
1
- 133 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(23.) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements pertaining only to the Parent are presented below (in thousands).
Condensed Statements of Financial Condition
Assets:
Cash and due from subsidiary
Investment in and receivables due from subsidiary
Other assets
Total assets
Liabilities and shareholders’ equity:
Long-term borrowings, net of issuance costs of $1,089 and $1,377, respectively
Other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Condensed Statements of Income
December 31,
2021
2020
$
$
$
$
23,318
555,310
5,998
584,626
73,911
5,573
505,142
584,626
$
$
$
$
31,848
511,572
4,136
547,556
73,623
5,570
468,363
547,556
Years ended December 31,
2020
2021
2019
Dividends from subsidiary and associated companies
Management and service fees from subsidiaries
Other income
Total income
Interest expense
Operating expenses
Total expense
Income before income tax benefit and equity in undistributed earnings of
subsidiary
Income tax benefit
Income before equity in undistributed earnings of subsidiary
Equity in undistributed earnings of subsidiary
Net income
$
$
24,000
147
93
24,240
4,237
3,379
7,616
16,624
1,999
18,623
59,074
77,697
$
$
23,000
146
121
23,267
2,888
3,171
6,059
17,208
1,399
18,607
19,725
38,332
$
$
20,000
146
97
20,243
2,471
3,073
5,544
14,699
596
15,295
33,567
48,862
- 134 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(23.) PARENT COMPANY FINANCIAL INFORMATION (Continued)
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary
Depreciation and amortization
Share-based compensation
(Increase) decrease in other assets
(Decrease) increase in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Capital investment in subsidiaries
Purchase of premises and equipment
Net cash paid for acquisition
Net cash used in investing activities
Cash flows from financing activities:
Issuance of long-term debt, net of issuance costs
Purchase of preferred and common shares
Proceeds from issuance of preferred and common shares
Dividends paid
Net cash (used in) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents as of beginning of year
Cash and cash equivalents as of end of the year
(24.) SEGMENT REPORTING
Years ended December 31,
2020
2021
2019
$
77,697
$
38,332
$
48,862
(59,074)
367
1,743
(1,448)
(86)
19,199
-
-
-
-
-
(9,235)
(43)
(18,451)
(27,729)
(8,530)
31,848
23,318
$
(19,725)
209
1,333
(48)
497
20,598
(11,966)
(11)
-
(11,977)
34,221
(209)
-
(17,957)
16,055
24,676
7,172
31,848
$
(33,567)
153
1,406
2,243
(1,407)
17,690
(350)
8
-
(342)
-
(293)
-
(17,260)
(17,553)
(205)
7,377
7,172
$
The Company has one reportable segment, Banking, which includes all of the Company’s retail and commercial banking operations.
This reportable segment has been identified and organized based on the nature of the underlying products and services applicable to the
segment, the type of customers to whom those products and services are offered and the distribution channel through which those
products and services are made available.
All other segments that do not meet the quantitative threshold for separate reporting have been grouped as “All Other.” This “All Other”
grouping includes the activities of SDN, a full service insurance agency that provides a broad range of insurance services to both personal
and business clients, Courier Capital and HNP Capital, our investment advisor and wealth management firms that provide customized
investment management, investment consulting and retirement plan services to individuals, businesses, institutions, foundations and
retirement plans, CHIL, which oversees the Company's Banking as a Service and Fintech relationships, and Holding Company amounts,
which are the primary differences between segment amounts and consolidated totals, along with amounts to eliminate balances and
transactions between segments.
- 135 -
FINANCIAL INSTITUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021, 2020 and 2019
(24.) SEGMENT REPORTING (Continued)
The following table presents information regarding the Company’s business segments as of the dates indicated (in thousands).
December 31, 2021
Goodwill
Other intangible assets, net
Total assets
December 31, 2020
Goodwill
Other intangible assets, net
Total assets
Banking
All Other
Consolidated
Totals
$
$
$
$
48,536
3
5,481,889
48,536
28
4,875,673
$
$
18,535
7,326
38,890
17,526
7,699
36,633
67,071
7,329
5,520,779
66,062
7,727
4,912,306
The following table presents information regarding the Company’s business segments for the periods indicated (in thousands).
Year ended December 31, 2021
Net interest income (expense)
Benefit for credit losses - loans
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Year ended December 31, 2020
Net interest income (expense)
Provision for credit losses - loans
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Year ended December 31, 2019
Net interest income (expense)
Provision for loan losses
Noninterest income
Noninterest expense
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Banking
All Other(1)
Consolidated
Totals
$
$
$
$
$
$
158,967
8,336
31,340
(95,882)
102,761
(21,038)
81,723
141,873
(27,184)
31,232
(94,988)
50,933
(8,630)
42,303
132,383
(8,044)
29,390
(88,801)
64,928
(11,190)
53,738
$
$
$
$
$
$
(4,237) $
-
15,566
(16,868)
(5,539)
1,513
(4,026) $
(2,888) $
-
11,944
(14,266)
(5,210)
1,239
(3,971) $
(2,471) $
-
10,991
(14,027)
(5,507)
631
(4,876) $
154,730
8,336
46,906
(112,750)
97,222
(19,525)
77,697
138,985
(27,184)
43,176
(109,254)
45,723
(7,391)
38,332
129,912
(8,044)
40,381
(102,828)
59,421
(10,559)
48,862
(1) Reflects activity from the acquisitions of assets of Landmark since February 1, 2021 (the date of acquisition) and North Woods
since August 2, 2021 (date of acquisition).
- 136 -
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Effectiveness of Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation
of the Company’s management, including the Company’s Chief Executive Officer (Principal Executive Officer) and Chief Financial
Officer (Principal Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures pursuant to Rule 13a-15(b), as adopted by the Securities and Exchange Commission (“SEC”) under the Securities Exchange
Act of 1934 (“Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K.
Disclosure controls and procedures are the controls and other procedures that are designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the
Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Management Report on Internal Control over Financial Reporting and Attestation Report of Independent Registered Public
Accounting Firm
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
Management assessed the Company’s internal control over financial reporting based on criteria established in the Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on
this assessment, management has concluded that, as of December 31, 2021, the Company maintained effective internal control over
financial reporting. Management’s Report on Internal Control over Financial Reporting is included under Item 8 “Financial Statements
and Supplementary Data” in Part II of this Form 10-K.
RSM US LLP, an independent registered public accounting firm, has audited the consolidated financial statements as of and for the year
ended December 31, 2021 which are included in this Annual Report on Form 10-K, and has issued a report on the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2021. The Report of the Independent Registered Public
Accounting Firm that attests the effectiveness of internal control over financial reporting is included under Item 8 “Financial Statements
and Supplementary Data” in Part II of this Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31,
2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
- 137 -
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
In response to this Item, the information set forth in the Company’s Proxy Statement for its 2022 Annual Meeting of Shareholders (the
“2022 Proxy Statement”) to be filed within 120 days following the end of the Company’s fiscal year, under the headings “Proposal 1 -
Election of Directors,” “Business Experience and Qualification of Directors,” “Our Executive Officers” and “Delinquent Section 16(a)
Reports” is incorporated herein by reference.
Information concerning the Company’s Audit Committee and the Audit Committee’s financial expert is set forth under the caption
“Committees of the Board” in the 2022 Proxy Statement and is incorporated herein by reference.
Information concerning the Company’s Code of Business Conduct and Ethics is set forth under the caption “ESG and Corporate
Responsibility” in the 2022 Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
In response to this Item, the information set forth in the 2022 Proxy Statement under the headings “Compensation Discussion and
Analysis,” “Executive Compensation Tables,” “Management Development and Compensation Committee Interlocks and Insider
Participation,” “Director Compensation,” and “Management Development and Compensation Committee Report” is incorporated herein
by reference.
ITEM 12.
STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
In response to this Item, the information set forth in the 2022 Proxy Statement under the heading “Security Ownership of Certain
Beneficial Owners and Management” is incorporated herein by reference.
Equity Compensation Plan Information
The following table sets forth, as of December 31, 2021, information about our equity compensation plans that have been approved by
our shareholders, including the number of shares of our common stock exercisable under all outstanding options, warrants and rights,
the weighted average exercise price of all outstanding options, warrants and rights and the number of shares available for future issuance
under our equity compensation plans. We have no equity compensation plans that have not been approved by our shareholders.
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted average
exercise price
of outstanding
options, warrants
and rights
(b) (1)
Number of securities
remaining for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
191,310(cid:3)¹(cid:5) $
- $
-
-
815,769
-
Plan Category
Equity compensation plans approved by
shareholders
Equity compensation plans not approved
by shareholders
(1) Comprised of restricted stock units granted under our 2015 Plan. See Note 18, Share-Based Compensation, to the Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K for further details. All restricted stock units are
excluded from the weighted average exercise price column.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
In response to this Item, the information set forth in the 2022 Proxy Statement under the headings “Certain Relationships and Related
Party Transactions” and “Director Independence and Qualifications” is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- 138 -
In response to this Item, the information set forth in the 2022 Proxy Statement under the heading “Proposal 3 – Ratification of
Appointment of Independent Registered Public Accounting Firm” is incorporated herein by reference.
- 139 -
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) FINANCIAL STATEMENTS
PART IV
Reference is made to the Index to Consolidated Financial Statements of Financial Institutions, Inc. and subsidiaries under Item
8 “Financial Statements and Supplementary Data” in Part II of this Annual Report on Form 10-K.
(b) EXHIBITS
The following is a list of all exhibits filed or incorporated by reference as part of this Report.
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Amended and Restated Certificate of Incorporation of the
Company
Description
Amended and Restated Bylaws of Financial Institutions, Inc.
Subordinated Indenture, dated as of April 15, 2015, between
Financial Institutions, Inc. and Wilmington Trust, National
Association, as Trustee
First Supplemental Indenture, dated as of April 15, 2015, between
Financial Institutions, Inc. and Wilmington Trust, National
Association, as Trustee
Form of Global Note to represent the 6.00% Fixed-to-Floating
Rate Subordinated Notes due April 15, 2030
Subordinated Indenture, dated as of October 7, 2020, between
Financial Institutions, Inc. and Wilmington Trust, National
Association, as Trustee
Form of 4.375% Fixed-to-Floating Rate Subordinated Note due
October 15, 2030
Description of the Company’s Securities
Supplemental Executive Retirement Agreement between Financial
Institutions, Inc. and Peter G. Humphrey
Supplemental Executive Retirement Agreement between Financial
Institutions, Inc. and Richard J. Harrison
Financial Institutions, Inc. Amended and Restated 2015 Long-
Term Incentive Plan
Form of Director Annual Restricted Stock Award Agreement
Pursuant to the Financial Institutions, Inc. 2015 Long-Term
Incentive Plan
Form of Director “In Lieu of Cash Fees” Stock Award Agreement
Pursuant to the Financial Institutions, Inc. 2015 Long-Term
Incentive Plan
Form of Restricted Stock Unit Award Agreement Pursuant to the
Financial Institutions, Inc. 2015 Long-Term Incentive Plan
Form of Restricted Stock Unit Award Agreement Pursuant to the
Financial Institutions, Inc. Amended and Restated 2015 Long-
Term Incentive Plan
Form of Indemnification Agreement
Location
Incorporated by reference to Exhibits 3.1, 3.2 and 3.3
of the Form 10-K for the year ended December 31,
2008, dated March 12, 2009
Incorporated by reference to Exhibit 3.1 of the Form
8-K, dated June 25, 2019
Incorporated by reference to Exhibit 4.1 of the Form
8-K, dated April 15, 2015
Incorporated by reference to Exhibit 4.2 of the Form
8-K, dated April 15, 2015
Incorporated by reference to Exhibit A of Exhibit 4.2
of the Form 8-K, dated April 15, 2015
Incorporated by reference to Exhibit 4.1 of the Form
8-K, dated October 7, 2020.
Included in Exhibit 4.4.
Incorporated by reference to Exhibit 4.4 of the Form
10-K for the year ended December 31, 2019, dated
March 4, 2020.
Incorporated by reference to Exhibit 10.3 of the
Form 10-Q for the quarterly period ended September
30, 2012, dated November 6, 2012
Incorporated by reference to Exhibit 10.1 of the
Form 10-Q for the quarterly period ended June 30,
2014, dated August 5, 2014
Incorporated by reference to Exhibit 10.1 of the
Form 10-Q for the quarterly period ended June 30,
2021, dated August 9, 2021
Filed Herewith
Incorporated by reference to Exhibit 10.3 of the
Form 10-Q for the quarterly period ended June 30,
2015, dated August 5, 2015
Filed Herewith
Filed Herewith
Incorporated by reference to Exhibit 10.1 of the
Form 8-K, dated December 30, 2016
- 140 -
Incorporated by reference to Exhibit 10.1 of the
Form 8-K, dated May 4, 2017
Incorporated by reference to Exhibit 10.1 of the
Form 10-Q for the quarterly period ended June 30,
2018, dated August 8, 2018
Incorporated by reference to Exhibit 10.15 of the
Form 10-K for the year ended December 31, 2020,
dated March 15, 2021
Incorporated by reference to Exhibit 10.2 of the
Form 10-Q for the quarterly period ended March 31,
2021, dated May 10, 2021
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
10.9
10.10
Amended and Restated Executive Agreement, dated May 3, 2017,
by and between Financial Institutions, Inc. and Martin K.
Birmingham
Supplemental Executive Retirement Agreement between Financial
Institutions, Inc. and Kevin B. Klotzbach dated June 26, 2018
10.11
Form of Executive Agreement
10.12
10.13
21
23.1
31.1
31.2
32
Form of Performance Stock Unit Award Agreement Pursuant to
the Financial Institutions, Inc. 2015 Long-Term Incentive Plan
Financial Institutions, Inc. Executive Incentive Plan, effective as of
January 1, 2021
Subsidiaries of Financial Institutions, Inc.
Consent of Independent Registered Public Accounting Firm, RSM
US LLP
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Principal Executive Officer
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Principal Financial Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Inline XBRL Instance Document
101.INS
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase
Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Cover Page Interactive Data File (embedded within the Inline
XBRL document)
101.DEF
104
All material agreements consist of management contracts, compensatory plans or arrangements.
ITEM 16. FORM 10-K SUMMARY
None.
- 141 -
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SIGNATURES
March 10, 2022
FINANCIAL INSTITUTIONS, INC.
By:
/s/ Martin K. Birmingham
Martin K. Birmingham
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
Signatures
/s/ Martin K. Birmingham
Martin K. Birmingham
Title
Director, President and Chief Executive Officer
(Principal Executive Officer)
/s/ W. Jack Plants, II
W. Jack Plants, II
/s/ Sonia M. Dumbleton
Sonia M. Dumbleton
/s/ Donald K. Boswell
Donald K. Boswell
/s/ Dawn H. Burlew
Dawn H. Burlew
/s/ Andrew W. Dorn, Jr.
Andrew W. Dorn, Jr.
/s/ Robert M. Glaser
Robert M. Glaser
/s/ Samuel M. Gullo
Samuel M. Gullo
/s/ Susan R. Holliday
Susan R. Holliday
/s/ Robert N. Latella
Robert N. Latella
/s/ Mauricio F. Riveros
Mauricio F. Riveros
/s/ Kim E. VanGelder
Kim E. VanGelder
/s/ Mark A. Zupan
Mark A. Zupan
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
Senior Vice President and Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director, Chair
Director
Director
Director
Director
- 142 -
Date
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
March 10, 2022
Appendix A
Five Year Financial Highlights
(Dollars in thousands, except per share data)
2021
At or for the year ended December 31,
2018
2019
2020
2017
Selected Financial Condition Data:
Total assets
Shareholders’ equity
Selected Operations Data:
Interest income
Interest expense
Net interest income
(Benefit) provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Stock and Related Per Share Data:
Earnings per common share:
Basic
Diluted
Cash dividends declared per common share
Common book value per share
Market price (Nasdaq: FISI):
High
Low
Close
Performance and Capital Ratios:
Net income, returns on:
Average assets
Average equity
Common dividend payout ratio
Net interest margin (fully tax-equivalent)
Effective tax rate
Efficiency ratio 1
Common equity to assets
Reconciliations to Non-GAAGG P Financial Measures
Pre-tax pre-provision income:
Net income
Add: Income tax expense
Add: (Benefit) provision for credit losses
Pre-tax pre-provision income
Tangible common book value per share:
Common shareholders’ equity
Less: Goodwill and other intangible assets, net
Tangible common equity
Common shares outstanding
Tangible common book value per share 2
Other data:
Number of branches
Number of employees
$5,520,779
505,142
$4,912,306
468,363
$4,384,178
438,947
$4,311,698
396,293
$4,105,210
381,177
$167,205
12,475
154,730
(8,336)
163,066
46,906
112,750
97,222
19,525
$77,697
1,460
$76,237
$4.81
$4.78
$1.08
$30.98
$33.65
$21.76
$31.80
1.46%
16.01%
22.45%
3.14%
20.1%
55.76%
8.84%
$77,697
19,525
(8,336)
$88,886
$487,850
74,400
$413,450
15,747
$26.26
$161,299
22,314
138,985
27,184
111,801
43,176
109,254
45,723
7,391
$38,332
1,461
$36,871
$2.30
$2.30
$1.04
$28.12
$32.70
$12.78
$22.50
0.82%
8.49%
45.22%
3.22%
16.2%
60.22%
9.18%
$38,332
7,391
27,184
$72,907
$451,035
73,789
$377,246
16,042
$23.52
$168,800
38,888
129,912
8,044
121,868
40,381
102,828
59,421
10,559
$48,862
1,461
$47,401
$2.97
$2.96
$1.00
$26.35
$33.28
$25.50
$32.10
1.14%
11.61%
33.67%
3.28%
17.8%
60.59%
9.62%
$48,862
10,559
8,044
$67,465
$421,619
74,923
$346,696
16,003
$21.66
$152,732
29,868
122,864
8,934
113,930
36,478
100,876
49,532
10,006
$39,526
1,461
$38,065
$2.39
$2.39
$0.96
$23.79
$34.35
$24.49
$25.70
0.95%
10.18%
40.17%
3.18%
20.2%
62.73%
8.79%
$39,526
10,006
8,934
$58,466
$378,965
76,173
$302,792
15,929
$19.01
$130,110
17,495
112,615
13,361
99,254
34,730
90,513
43,471
9,945
$33,526
1,462
$32,064
$2.13
$2.13
$0.85
$22.85
$35.40
$25.65
$31.10
0.86%
9.62%
39.91%
3.21%
22.9%
60.65%
8.86%
$33,526
9,945
13,361
$56,832
$363,848
74,703
$289,145
15,925
$18.16
48
625
47
613
53
722
53
725
53
656
1: Efficiency ratio provides a ratio of operating expenses to operating income. Efficiency ratio is calculated by dividing noninterest expense by net revenue, which is defined as
the sum of tax-equivalent net interest income and noninterest income before net gains on investment securities. The efficiency ratio is not a financial measurement required
by GAAPPP However, the efficiency ratio is used by management in its assessment of financial performance specifically as it relates to noninterest expense control. Management
also believes such information is useful to investors in evaluating Company performance.
2: Tangible common equity divided by common shares outstanding.
Five Year Financial Highlights
Legal Counsel
Harter Secrest & Emery LLP
Independent Auditors
RSM US LLP
Chicago, IL
Affiliates
Five Star Bank
SDN Insurance Agency, LLC
Courier Capital, LLC
HNP Capital, LLC
Five Star Bank Rochester Regional
Administrative Center
Five Star Bank Plaza
100 Chestnut Street
Rochester, NY 14604
Five Star Bank Buffalo Regional
Administrative Center
300 Spindrift Drive
Amherst, New York 14221
New Address Effective Summer 2022:
6215 Sheridan Drive
Amherst, NY 14221
SDN Insurance Agency, LLC
300 Spindrift Drive
Amherst, New York 14221
New Address Effective Summer 2022:
6215 Sheridan Drive
Amherst, NY 14221
Courier Capital, LLC
1114 Delaware Avenue
Buffalo, NY 14209
HNP Capital, LLC
Five Star Bank Plaza
100 Chestnut Street
Rochester, NY 14604
Corporate Headquarters
220 Liberty Street
Warsaw, New York 14569
Corporate Website
Financial results, corporate announcements, dividend
news and corporate governance information is available
on the Company’s website: www.fiiwarsaw.com
Annual Meeting
The 2022 Annual Meeting of Shareholders will be held at
10:00 a.m. EDT on June 14, 2022. The meeting will be held
solely by means of remote communication via the virtual
meeting at www.virtualshareholdermeeting.com/FISI2022.
Transfer Agent
Our transfer agent, American Stock Transfer & Trust Co.,
maintains the records for our registered shareholders
and can assist you with a variety of shareholder services
including address changes, certificate replacement and
other inquiries regarding your account.
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
Phone: 800.937.5449
Teletypewriter for the hearing impaired: 866.703.9077
help@astfinancial.com
Website: www.astfinancial.com
Stock Exchange Information
NASDAQ Global Select Market
Ticker Symbol: FISI
Form 10-K and Other Reports
This Annual Report includes the Financial Institutions, Inc.
Annual Report on Form 10-K. The Form 10-K Report
filed with the U.S. Securities and Exchange Commission
in March 2022 also contains additional information
including exhibits.
The Form 10-K can be viewed at www.fiiwarsaw.com,
Financials/SEC Filings, and is also available without
charge upon request to Samuel J. Burruano, Jr., Chief
Legal Officer and Corporate Secretary, 220 Liberty Street,
Warsaw, New York 14569.
Investor Relations Contacts
Shelly J. Doran – Director of Investor and
External Relations
SJDoran@five-starbank.com
or
W. Jack Plants II – Chief Financial Officer and Treasurer
WJPlants@five-starbank.com
Financial Institutions, Inc. 2021 Annual Report
220 Liberty Street, Warsaw, NY 14569
585.786.1100 | www.fiiwarsaw.com